Let Us Pray

The proposed GOP tax bill repeals the so-called “Johnson Amendment” to IRC 501(c)(3)  which allows tax exempt status only to an organization “which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”

Under the proposed bill, Section 501(c)(3) would be modified to allow “campaign activity by churches, their integrated auxiliaries, and conventions or associations of churches.” As set forth in the explanation of the bill (text pages 297-297, pdf pages 304-304):

[A] church, an integrated auxiliary of a church, or a convention or association of churches shall not fail to be treated as organized and operated exclusively for a religious purpose, nor shall it be deemed to have participated in, or intervened in any political campaign on behalf of (or in opposition to) any candidate for public office, solely because of the content of any homily, sermon, teaching, dialectic, or other presentation made during religious services or gatherings, but only if the preparation and presentation of such content: (A) is in the ordinary course of the organization’s regular and customary activities in carrying out its exempt purpose; and (B) results in the organization incurring not more than de minimis incremental expenses.

Oddly, the bill is essentially effective immediately upon enactment, since it is effective for all years ending after the date of enactment.  Because the taxable year for most churches ends on December 31, if the bill is passed in December, political activities in 2017, even if they took place before the date of enactment, will not result in disqualification of the church’s tax exempt status.

According to the majority GOP estimate (text page 76, pdf page 82) (which manages to misspell “de minimis”), this provision will cost the Treasury $2.1 Billion over 10 years.

One can see from the explanation one of the most significant problems with this provision that, in order to determine if any church is or is not violating the provision, there will have to be direct government entanglement with religion.  This poses a direct threat to the Establishment Clause of the First Amendment. Walz v. Tax Commission, 397 U.S. 664, 674 (1970).

Today, Paul Ryan tweeted: “Reports out of Texas are devastating. The people of Sutherland Springs need our prayers right now.” Of course, my prayer is that Paul Ryan vacate his position as Speaker of the House as soon as possible.  Judging by the tweets in response to Ryan’s tweet, this country is about to undergo a religious revival and answer my prayers.  And, if the churches chime in, the revival will be tax exempt.

One That the GOP May Have, But Probably Didn’t, Get Right

On the big stuff, the GOP tax proposal gets it wrong. However, there may be a significant issue on which it gets it right. But whether it did or didn’t is really anyone’s guess.

The GOP bill proposes to repeal IRC § 45C that provides a 50% tax credit for qualified clinical testing expenses incurred in testing of certain drugs for rare diseases or conditions, generally referred to as “orphan drugs.” The Republican JCT budgetary analysis (text page 42, pdf page 48) calculates that the repeal of Section 45C would bring in $54 Billion in additional tax revenue over the 2018-27 period.

So, is the repeal of Section 45C a good thing or a bad thing? I can say with absolute assurance and with no possibility that I will be contradicted that . . . I don’t know.  And likely neither do the proponents of the repeal of Section 45C.

The orphan drug program has come under serious and thoughtful criticism. See for instance this article from Kaiser Health Network. As the article points out, however, FDA Commissioner Scott Gottlieb has promised reforms in the way that the FDA deals with orphan drugs. And, the GAO has promised an investigation.

The point here is that the GOP needs offsetting revenue to mitigate its proposed massive tax cuts for the wealthy.  It is so hellbent on delivering those tax cuts that it throws out completely a tax benefit that is intended to advance a popular goal. It may very well be that this tax benefit has been abused, but we won’t know that this is the case with any assurance until we see the results from the reforms that the FDA has already instituted and the GAO study. More than likely, the program needs to be reformed, but not thrown out entirely.  Of course, we won’t be able to make an informed conclusion by December. And we can’t wait until the facts are in before we give the rich their holiday gift.

Getting Into the Weeds on the Tax Bill

I have uploaded the new tax bill, the GOP explanation of the bill, and the estimates by the Republican members of the Joint Committee on Taxation of the budgetary impact of the various provisions of the bill.

The staff’s explanation (text page 61, pdf page 69) of the alimony provisions that I previously discussed  is patently false: “[T]he intent of the proposal is to follow the rule of the Supreme Court’s holding in Gould v. Gould, [245 U.S. 151 (1917)] in which the Court held that such payments are not income to the recipient.” This explanation conveniently omits the fact that the result in the Gould case was changed by statute in 1942, over 75 years ago.

The Republican JCT budgetary analysis (text page 17, pdf page 23) labels current law as being a “divorce subsidy” (quotation marks in the original). The analysis goes on to assert that “The provision recognizes that the provision of spousal support as a consequence of a divorce or separation should have the same tax treatment as the provision of spousal support within the context of a married couple.” In other words, for 75 years there has been a recognition that a divorced couple has financial burdens that are greater than a married couple and the GOP is simply going to ignore those financial burdens.

According to the analysis, this provision would provide a subsidy to support corporate tax cuts of $8.3 billion over ten years. (Ok, I lied. What the analysis actually says is that “the provision would increase revenues by $8.3 billion over” 10 years. Whatever.)

With the sufferance of the editors of this blog, I will attempt to analyze other provisions of the bill over the next couple of week.

The GOP’s War on Women

Women earn less than men.  They have less wealth. Thus, in a marital relationship, they will most often be the economically weaker party.

Currently, the tax code allows alimony payments to be deducted from income by the payor per IRC § 215, with the payments to be included into income by the recipient per IRC § 61(a)(8). The GOP tax bill repeals these two provisions. The practical effect of the proposed change will be to financially disadvantage the economically weaker party in a divorce.

(I’ve posted the entire bill here. The alimony rules are changed via Section 1309 of the bill which begins at page 122 of the pdf version.)

The reason is really quite simple. The current statutory arrangement encourages the more financially well-off party to pay alimony since it confers a net benefit on the recipient that is, after tax, greater than the after-tax cost for the payor. Simply put, the payment of alimony, which generally flows to the wife in a divorce, will become more expensive.

On a tax lawyer listserve, a conservative colleague of mine commented about this provision: “The loss to the payor will be much bigger than the gain to the payee, and this loss will be incurred at exactly the moment when the former husband and wife are most economically fragile. This is such awful public policy that it is hard to believe that the people who proposed it understand the consequences of what they propose.”

I agree with the first sentence, but not the second. The entire purpose behind the proposed change is simple: raise taxes on individuals wherever possible in order to accommodate corporate tax cuts, overarching public policy be damned. The public policy is awful. But the people behind the public policy fully understand its consequences.  They simply don’t care.  They’re awful.

Why does art stupefy otherwise smart people?

What is is about art, that when smart, tough-minded people get near it, their brains turn to mush? I’ve worked in a museum and universities, and studied the former professionally: while management of the latter is often very feckless and lax, museums take the cake. Most recently, but not exceptionally, a board of trustees starring the business élite of New York City has managed to let the Metropolitan Museum of Art go seriously into the financial toilet, despite having assets worth at least $100 billion.

Today we have a lawyer, apparently capable of actual research and inference from evidence and writing literate English, proposing that artists should have a full value deduction for the untaxed value of gifts of their own work, something we fixed fifty years ago.  He managed to get that truly loony and regressive idea (like all deductions, this one is only valuable for successful artists who are already rich) past the editorial page editors of the New York Times. I can see them now, looking at this piece of copy and going all gooey-eyed and misty…”Art! Awww…we love art! Let’s print it!”

OK, Mr. Rips and NYT tough-minded skeptical journalists, how’s this idea?

Janet Napolitano

President, University of California

Dear President Napolitano:

Because of my great love and affection for the University of California, I propose to give half my working hours to Cal as pro bono work, and only take a salary for the other half. Now, I will need you to double my salary rate for the half time I’m on the clock, but this won’t cost you anything. What it will do is enable me to deduct my unpaid time against my new salary under the new rules, which will leave me with no taxable income at all: we can stiff the taxpayers for my whole tax bill! Naturally, I’m happy to give you a cut of this windfall, shall we say 20%: you make money, I make money, the students still get their courses…who could object to this?

I might add, doctors in our hospitals can really clean up this way; in fact anyone who works for a nonprofit or a government agency is looking at a historic opportunity to rip off the taxpaying public, and surely we’re as lovable and deserving as artists whose work sells for hundreds of thousands of dollars, and knowledge and health are as important as art.

Do we have a deal?

Very truly yours,

Michael O’Hare

[my coauthors and I get well into the weeds of this foolishness in Patrons Despite Themselves: Taxpayers and Arts Policy, if you want to follow up. Sheesh.]