Bob Carlson

How retirees are treated by states varies considerably. Some states that overall are high-tax states actually provide a lot of tax breaks for seniors and are low-tax states for them.

But you have to stay on top of things. Many states are changing their tax policies in response to budget shortfalls, and some are removing some of the tax breaks for seniors. You can find some details here. (Subscription might be required.) Others that haven’t been too attractive to retirees are changing or thinking of changing their policies. As I’ve said many times, retirement has changed and will change again. You have to stay on top of things.

Financial advisers often discuss tax regimes with clients who are getting ready to retire. Andrew Tignanelli, president of the Financial Consulate, an advisory firm in Hunt Valley, Md., is working with a New Jersey doctor who plans to retire to Hershey, Pa., because taxes are lower there and family members also live in Pennsylvania.

Mr. Tignanelli, whose firm manages around $275 million, tells clients in Maryland to consider neighboring Delaware as well as more distant Tennessee. Delaware exempts a portion of retirement income and has no sales tax, while Tennessee taxes only dividends and interest, he says.

On the West Coast, retirees are sometimes drawn to Nevada partly because it has no income tax, says Christopher Jones, who runs Sparrow Wealth Management in Las Vegas. Mr. Jones has personal experience—he moved the firm from the East Coast two years ago, partly to be close to family and partly to save money. “I was getting killed on New York City taxes,” he says.

People move from one state to another, and they take money with them. There are a lot of anecdotes about migration within the U.S. and what causes it. But there isn’t a lot of documentation. Here’s a web site that tracks the state money flows. Consider these trends when you’re planning where to retire. But also try to analyze why people are making these moves. Is it taxes, weather, or something else. Click around the map, read the blog, and make your choices.

State tax laws changed a lot the last few years. States responded differently to the financial crisis and its aftermath. Some raised taxes, while others cut taxes. Some did a little of both, creating new winners and losers. Here’s a survey of all 50 states by Bloomberg that states the per capital tax burden for each state. That’s the best way to compare them. This number aggregates all taxes. Some states deceive people by having low or no income tax, for example, but replacing it with high sales and property taxes. One shortcoming of the survey is that local taxes don’t appear to be included, only state level taxes.

The survey also tries to give a heads-up on proposed tax changes. That’s important, because there are a lot of tax proposals on the table.

It’s always important to look at the particulars of a state’s taxes and those of its localities. Because different activities are taxed different ways, one tax might be a low-tax state for you but a high-tax state for someone else.

Arizona’s state and local tax burden of $3,006 per capita is small compared with that of many other states, thanks to lower-than-average property taxes. That means the decline in home prices hit Arizona’s municipalities harder than those in many other states. Arizona does have high sales taxes, though — the Tax Foundation ranks it second in combined state and local sales taxes, at 9.16 percent.

Governor Jan Brewer set out to overhaul and simplify the state sales tax system in 2013. The state uses a complicated “transaction privilege” tax system that has sellers and lessors ultimately responsible for sales taxes, though they may pass the cost on to buyers or lessees. Brewer has faced opposition from local governments.

Most of you give to charity. Few of us are aware that there is research trying to discover the most efficient way to donate. As with most things economists study, the results often are different from what people are doing or intuitively believe would be best. Read this piece and the links if you want some fresh thinking and interesting ideas.

…Then he started talking about how you should only ever donate to one charity – the most effective. I’d heard this one before and even written essays speaking in favor of it, but it’s always been very hard for me and I’ve always chickened out. What Robin added was, once again, a psychological argument – that the reason this is so hard is that if charity is showing that you care, you want to show that you care about a lot of different things.

The IRS has its own production studio to create training films and similar items. Over the years it also has used the studio to provide entertainment for its employees. Here you can find a Star Trek parody that was shown at a national conference of IRS employees, and here you can find a Gilligan’s Island parody.

IRS spokespeople say the videos were made in a different environment and wouldn’t be made today.

For many Americans, tax filing season could be easier and cheaper than it is now. Today, you have to complete a tax return yourself, perhaps with the help of computer software from a private company, or you pay a return preparer to do it for you. Instead, the IRS could build its own system. For those who want to prepare their own returns, they could go to the IRS web site and complete their own returns. Or, if your return is striaghtforward, the IRS could complete the first version of the return and submit it to you.

In addition to saving money and time, there would be other benefits. Errors are likely to be reduced, because the IRS already has most of the information needed to complete a return (W-2s, 1099s, brokerage income, mortgage payments). Identity fraud and other crimes also are likely to be reduced, because the IRS could have better security and identify to false filers more easily. Identity fraud and false refunds are a big business, and the IRS can’t do much to stop them under the current arrangement.

We’re stuck with the current situation, because the big software companies that profit from the current system used lobbyists to keep Congress from allowing a change in the system. Don’t take my word for it, read this investigative report. Campaign contributions beat a system that would reduce taxpayer costs, save time, and curb refund fraud.

Intuit has spent about $11.5 million on federal lobbying in the past five years — more than Apple or Amazon. Although the lobbying spans a range of issues, Intuit’s disclosures pointedly note that the company “opposes IRS government tax preparation.”

The disclosures show that Intuit as recently as 2011 lobbied on two bills, both of which died, that would have allowed many taxpayers to file pre-filled returns for free. The company also lobbied on bills in 2007 and 2011 that would have barred the Treasury Department, which includes the IRS, from initiating return-free filing.

State and local taxes used to be an afterthought for most people. In recent years, however, most governments have had fiscal problems and steadily increased their taxes. This post presents a theory of why that will continue. It argues that local governments pursued policies over the decades that are almost guaranteed to generate fiscal problems and higher taxes.

The focus is transportation and suburban sprawl. The thesis is that federal funds and borrowing were used to build transportation. But roads and other transportation infrastructure need a lot of maintenance over the years, and most of the projects built don’t generate enough tax revenue to pay for all the upkeep. The result is a cash crunch and ever-rising taxes.

Just as the welfare state is fiscally unsustainable and bound for collapse, Marohn argues, so is the American “suburban sprawl” model of growth and development. Just as the federal government is built on a mountain of debt, so is sprawl. He offers no remedy for federal profligacy; his mission is to build fiscally resilient “strong towns.”

The core premise of the book is that the auto-centric development policies that prevailed between World War II and the Great Recession of 2007 amounted to a municipal Ponzi scheme. The process got rolling when local governments used federal and state aid to fund the expansion of roads, water, sewer and associated infrastructure. For a while, localities enjoyed the best of both worlds: They enjoyed growing revenue from new growth and development without assuming the burden for the up-front capital cost. There was a hitch, however: Municipalities did assume the liability for maintaining the infrastructure. The cost of maintaining infrastructure was modest initially but when the infrastructure wore out, the full financial burden for fixing it fell upon the localities.

The IRS encourages individuals to file their tax returns electronically. Yet, because of restrictions imposed by Congress and its own mistakes, the IRS doesn’t have its own secure online tax return completion and filing system. Instead, private software firms write preparation software, sell it to taxpayers, and also provide an online filing system for which they charge. This entire system creates a lot of risk. It puts each taxpayer at risk for ID fraud. It also puts the taxpayers overall at risk for fraudulent refunds that can’t be recovered. You can read details of how the system puts us at risk and increases costs here.

Many if not all of these problems could be avoided and the costs greatly reduced if the IRS created its own filing system the way most other government agencies do for form filings that they require. But a collection of software companies, gathered under the misleading name the FreeFile Alliance, pays a lot of money to lobbyists to convince Congress not to let the IRS create its own system. Because of the power of these lobbyists and the lack of understanding of the public, the government loses billions in fraudulent refunds and taxpayers are at risk for identity theft.

Why has identity theft rocketed through the Internal Revenue Service? Because American taxpayers, urged on by the IRS, have taken to filing their income-tax returns electronically and arranging for refunds to be directly deposited into bank accounts. E-filing is appealing because it provides an electronic postmark confirmation that the return was filed on time. When it is combined with direct deposit, a refund can arrive in as little as seven days. In 2012, 80% of individual returns were e-filed, fulfilling an initial goal Congress set in 1998. The result is an automated system in which the labor burden is transferred to the taxpayer.

E-filing contributes to tax complexity as the IRS demands ever more data for reporting of wage, interest and brokerage income with more tax forms. A discrepancy may result in a rejection code, a letter from the IRS Automated Underreporting Unit, or a computerized audit out of a centralized IRS office in Ogden, Utah. There’s no cost to the IRS for requesting extra information when it’s received electronically.

Not many people know about it, but there’s 0% long-term capital gains rate that expires at the end of 2012. While many people who write about it focus on how youngsters qualify for the 0% rate, there also are adults, especially senior adults, who can use the 0% rate. I wrote about the 0% rate several times in the past in Retirement Watch. But here’s a refresher.

The 0% rate applies only to long-term capital gains and qualified dividends that would otherwise fall within the 10% or 15% federal income tax brackets (the bottom two brackets). The little-known truth is you can be doing pretty well income-wise and still be within those brackets.

Earlier I references a post by Martin Wolf of The Financial Times regarding the appropriate fiscal policy to emerge from the after-effects of the bubble. In his second post in a series Wolf addresses the appropriate tax policy. One extreme argument is that taxes should be increased to confiscate a lot of money from the wealthiest people, the 1% as they’re called. The other extreme is that we need to cut tax rate some more. Wolf, again citing an academic article, takes a middle position. Wealthier people should pay higher income tax rates than they are now, but the rates shouldn’t be confiscatory. He cites research putting a top income tax rate around 48%. It’s a good piece. You should read it regardless of your current views on the issue.

The paper on the US written by profs Diamond and Saez states, quite simply, that “we favour a top tax near or in the range of 50 per cent to 70 per cent: 50 per cent being the top tax rate in force from 1982 to 1986, during the Reagan administration, and 70 per cent being the top tax rates in force from 1965 to 1981, under presidents Johnson, Nixon, Ford, and Carter. We reach this conclusion by combining widely accepted notions of fairness in taxation with empirical analysis of the tax revenue loss (and so efficiency cost) as a consequence of how top earners are likely to change their behaviour in response to higher taxes.”

How do the authors reach a conclusion so at odds with prevailing sensibility? In essence, the decision must be based on the balance between fairness and economic efficiency.