by Gayl Mileszko
Tax Free
Tax Day came and went with the usual gnashing of teeth and spilling of tears, searching for pitchforks, and cussing at Uncle Sam. By the time the clock struck midnight, about 19 million of us requested an extension, and 8% interest began accruing on our liabilities. Most of us got the amount we overpaid back in the form of a refund check. As of April 5, approximately 66.8 million — or two of every three filers — waited about 3 weeks to be repaid. The average refund check totaled $3,011, up $123 from last year. These refunds caused outflows of more than $200 billion from the U.S. Treasury, but that is loose change in the context of its monthly borrowings. In the first quarter of 2024, the Treasury sold $7.2 trillion of debt, the largest quarterly total on record. In 2023, they issued $23 trillion of Treasuries, an all-time high, raising $2.4 trillion of cash after netting out all the maturing bonds. They have $386 billion of auction sales planned for May.
Deductions, Exemptions, and Credits Cost More than Social Security
More than 101 million returns were submitted in the runup to April 15, about 50 million in the last two weeks. More than 96% of individual filers submit returns electronically, 47% by do-it-yourselfers. Some 2.3 million fewer Americans filed for refunds this year and economists are analyzing the impact this might have on consumer spending. The federal government collected $4.394 trillion in income, payroll and corporate income taxes in 2023, with 49% coming from individuals and 36% from payrolls. This revenue accounts for 16% of gross domestic product. Deductions, exemptions, exclusion, credits and other special provisions totaled $1.8 trillion last year, more than we spent on Social Security, Medicare, or Defense.
Cost and Complexity
We don’t like to think about it but, on average, we pay $524,625 in taxes during our lifetime, about one third of our earnings, and as much as $987,117 if we live in New Jersey. And the process of paying up is increasingly complex. Last year, compliance required a stunning 6.5 billion hours and imposed an economic burden totaling $414 billion. We should not be surprised. If you flip through the Code, there are 4,209,496 words in it: seven times the length of “War and Peace”. When you add in associated regulations, add 17,472 pages and another 12 million words, much of it so convoluted with parentheticals that it is actually quite hilarious to read aloud.
Sixteenth Amendment and the Right to Gripe
The U.S. Internal Revenue Code is the body of law codifying all the federal taxes laws including those imposed on income, employment, estates and gifts. The first effort to compile all these laws came in 1939, some twenty-six years after the federal income tax was first enacted, and the product totaled 504 pages. The 16th Amendment to the Constitution gives the Congress the power to tax and the First Amendment gives citizens the right to gripe about it. A hefty number of lobbyists from “Gucci Gulch” are hired to wine, dine and otherwise contribute to Members of Congress, especially those serving on the House Ways and Means and Senate Finance Committees. They prowl the corridors, testify at hearings and pressure Members staff for attention to their issues. Some are in favor of a flat tax, a value added tax, or a tax credit. Others promote exemptions, loopholes and special provisions for businesses and many other interests. Bond dealers have a lobbyist. So do charter schools and senior living organizations. Every thirty years or so, Congress will attempt a major overhaul of the Code, as was the case in 1954 and 1986, or significant amendments, as happened in 2017. It has been the norm for Members to publicly rail against certain loopholes and then vote for dozens if not hundreds of “technical corrections.” But in the 118th Congress so far, there have been less than 50 mentions of “tax simplification” in the Congressional Record, and only 15 changes to tax laws.
Exceptions and Exemptions
Families and companies all look for ways to reduce their tax burdens and take advantage of laws designed by government to meet certain economic and societal objectives. Buy a home. Adopt a child. Spend more on research. Turn corn into ethanol. Invest in historic buildings. Construct more affordable housing. Governmental units and non-profit organizations benefit from the exclusion of interest income on public purpose tax-exempt bonds. The amount of forgone tax revenue from the exclusion of interest income on public-purpose tax-exempt bonds is substantial. According to the Office of Management and Budget, over the 2017 to 2026 budget window, the estimated loss of revenue was said to be $422.8 billion, making it the 15th largest tax expenditure. It will be a target of reform again most likely in 2025 when the next Congresses addressees the expiring provisions in the 2017 Tax Cuts and Jobs Act. That bill eliminated advance refunding bonds to save an estimated $17.4 billion over ten years. It has had a staggering effect on the municipal market, removing most refinancing options and increasing borrowing costs for those nonprofit borrowers struggling to balance budgets and undertake new essential public projects.
Private Activity Bonds
Among the many policy options that keeps resurfacing in Washington is the one that eliminates the tax exemption for new qualified private activity bonds. Since 1968, the federal tax code has classified state and local bonds as either governmental bonds or private activity bonds. Congress places an annual state volume cap and restricts the types of activities that qualify for tax-exempt PAB financing. These bonds are used to fund eligible projects including charter school facilities, and senior living and care communities, among other infrastructure. In 2017, the House tax bill included this elimination but the municipal bond community lobbied hard and successfully to have it dropped. OMB projected that this would generate a budget savings of $35 billion over the 2023 to 2032 budget window. Bond experts have testified that 20 to 25 percent of the municipal market would be lost if this exemption was eliminated, blocking millions of dollars of critical investment.
Municipal Market Update
Among the private activity bonds in the municipal market this week is one that HJ Sims is bringing for Ascent Classical Academy Charter Schools through the Colorado Educational and Cultural Facilities Authority for $77.6 million. Ascent, rated BB, is a member of Hillsdale College’s national network of charter schools and includes four schools with 2,200 students. Purchases are limited to qualified institutional buyers and accredited investors. Also on this week’s primary calendar is a $12.1 million non-rated Capital Projects Finance Authority sale for Kissimmee Charter Academy in Florida. Last week, the calendar totaled $9.2 billion and included a $25.8 million non-rated transaction for Ecumen Obligated Group which came through the City of Bethel, Minnesota and priced with a coupon of 6.25% to yield 6.50% in 2054.
Market Movers
This week the financial markets are closely following developments in the Middle East after the unprecedented attack on Israel by Iran, and Congressional action on pending aid packages for Israel, Ukraine and Taiwan. The latest consumer price index data disappointed investors expecting several rate cuts by the Federal Reserve this year. Futures trading currently indicates an expectation for only one cut in September. Economic data coming out this week includes retail sales, housing starts, and the leading indicators. Nine Treasury auctions are scheduled, and traders will see how the sales proceed after a series of weak auctions last week. First quarter corporate earnings will be reported by Bank of America, United Health, and American Express, among other headliners. Investors will monitor several other main events including remarks made by Fed officials in 14 venues, meetings of the United Nations Security Council, the World Bank and International Monetary Fund, and the G-7 foreign ministers. Articles of impeachment against Alejandro Mayorkas are being delivered by the House to the Senate, The Supreme Court is hearing arguments on the law used to charge more than 350 people involved in the events of January 6, 2021, at the Capitol, and the former president is on trial in Manhattan criminal court –an historic first.
Tax Freedom Day arrives on April 18 this year. This is the day that America as a whole is said to have earned enough income to pay its taxes at all levels of government for the year. One hundred and nine days through the calendar year, it is the perfect time for you to contact your HJ Sims representative to discuss tax advantaged investments, such as tax-exempt municipal bonds, that may help you to meet your investment and tax goals. We strive for the outcome of income; and the more tax-free the better.