Here’s a note to everyone concerned with the tax issues that are playing a prominent role in the presidential election: U.S. taxpayers are paying more – and completely different – taxes than they realize.
Most tax policy discussions dwell on three types of taxes: income tax, payroll tax and estate tax. These taxes, however, are only cornerstones in a crowded fiscal system consisting of federal, state and local taxes. Such tunnel vision leaves commentators and taxpayers alike with a murky understanding of what taxation in the U.S. actually entails. The gap between what the public believes about its tax burden and the amount it pays is so wide that it renders much of our tax debate totally off target.
“Big taxes” are not the whole story. Although some commentators look beyond the three major taxes and consider state and local sales and use taxes, what of the dozens of other revenue-generating charges that erode an individual’s after-tax dollars? Governmental authorities impose many lesser-known taxes, but you’d never know that from public discussions about our tax system.
More Than Meets the Eye
So what does the U.S. tax burden really entail?
In FY 2014, total federal revenue consisted of personal income taxes (46 percent), payroll taxes (34 percent), corporate income taxes (11 percent), and “other taxes and fees” (9 percent). While 9 percent doesn’t seem like much, “other taxes and fees” amount to a staggering $271.8 billion. These consist of regulatory fees and custom duties, excise taxes, estate and gift taxes, and miscellaneous receipts, including profits on assets held by the Federal Reserve.
The public, though, is actually paying more than these federal taxes. State and local governments also rely on taxpayers’ dollars for revenue. According to the U.S. Census Bureau, state taxes generated nearly $866 billion in FY 2014. These taxes include sales and gross receipts taxes, income taxes, license taxes, property taxes, and other taxes, including death and gift taxes, documentary and stock transfer taxes, severance taxes, and “other” taxes not otherwise classified.
This raises the question – what is included in the “other” category?
The “Other” Tax Category
Sometimes, excise taxes that are arguably minor enter the greater tax narrative. For example, the federal government collected approximately $93 billion in revenue from excise taxes in FY 2014. Of that total, the Alcohol and Tobacco Trade and Tax Bureau alone collected more than $25 billion in revenue in federal beer, tobacco, liquor, firearms and ammunition excise taxes. This category of taxes has been a topic of public discussion.
The remaining $68 billion in federal revenue generated from excise taxes in FY 2014, however, consisted of taxes that rarely make it into the national discussion. This total includes gambling taxes – .25 percent of state-authorized wagers and 2 percent of unauthorized wagers placed with bookmakers and lottery operators. The gambling taxes are in addition to the $50 annual license fee on each state-authorized person and the $500 annual license fee on each unauthorized person accepting wagers.
Other federal excise taxes contributing to the $68 billion are the federal highway motor vehicle use tax and the federal excise tax on gasoline. There’s also an annual occupational tax on firearms of either $1,000 (importers or manufacturers) or $500 (for dealers, small importers and manufacturers). Sales of handguns incur a 10 percent sales tax, while sales of ammunition and firearms other than handguns incur an 11 percent sales tax.
Go on a boating trip, take up archery, get a flu shot, or buy life insurance and you become an even bigger contributor to federal tax revenue – whether you are aware of it or not. In FY 2014, the federal government imposed a 3 percent tax on the price of electric outboard motors and fishing tackle boxes, a 10 percent tax on the price of sport fishing equipment, an 11 percent tax on the price of bows with a draw weight of at least 30 pounds plus quivers, broadheads, and points, and a .46 cent tax on each sale of an arrow shaft.
At the state level, the same dynamic plays out – revenue is generated through indirect taxes. State taxation has increased in recent years as states try to reduce growing budget deficits.
What do “other” taxes look like at the state level? In FY 2014, New York state collected nearly $1.5 billion in state cigarette and tobacco taxes, $473 million in motor fuel taxes, and $250 million in alcoholic beverage taxes. Plus, New York state collected $136 million in highway use taxes, $85 million in taxicab surcharges, and $114 million in auto rental taxes. It also collected $911 million via the real estate transfer tax and additional revenue from a mortgage recording tax, a stock transfer tax, and a beverage container deposit.
Localities throughout the state collect a property tax, which, in New York City, varies by asset class. Additionally, sales of parking services sold in New York City are subject to an 18.375 percent tax, consisting of sales and other taxes. There is also a commercial rent or occupancy tax in certain parts of New York City, as well as a tax on public utilities, a taxicab license transfer tax, and motor vehicle taxes.
Another layer, consisting of “fees” or “charges” that are not referred to as taxes, also finds its way into the cost of daily life. Certain fees imposed on health insurance companies, such as the $2.08 Comparative Effectiveness Research Fee, are built into the premium fees and thus passed on to the insured. If you own a car in New York, you not only pay driver’s license renewal fees every few years for the privilege of legally driving that car, but you also pay sales tax upon purchase or lease of the vehicle, a passenger vehicle registration fee, a title certificate fee of $50, a vehicle plate fee of $25, and additional MCTD fees if you are in certain counties. If you dare to drive your vehicle, you will likely pay bridge and tunnel tolls.
If you think air travel is a better alternative, think again. The federal government generates revenue from air travel via the 7.5 percent U.S. Domestic Transportation Tax or the reduced Alaska/Hawaii Domestic Transportation Tax, the $4 Federal Security Segment Tax, the $5 U.S. Animal and Plant Health Inspection Service Fee, the (up to) $4.50 Passenger Facility Charge, and the $5.60 U.S. Passenger Civil Aviation Security Fee.
Whether you have a cellphone or still have a landline in your home or office, you are familiar with the taxes and fees on top of the standard sales taxes on your monthly bill. The Universal Service Tax, which is a federal tax on wireless service, was 5.82 percent in 2014. For cellphone users in New York, there were additional taxes totaling 17.74 percent in addition to the federal Universal Service Tax – resulting in a 23.56 percent combined wireless tax rate for New Yorkers.
If you have a landline, you pay a Federal Excise Tax (3 percent), a Local Communications Tax, an MCTD Tax, a School District Sales Tax, the state sales tax, and a State Telecommunication Excise Tax. There is also a Federal Universal Service Fund Surcharge, a Federal Regulatory Recovery Fee, an FCC Regulatory Fee, a Federal Subscriber Line Charge, an E911 Surcharge, a Public Safety Communications Surcharge, Municipal Surcharge, a Local Gross Revenue Recovery Fee, a Local Number Portability Fee and a State Regulatory Recovery Fee.
All of these taxes and fees are the source of only some of the funds raised by the “other” category.
A Broader View
Taxation and tax policy will always be hot-button issues – and in an election year, even more so. Journalists, columnists, pundits, professionals and everyday taxpayers will take positions – some of them nuanced, some of them polarizing. The problem is that many of those positions will be misguided because they’re based on a limited or selective view of what taxpayers really pay.
With so much at stake, it’s important that everyone involved in the tax debate come to an accurate understanding of the real U.S. tax burden. Taxpayers and tax strategists would also benefit from being able to formulate a tax strategy based on the true tax burden, not a limited notion of what it’s believed to be. Before you jump into a tax debate or decide how to handle your own or your client’s taxes, step back, look at the other hidden taxes, and give them their rightful place in your policy positions and financial plans.
This article was originally published in the October 2016 issue of Metropolitan Corporate Counsel. It was co-written by Maria L. Castilla of Thomson Reuters and Steven Eliach, Principal-in-Charge of Tax Services, Marks Paneth LLP.
Marks Paneth LLP has been ranked among the top three providers of forensic accounting services in the New York metropolitan area by readers of the New York Law Journal (NYLJ). Marks Paneth is the only firm to be voted among the top three in this category for all six years since the NYLJ’s 2010 inaugural survey.
2016 Tax Deadline Calendar
We've developed a useful summary of various tax deadlines occurring in calendar year 2016. Please review and let us know if you have any questions or, if you have missed a deadline, whether you would like to discuss late filing procedures and options.