The Never Ending Mining of Your Wallet for Tax Revenue
What If I told you cell phone service, cable, internet and air travel will cost 5% to 10% more this year. If you called the phone company or the airlines to complain your anger would be misdirected. Blame your representatives on all levels of government for the extra costs of communicating and for the extra fees as you make that trip to Yellowstone. And point the finger to your elected officials for the many increased and new fees you will be required to pay this year.
According to the Office of Management and Budget, the Federal Government is estimated to collect more than $3.0 trillion in total receipts for the year of 2014. The vast majority of these funds come from taxes, including almost $1.4 trillion expected to come from individual income tax payments alone. Another $800 billion will come from Social Security receipts, $300 billion in corporate income taxes, $280 billion listed as miscellaneous and the final $220 billion will come from excise taxes and fees. While the revenue from income taxes, Social Security receipts and corporate taxes has remained relatively flat, revenue from excise taxes and fees-which this study will cover- will rise 20% in 2014 over the previous year. These fees, along with others can push your 15% federal tax bracket to 25%, and your 33% bracket to 54%.
Why is this happening? As the population ages and millions of baby boomers retire, tax revenue collected the traditional way through payroll taxes has and will continue to decline. Without any discernible cut in government spending to offset that decline in revenue and to still be able to pay for Big Bird, our representatives have come up with many creative, dubious and outright absurd ways to fill the government coffers. The frustratingly ironic realization is that this money has been previously taxed on the federal, state, and local levels. My decision to do this study was motivated by the curiosity of an increasingly higher monthly cell phone bill, cable bill and internet bill without any change in service. Stick with me and I will take you to the fantasy world of American taxation.
It all starts with the sales tax, which is mandated by the state to be collected on all goods and services that are sold within the state. Sales taxes are often considered to be regressive, meaning lower-income individuals and households spend a greater proportion of their earnings to pay the tax, compared with higher-income residents. Some necessities such as certain food items are exempt from the tax, whereas others, such as electricity are taxed at a high rate. On top of that, homeowners pay property taxes, or if you rent, your landlord includes the property taxes in your monthly payment.
If you travel, you are taxed on airline tickets, rental cars and hotel rooms. You pay taxes on your cab rides, on gas for your car, as well as tolls for maintenance and operations of bridges and tunnels. You may think this is not a tax, call it a surcharge if you like, but when you pay your state and local taxes, isn’t a portion of that supposed to fund maintenance of roads and bridges? And isn’t that what the gas tax was originally meant for? Your indulgence in drinking and smoking will be punished by heavy taxation. The “sin” taxes alone are expected to generate almost $34 billion in revenue for the Feds in 2014. There are very few items that you buy that don’t have some sort of tax or fee attached to it. If you think the only way to escape the constant assault of taxes is death, think again: there is an estate tax.
These inconspicuous taxes can account for anywhere from 8% to almost 30% of your total purchase. Add that to what you pay in federal, state, and in some cases local taxes, and your total tax bill can be surprisingly high, to say the least.
Of course, where you live in this country has a big influence on the amount of taxes you pay. However, you can’t escape the fact that no matter where you live, you will pay.
For this study, I tracked my expenses for a period of 2 months to present a more accurate picture of my spending. Each tax item on goods purchased and bills paid is recorded in the included spreadsheet.
My demographics are as follows: I work and live in New York City, I own a mortgage- free home on which I pay a co-op maintenance fee that includes real estate taxes. I do not own a car, but occasionally rent one, I travel, I have a cell phone, as well as the internet and cable services.
One of the many revelations in this study is how redundant and often outrageous many of these taxes are. For example, the 3% Federal Excise tax or State communication excise surcharge was enacted in 1898 as a temporary measure to help pay for the Spanish-American war. Yes, 1898. There are speculations that the tax was suspended in 2006- a full 108 years after the war began- but most likely where the revenue is targeted has been renamed.
My expenses fall into 4 major categories: Housing which encompasses real estate taxes and electricity. Transportation includes airline tickets, taxis, rental cars, gas and hotel rooms. Communication covers cable, internet and telephone. And finally Merchandise and Services comprises clothing, food, dining out, household items and other necessities.
I am aware of what part of my income is paid in federal state and local taxes, but I wanted to see how my day-to-day expenses add to the bottom line. In the past, I thought the sales tax was the only one to account for. In many examples that is not the case.
The Housing category is heavily skewed by the inclusion of real estate taxes as part of the co-op fee. They account for 49% of the fee, and the other 51% is for maintenance, water and gas. As the spread sheet shows, a whopping 49.8% of Housing expenses went to pay taxes. Even if you rent, the real estate taxes your landlord pays are part of your bill.
In addition, your electricity is heavily taxed. Con Edison, the electric supplier, is a quasi public/private organization that is publicly traded but heavily regulated by the state. In reality, it’s a monopoly overseen by the Public Service Commission whose 5 members are appointed by the governor and whose key responsibility seems to be rubber stamping rate increases.
On the $142.78 bill for the month of July the actual cost of electricity was $56.15, a mere 39% of the total. But you, as a consumer, fund the operations of the company. You shoulder expenses for infrastructure and maintenance of the system, accounting, meter reading, environmental funds, and delinquent payers. Various taxes and fees are responsible for $18.33 including a temporary surcharge of $1.95 that the state of New York sneaked onto your electricity bill 5 years ago. This money is directed into the New York general fund that pays for the operation of the state and is supposed to be funded with the state taxes that you already pay. Just think of this: 13% of your electricity bill is taxes.
This is the government’s playground for arbitrary state and local taxes and fees. Just the Federal government take of transportation fees is projected to be $39 billion in 2014. For every $100 dollars spent on transportation, $18.60 was some sort of tax. For example, airline ticket surcharges can account for 15% to 25% of the total cost of the ticket. This includes a US Fed Transportation fee for control towers, communications and operations, a 9/11 fee that helps to fund TSA, a facility fee that pays for the airport itself. If you decide to fly international, add a customs fee, an immigration fee, a passenger fee, and an international surcharge on top of this. Seven different fees in total!! The revenue generated is directed into the general fund of the Federal government.
The tax in NYC for rental cars is 19.875%. It’s comprised of the standard sales tax of 8.875% and a state imposed tax on rental cars which skyrocketed to 11% from the original 5% when it was enacted in 1990. That 11% collected is directed into the general fund for New York State.
A gallon of gasoline purchased in NYC has at least 7 separate taxes and fees totaling about 69 cents according to a study by the API. A full 12 gallon tank will cost you $8.38 in fees and taxes. Of them, 8 cents in state sales taxes, 2 cents for environmental cleanup, and 16 cents in local taxes, a portion which funds the MTAs budget. As a car driver, you still pay for the operations of the subway and bus system. There is an 8 cent motor fuel excise tax which is supposed to go for road and bridge repairs –isn’t that what tolls are for- but which is regularly ends up in the general fund. Another 17 cents is passed along to you from petroleum companies which pay this tax to the government. The Federal Government takes 18.4 cents. Oh wait, don’t you already pay federal taxes? The state tax in New Jersey, one of the lowest in the nation, is about 15 cents per gallon plus the Federal government fee. If you count state taxes only, NY ranks eighth in the country. When you calculate the total to include federal and local taxes, NY is number one.
Another mode of transportation that has obscure fees is taxi cabs. For every taxi ride taken in NYC, there is a 50 cent surcharge that helps to yet again fund MTA operations. For the average $12 taxi ride, the surcharge implies a 4% tax.
Another favorite dumping ground for taxes and fees, Communication group covers wireless telephone, land line, internet, and cable. Those little charges can drive your bill up anywhere from 10% to almost 30%. This is the one area that will affect the middle class the most as the vast majority of Americans use phone and cable daily. These taxes are mandated on all three levels of government and in my case accounted for 17.7% of my total communication expenses. The catch here is that you pay for a variety of services in locations that have nothing to do with your daily life. You fund communication services in schools, hospitals and libraries far from where you actually live; it is listed under “Federal Universal service charge”. So, the next time a call is made from a North Dakota library to remind someone in Bismarck of an overdue book, you made that happen.
Yet, other taxes offset the cost the service provider incurs while providing state-to-state and long-distance services. Not only are we paying a fee when we call state to state, we are also paying to provide the service. It’s on your bill under “Regulatory Cost recovery surcharge.” There are fees for using other providers’ towers and a myriad of other state and county taxes on your cell phone bill.
And you didn’t think that we can do without funding the MTA in this category, did you? The MTA Telecom Surcharge, in which 15 million New York City metro residents pay every month, generates almost $130 million annually in revenue for the transportation system. The tax was introduced in 2001 as a temporary fee. On your cable and internet bill you can expect taxes and fees for funding the FCC, PBS and public education, providing services to rural areas and a variety of state and local taxes.
And the tax that takes the prize is for the administration and deployment of 911 services. Part of this tax which appears in 2 different places on most of my communication bills and accounted for over 1% of the total cost pays for the system that can triangulate a person’s position in case they are lost and unaware of their location in New York State. Why is this important? It can save lives. The irony of it is that the government “has forgotten” to implement the system though the technology is available and many states use it. What it hasn’t forgotten is to collect the fee for the system for many years. A few years ago an elderly couple became lost while driving in the Adirondack Mountains, and though they were able to call 911 and report their situation, they could not be found and subsequently froze to death. Two teenage boaters lost their lives in an East river storm a couple of years ago for exactly the same reason.
Merchandise and Services
The final category covers daily expenses such as food, household items, dining out, entertainment, dry cleaning etc. While food, unless prepared, and clothing under $110, are exempt of any sales tax, the rest of the items are taxed at 8.875% in New York City. The state’s share is 4%, and the other 4.875% percent is split between local governments and yes, you guessed it right, the MTA.
How are these taxes generated by the government? A state representative provided me with some insight on how the system works. In most cases, there must be public hearings and an extensive amount of debate for the state or the federal government to raise income taxes. However the reality is raising income taxes is not a way to win votes unless you are talking about raising taxes on the wealthy. I want to stress that this is a bipartisan issue - neither party wants to raise taxes on the middle class or the poor. And that’s where our representatives have to stretch their imagination to come up with new fees or at least raise the existing ones in order to fund projects and close budget gaps. And as a tax payer you have surprisingly very little control over what they do. And have no doubt, because of declining income tax revenue this train of taxes will never stop.
Many of these taxes are redundant. The MTA, in addition to subway, bus and train fares, receives funding from taxi rides, cell phone bills, and the sales tax -none of which has anything to do with running the MTA. That is 4 different sources of revenue that this octopus-like agency has. And here is the real shocker: while the Board of the MTA is appointed by the governors of New York and New Jersey, the MTA has no fiscal oversight from the governors, the legislature or anyone else in either state. They are almost completely autonomous and have very little control.
Many of the taxes are called “temporary,” but in the case of the war tax, and others, the temporary label can be anywhere from 5 to 100 years. But as an old Russian proverb has it: “there is nothing more permanent than temporary.” For your enjoyment, below is a list introduced in 2010 which identifies 124 different taxes that the New York State Legislature was proposing to raise in just one year. You might think a few dollars here or there don’t matter, but if all the taxes proposed were raised, the state would expect about $14 billion in revenue. The list includes everything from drivers’ licenses to fishing licenses and 122 other ways to raise revenue in between. And unless the voter chooses to expel every one of their representatives from office, or to dump tea in New York harbor, the taxation by our representation will continue. Unlike headline grabbing income tax hikes, our taxes are raised in a sly pickpocket of our wallets. Many of them harm the quality of life they are trying to improve, -such as College tuition (7), health insurance (13), and the Criminal history search (116) fee. A lot of these new fees did pass as is the case with the auto rental fee (35) and the Internet hotel tax (111) called the Expedia fee, which is sure to drive some tourists and eventually jobs away. Some did not pass, such as the Income tax hike (1). Others had good intentions but would cost taxpayers millions, such as the Timothy’s law fee (100), which would have placed a surcharge on all health insurance policies sold within New York State to pay for mental health services for the uninsured.
New taxes for 2014 If you believe this only goes on in New York State, you are wrong. This goes on around the country. In fact, when the latest budget deal was made in the Senate in December of 2013, both Democrats and Republicans were beaming about the fact that they did not raise taxes. However, what they did was raise fees for things such as airline tickets, entrance fees for parks, licenses, passports and many, many more. The sobering thought is that the reigns are off and it only gets worse. Not one objection was raised. Should they be held accountable?
To make our future even brighter, in 2014 a torrent of new fees will take effect on all levels of government with the spotlight on the taxes imposed to pay for Obamacare. It starts with a 2% tax on every healthcare plan sold, and an additional $2 fee per policy directed to a medical research trust fund with a very Orwellian name - the Patient Centered Outcomes Research Institute. There is also a 2.3% medical device tax. If you suffer from asthma and your breath has been taken away by the findings in this study, your inhaler was taxed. And according to Kaiser Health News, if you earn $200,000+, you will pay even more taxes. On a plan costing $322, the taxes and fees will add $23 to the monthly cost. Even insurers will have to shell out 3.5% per plan sold on the healthcare.gov website. That, of course, they will happily pass on to the consumer.
The Bottom Line
All those inconspicuous taxes and fees, a dollar here and 2% extra there, added 20.7% to my tax bill or 11% excluding the real estate tax. Combined with my federal, state, and local taxes, it’s a mind boggling 70% that goes to Uncle Sam and his cousins, on the state and local levels in one form or another. And this number is even higher for a middle class family earning $40,000 to $100,000. Lower earners have to spend a higher percentage of their income on things such as communication, transportation, housing- the exact items that carry the arbitrary taxes and fees- and less on discretionary items that are taxed at the lower sales tax rate.
I drew some parallels between what an average person would pay in the US or in the UK and Germany. I found some creative and at the same time familiar ways taxpayers are hit in those countries too. For example, in Germany, while the top federal tax rate is 45% on incomes over 250,000 Euros, citizens are subject to state and local taxes, along with real estate, and social security taxes. There is also a Church Tax that violates every rule of separation of church and state in this country. In 2011, the Catholic Church received 5 billion Euros from the German government and the Protestant-Lutheran church received 4.5 billion according to the Merco press. This tax was introduced through an 1803 decree that called for the nationalization of church property and made the government responsible for the maintenance of churches. The government collects the tax from registered Catholics and Protestants and reimburses the church. The tax is on a sliding scale and can run as high as 8% on incomes over 1 million Euros.
Germany also imposes a VAT (Value added Tax) which is a national sales tax or consumption tax. The current rate for the tax is 19%, but as low as 8% for necessities such as food, clothing, and medicine. This tax is applied to all goods and services sold, so instead of having 14 different taxes and fees on your cell phone bill you have the VAT. And of course the so-called temporary- taxes turned-perpetual are not isolated to this side of the pond. After the fall of the Berlin wall in 1989, a temporary Solidarity tax was introduced to assist in the re-unification of the two parts of Germany. That tax still exists today and runs as high as 5.5% on incomes over 1 million Euros.
In the UK you will find much of the same thing. Income tax rates of 20% to 45% on incomes above 150,000 pounds. There is also a 20% VAT with exemptions for food and clothing. So, your phone bill, for instance, will only have one tax, the VAT. A UK citizen also pays the council tax which funds local services in a way property taxes would and a road tax if he owns a car. The second biggest source of revenue is the National Insurance Tax, which covers healthcare, disability, unemployment and retirement benefits, this tax rate varies between 0% and 12% of income and is derived from a complicated formula that considers age, health, job title and seniority in determining the final rate. However, healthcare in the UK is fully funded by the government which makes medicine free to the consumer after the tax is paid, of course. In the US, I still have to pay $600 per month as my insurance premium as well as, my co-payments, deductibles and the percentage of the medical bills that is the patients’ responsibility.
The immortal Winston Churchill once said “there is no such thing as a good tax”. What I have found is, no matter where you live in the civilized world if a government can figure a way to tax its citizens, it will.