Are U.S. States unfairly burdening smokers by taxing cigarettes to cut budget deficits?  Historically, states have used part of the revenues from cigarette sales to help smokers quit or to pay for their health care. But now, many states are proposing an additional cigarette tax to bail them out of the fiscal crisis without earmarks to help people stop smoking.

Sure, smokers are an easy target. There is little political opposition and health advocacy groups consider it a bane to society.  But does it make it right? Are they being singled out?

In more than 20 states, budget shortfalls are pushing more to look to tobacco for revenue. Even the tobacco-producing states are considering it.

According to the New York Times, “in the South, where such taxes have been lower than in the rest of the country, Arkansas has nearly doubled its tax, to $1.15 a pack, and Kentucky’s will double, to 60 cents, on April 1.

Increases are also under consideration in other tobacco-growing states like North Carolina, South Carolina and Georgia. With estimated state budget shortfalls nearing $50 billion, opponents of smoking see an opportunity to make headway with the most reluctant lawmakers.

A 10 percent increase in the price of cigarettes reduces consumption by 3 percent to 5 percent, according to the Centers for Disease Control and Prevention, and deters young people from picking up the smoking habit.

Tobacco industry representatives have argued that tobacco taxes unfairly burden smokers, who are mostly working class or poor, and jeopardizes jobs at retailers like convenience stores, where more than 30 percent of total sales can come from cigarettes.

“Many of these states are asking the very definition of Main Street to bail out state capitals,” said Frank Lester, a spokesman for Reynolds American, which makes Camel and other major brands. “It’s just another bailout.”

States whose cigarette taxes are already high are also considering increases. In Oregon, now at $1.18 a pack, Gov. Theodore R. Kulongoski has proposed a 60-cent increase. In New Jersey, Gov. Jon Corzine is asking the Legislature for a 12.5-cent increase over the current $2.58. New York has the highest state tax on cigarettes, $2.75 a pack.

In Mississippi, cigarette tax increases in surrounding states have helped dampen fears that people would cross state lines to buy cigarettes. After a tax study commission appointed by Governor Barbour recommended an increase, he reversed his opposition but warned that the tax should be viewed as a matter of health policy, not a generator of revenue.

Bill Phelps, a spokesman for the Altria Group, the parent company of Philip Morris, argued that states often overestimated revenues from cigarette tax increases. From 2003 to 2007, there were 57 state tax increases, Mr. Phelps said, and in 41 cases they fell short of projections.

“We don’t think it makes a lot of sense to fund what are often important government programs with a revenue source that is in decline,” he said. “Just in the last 10 years, sales have declined an average 3 percent a year.”

But Frank J. Chaloupka, an economist and director of the Health Policy Center at the University of Illinois, Chicago, said cigarette taxes had not reached the threshold of diminishing returns. “We haven’t yet seen a case where if you raise taxes you don’t raise revenues,” Mr. Chaloupka said.

New Jersey did see a decline in revenue after its last tax increase, he said, but other factors, like a comprehensive smoke-free-air law that went into effect before the increase, drove down consumption.”

On top of all this, a 62-cent increase in the federal cigarette tax will go into effect in April.  The tobacco industry believes this will overburden smokers and drive down state collections. But the federal increase does not seem to have derailed state efforts, in part because smokers cannot avoid it by crossing state lines.

The debate will continue but the bottom line is that states will come down to the last day of the session, when they realize they have to get the budgets down and they need X dollars.”

What vice will be taxed next?  Beer, Wine, Liquor?

source: NY Times

According to the NY Times, Switzerland recently announced it would help global authorities pursue tax cheats.

The surprise announcement came after a similar shift by two other European tax havens, Liechtenstein and Andorra, on Thursday.

The moves deal the biggest blow yet to European traditions of banking secrecy and come amid a global crackdown on tax evasion. The three governments agreed to cooperate with authorities in the United States and elsewhere in investigating tax evasion and, under certain circumstances, to turn over data on accounts at banks headquartered within their jurisdictions.

“The adoption of the O.E.C.D standards is a significant signal that bank secrecy as it has existed for generations is coming to an end,” said Scott D. Michel, a tax lawyer at Caplin & Drysdale in Washington, D.C.

Switzerland is not abandoning its banking secrecy laws, but rather adopting the definition of tax evasion used by the 30-nation Organization for Economic Cooperation and Development.

Switzerland was placed this week on the O.E.C.D.’s list of uncooperative tax havens, which also includes Andorra, Austria, Hong Kong, Liechtenstein, Luxembourg, Monaco and Singapore. It has also come under pressure from the British prime minister, Gordon Brown, who last month threatened to disinvite Switzerland to a meeting in London next month of the Group of 20 leading nations. Austria and Luxembourg have also agreed to adopt the organization’s definition of tax haven.

Switzerland is home to a third of the estimated $7 trillion hidden offshore globally.

Switzerland, unlike the United States and many other countries, distinguishes between tax fraud and tax evasion, and does not consider tax evasion to be a crime. But by adopting the O.E.C.D. definition, it will now cooperate with countries with which it has information-sharing treaties in pursuing tax evasion.

Those countries must already possess names of clients suspected of tax evasion, and then ask Switzerland for assistance.

“The privacy of foreign clients not under suspicion will continue to be protected by Swiss bank-client confidentiality,” the Swiss Bankers Association said on Friday. “An automatic exchange of information is excluded.”

UBS, the Swiss bank, averted indictment last month and agreed to pay $780 million to the Justice Department to settle charges that it helped scores of wealthy Americans evade taxes through secret offshore accounts.

UBS declined to comment.

Here are some key facts about Switzerland’s bank secrecy:

BANK SECRECY:

- Sharing information about bank client data is a criminal offence in Switzerland. Banks are forbidden from handing over bank client data directly to foreign authorities even if requested to do so. Switzerland’s protection of banking secrecy goes back to 1934 when it passed a law imposing heavy penalties, up to and including prison sentences, for breaches of banking secrecy.
TAX FRAUD/TAX EVASION:

- Unlike most other countries in the world, Swiss law distinguishes between tax fraud and tax evasion. Tax fraud is a criminal offence that involves actively forging documents to hide income from the tax man. Tax evasion, which is defined as not fully declaring one’s income to the Swiss tax authorities, is an administrative offence, punishable with a fine as the law accepts that citizens can sometimes innocently forget data or make mistakes when filing their tax returns.

Tax evasion is distinct from tax avoidance, which is the legal exploitation of tax loopholes to minimise tax payments.

TAX INFORMATION SHARING

- Switzerland can share tax information under a so-called administrative process enshrined in tax treaties signed with the United States and other countries. Up until now, it has mainly shared information on tax fraud.

Banks supply information requested by foreign governments pursuing criminal investigations of individuals, but this does not automatically extend to tax matters.

Swiss law requires the other jurisdiction demanding the information to come forward with a detailed claim about a precise individual. Berne does not offer cooperation in the case of blanket requests for data.

THE UBS TAX FRAUD CASE

- UBS (UBSN.VX)(UBS.N), Switzerland’s largest bank, became the target of a U.S. investigation alleging the bank had helped thousands of Americans to hide money from its tax authorities in Swiss bank accounts. In a landmark settlement, UBS agreed to pay a $780 million fine in February. Berne also agreed to the transfer to the U.S. of a few hundred UBS client names even before a Swiss court had ruled on whether tax fraud had been committed.

EU SAVINGS DIRECTIVE

- Switzerland allows European Union account holders to keep their affairs secret by paying withholding tax on the interest of savings from their income instead.

Switzerland shares the bulk of the revenues collected in this way with relevant EU governments without revealing the identity of the EU bank account holders. The matter is regulated by the so-called EU savings tax directive.

It seems the reason Switzerland is now agreeing to bend on it’s bank secrecy policies is to gain some leverage in the U.S. investigation of it’s largest bank, UBS, which is alleged to have helped thousands of Americans hide money from the IRS in Swiss bank accounts.  With a new president and a need for more cash, the Swiss know the U.S. government is serious about pursuing this lost tax revenue.

source: Reuters, NY Times

President Barack Obama’s pick for U.S. trade representative is the fourth nominee to have tax issues. Former Dallas Mayor Ron Kirk will file amended tax returns for 2005 through 2007 and pay almost $10,000 in back taxes.

Ron Kirk’s tax problems stem from excess deductions for basketball tickets and failure to report speaking fees. 

White House officials and key senators call the errors minor and predicted that the issue should Kirk’s nomination to be U.S trade representative.

“When you put anybody’s tax filings under a microscope, people don’t have to be dishonest,” said Senate Majority Leader Harry Reid, D-Nev. “It’s just hard to do all the right things. It certainly shouldn’t disqualify him.”

Senate Finance Committee aides uncovered Kirk’s tax issues during weeks of his examination and evaluation for the cabinet position.  Kirk, a lawyer and the Texas Democratic Party’s 2002 Senate nominee, will file amended tax returns for the last three years and pay the Internal Revenue Service $9,975 plus interest.

This careless error pales in comparison to some other Obama Cabinet picks.

Treasury Secretary Timothy Geithner paid $43,000 in back taxes before his confirmation. Tom Daschle, the former Senate majority leader who withdrew his bid to lead the Health and Human Services Department, paid $128,203 in back taxes, plus interest, for failing to report as income the car and driver a friend had provided to him.

Labor Secretary Hilda Solis’ confirmation was delayed for weeks amid questions about her husband’s unpaid taxes. Outside the Cabinet, an Obama pick for a top White House job withdrew over questions about her tax compliance.

Texas Sen. John Cornyn, a member of the GOP leadership and the finance committee who defeated Kirk in the 2002 race, had been supportive of the nomination. But Monday night, an aide called the tax problems “a very serious offense.”

“He’s very disappointed,” Cornyn spokesman Kevin McLaughlin said. “He’s hopeful Mr. Kirk will take the opportunity to provide an explanation when he comes before the finance committee.”

The top Republican on the panel, Sen. Charles Grassley of Iowa, “will reserve judgment on the nomination until the vetting process, including the hearing and any follow-up questions resulting from the hearing, is completed,” said spokeswoman Jill Gerber.

His tax bill includes three main discrepancies:

1. He owes $5,800 because of $37,750 in honorariums from 16 speeches dating to 2004. He assigned the fees to be paid directly to a scholarship fund at his alma mater, Austin College in Sherman. The Finance Committee said he should have reported the income and claimed a corresponding charitable deduction.

2. Kirk owes $2,600 stemming from deductions for season tickets to the NBA Dallas Mavericks: $6,208, $7,035 and $4,139 in 2005, 2006 and 2007, respectively.

A memo issued by Democratic and GOP Finance Committee staffs said, however, that “he has substantiated $9,900 of the total $17,382 as qualifying entertainment expenses.”

3. An additional $1,000 in back taxes involved deductions for $25,218 in tax and accounting fees over three years. Kirk attributed 90 percent to his law practice, but that was too high.

Last October, Kirk also paid the IRS $2,188 plus $139 interest for tax year 2006, after the IRS notified him that he had failed to report a $5,000 speaking honorarium and $819 in dividend income.

Expect some tough questioning by members of Congress but the consensus is that Ron Kirk will be confirmed as the U.S. trade representative and join Obama’s cabinet.