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Flake Report Highlights Costly Tax Loopholes: Alpacas, Private Golf Courses, Vacations

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Luke Rosiak Investigative Reporter
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Closing tax loopholes can draw bipartisan support and is imperative for balancing the federal government’s books, Republican Sen. Jeff Flake says in a new report “Tax Rackets.” The report is his seventh major project examining the federal deficit.

Flake reviews how tax loopholes increase the national debt and result in higher tax rates for average Americans in the oversight report, while allowing some Americans with lobbyists and accountants working on their behalf to save billions of dollars in taxes owed by building personal golf courses, lounging in Puerto Rico, buying alpacas and taking part in other financial hideaways.

For every dollar of taxes someone avoids through a special exemption, as much as a dollar of spending is added to the deficit, Flake argues in the report, concluding both conservatives and liberals should be infuriated by this status quo. Close to half of all tax filers don’t pay federal income tax, he notes, and many corporations don’t pay any taxes at all, even though the U.S. has the highest corporate tax rate in the world.

“Tax expenditures [or special tax exemptions] cost $1.23 trillion annually in foregone revenues,” Flake notes, saying that amount of money exceeds the cost of all discretionary federal spending, including on defense, education, transportation and more.

A lobby for alpacas — the odd-looking animal found in South America — openly bills them as living tax shelters, because they’re an easy ticket to a tax write-off-rich but profit-poor agricultural “business.” One Texas woman who raises the animals says in the report she “gets phone calls every December from rich people, looking for the agriculture exemptions.”

Another man said he bought alpacas in the years his kids were going to college and wrote off the animals’ cost to decrease his taxable income, then had his children list the lower income on college applications, leading to $700,000 in need-based scholarships.

Lobbyist-approved tax loopholes for special interests include provisions encouraging newspapers to hire telemarketers to spam people, costing $300 million over five years, and one to convert chicken poop into power–even though farmers could make more by selling it as fertilizer, and some plants that took the government up on the poop-to-power credit wound up being fined because the process can pollute the air.

Another longstanding loophole illustrating the potential for bad government spending decisions to multiply outlined in the report is the exemption for investing in municipal bonds, or “munis.” Unlike mutual funds, investors aren’t taxed on income, so they gobble them up, and local governments use the money to pay for dubious projects they can’t afford. When funded by bonds, city administrators often seem to ignore laws of supply and demand, such as when San Jose, California built two public golf courses, even though there are 23 other courses within 25 miles.

“The city owns three golf courses and is spending $2.6 million to cover operating losses and debt service at the two —Los Lagos and Rancho del Pueblo—that were constructed with federal tax loopholes,” the Flake report notes. “A Virginia city that defaulted on the municipal bonds issued to build a golf course is threatened with foreclosure on its police headquarters and city hall which were put up as collateral.”

Flake also cites a loophole that lets millionaires avoid taxes by creating private golf courses.

“The Internal Revenue Code allows landowners to claim a charitable deduction in exchange for agreeing not to develop their property,” the report notes. “The land is still owned by the donor and can be used for farming, recreation, and other purposes and public access is not required. Even the construction of homes is still permitted, but ‘intrusive’ development—such as hotels or shopping centers—is not.”

The provision means rich people can designate their backyards or golf courses as nature areas, then donate them to themselves and collect a tax write-off.

Golf management consultant Mike Kahn instructs rich people on using private golf courses as tax shelters, and collects a percentage of the resulting tax rebate as his pay. Kahn said one investor paid $2.4 million for a golf course, which resulted in $4.8 million “in pure tax savings.”

Flake also cites the case of New Jersey selling tax-free muni bonds to subsidize a Canadian corporation building a mall with an indoor ski slope, which locals didn’t want and couldn’t afford, and for which no subsidies were needed.

“Completion of American Dream Meadowlands, a 2.9 million square-foot shopping and entertainment center, is dependent upon $1.15 billion in tax-exempt municipal bonds and hundreds of millions of dollars in other state and local tax incentives,” according to the Flake report.

In another illustration of how bizarre the tax-free market is, the Wisconsin Public Finance Authority bought the New Jersey bonds, then sold its own bonds. The jobs created by the mall will pay an average of $20,000 a year, not enough to afford even a one-bedroom apartment in the area.

The near-bankruptcy of Puerto Rico was enabled by munis that encouraged officials to keep spending more than they were receiving in revenues. Puerto Rico has a bevy of additional loopholes, too.

If Puerto Rico were a state, it would send approximately $2.3 billion to Washington annually, but instead its residents paid only $20 million in federal income taxes in recent years. And an aggressive accounting measure gets Uncle Sam to even reimburse local taxes under rules designed for foreign countries. This “was never approved by Congress” and “some analysts question whether the arrangement is constitutional,” the Flake report said.

Flake cited a statement from Forbes that “yes, this is legal … a refuge for tax-oppressed millionaires and billionaires. This is a much sweeter deal than you can get these days by renouncing U.S. citizenship.”

He added that “new resident investors may be able to reduce the tax rate applied on interest and dividend income coming from sources outside of Puerto Rico (including the source country taxation) to 0 percent or 10 percent, respectively, by investing through certain Puerto Rico investment vehicles.”

A California private equity executive saved $10 million a year by spending at least half the year on the island, and another moved there from Connecticut to avoid taxes and now says his life is “utterly epic.”

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