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VOL. 13,
NO. 203
How a decades-old loophole lets billionaires avoid Medicare taxes
LA County alleges harmful emissions from landfill
By Paul Kiel, ProPublica
By City News Service
This story was originally published by ProPublica. ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox. Series: The secret IRS files: Inside the tax records of the .001% Reporting highlights - Tax Dodge: Most working Americans have to pay Medicare taxes, but some of the richest figures on Wall Street have found a way to opt out, a ProPublica investigation found. - Accidental Loophole: Nearly 50 years ago, Congress tried to fix one financial abuse but unwittingly created an obscure loophole that these billionaires exploit to avoid Medicare taxes. - Battling Abuse: The IRS only recently got tough on people it viewed as abusing the loophole, but it is unclear if the agency will be able to end the practice. These highlights were written by the reporters and editors who worked on this story. For most working Americans, paying their share of the taxes that fund Medicare is an unavoidable fact of life. It’s so automatic for many workers that they may not even realize it takes a bite out of every paycheck. In theory, everyone is required to contribute to the country’s health insurance program for seniors, no matter how poor or rich, from cashiers to CEOs. Not on Wall Street. There, some of the most powerful people in finance found a way to opt out. The trove of tax records behind ProPublica’s “Secret IRS Files” series contains plenty of examples of billionaire financiers who avoided Medicare tax despite earning huge amounts from their companies. In 2016, Steve Cohen, the owner of the New York Mets, paid $0. So did Stephen Schwarzman, head of the investment behemoth Blackstone. Bill Ackman, the
Damaged “Medicare For All” sticker. | Photo by David Seibold/Flickr (CC BY-NC 2.0)
headline-grabbing hedge fund manager, was able to shield almost all his income from the tax. How do they do it? Business owners, like any selfemployed person, whether they’re a freelance Uber driver or a hedge fund manager, have the responsibility to declare their self-employment earnings on their tax returns. Indeed, the vast majority of small-business owners have no choice but to do so and pay the same taxes that wage earners pay, including Medicare. But high-priced tax advisers, wielding a onceobscure bit of the tax code, found a way to make that obligation vanish. By carefully channeling profits through a company in a way that invokes that obscure provision, even a Steve Cohen, with a tax return showing he received hundreds of millions in profits from his hedge fund, can exempt that income from Medicare tax. The three billionaires contacted for this article said they followed the law as written. They also pointed to the fact that they paid substantial income tax, which for them carries a much
higher rate. Medicare tax is 2.9% for most people and 3.8% for high earners. But these maneuvers by the rich hasten Medicare’s future crisis. Sometime in the 2030s, the program’s trust fund is due to run dry. Closing the loophole, along with eliminating other ways around the tax for wealthy business owners, could raise more than $250 billion over 10 years for Medicare, according to recent government estimates. Over the past three years, ProPublica has mined the tax records of the rich to detail the many ways they avoid taxes. We’ve focused on basic structural features of the U.S. system that advantage them. We’ve uncovered maneuvers of questionable legality that seem to have escaped the notice of the IRS. The Medicare tax loophole occupies a gray area. The IRS definitely knows about it, but it’s unclear if the agency will be able to stop it. The potential of the loophole first surfaced in the 1990s, and the IRS soon expressed the view that active business owners shouldn’t be allowed to exploit it. It was only in recent years, however,
that the agency got tough. Today, the IRS continues to battle what it considers a serious abuse, waging a rare, long-shot campaign to prevent some of the nation’s wealthiest citizens from using the loophole. The story of how America’s richest financiers avoid paying Medicare tax gives unique insight into the peculiar, messy way taxes work in the U.S. No one set out to create the loophole when it first entered the tax code in 1977. But a series of seemingly unrelated policy changes, together with a revolution in how American businesses are structured, conspired to deliver a major tax advantage to the wealthy. On Capitol Hill, interest groups have successfully defended that advantage, branding any effort to close the loophole as a tax hike on Main Street businesses. Approaching its 50th birthday, the loophole, for now, lives on. Fixing one problem, creating another Over the 2010s, years of budget cuts sliced deep See Medicare Page 06
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second lawsuit was filed last week in Los Angeles federal court against the owners and operators of Chiquita Canyon Landfill, alleging that Castaic residents have been sickened by noxious fumes and odors emanating from the site. The suit brought by Los Angeles County contends landfill owners Chiquita Canyon LLC, Chiquita Canyon Inc. and Waste Connections US Inc. have failed to control a persistent and harmful underground smoldering reaction within the landfill, which has been emitting noxious odors, hazardous gases and toxic leachate into nearby communities and the environment for nearly two years. The county’s complaint includes claims for public nuisance, violations of the California Unfair Competition Law, and violations of the Los Angeles County Code. The county is seeking an injunction to halt the noxious emissions and protect affected communities, orders to relocate nearby residents temporarily until the reaction is contained, and civil penalties for the defendants’ alleged ongoing violations of environmental and public health laws, according to the suit. A Waste Connections representative did not immediately respond to a request for comment from City News Service. A group of Castaic residents filed a lawsuit against Waste Connections in federal court in October, alleging the company failed to properly manage the landfill’s gas capture, control systems and leachate systems. Leachate is a polluted liquid that forms from rainwater filtering through solid waste. The alleged failure caused the emission of elevated and harmful levels of carbon monoxide, hydrogen sulfide and volatile organic gases,
creating unsafe living conditions for thousands of residents, the residents’ lawsuit says. This year alone, there have been 13,000 odor complaints about the landfill, according to plaintiffs’ attorneys in the October suit. Residents have reported headaches, nausea, respiratory issues and the inability to enjoy use of their properties due to the offensive smells, the suit states. According to LA County, the landfill operator has been working to remain in compliance with an administrative order, issued by the U.S. Environmental Protection Agency, to implement dozens of corrective measures recommended by federal, state and local agencies to slow and eventually abate the smoldering. This includes the installation of more than 200 gas extraction wells, installation of multiple flares, leachate extraction systems, along with the installation of a geomembrane cover that will encompass the reaction area where the odors are apparently emanating from, the county said. While the operator is nearing completion of the majority of these measures, local residents have indicated the odors and impacts have not been significantly abated, the new complaint states. “This lawsuit is a necessary step to ensure accountability and compliance with the rules that protect our residents and the environment,” Supervisor Kathryn Barger said in a statement. “We must hold the responsible party accountable and continue doing everything possible to restore safe and healthy living conditions for our communities,” she continued. “While federal, state and See Landfill Page 28