Is the oil business not profitable?

I'm confused. I thought the oil business was doing well these days. The demand is there along with soaring prices. This is a tough set-up for consumers, but it's definitely a seller's market.

That's why I'm so disheartened by the giveaways in Congress's energy bill. These guys are acting like they need to bribe oil executives to drill for oil to sell at $50 a barrel.

Here's the letter that Henry Waxman, ranking Democrat on the Government Reform Committee sent to Speaker Hastert to let him know that Energy Committee Chairman Joe Barton's staff had snuck a $1.5 BILLION hand-out that is aimed at a particular group of Texas oil companies into the bill, after the mark-up session was supposed to be over. Over one-third of the total was worked in as a "direct spending" measure, so if passed, it would be outside of the standard congressional appropriations process. So what's the cool $1.5 Bil for? Glad you asked! It is meant to go towards "Ultra-Deepwater and Unconventional Natural Gas and Other Petroleum Resources" [Italics mine]. Well, that went from Ultra-Specific to Unconventionally Vague really quickly. What is quite clear is just who the money is aimed at. The language of the bill mandates that the government "contract with a corporation that is constructed as a consortium." Sounds general, except it's not. It's just about a sure thing the bill refers to a consortium known as the Research Partnership to Secure Energy for America (RPSEA), which is based in Sugar Land, Texas--made famous by its representation in Congress by one Hon. Tom Delay. Chairman Barton is also from Texas. The Board members of RPSEA include Halliburton and Marathon Oil Company. Marathon Oil's PAC contributed heavily to Republican (and to a lesser extent Democratic) candidates in the 2004, including donations to both Delay's and Barton's campaigns. Looks like their return on investment will exceed all expectations! In his letter, Waxman says that the "top oil companies" in this country are expected to break all records and earn over $230 Billion in 2005. Why on earth would Congressional Republicans bend over backwards to sneak them an extra $1.5 Billion? This is not in our common interest and it is also absolutely unnecessary. Why spend taxpayer dollars subsidizing an amazingly profitable industry? This makes no sense.

Here are the Boston Globe and Reuters articles on this story.

Update: Rep. Joe Barton has finally explained, based the merits, why everyone should support his energy bill, filled with all the giveaways. Because everyone against is "so anti-American....[long awkward pause]....economic growth and opportunity."
He must have realized that he sounded odd, because he went into this eloquent backtrack. So reports the Dallas Morning News:

Did Mr. Barton really consider the opponents anti-American? a reporter asked a moment later.
"No. No," he said. "What I said was, ask them why they're opposed to something which is pro-American economic growth and opportunity. That's what I said."
An hour later, Mr. Barton remained puzzled that his statement had come across so harshly.
"If I said it, I didn't mean to," he said in an interview. "Anybody can oppose any bill and still be pro-American. That's silly. ...
"My gosh," he said, "we've got 100 senators and 435 House members, and I assume that if some subset of America votes for you, either congressman or senator, you're a person who's pro-America."

Mr. Barton, nice job with the explanation. Don't be scared to go with your gut though. Sometimes, the best bet is to just call your opponents "anti-American." Otherwise, you might need to explain to your constituents how you're sending their hard earned tax dollars straight to the oil companies.

Banning Happy Hour?

Apparently, the National Labor Relations Board sided with Guardsmark against a complaint filed in 2003 by the SEIU. They have upheld the company's policy of banning social interaction between employees after work.
How is that a defensible position? What happened to the First Amendment?

Pro-Adequacy, Pro-Jobs

For too long, politicians have gotten mileage out of touting race-to-the-bottom tax "incentives" to woo companies into setting up shop within their state's boarders. These offers are unsustainable and create an uneven playing field within the state, making economic growth uncertain and the market less predictable (see Casey's post below for an example).

At long last, people are starting to wise up to the fact that cutting every tax, reducing every service, and breaking every union, can cause a lot of problems and actually make a place uncompetitive and unprepared for global competition. Follow this link for just a part of the story.

NC Building Breaks

Would you give money to someone to do something that they're already making money doing and then pay for it by charging someone else? Doesn't make sense right? Well that's exactly what home builders are asking of the North Carolina General Assembly.

North Carolina home builders are asking the government to subsidize their cost of doing business with property tax breaks:

The legislation would create a special class of property for anyone who develops and sells real estate. It would allow builders to increase the value of their property by creating lots, paving roads and building houses without paying any property taxes on the improvements. New homes would not be taxed at their full value until they were sold.

Asking for this tax break, home builders are trying to convince law makers that the price of housing is being driven up primarily by the cost of building, not the high level of demand on the market. And that reducing the cost of building will spur on the housing market. But as it turns out, the home building market is doing just fine:

Builders are already busy in the Triangle. Wake, Durham, Orange and Johnston counties added more than 67,000 homes and apartments between 2000 and 2004, according to U.S. Census Bureau estimates. Johnston Commissioner W. Ray Woodall said his county can't keep up with demand for sewage treatment and other services, and he said builders don't need any more incentives.

Looking at the issue through a policy lens, this legislation would definitely cut into local tax revenues and without a cut in spending, NC lawmakers will have to raise taxes in other places. If you make home builders the winners, then who are going to be the losers?

In short, North Carolina home builders are asking for a publicly-funded handout, plain and simple.

If only it were true

On the Wall Street Journal's online Op-Ed clearinghouse, Ken Blackwell, Ohio's Secretary of State and a candidate for the Republican nomination for the governor's office in 2006 and Arthur Laffer, of Reaganomics, write about the greatness that is TEL. TEL is a spending cap that in Blackwell's plan would limit state and local spending growth to 3.5% or the sum of inflation and population growth. The proposed TEL for Ohio is not very different from TABOR in Colorado, which has been highly problematic since it was voted into the state's constitution in 1992.

The most surprising claim in the column comes in the second to last paragragh:

Given that high-spending states underperformed low-spending states in key growth and productivity metrics from 1994 to 2003, under TEL the fiscal experience in Ohio would have been dramatically different. A 17% reduction in tax rates would
have enhanced Ohio's attractiveness to investors, businesses and employers. Greater investment, more businesses and more employers would obviously have lowered unemployment rates, raised real wages and attracted migration into the state. This in turn would have increased allowable expenditures. Thanks to these dynamic effects, even with its cut in tax rates the Ohio TEL could well have increased tax revenues, allowing for even larger tax reductions and further enhancing economic growth.

The problem, and you hate to burst the bubble of people who are so giddy with excitement for public policy--no matter how ill-conceived, is that, if TABOR is any guide (and I think it is), TEL will definitely reduce revenue. The odd thing about their final claim is that they spent the whole article extolling the virtues of low-taxes and small government. But Blackwell and Laffer can't leave it alone there--indeed, Laffer has made a career of not leaving it there. Instead, they make the preposterious claim that dramatically lower taxes will yield much higher revenue (which presumably, the government will need to give back to the taxpayers, under TEL).

Moreover, Blackwell and Laffer write as though taxes and Ohio's economy live together blissfully in a vacuum. They make no mention of the loss of manufacturing jobs. They also make no mention of how taxes are collected or the distributive impact of different taxes. These are crucial issues, but it seems that Blackwell and Laffer don't have the inclination to consider them. It's not really a shock though, if you're an ideological warrior like these two, it's easier to squint through public policy details.

Facts? Why Bother?

In today's News & Observer of Raleigh, NC former Wachovia Bank Corp. Chairman, major Republican Party Donor, and Federalist Society Member, John G. Medlin Jr. has a hilarious Op-Ed column about why North Carolina absolutely needs to follow his advice and cut the income tax rate for people in the highest bracket. Of course, Medlin isn't trying to write comedy, but if he needs a little extra cash to make it through retirement, let me suggest that he may have found his vocation.

First, he claims that NC is losing people to the surrounding states that have lower income taxes. Does he offer proof? Nope. He does, however, inform us that "It is interesting that the fastest-growing city in the Charlotte metro area is Rock Hill, S.C., whose population jumped 16.2 percent between 2000 and 2004 compared with 6.5 percent for Charlotte and only .9 percent for Gastonia." If I remember my scientific method from middle school correctly, that wouldn't qualify as a controlled experiment. One town grew faster than the others. One North Carolina town grew dramatically faster than the other North Carolina town. Presumably, both of these towns, being in North Carolina, and all, are each paying North Carolina's statewide income tax. Seems like something else might be playing a factor in determining population growth.

For what it's worth, North Carolina has experienced population growth for every year dating back to at least 1976. Medlin must have forgotten about that, surely he didn't write his column in bad faith in an effort to scare up some popular support for reducing his personal tax bill.

Here is where he really gets into trouble:

What are the numbers, income and taxes of individuals vulnerable to loss? It is estimated that in 2004 about 70,000 tax returns, or about 2.5 percent of the state's total, were in the 8.25 percent bracket and accounted for about 30 percent of state personal income taxes. Their taxable income averaged around $500,000 and they paid an average of about $39,000 in state income taxes and an estimated $9,000 in state sales taxes. Higher-income people expect to and should pay a higher proportion of taxes, but there are limits to what they will accept when there are less punitive alternatives.

No one knows for certain how many higher-income taxpayers leave or do not come due to our state's higher income tax rates, but a conservative estimate is at least 750 per year on average. Based on the above figures, that would result in a permanent loss from our income and sales tax revenue base, which has grown for other reasons, of about $36 million per year on average, or a total of $144 million for the last four years.

Two more years at this rate would raise the estimated cumulative permanent loss from the tax base to around $216 million, which is more than the estimated revenue gain per year from the extra one-half percent "temporary" income tax increase. These estimates do not include lost city and county sales and property taxes or jobs and tax revenues lost due to economic development prospects being scared away by our higher taxes. [emphasis mine]

Nobody knows how many, or if any high income people are moving away, but Medlin decides he can guess, and don't worry, he's making a "conservative estimate" (I'll say). And now that he's made a wild guess on hypothetical population loss, he'll note that over the past few years, that sales tax collection in the state has increased. So, a made up number of people leaving the state, when alongside the fact that revenue has been increasing, leads Medlin to believe that "at this rate" the state will lose money over the next two years. And not just a little either, where talking "$216 million."

Medlin threatens population loss. The population is actually growing. Medlin warns of declining revenue. Recent trends, however, indicate growth.

Unclaimed Property Tax Relief in Arkansas

The Arkansas Democrat and Gazette reports that a progressive Arkansas property tax break is frequently not being claimed by the low-income homeowners who need it most. The credit, which was enacted through a vote of the people in the fall of 2000, gives every Arkansas homeowner a $300 credit against their property taxes-- if they apply for it. A July 17 article (only available to paid subscribers on-line, sorry) says that many homeowners who are eligible for the credit simply aren't applying for it.

When the $300 credit was enacted in 1999, it was a mixed blessing: the enabling legislation gave a generous property tax break to homeowners--but gave nothing to renters, who pay rent indirectly in the form of higher property taxes. And the 1999 legislation specified that the $300 credit would be paid for by a half cent sales tax hike. When the funding source is taken into consideration, this is no longer a very progressive move for homeowners-- even if everyone who's eligible applies for the credit. (For renters, of course, it's a flat-out regressive tax hike.) If we guess that low-income homeowners are disproportionately likely to not apply for the $300 credit, this tax swap seems, in retrospect, to be a pretty raw deal for Arkansas tax fairness.

This is an object lesson for state lawmakers who want to enact progressive targeted tax relief, whether it's an Earned Income Tax Credit, a sales tax credit, or a property tax credit: if lawmakers value tax fairness enough to enact such a credit, they need to think about implementation. At the end of the day, someone has to be in charge of running an outreach program to tell people across the state that they might be eligible for this thing-- and lawmakers need to appropriate enough money to make an effective outreach program possible.

The state's Assessment and Coordination Division (the state agency that keeps track of total property value and property tax statewide) has this on their website for those intrepid enough to find it. Their advice for those with questions about their eligibility? "Contact your local assessor's office." No obvious hints are given about how one might do that.

The Democrat and Gazette article provides anecdotal evidence that the people who ought to know things about this credit just don't, including:

1) The taxpayer: "'I didn’t know it existed,' said David Cameron, the Siloam Springs city administrator and one of the Benton County homeowners who isn’t receiving the credit. 'I’ve never heard of such a thing as a $300 tax credit.'"

2) The tax administrator: "...assessors believe thousands of homeowners are still missing out. 'It could be 1,000 people, or it could be 10,000 in this county,' said Lee Ann Kizzar, the Washington County assessor. 'It’s one of those things that I can’t tell.'"

The article also notes that some local tax administrators clearly don't think it's their job to do PR on this:

"In Carroll County, Assessor Zelah McCollough said she no longer tries to track house sales to inform new owners about the tax credit. It’s too expensive to send notices, she said. 'I think the taxpayer needs to be responsible to make sure they get that,' McCollough said."

This view shouldn't be allowed to carry the day. Taxes are complicated, and tax administrators (and lawmakers) should do what they can to ensure that those who are eligible for tax breaks are aware of them.

Targeted tax credits are absolutely the right way to deliver inexpensive tax relief to the low- and middle-income taxpayers who need it most. But lawmakers choosing to follow this path should learn from the lessons of Arkansas.

School Funding in Texas

A lot of change is on the table in Texas. The legislature is turning into the home stretch of what could turn out to be just round #1 of their special session. In short, they are trying to boost school funding -- both houses of the leg. have already voted in support of higher teacher salaries-- while cutting property taxes, making particular use of the homestead exemption, and raising the sales and cigarette taxes.

The challenge, as Texas goes forward, is to make sure that the whole state reaps the advantages of better education funding. As expressed in the article linked to above, some legislators are concerned that it will vary too much from locality to locality.

Mississippi Burning

Ole Miss Journalism Prof Joe Atkins launched a broadside at corporate welfare in today's edition of The Clarion-Ledger. It's worth reading.

He offers several examples of how special tax deals for corporations haven't always worked out particularly well for the people of Mississippi. He points to companies who move in to take advantage of sweet-heart deals, only to shutter the factory and move out when they expire. He is also concerned with the way that workers are underpaid as companies fudge the numbers to make the public investments seem more worthwhile.

He's on to something very important with this Op-Ed. States need to move away from gimmick-economics and get serious about long-term planning, with easy to understand, level-playing fields. Everyone should be wary about a company that would only set up shop given a sketchy property tax deal.
Politicians should ask themselves: If we need to bribe businesses to come here, is the economy working?
The answer is no, and while a sweet-heart deal might draw a company or two, the real question is how to make a town or state an attractive place for a company (or family, or worker) to find start up and find opportunity. Good policies don't change on such an individual basis.

Utah Corporate Tax Poll

The Deseret Morning News conducted its own poll and discovered that most people in the state, including 62% of Republicans, are against Governor Huntsman's proposal for a full repeal of the state's 5% corporate income tax.

This is particularly note worthy because Huntsman pushed for it using tired supply-side rhetoric suggesting that the tax cut would increase state revenue. Right now, it looks like Utahns see right through that.

Schwarzenegger's $8 Million Conflict of Interest

Arnold Schwarzenegger hasn't developed a great reputation for separating state business from his political fundraising efforts.

Now, he's having trouble clearly distinguishing between the public interest and his personal fundraising efforts. He recently vetoed a bill focused on regulating dietary supplements, and an $8 million deal he has to consult with the publisher of Flex and Muscle & Fitness magazines. He also serves as an "editor" and writes columns. Both magazines rely on the supplement industry for much of their ad revenue.

I can't prove that the Guv-a-karten Cop (putting a new polish on "Guvenator") vetoed the bill specifically because of his contract with the magazine publisher, but I strongly believe that citizens of California do have a real reason to be concerned about their chief executive's ability to remain impartial, or focused on their best interest, while he is being paid $8 million by any private company.

From an action movie star who complains about teachers, nurses and janitors, this interest seems particularly "special."

On a sidenote, you'd expect that one positive by-product of electing an out-of-touch, multimillionaire ideologue was that he couldn't be bought. Alas, not even that small respite can be offered to our West Coast friends.

Black is white. Night is day.

And the best way to improve your state's bond rating is to plunge it further into debt. Or so says South Carolina Governor Mark Sanford (R).

Earlier this week, South Carolina saw its bond rating downgraded from "AAA" (which is very, very good) to a slightly less good "AA+", by Standard and Poor's, one of the bond rating agencies that is in charge of such things.

S&P issued a news release explaining their action. (For the moment, it's available here, but probably won't be available to non-subscribers long.)

In brief, here's what they said:
1) the state's economy is growing pretty slowly, and its unemployment rate is worryingly high.
2) the good news is that the state has taken steps to clean up its act fiscally, including formal financial planning and not enacting a proposed income tax cut earlier in 2005 that would have cost more than $1 billion.
3) So the state's bond rating is going down, despite the fact that state lawmakers have done the right thing fiscally, because the good fiscal policy will make things better only in the long run and there remains a short-term economic downturn from which SC has not yet emerged.

Bond rating downgrades are nothing to laugh at: they make it more expensive, in the long run, for a government to borrow money, and they also send a powerful signal to businesses and individuals about how well the state is being managed. This is why the mere threat of a downgrade was enough to get anti-tax Virginia lawmakers to pass a big tax hike in 2004.

Within a day of the S&P announcement, Gov. Sanford had cooked up his response, which called for income tax cuts as the best long-term approach for impressing S&P.

In a way, this wasn't surprising. After all, it was Sanford who proposed a billion-dollar income tax cut back in January. But the S&P report states pretty clearly that cutting income taxes earlier this year, as Sanford recommended, would have made the state's fiscal health even worse. So why are income tax cuts any smarter now than they used to be?

According to Sanford spokesman Will Folks, it's because S&P isn't measuring things right:

“If you’re going to assume the price tag, you’ve got to assume the economic growth,” Folks said.

In other words, the administration is saying that a ratings agency that makes its living by evaluating the fiscal health of public and private entities just doesn't know how to do the math when it comes to tax cuts.

I wait with bated breath to see if investors worldwide will now shift their accounts from Standard and Poors to the governor of South Carolina. Hope he's got a license for that sort of thing.

Kudos, by the way, to South Carolina press for picking up on the incongruence between S&P's diagnosis and Sanford's cure:
An editorial in the Times and Democrat takes Sanford to task.
An article in the State is the reason the administration was even asked to defend its position on this.

Update: SC-based blogs are hitting this on all cylinders here and here.

The American Cancer Society vs. the State of Minnesota

In a post yesterday we discussed the competing objectives being sought by folks who support the pending Minnesota cigarette tax hike. The legislature clearly want to use the estimated $380 million from this hike to balance their budget and pay for services-- but anti-tax advocates historically think of the cig tax as a way of discouraging smoking. In other words, some people are thinking of this tax as a fiscal policy tool, but others see it as a social policy tool.

Minnesota Public Radio has a piece today that makes very clear what the American Cancer Society thinks will happen as a result of this hike:

Matt Flory of the American Cancer Society says the new tax will either stop or prevent 40,000 Minnesotans from smoking. "We're very confident that this will prevent smoking. And if we reduce smoking we'll reduce tobacco related diseases which will reduce health care costs," he says.

He could be right about this. Alternatively, the legislature could be right when they say they can get $380 million for health care services out of this hike. But it's easy to see that these two groups have very different expectations about what will happen next year-- and one of them will likely be very disappointed at the outcome.

A Budget Agreement in Minnesota

After a partial government shutdown, Minnesota leaders have reached a tentative agreement on a budget for the next biennium. The linchpin of the plan: a 75-cents-per-pack cigarette tax hike, styled a "health impact fee" by Gov. Tim Pawlenty (R), which is supposed to raise $380 million over two years. As far as new state revenue sources go, that's it--no income tax increase (as proposed by DFL'ers a while back, no closing of corporate tax loopholes, no new gambling revenues. Just the cigarette tax.

For many people in the state, the initial reaction to this deal is a sigh of relief. MN Politics Guru sees adequate funding of health care and education as a plus. And he's correct, in a way--the prospect of Pawlenty's proposed cuts in MinnesotaCare health insurance is something few wanted to see. So this is a victory, of sorts, for adequate services in Minnesota.

But there is more (and less) to this picture than meets the eye.

More, because the absence of new state revenue other than the cigarette "fee" doesn't mean Pawlenty has meaningfully upheld his "no new taxes" mantra; rather, it means that the costs of funding education have been shifted to locals. While details are sketchy at this point, it sounds like locals have been authorized to raise close to $140 million in local property taxes.

Less, because the cigarette tax is not a revenue-raising solution for the long term. That $380 million will definitely be useful to the state as it seeks to keep the Interstate rest stops open until 2008. But if the cig tax is supposed to fund the preservation of MNCare health insurance, that's just not gonna work. Health care is one of the fastest-growing costs facing state governments-- and the cigarette tax is about the slowest-growing revenue source lawmakers could have picked. In fact, cigarette consumption has been in decline for about a quarter century. It seems likely that MN smokers will respond to this tax hike by quitting entirely or by smuggling cigs in from other states or via the Internet. There's a fundamental mismatch here between the services that lawmakers want to provide and the way they've chosen to pay for it. This mismatch may not be apparent in the upcoming year-- but eventually it will become painfully obvious.

So in my book, Minnesota joins Illinois in the ranks of midwestern states that have recently balanced their books with little more than fiscal duct tape--and Pawlenty joins Blagojevich in the club of "no-new-taxes" governors who meant "no visible broad-based taxes on today's generation of taxpayers."

Estate Tax

This article by David Cay Johnston for the New York Times should be required reading for people arguing about the estate tax. Here's a key quote:

President Bush, the American Farm Bureau Federation and the National Cattlemen's Beef Association have asserted that the estate tax is destroying family farms.
None, however, have cited a case of a farm lost to estate taxes, although in June 2001 Mr. Bush said he had talked to such farmers.

For too long, the estate tax debate has operated in a universe distinctly unhinged from reality. It's not about "family farms" and proponents of repeal should stop pretending that it is.

Several Companies fess up to tax evasion in exchange for reduced rates

From the AP:

(Washington-AP) July 11, 2005 - The head of the IRS says dozens of corporate executives accused of abusing a tax shelter have had a change of heart.
80 executives and more than 30 corporations are owning up to the accusations in exchange for reduced penalties. Another 19 executives who aren't taking advantage of the IRS offer face audits or criminal tax investigations into whether they under reported their income by $400 million.
Companies participating in the IRS program must disclose the names of all executives who used the tax shelter. The IRS says executives used the shelter to hide income from stock options.

I suppose there are a few take away points here. Many, many companies believe that it is generally unlikely for them to get caught under-reporting income, otherwise they wouldn't have tried to pull it off in the first place. The IRS is underfunded and can't enforce the government's rules, leaving it to rely on deals like this to make up for lost revenue. The bad news here is that this cost, in terms of relative tax burden, and the impairment of our future ability to invest in public projects thanks to federal debt, is passed directly onto honest taxpayers. Every dollar that corporations evade paying is added to our national debt. We pay interest on it, and it eats into the government's ability to act. Moreover, in the future, a greater percentage of each tax-dollar that honest folks pay will go towards servicing this inflated debt bill.

Hillary Clinton takes on the Bush tax cuts

It was good to see the mainstream press (at least partially) cover Senator Clinton's issue-based criticism of President Bush and not simply focus on the "What, me worry?" Alfred E. Neuman jab.

The way the government taxes reflects its fundamental understanding of fairness. Lets hope that progressives find their voice on this issue in time for the mid-terms and the '08 election cycle.

Blagonomics

Illinois Governor Rod Blagojevich has finally "balanced" his state's budget this year. It has come at a high cost, however. He and the legislature have dramatically deferred payments on the public employees' pention plan. They have also reduced the benefits of future retirees and changed the way that teachers and school administrators are paid, shifting more of the costs back onto the school districts, as opposed to taking care of it on the state level. The move specifically targets teacher raises that are beyond 6%. Read all about it here (the teacher part is 3/4 of the way down).

My concern is that this will make it even more difficult for school districts with smaller property tax bases to retain their best teachers. Illinois already has major inequity in its education funding system. Only 36% of expenses are paid for on the state level, which is well below the national average. The result is a disparity in per-pupil spending that, as of '01, ranged from $4,340 to $18,193. There are probably a lot of different possible solutions for fixing this problem that are worth discussing. Pushing more of the responsibility for funding teachers down to the local level isn't one of them.

I'm also concerned, as we're seeing on the federal level, that any time politicians mortgage a program and defer payments to future generations, all the while increasing the bill through interest, it makes it more likely that such a program will be cut. What a shame, and a rip off, it would be for the public employees in Illinois to find themselves in a United Airlines type of situation in a years down the line.

Arkansas: Good Words from Governor Huckabee

Arkansas has a surplus.
Their fiscal year ended June 30, and they have $113 million in revenues left over.

Of course, with school finance litigation still hanging over lawmakers' heads, and fundamental questions unanswered about whether the state is currently spending enough on K-12 education to satisfy the state constitution's guarantees of an adequate education, you would think responsible lawmakers would immediately put the brakes on any talk of giving that $113 million back to taxpayers.

And damned if that isn't exactly what Governor Mike Huckabee is doing.... more or less.
From Wednesday's Associated Press:

But the governor urged against rushing to decide how the surplus should be spent. "Spending is the last and least option. What we need to be doing is setting aside (for a) rainy day. And if there's more than we even need for that, then tax reduction would be certainly appropriate," Huckabee said. "But we'd have to have a special session for that, and I wouldn't risk a special session to cut taxes, knowing that (legislators) might decide to spend it rather than give it back."

Well, I was with him for a while there. The rainy day idea is exactly right. Thing is, all this school funding litigation is pretty much a sign that the rainy day has already arrived.

A Cautionary Tale from Maryland

Last week’s Washington Post has this article about poor enforcement of Maryland property tax breaks. Maryland, like almost every other state, gives property tax breaks to homeowners. But, also like these other states, Maryland imposes one condition: you have to live, basically full-time, in the house to get the tax credit. If you own a Maryland home as an investment property which you rent out to someone else, you don’t get the credit.

But, funny story: turns out Maryland tax collectors are not devoting a lot of resources to enforcing this rule. It’s not clear from the article who’s to blame—state tax administrators are pointing the finger at local tax folks, and vice versa—but for whatever reason, both the state and Montgomery County governments are giving this tax break to people who don’t actually live in their house.

So what’s the lesson from this story? This may well be another case of underfunded tax agencies simply not having the resource to enforce tax compliance. But the fact that some private citizen blew this story open with a spreadsheet in his spare time sheds some doubt on this. The real object lesson here is a broader one. Every special tax break carries a hidden price: the cost of enforcing the distinction between those who are eligible and those who are not. The more lawmakers load up the tax system with special tax preferences, the more resources the government’s tax enforcement agencies will need in order to make sure that everyone’s claiming only those tax breaks for which they are eligible.

As the resourceful guy in this article shows, sometimes it’s not all that hard to make sure that everyone’s behaving properly. When you’re talking about a visible, widely understood tax break that affects normal people in predictable ways, a guy with a spreadsheet can check on things pretty easily. But the under-the-radar tax breaks going to big businesses are a lot harder to police, not least because the average taxpayer isn’t even aware of them. As Congress quibbles over how much funding to give the IRS’s enforcement activities for the next fiscal year, lawmakers should remember that they’re the reason all this police work is necessary.

More on the Kelo decision

Today's New York Times has this by John Tierney, who notes that Pittsburgh has a long history of poorly planned eminent domain takings. In response to the Supreme Court's deference in Kelo to the wisdom of local governments' "carefully considered" economic development plans when those plans lead to takings, Tierney's point is that Pittsburgh's leaders planned pretty carefully-- and screwed things up completely. He clearly thinks that Pittsburgh would be a better place today if the city's grand plans for urban renewal had never been enacted.

To which the appropriate response is, so what? The experience of Pruitt Igoe and many other public housing disasters tells us that city designers have had some remarkably bad ideas about how to revitalize downtrodden city centers. But economic development remains a goal that state and local lawmakers should pursue--even in the wake of earlier failures. And the Court has to trust that locals can do it right-- or at least better than nine old lawyers in robes ever could.

The Big Question for anyone thinking about the Kelo decision is whether economic development is a permissible goal of local government takings. And the majority's logic in their answer to this question (which was basically "yes") seems just right: we know that it's OK to take property for basically public goals, such as a highway. We also know that it's not OK to simply give one person's property to another person just for the hell of it. In between these two extremes is a big gray area, in which eminent domain takings result in a transfer from one private individual to another, but a broader public purpose is (possibly) served by the taking. And the way the Court has traditionally dealt with these "gray area" takings is by giving a great deal of deference to the local governments doing the taking, checking only to make sure that the taking is not a blatant land grab, but actually achieves some public purpose.

So the only question the Court really had to answer in the Kelo case is whether a public purpose was actually achieved by the city's plan. And it's pretty easy to see that it was.

A few months ago the Court ruled that executing juveniles was unconstitutional. I was absolutely appalled by the logic of the decision, but was totally jazzed about the practical implications (states will stop executing kids). The Kelo case is exactly the opposite for me: I'm absolutely worried about the potential for crooked politicians and developers making back-room land grab deals, but I can't fault the Court's logic in their decision. And if you look at the folks who are maddest about Kelo, they're not criticizing the Court for being illogical-- they're criticizing the Court for not thinking pragmatically about the long-term implications of their decision.

As the Court pointed out, if lawmakers find this decision reprehensible they can pass laws weakening eminent domain laws. (And states like California apparently already have.) But in the meantime, it seems unreasonable to fault the Court for thinking in terms of precedents rather than navel-gazing about where the slippery slope might lead.

An Empty Pledge

The Illinois General Assembly's 2005 legislative session was pretty dramatic. The state came closer than ever to achieving what most people agree is a long-overdue tax reform-- reducing local property taxes and increasing state income taxes. Such a reform, as embodied in this year's HB 750, would help the state to fund services in a sustainable way and would make the tax system less unfair.

But HB 750-style reform didn't happen in in the regular 2005 session, and there's basically one reason: Governor Rod Blagojevich's frequently reiterated pledge to veto any increase in income or sales taxes.

Forget for a moment the question of whether elected officials should pledge anything except to uphold the state constitution, and let's assess the impact of Blagojevich's refusal to allow an HB 750-style tax hike in 2005.

Short run impact: look at Chicago, where the sales tax rate just went up by a quarter cent on July 1. At 9 percent, the total general sales tax rate in Chicago is now higher than in any other state's biggest city. Look also at 40 home rules districts that hiked their sales tax rate last year. More generally, look at local governments who must either hike sales or property taxes or cut services-- which at the local level basically means education. When state lawmakers don't answer the tough fiscal questions, they usually pass them right on down to the local level. And that's clearly what has happened here. Local taxes are going up, big-time, in Illinois-- which makes Blago's no-tax pledge seem pretty empty.

Long run impact: The state legislature managed to avoid enacting tax hikes again this year, and did so in breathtakingly irresponsible fashion: by borrowing over $2.2 billion from the state's pension fund-- that is, money that was slated to go to public employees' retirement down the road. The state's pension system is already underfunded. So in the long run, the state will have to pay this money back. If Blagojevich's effort to "pass the buck" to locals constitutes an implicit tax hike for locals-- thus violating the spirit of his pledge--this pension raid arguably violates the letter of his pledge, since it amounts to a tax on future generations of Illinoisans.

This seems like the sort of stunt that people go to jail for. (Except for Congress, which has raised pension-raiding to an art form by using the Social Security surplus to fund tax cuts in the past four years.) But even if Blagojevich doesn't get sent to Joliet for this transgression, it's important to remember that his pension scheme is a short-sighted fix that simply papers over the structural problems facing the Illinois tax system for one more year. The billion-dollar budget deficits that Blagojevich has managed to muddle through in the past three budget cycles will be back next year--that's what structural deficits do; they keep coming back--and the state's pension fund will no longer be available to loot. Let's hope Illinois voters recognize the back-door way in which Blagojevich has violated his own no-tax pledge.

Taxation and Takings: Lessons from the Kelo Case

Last week's Supreme Court decision affirming the right of the government to take private property for public purposes has drawn a lot of attention--but a lot of the outcry over this case is a bit overblown. Here's a brief take on what's good (and bad) in the Kelo decision.

What it's about:
New London, CT is a pretty economically depressed place. Its military base closed in the 90s, its unemployment rate has been about twice as high as the state average. So right around the time that Pfizer decided to build a new plant on the site of the old military base in 1998, the city decided that they'd try to kick start the local economy by implementing an ambitious economic development strategy centered around a big new multi-use development. Retail, residential, parks, a marina, all in one big monolithic site next to the new Pfizer plant. The city developed a plan for the location of the planned development and started buying up property from the current owners. A dozen or so people (mostly owner-occupied residential, plus a couple of investment properties) refused to sell, so the city used its eminent domain powers to condemn the properties, paying the owners the fair value of the properties.

The property owners filed a suit against the city. Their argument was that the city's eminent domain power (that is, their power to take away private property and reimburse the owners) cannot be used for the purpose of economic development. In particular, they argued that the 5th Amendment of the US Constitution, which says that "private property [shall not] be taken for public use, without just compensation," means something other than economic development when it says "public use."

What the decision says (relevant page numbers in parentheses):
1) The properties being condemned in this case are not "blighted" in any sense. They're being taken only because they're located in the place where the city wants to develop. (p.4-5)
2) Takings are clearly not permitted under some circumstances (like when you're simply shifting ownership from one private person to another in a way that only benefits the recipient of the property), and are clearly permissible under other circumstances (like when private properties are taken to help build a public highway or railroad that benefits almost everybody). In between, you've got a fuzzy area where private people benefit from the taking, but a public benefit also exists. (p.6)
3) The City of New London clearly had a "carefully considered" plan for economic development in mind when they did these takings. And there's no evidence that this plan was designed to benefit any particular individual or company. One of the tests the Court has used to identify unacceptable economic development-oriented takings in the past is whether the plan "was adopted...'to benefit a particular class of identifiable individuals,'" so the City's plan passes this test. (p.7-8)
4) The City's proposed development would be only partially available for "public use." But that doesn't matter: the "'Court long ago rejected any literal requirement that condemned property be put into use for the general public.'" What the Court actually looks at is whether the taking is designed to achieve a "public purpose." So all that really matters in this case is whether the City's plan actually serves a "public purpose"-- and the Court has a policy of deferring to legislative judgment about what constitutes a public purpose. (p.8)
5) In a 1954 case, Berman v. Parker, the Court upheld an economic development taking in Washington DC. The area being reclaimed was pretty blighted, but a department store owner whose property was not blighted at all sued. The Court said the taking was legitimate because it doesn't matter how the plan affects any individual person. All the Court can do is to ask whether the legislature enacting this plan was acting to achieve some "public welfare" goal. And in DC, they clearly were. (pp.10-11)
6) In a 1984 case, Hawaii Housing Authority v. Midkiff, the state legislature decided that property wealth was too concentrated in a few hands-- and took away property from rich landowners and transferred it to poorer Hawaiians. The Court said this was OK even though it was a transfer from one private party to another, because "the State's purpose of eliminating the 'social and economic evils of a land oligopoly' qualified as a valid public use." In fact, the Court said, it didn't matter at all who the property was being given to at all as long as there was a good reason for it: "it is only the taking's purpose, and not its mechanics" that matter in evaluating whether there's a public use involved. (p.11)
7) The City of New London decided that the city was economically distressed, and the Court is not gonna second guess them on that goal. The City also put together a comprehensive plan for revitalizing the economy. Since their well-thought-out plan for doing so "unquestionably serves a public purpose," the plan does not violate the Constitution. (p.13)
8) The slippery-slope argument being made by the other side-- that this case opens the door for takings that are designed to benefit private individuals, but are disguised to look like public benefits--doesn't need to be addressed now, because that's not happening in this case. (especially lame paragraph on pp.16-17)
9) When the legislature's stated purpose for a taking is "economic development," we can't expect them to prove that the desired development will occur. That goes against the Court's tradition of deferring to legislative objectives, and would simply not be possible anyway in some cases. (How can you prove that a plan will work before you try it?) (pp.17-18)
10) If this decision seems insufficiently protective of private property rights, states can always take action to limit takings-- and many states have. In the meantime, the Court will continue to think just about one technical thing: whether a given taking achieves a "public purpose." (p.19)

What's bad: The Kelo case does create the potential for a slippery slope leading to backroom deals between lawmakers and developers. To satisfy the constitutional conditions set out in Kelo, all a crooked city council member would have to do is to put together some sort of fake "grand plan" for economic development built around their land grab, and take some steps to make it look like the bidding process for the development is fair when it's not. As long as they can plausibly describe this land grab as achieving a public purpose, it's constitutional. And that's worrisome.

Of course, that's not what's happening in the Kelo case at all. The city was in a bad way economically, and city leaders came up with a plan to create jobs. And the court seems to believe that you couldn't tell ahead of time which developers would benefit from the plan.

And you'd sure like to believe that the public would be able to sniff out this sort of backroom dealing when it happens. As long as the public and the media are even mildly vigilant about this sort of thing, the nightmare scenarios envisioned by opponents of this decision are unlikely to emerge.

Of course, the potential for back-room deals still makes me nervous. It seems at least technically possible that local governments could take one person's property away and give it to another more favored constituent for no real public reason. And it's also quite possible to imagine government taking properties away simply because the government thinks they could be more productive in other hands (paving your home over to build a Walmart, for example).

But at the end of the day, you have to trust that local politics (and local media) can work this sort of thing out. If the evil developers can push truly bad deals through in the 21st century, then local media and local voters are to blame-- not the Supreme Court. I have no faith in the ability of my local news channel to say anything sensible about whether Bush was lying about WMD's-- but you know they're gonna do a bang-up job covering some kid who fell down a well. And an 85-year-old widow getting evicted from her home to build a golf course is exactly the sort of human interest story that local news will eat up.

What's good: Two things.
#1: The Court is doing exactly what it ought to do--keeping its hands off state policy decisions. Starting from the sensible perspective that the Court should defer to state decisions about what policy choices serve the public welfare, all the Court had to do was to convince itself that the elected officials of New London had some reasonably well developed plan in mind when they did this taking.

So it's fine to be mad about the abuses that could result from the Court's decisions, as this guy is. But that's not the sort of thing the Court can really worry about until it happens. Which is basically what Stevens' opinion says in point #8 above.

#2: This case highlights the fact that governments have a real claim on their citizens' property. "Private property" only exists because government protects it. So if we owe the existence of our property to the effectiveness of our government, our right to that property is not absolute-- it's contingent. We owe something to our government, which is where taxes come in.

Of course, taxes and takings are very different things. A 1% property tax rate on your home is a lot less punitive than simply having your home taken away from you. But these two kinds of government action are based on the same basic principle: government needs resources to operate, and uses them to provide public services.

Governments exist to provide public benefits. And while there is tension between the unrestricted ownership of private property and the provision of these public benefits, the sort of takings being done in New London seem well within the bounds of what's permissible.

And who knows-- maybe the anti-tax loons out there will look at this case and realize that taxes can actually be a pretty good deal compared to takings...

A question for another day: is there any inconsistency between this decision, which says local governments can take property away in the name of economic development, and the Cuno case, which says (to oversimplify) that state governments cannot offer corporate tax breaks in the name of economic development?