November 30, 2005

Sam Brownback wants to use DC as his "laboratory."

Given the Senator's hostility towards the scientific method, that is truly alarming.

Man, if anyone needed another example of why the District needs more autonomy from Congress (or at least some full-fledged Representation):
Mr. Brownback said that making D.C. a test case would, with limited potential for negative impact, provide valuable data about the effects of a flat tax that would prove helpful in determining whether it should be applied nationwide.
Of the flat tax, Mr. Brownback said: "We're going to hold some
hearings about what that might look like, and the District we can use as a laboratory."

The District of Columbia has the greatest income disparity between its poorest families and richest families of any major metropolitan area in the nation. Reducing taxes on the wealthy while increasing them on the middle class is not what is needed, to put it mildly.
Thankfully, this proposal would apply only to federal taxes, so it wouldn't necessarily risk destroying the city's finances, though if the plan put in place got rid of local tax deductability, it could make funding city services more difficult, though it's too early to tell how that will play out, at least from the article that I read.

Also, on matters of tax policy or otherwise, the District of Columbia is not a laboratory for Sam Brownback, or any other member of either chamber of Congress to experiment in. The District is a full-fledged major city, with a population size similar to Alaska, Wyoming and Vermont. The good news is that past attempts to implement similar schemes have failed. Also, the legality of such a bill would be highly questionable because it may amount to geographic discrimination, in violation of the 14th Amendment.

November 28, 2005

Exemptions Based Only on Age...There is A Better Way...

Yesterday's editorial in the Concord Monitor (NH) gets it's right when it comes to eliminating tax breaks that are unfairly targeted to the elderly. While it might be seen as politically unpopular (and heartless) to eliminate exemptions that are specifically targeted for the elderly, it's the right thing to do.

The Monitor editor writes, "High property values and high taxes mean younger people cannot afford to raise a family in their hometown." but yet in Concord, NH "the [property tax] exemption ranges from $67,000-plus at age 65 to $187,000 at age 80. The latter, with 124 members receiving exemptions, makes up the largest group. Those exemptions add up. Last year, the 304 granted by Concord were worth roughly $600,000 in taxes forgiven. That number will grow rapidly once the baby boomers, a generation notorious for saving too little, begin retiring."

Not only are these elderly exemptions going to cost more in future years, but as the Monitor so rightly points out later in the article, some of the elderly being given these large tax breaks could actually afford to pay more of their property taxes then they do now.

The real solution is not to simply eliminate these exemptions - afterall, some of elderly would be "taxed out of their house" if it weren't for these special tax breaks. Instead, New Hampshire policy makers should create an income specific "circuit breaker."

According to ITEP's Policy Brief about Circuit Breakers: a circuit breaker protects taxpayers from a property tax “overload” just like an electric circuit breaker: when a property tax bill exceeds a certain percentage of a taxpayer’s income, the circuit breaker reduces property taxes in excess of this “overload” level.

Because circuit breaker credit amounts vary with income, the use of these credits
introduces an “ability to pay” criterion that New Hampshire's current age exemption lacks. Circuit breakers identify the individual taxpayers for whom property taxes are most burdensome and reduce their tax to a manageable level.

The introduction of a circuit breakers is good fiscal policy too - because they are almost always guaranteed to be less expensive than New Hampshire's current "across the board" age exemption.

So while it may seem like a cold and heartless thing to do, it's better tax policy to eliminate age specific exemptions like this one and replace them with exemptions based on people's income.

November 23, 2005

Ben Bernanke on PAYGO

Slogging through the transcript of last week's Senate hearing on the nomination of President Bush's nominee as the new Federal Reserve Board Chairman, we came across an interesting exchange between Sen. Jack Reed (D-Rhode Island) and Bernanke, in which Bernanke tries very hard to avoid implying that his current boss's strategy of unfunded, unaffordable tax cuts is bankrupting the country:

REED: you agree that PAYGO rules should apply to taxes, as well as to expenditures?
BERNANKE: Senator, I think it's important for Congress to have well-developed structures and practices and procedures for managing its budget.But I'm not going to make a recommendation on that. I think that's outside of my realm of authority and I think I would leave that to the Senate and to Congress to make up their own minds.
REED: Well, your predecessor was not equally inhibited. He seems to suggest that PAYGO was an appropriate mechanism to deal with fiscal discipline [...] Let me ask the question again[ ...] If we do not subject tax cuts to PAYGO, then essentially in this economy we're borrowing the money for these tax cuts. Is that accurate?
BERNANKE: It depends on both the spending side and the tax side. To respond to your question in just a general economic way, I think there are several things to look at when you're looking at a fiscal policy. One of them is deficits. Deficits are important because they represent debt which is being accumulated and being passed on to future generations. But the share of the economy being devoted to government spending is another important criterion. In particular, a balanced budget with government spending at 25 percent of GDP is a very different proposition of a balanced budget with government spending at 15 percent of GDP. So I'm a little bit reluctant both for the reasons I mentioned in terms of my prerogatives, but also in terms of the economics, to put specific rules like that. I think that the Congress has to make judgments about the overall arc of the budget and make trade offs.
REED: Well, then let me ask this a final way. Assuming you're consistent in your viewpoint, you would not render an opinion if we increased expenditures without offsetting it?
BERNANKE: I believe that it's within my purview to discuss broad issues of the share of government spending in GDP, the share of taxes in GDP, deficits, fiscal stability, those issues. What I would like to do is refrain from making recommendations on specific matters of taxes and spending, or specific approaches to PAYGO in the similar manner.
REED: And we can assume that's going to be a policy after you're confirmed as chairman?
BERNANKE: That's my intention.

What I think Bernanke is saying here is that PAYGO is a good thing, but is unnecessary when taxes are high. If taxes are (in his example) 25% of GDP, then maybe tax cuts don't have to be offset with spending cuts. But this hardly seems like a reasonable position unless you think that tax cuts pay for themselves. He can't mean that, can he? Read on:

REED: ...Chairman Greenspan has explained as recently as last fall that it's, in his words, "Very rare and very few economists believe that you can cut taxes and you will get the same amount of revenues. When you cut taxes, you gain some revenue back. We don't know exactly what this is, but it's not small, but it's also not 70 percent or anything like that," closed quote. You don't subscribe to the view that tax cuts pay for themselves, do you?
BERNANKE: Senator, the offset, the revenue cost of a tax cut depends on the structure of the tax cut, whether it's one that improves economic growth or not and so on. I think that generally the tax cuts, if they're well-designed, do increase growth and therefore do partially offset the revenue loss. But I think it's unusual for a tax cut to completely offset the revenue loss.

That would be a somewhat-concealed "no," and a pretty poor defense of an admittedly undefendable position: that PAYGO rules don't need to be followed. This topic didn't really reemerge during the hearings, probably because Bernanke has sent a pretty clear vibe that he's not going to pass judgment on the Bush tax cuts as Fed chairman one way or the other. But behind his words is an implicit defense of the Bush administration's fiscal policy that should really have been pursued a bit more.

November 22, 2005

Senate Seeks to Expand Charitable Giving Deduction

The Senate is going to take an increased charitable giving deduction into reconciliation with the House.
From the NYTimes:

Under the Senate bill, people who do not itemize deductions on their federal income tax returns would for the first time be able to deduct the amount they gave if it exceeded certain thresholds. The minimum would be $210 for individuals and $410 for married couples. Taxpayers must now itemize, instead of taking the standard deduction, if they want a tax break for their gifts.
The provision would last two years and could increase charitable giving by $1 billion a year at little cost to the government, said Patrick Lester, director of public policy for the United Way of America, the nation's largest charitable organization.

The article doesn't get into the nitty-gritty details, but it seems like a fair move. As long as donations are deductible for itemizers, they ought to also be deductible for non-itemizers.

November 20, 2005

Candor in Utah: Debating the Food Tax

The ongoing debate over how (if at all) to cut Utah's sales tax on groceries continues. The Deseret News has some interesting polling data evaluating various reform ideas.

Take these results for what they're worth, but here's what they find RE the sales tax on food:
1) Most Utahns want to eliminate the sales tax on food. But of those who support it, most want to see the revenue loss made up with a rate increase on non-food items.
2) 18 percent of Utahns would rather see a sales tax credit for groceries (about which you can read more here) than a complete exemption for food.

One can reasonably ask whether lawmakers' choices on this issue should be guided by what people think, since this is a case where the views of regular folks (who don't want to tax "necessities") tend to be diametrically opposed to the views of economists (who think that the best recipe for tax reform is a broad base and a lower rate, not a narrow base and a high rate).

This week's edition of the Inside Utah podcast shows that (some) lawmakers and advocates on both sides of the issue are thinking things through pretty thoroughly-- even if they're starting from pretty dubious premises. Senate President John Valentine wants to exempt food, but pooh-poohs the idea that the state should make up the revenue through increases in the sales tax rate or in any other tax. So how would he make up the revenue? "Shrink government," he says:
"We would basically have less government. We’d have less health and human services, probably earlier release from prisons, maybe less road building. Maybe some park closures. Maybe less funding of higher education. All of those things would be on the table, because those are all functions of state government."
I'll say this for John Valentine: at least he's putting his cards on the table-- none of the sort of duplicity here that you see from the Congressional leadership in Washington. His candor in admitting that there are two sides to the tax and spending ledger is refreshingly honest. None of that "free lunch" business from John Valentine.

Each of the other guests on the program offers interesting insights--many of them wrong.
House Minority leader Ralph Becker clearly gets that unaffordable tax cuts often turn out to be "tax shifts" to someone else, likening the proposed sales tax cut to "squeezing a balloon and having it come out somewhere else." But he doesn't seem to mind funding this particular tax cut by hiking the rate on non-food items, and calls this "fair." His main concern seems to be that the state finds some way-- any way-- of making this plan revenue neutral.

Lane Beatty, president of the Salt Lake Chamber of Commerce, seems sympathetic to the notion of exempting food, noting that the food tax "affects people in their ability to survive who are at lower income levels." (Of course, if that's his real concern, than shifting away from the food tax and increasing the sales tax rate on everything else seems like a pretty counterintuitive solution!) But he is also is leery of the potential impact on public services, noting that there "from an education standpoint, from a roads standpoint, from an economic development standpoint, there are great needs" that the state hasn't yet met. Hey legislature-- when the local Chamber tells you infrastructure needs aren't being met, you should maybe listen.

Perhaps most distressing are the comments from Amberlie Phillips of the Utah Food Bank, who you really hope would see past the "free lunch" tax cut argument, but clearly doesn't. For Amberlie, exempting food would be "almost like getting a 6 percent raise."

Which brings us back to the topic of why public opinion maybe shouldn't guide this debate. It's just asking too much for the public to evaluate tax proposals and spending needs side by side. How many Utahns (or residents of any state) can accurately assess whether Utah really has a couple hundred million to blow on tax cuts without forcing cutbacks in public services? In the end, balancing the books (and ensuring that the tax system is designed as intelligently as possible) is a job that should be done by experts. If we can't leave this job to our elected officials, why have elected officials at all?

November 18, 2005

Federal Budget Wars: Will Bush Say the "V word?"

Now we know what it takes to provoke an actual Bush veto: a Senate bill including a tax hike on oil companies. S.2020, which the Senate passed earlier today, provides over $70 billion in new tax cuts over 10 years--and dares to provide revenue offsets for $30 billion of the cuts. Net loss to the feds is $41 billion over 10 years.

Here's how the Senate bill's tax provisions are divvied up:
*$7.6 billion in hurricane-related tax relief;
*$60 billion in "extenders"-- that is, extension of various temporary tax breaks;
*$0.3 billion in new tax breaks for charitable contributions;
*$3 billion in "miscellaneous" tax breaks;
*$30 billion in revenue raisers, including $5 billion from the oil industry.

If you've seen the list of extenders, you know I'm oversimplifying a bit. But the really important things to keep your eye on between the Senate-passed bill and the House version, HR 4297, which got pulled off the floor Friday and now won't get voted on until after Thanksgiving, are the following:
1) AMT relief. On January 1, 2006, the temporarily higher exemptions from the Alternative Minimum Tax are scheduled to go away, which means that even more upper-middle-income taxpayers will fall into the AMT trap. The very least Congress needs to do is to extend these temporary exemptions. The Senate bill does so, but for only one year. The House bill ignores this necessary fix completely. The Senate's one-year extension costs nearly $30 billion.
2) Capital gains and dividends tax breaks. The current tax breaks for cap gains and dividends, introduced by the Bush 2003 tax cuts, are scheduled to go away on January 1, 2009. The Senate, sensibly, has bigger and more immediate fish to fry and is leaving this alone for the moment. The House bill extends the cap gains and dividend breaks for two more years, at a cost of $50 billion. (A new CTJ analysis shows the impact of the cap gains/dividend cuts for each state; it's here. )
3) Under-the-radar tax breaks for the top 1%. In the maze of phaseouts and phaseins, it's easy to forget that some of the 2001 Bush tax cuts actually haven't even started yet. But on January 1, 2006, two new ones are scheduled to start. Current law has "clawback" provisions that reduce the amount of itemized deductions and exemptions for a small number of the wealthiest taxpayers. Starting in January, these two clawbacks will gradually go away. The impact on 2006 is relatively small by federal tax standards-- just under $3 billion, not counting added interest on the national debt-- but a staggering 96% of the tax cuts from these two little provisions will go to the wealthiest 1 percent of Americans. Paring back these two tax breaks is an easy move that has basically no impact for 99% of Americans. But so far, only Senators Harkin and Durbin have introduced legislation that would do anything about it, and it doesn't seem likely to go anywhere.

There are things to be mad about in these two bills-- yes, even maybe even mad enough to veto. But a small tax hike on the energy industry ain't among them.

November 16, 2005

Note to Howard Dean: Better Work on That Platform

From Sunday's Meet the Press:
MR. RUSSERT: [...] What do the Democrats stand for?
DR. DEAN: Tim, first of all, we don't control the House, the Senate or the White House. We have plenty of time to show Americans what our agenda is and we will long before the '06 elections.
MR. RUSSERT: But there's no Democratic plan on Social Security. There's no Democratic plan on the deficit problem. There's no specifics. They say, "Well, we want a strong Social Security. We want to reduce the deficit. We want health care for everyone," but there's no plan how to pay for it.
DR. DEAN: Right now it's not our job to give out specifics.

We've got historically large and growing deficits. We've got Republicans threatening to cut essential safety-net programs to fund capital gains tax cuts. We've got an AMT problem that really ought to be resolved by the end of the year. Pretty specific plans are needed to confront this stuff. So can anyone explain to me why Dean's answer is NOT a completely lame and wrong response?

November 09, 2005

Politics in the Pulpit: The IRS Cracks Down

The LA Times has the story:
The Internal Revenue Service has warned one of Southern California's largest and most liberal churches that it is at risk of losing its tax-exempt status because of an antiwar sermon two days before the 2004 presidential election. A leader of the All Saints Episcopal Church in Pasadena announced the IRS warning in Sunday services a week ago.
According to the Times, the reverend who delivered the sermon never told parishioners explicitly who to vote for, although his pointed remarks about unjust wars and inequitable tax cuts really could only be construed as an anti-Bush slap.

The text of the sermon is on the All Saints website (at least until it crashes as a result of actually getting some visitors) here. About the first thing you read here is a statement that "I don't intend to tell you how to vote." And the rest is a pretty clearly disapproving look at the Bush legacy on foreign policy and tax policy.

Two fun questions to discuss here, one practical and one theoretical.
1) Is the All Saints sermon different in any meaningful way from a politically oriented sermon that doesn't happen to be given on the weekend before a Presidential election? In other words, if a right-wing mega-church telecasts Bill Frist bad-mouthing Senate Dems aboute potential filibusters, and no election is impending, is that somehow less bad?
2) What level of political behavior should we allow from churches? If the All Saints speech is impermissible, where exactly does it cross the line?

Today's LA Times has this op-ed from the guy who gave the sermon. The payoff pitch:
Some might argue that religious communities should stay out of politics altogether. But that would render our message of core moral values — the values that Jesus taught us — irrelevant. The fact is, all life is arguably political. For example, Jesus says to us: "Heal the sick." Thus, when we address the desperate health needs in the nation and across the planet, this is at once a moral and a political issue.The rightful role of communities of faith is not to speak and act as though God is in the pocket of the Democratic or Republican parties. Our role is to boldly proclaim the biblical themes of justice for all, peace on Earth, the sacredness of all life and the preciousness and fragility of the environment.
Good stuff.
The most obvious, and easily circumvented, boundary between acceptable and unacceptable political speech in a church would be actual endorsement of or opposition to a particular candidate. This guy took great pains to point out that he wasn't endorsing anyone, and then gave some pretty clear inferences about who he really preferred. So if the boundary is defined by saying the magic words "vote for X", then it's a pretty lame boundary. But if that's not the boundary, it's hard to see how you define one.

The idea that sermons must be free of political content (or political judgment) seems absurd to me-- and pretty hard to police equitably too. I think if you're the IRS, you have to let this go.

Postscript: You don't have to look very far into the past to see an example of the IRS making it pretty clear they want no part of adjudicating this sort of thing. This Washington Post article from November of 2004 chronicles the ultimately successful effort of a Pat Robertson-led group to get IRS approval to pray for their favorite candidate (and whoever might that be?) on the Sunday before the election.

November 08, 2005

Cigarette Tax Avoidance in California

From the Sacramento Bee:
A father and daughter whose Rancho Cordova wholesale business illegally evaded payment of $265,000 in tobacco taxes will be sentenced Dec. 1 after the pair pleaded no contest to felony charges, the Board of Equalization said Friday.
But their lawyer asserts that it's all California's fault for having such high cigarette taxes:
"This is what you get when you make tobacco taxes 60 percent," Galgani said. "You create an incredible temptation for people to commit fraud to keep their business afloat. You can turn very decent people into criminals."
87 cents a pack is, in fact, on the high side compared to most other states. And the state's tax base has been hit pretty hard by tax avoidance of this type. The Bee article cites an estimate from the state Board of Equalization (BOE) that while they collect $1 billion a year from the cig tax, they lose $300 million more to black-market sales.

Which brings us back to the father-daughter team being sentenced here. At 87 cents a pack, how many packs of cigarettes would they have to smuggle to avoid $265,000 in tax? 300,000 packs, according to my dummy calculation. Seems like something more than a cottage industry.

If California was levying an 87-cent cig tax just to prevent smoking, this would hardly be worth mentioning. But, of course, most of California's cig tax revenue is supposed to be funding health care for kids, thanks to a ballot initiative pushed through by Meathead in 1998. And if the real outcome is neither revenue raising nor reduced smoking rates, but a rise in cigarette counterfeiting, as the BOE seems to think, it's hard to see who wins from this.

November 05, 2005

Mortgage Deduction Reform: Regionally Biased?

In a previous post I noted one principal objection to the Bush panel's suggested reform of the mortgage interest tax break: the basic (although not severe) unfairness of changing the tax treatment of housing after a lot of wealthy folks had factored the deduction into their purchase of expensive homes.

There's another criticism that's getting more play on the East and West coasts: if you're going to put a cap on the mortgage interest deduction, you have to factor in regional differences in housing costs. The Bush panel's recommendations would do just that, by using Federal Housing Administration loan limits (which vary by region) as the mortgage cap. But in some super-high-end areas in California and New York, the FHA limits are well below median home prices, as this article notes:
The FHA limit varies by region, but in the Bay Area and most of coastal California is $312,895... far short of the typical mortgage needed to buy a house in the Bay Area, where the median price for an existing single-family home was $726,900 in the second quarter, according to the National Association of Realtors.
But this line of criticism is missing the whole point of the deduction. The idea is to encourage homeownership, not dream-homeownership. I would love to live in San Francisco. I can't afford to, and that's sad. But the idea that I should get a federal tax cut to help me relocate to just the right neighborhood in my favorite city is so wrong it's offensive.

Sorta related: take a gander at the pages on the FHA website where you can look up the applicable loan limit for your area. There are a lot of numbers here, which means you'd need a multi-page table in the tax forms to make this work. That's hardly a disqualifier for what is otherwise a fine reform idea-- it's just to point out that while some elements of the Bush panel's plan might help achieve tax simplification, this isn't one of them.

Reich on the Mortgage Deduction

Lots of ink getting spilled on one particular proposal from the President's Tax Reform Panel: paring back the mortgage interest deduction. Robert Reich has nothing but bad things to say about the deduction-- and nothing but good things to say about the panel's proposed reforms.
You couldn't design a more regressive housing policy if you tried. The home mortgage interest deduction cost the Treasury $63 billion in lost revenue last year, and the rich got most of it. Yet the entire budget of the Department of Housing and Urban Development — which, among other things, provides low-income housing — was just $35 billion.
Read it here.
I'm right there with Reich on all of this. The only qualm I have about the commission's plan--which involves paring back the thing so it only applies to "average" sized mortgages, then turning it into a credit so it's more valuable to low-income folks and less valuable to the wealthy--has to do with people's expectations. Homeownership is not always an easy decision. For many, it's a dollars-and-cents thing. Plenty of long-term renters, I bet, get pushed into homeownership not because they've always dreamed of it but because one day, their rent gets hiked just a bit too high. For the upper-income folks who would be hurt by the commission's proposal, getting the smaller credit could very well change the calculus about whether homeownership is a good deal.

In the scheme of things, this is nothing to cry excessively about. It's about as troublesome as it would be for current stock market investors if the federal capital gains tax rate got pushed back up to equal the earned-income rate: it's a little sad that people's expectations got screwed, but it's the right long-term outcome. The pulling-the-rug-out move here isn't all that wrong-- but it ain't quite right.

Another interesting objection is raised by Professor James Maule, who points out that if you eliminate one tax-induced market distortion while leaving other related distortions intact, you can making the remaining distortions even worse:
The tax law currently props up McMansion purchases, exurban sprawl and the resulting energy waste, and inflated vacation home markets, but the tax law also props up an inefficient energy exploration and production industry, the construction of shopping mall after shopping mall and excess commercial and office building capacity, a variety of supposedly beneficial and favored social behavior, and a long list of other special interest group favorites. What happens if the reduced demand for home mortgages causes banks to lend their money to shopping mall developers or the builders of unnecessary commercial and office building space?
Which amounts to a (correct) warning from Wonkville that if Congress seizes on this one tax break and leaves the rest intact, all we're really getting out of it as a nation is a little better-well-spent tax revenue.

This is a crazy-dreamer objection, and one I have a ton of sympathy for. But let's take the incremental reforms when we can get them.

Indiana Locals Fail Tax Administration 101

For most homeowners, it's not hard to come up with reasons why they don't like property taxes. They can grow in ways that don't reflect your ability to pay them (if you lose your job, you'll pay less income taxes because you have less income, but your property taxes will usually not drop at all). For many people, they're paid in one or two big lump sums a year.

In Indiana, they've got a new grievance to add to this list: local assessors appear to be doing a terrible job of determining the value of people's homes. A new study by the Indiana Fiscal Policy Institute, which was hired by the state to evaluate the success of Indiana's recent attempt to value all homes based on their actual market value, shows that the assessors whose job it is to accurately value residential properties are doing a pretty lousy job.

A Star-Press editorial pulls no punches:
Deficiencies outlined in the assessment report amount to a major failure by government to perform one of its most basic and important chores - properly determining the value of property for taxation. The fact that Indiana appears to be failing at this basic responsibility - especially after so many years of debate and promises - is a failure of scandalous proportion.
Property taxes don't have to be unfair, and they don't have to be unpopular. Regular, accurate assessments can make sure that taxes are based on the actual value of people's homes, and targeted tax relief can ensure that fixed-income residents don't get taxed out of their homes. But Indiana's continuing inability to accurately assess home values-- in combination with Governor Daniels' recent effort to balance the state's budget by forcing local property taxes higher-- means that the property tax will likely remain the ugly stepsister of Hoosier taxes.

Indiana: The "Tax Shift" Game Catches up with Daniels

A new progressive mantra, rapidly becoming a cliche, is that in a fiscally challenging environment, there are no tax cuts-- only tax shifts. That is, when you've got a deficit to make up, every dollar of tax cuts for a particular individual or company is going to have to be made up eventually by someone else.

Like most cliches, this one has a lot of truth to it. The federal tax cuts of the last 5 years are being funded partially by borrowing right now. We may not have to pony up to pay for these debts-- but if we don't, our grandchildren will, in a "tax shift" to future workers.

The trouble is, it can be hard to convince people that this is true when you have no idea where (or when) the other shoe is going to fall. But at the state level, where balanced budget requirements are stricter, it's much harder for elected officials to shunt costs into the future. Witness the 2006-2007 Indiana state budget, which got balanced largely by putting a cap on state property tax relief payments to local governments. A op-ed in the Fort Wayne News Sentinel speculates that Governor Mitch Daniels' plummeting poll ratings can be attributed to the fact that he pushed through a "tax shift" away from the state and toward locals, which will end up resulting in big local property tax hikes-- and that the public sees this quite clearly.

The Sentinel op-ed's argument is, in the end, just speculation. They don't show that the governor's lousy poll numbers are due to his handling of property taxes. But no one's offering any other explanation for "The Blade's" dropping popularity. And if this interpretation is true, it's big news-- if only because state and federal lawmakers across the nation have been pushing through the same sort of tax shift, gambling that they can force the cost of services to "trickle down" to lower levels of government without taxpayers putting two and two together. It's nice to see some evidence that this sleight-of-hand approach to fiscal policymaking doesn't always work.

Meanwhile, the Speaker of the House, Brian Bosma, wants the state to help reduce homeowner property taxes by picking up the tab for child welfare services, which is a cost that locals currently pay themselves through property taxes. So Bosma appears to be taking at least baby steps toward recognizing that passing the buck to locals is not a sustainable strategy. On the other hand, as the Indianapolis Star tells it, Bosma won't commit to explaining where the state's going to find the money for this. But Bosma's position is a good start.

November 04, 2005

Arkansas: Hutchinson's Tax Tall Tale

There's a reason why state and local lawmakers are so eager to grant special tax breaks to corporations: footloose companies frequently claim that tax incentives can be the critical factor in determining where they open that new manufacturing plant. When you hear this enough, you start to believe it's true-- even when the firms in question are making it all up.

This may explain where Arkansas gubernatorial candidate Asa Hutchinson was coming from when he asserted recently that the reason Arkansas lost a new steel plant to Mississippi was because of the state's sales tax on energy. Addressing the state's chamber of commerce, Hutchinson said:
"Should Arkansas be one of the few states in this region that taxes electricity rates that go to job-producing industries ? That is one of the reasons cited why an $ 880 million steel mill went to Mississippi instead of Osceola. It would have produced 450 jobs."
Compelling stuff-- except it's just not true. The president of the steel company in question, Steelcor, told the Arkansas Democrat Gazette that he didn't even know for sure whether Steelcor would have qualified for a special sales tax break--but that either way, the sales tax question was "not one of the reasons" why Steelcor ended up choosing Mississippi over Arkansas.

Of course, this is an unusual burst of candor for a firm in this situation. For every case where we know the tax situation didn't matter, there's another location decision where state lawmakers can only speculate-- or where the firms in question choose not to be so honest.

The special tax break that Steelcor may or may not have been eligible for was created in the 1980s to encourage Nucor to build in Arkansas-- and they did. But lawmakers will never really know if the tax break swung Nucor's decision back then. And the only folks who really know the answer (the good people of Nucor) have no reason to tell the truth about this.

Hutchinson's factually incorrect assertion, and the obvious inattention of Steelcor execs to the question of whether this tax break was even available, exemplify the confusion and guesswork that goes into the raft of tax incentives continually thrown at the feet of multi-state corporations by state and local governments. Whatever you think of the legal theory behind the Cuno case, good-government advocates have to be rooting for an end to the cross-state competition for footloose firms-- and and the US Supreme Court's impending Cuno decision may yet get us there.

November 03, 2005

Utah Lawmaker: Ax the Food Tax

The tax reform ideas never stop coming in Utah. The Deseret News reports today that House Republican leaders have hatched a plan to eliminate the sales tax on groceries and make up (most of) the revenue by increasing the tax rate.
There are three perspective from which you can evaluate this idea:
1) Tax fairness: Thumbs up. Taxing food hits the poor hardest. Hiking the rate on everything else will hurt them, but they won't lose as much as they gain. (Unless you do what North Carolina has done, which is to increase the tax rate on non-food items so much that low-income earners actually end up worse off!)
2) Ivory tower: Thumbs down. Tax reform 101 says "broaden the base, lower the rate." This plan does exactly the opposite, applying a higher rate to a narrower tax base. This means the sales tax treats consumers very differently based solely on what they choose to buy. Imagine two Utahns with the same salary. Sam likes to cook, and Harry always eats out. Groceries are exempt, so Sam pays no sales tax. Restaurants are taxable, so Harry pays a lot. It's hard to justify this basic difference, but that's what the Utah plan would do.
3) Paranoia: Thumbs down. From the tin-foil-hat perspective, one might imagine that the reason these guys are pushing this plan is not because they care about poor people, or even because exempting food polls so well, but because they know that in the longer term, people will get mad about the higher sales tax rate. Salt Lake City residents may grumble now about a 6.6 percent total sales tax rate, but wait until they find out they're paying 7.2 percent on their non-food purchases. The higher the tax rate, the more people are aware of the sales tax and the madder they get about their taxes in general-- which plays very nicely into the hands of anti-tax advocates.

From the Deseret News article, it sounds like progressives in the state are leaning towards perspective #1. Beehive Donkey gives this plan a thumbs up too. It's a tough call. No doubt, exempting groceries is a progressive move in itself, and lots of progressive groups have staked their tax plans to this idea. See Tennessee and New Mexico. But if the cuts prove unaffordable and the state ends up hiking the rate, it's hard to be sure that low-income consumers are better off in the long run. You can make a case that this is what's happened in North Carolina, Virginia and, yes, New Mexico.

November 02, 2005

Virginia Candidates to Estate Tax: Drop Dead

Representative democracy can be a lot of fun when it gives voters real choices-- but there's been a fairly steady stream of (accurate) bellyaching for about 200 years about how our two-party, privately-funded election system often eliminates meaningful choice. On the question of repealing the estate tax, we can add Virginia's gubernatorial election to this stream: the Virginian-Pilot notes that all three candidates in next week's election are in favor of permanent estate tax repeal.

If there's a quarrel between the candidates on this issue, it's just over how quickly the thing ought to go away: Democrat Tim Kaine and independent Russell Potts are a little slow on the trigger, arguing for a gradual phaseout, while Republican Jerry Kilgore has made it clear he'll have a shovel ready on Inauguration Day.

Is this uniformly timid response more understandable given that all three candidates expressed these position to an audience of farmers? Absolutely not. These are exactly the guys who need to hear the truth about the estate tax: that having such a tax is entirely consistent with our collective committment to preserving the small family farm.

Virginia lawmakers have shown more gumption than most in recent years, passing the big 2004 tax hike. Let's hope the next governor, whoever who is, shows a little backbone once he takes office...

Rethinking Gambling Revenues in Illinois?

The Illinois House of Representatives has voted to end the state's reliance on riverboat gambling as a revenue source. This would be a great thing if (1) the big thinkers in this deficit-ridden state had some ideas ready about how to pay for it, or if (2) they even really wanted this change to become law, but neither of these important hurdles seems to have been passed.

Press accounts indicate that actually, House Speaker Mike Madigan is fine with gambling-- he just doesn't think the current arrangement between the casinos and the state are giving the state their fair share of the profits. This could well be true, but there's a larger issue, as one anti-gambling advocate pointed out:
"I would suggest at this point that he's perhaps missing the point here," said Tom Grey, executive director of the Illinois Coalition Against Legalized Gambling. "The citizens believe the costs outweigh the benefits."

More and more lawmakers are getting on board the movement for a progressive Illinois tax shift that would cut property taxes and make the income and corporate taxes more progressive. It will be interesting to see if the House's latest stunt ends up making a real shift away from gambling part of the mix in 2006.

November 01, 2005

In Florida, Everyone's a Farmer

Everyone loves the family farm. People who otherwise dote on the federal estate tax are generally at great pains to ensure that no small farm will ever be subject to the tax.

This phenomenon has been around in the property tax world for years. Virtually all states have enacted a special property tax break for farmers, usually known as "use value." The use value exemption typically says that agricultural property will be valued, for property tax purposes, according to its use as farmland-- not according to its potential market value to developers. The idea is that as suburban development encroaches on farmland, farmers shouldn't be pressured by growing property taxes into selling their land.

On one level, use valuation clearly works. Property taxes paid by farmers in use-value states are much lower than they would be if this tax break didn't exist. And given the low profit margins of most farmers, this has to help make it possible for long-term farmers to stay on their land. But in more and more states, good government advocates are pointing out that some of the people benefiting from use valuation don't appear to be the sort of farmers we cherish as a nation. This Orlando Sentinel article describes the apparent widespread abuse of this tax break in Florida.

The problem described in the article is that the tax break is being claimed by land developers, whose long-term goal is to convert agricultural properties to residential use, who engage in just enough agricultural production to qualify for the tax break.

This is clearly a bad thing. As with most tax breaks, use value is designed to change people's behavior. In this case, the desired behavior is keeping farmland in production rather than selling it off for sprawl-inducing development. When land speculators claim the credit just because it's available, and engage in just enough farming to satisfy the terms of the credit, they are responding to the tax incentive just like the family farmer-- the problem is, they're just not the sort of people the tax break was designed to help.

So how do you ensure that this tax break only goes to legitimate family farms? Under current Florida law (according to this article), purchasers of agricultural property can be denied the use value tax break if they buy ag property at a price that is more than three times its agricultural value. The thinking here is that if people are willing to spend that much for the land, they must have a non-agricultural use in mind.

This seems like a decent first-cut approach. But it prevents only the most flagrant violations of the tax break's behavioral goal. The big-picture problem with special tax breaks of this kind is that anytime lawmakers decide to reward a certain type of behavior with tax breaks, they have to spend their scarce resources ensuring that people comply with the rules for eligibility.

And use valuation adds an additional compliance wrinkle: the problem here isn't that these part-time farmers aren't engaging in the right behavior, but that they don't plan to do it any longer than they have to in order to claim the tax break. So for use value to be truly well-targeted, it's not enough to ensure that the people getting the tax break are acting like farmers-- they also have to be in it for the long haul.

Line-drawing in the tax code (that is, distinguishing between those who get breaks and those who don't) always creates compliance problems, although they're not always as hard to police as this one. Let's hope the Bush reform commission's pending recommendations reflect this basic truth.

Senate to Census Bureau: Survey This!

As reported in the Washington Post a couple of weeks ago, the US Senate is threatening to enact severe cuts in the Census Bureau's budget for next year. The Post's editorial page reports today that the nascent American Community Survey would likely have to be abandoned if these cuts go through. Compared to the "long form" survey used in the 2000 decennial Census, the ACS is a shorter, monthly survey designed to provide the same information in a less painful way. The Post article explains pretty succintly why the ACS is a good thing:

The centerpiece of the reengineered 2010 census is the ongoing monthly American Community Survey, on which the bureau has spent $700 million. It asks the same questions as the long form, but by spreading questionnaires through the year, census officials say they can better handle complaints that some questions are an invasion of privacy and take too long to answer... For localities, the survey's selling point is that it produces updated data each year, not once a decade as the census does.

So the ACS gives a more continuous flow of information over time, and is (at least in theory) less of a drag for people to respond to than the traditional "long form" survey, for reasons which should be obvious from the name. To hear folks at the Census tell it, the demise of the ACS would be doubly bad for US taxpayers because (despite the short-run savings) in the long run, eliminating the ACS and returning to the old "long form" decennial Census would actually end up costing more, even though it provides less useful information.

Losing Census data probably doesn't sound like a big deal for most people. When the Census announced, after years of delay, that it was going to stop publishing its State and Local Government Finances data annually (going to an every-two-years schedule), you couldn't fill a room with the US taxpayers who ever noticed. But the idea of losing the ACS--to say nothing of the apparently "floated" idea of canceling even the old long-form Census in 2010 to save money-- should be a big deal for good-government advocates working on all sorts of issues. As D'Vera Cohn put it in the Post, the threatened cuts
would mean no long-form data about commuting times, housing costs, immigration patterns, marital trends, income inequality or other topics that help shape public policy.
Anyone who's seen the way tax policy is made knows the importance of an informed decision-making process. Without good data on social, economic and demographic trends, lawmakers can't even diagnose emerging policy failures-- let alone diagnose correct public policy remedies. The threat posed by these cuts is real enough that the Brookings Institution held a panel discussion on the implications for public policy research. (A transcript is available here.)

It may seem almost flippant to say this when Congress is considering cuts in the Food Stamp program, but the potential information loss from eviscerating Census funding is huge. Congress needs to know that Americans value an informed policy-making process-- and that we know the Census makes this process possible.