December 23, 2005

Windfall Profits Tax Part 1: Oil Executives Evade Oath-taking

Last month, a joint Senate committee invited five executives from major oil companies-- Exxonmobil, Chevron, ConocoPhillips, BP and Shell--to testify at a hearing on oil industry profits.

Now eight Democratic Senators have asked the Justice Department to investigate whether these oil executives lied in their November 9 testimony.

At the time, quite a few people-- including senators on the joint committee--made a fuss over the fact that Committee Chairman Ted Stevens chose not to swear the executives in. To my untrained legal eye, Stevens' stated reason for not doing so-- that lying to the committee would be illegal whether these guys took an oath or not--seems legit. Basically what Stevens is saying is that the only real reason to make these guys swear an oath is for the sake of posturing.

[But, to be clear, I have no idea whether that's the only point of requiring people testifying to take an oath. Is there really NO difference, for legal purposes, whether you've been sworn in or not when you lie to a Congressional committee? Anyone? As events have unfolded since the November 9 testimony, it's becoming clear that the answer to this legal question may matter.]

At any rate, the transcript from the very beginning of the hearing, in which Senator Maria Cantwell confronts Committee Chair Stevens about his refusal to swear the execs in, is riveting:

SEN. STEVENS: Could we ask the witnesses to sit down, please? (Pause.)(Strikes gavel.) If I may, there's -- the question's been raised, before we start the hearing -- the question whether Senator Domenici and I should administer oaths to these witnesses at today's hearings was raised by a letter that I received this morning at 8:10 a.m, after it was delivered to the press. As a matter of fact, there's a story in a Seattle paper about the request having been denied already.I remind the witnesses, as well a the members of this -- these committees, federal law makes it a crime to provide false testimony. Specifically, Section 1001 of Title XVIII provides the impertinent (sic) part. "Whoever in any manner within the jurisdiction of the legislative branch of the government of the United States knowingly or willfully makes any material false, fictitious or fraudulent statement or representation shall be fined under this title or be imprisoned not more than five years, or both."I have reviewed the rules of the Senate and the rules of the Commerce and Energy Committees in effect in this Congress, and the relevant provisions of Title II of the United States Code. There is -- could we have quiet, please? (Strikes gavel.) There is nothing in the standing rules of our committee rules or the Senate which requires witnesses to be sworn. The statute has the position that everyone before the -- appearing before the Congress is in fact under oath.These witnesses accepted the invitation to appear before our committees voluntarily. They are aware that making false statements and testimony is a violation of federal law, whether or not an oath has been administered. I shall not administer an oath today.
SEN. STEVENS: And we look forward to questions.Senator Cantwell?
SEN. CANTWELL: Mr. Chairman, I
did send you a letter, cosigned by eight of my colleagues, and asking that the witnesses be sworn in. This rare joint hearing --
SEN. STEVENS: I did not yield
to make statement. We're ready to go. We have a statement process. Do you have any --
SEN. CANTWELL: Mr. Chairman, I would like the committee to vote on whether we swear witnesses --
SEN. STEVENS: There will be no vote. That's not in order at all. It's not part of the rules that any vote can be taken to administer an oath. This is a decision of the chairman, and I have made that decision.
SEN. CANTWELL: Mr. Chairman, I move that we swear in the witnesses.
SEN. STEVENS: And I rule that out of order.
SEN. : I second the motion.
SEN. STEVENS: Thank you very much. That's the last we're going to hear about that because it's out of order.
SEN. CANTWELL: Mr. Chairman? Mr. Chairman? Could I just ask just for a little clarification here? If a senator makes this request and there's a second, why wouldn't we have a vote on that?
SEN. STEVENS: Because you can't vote to put in the rules something that's not there.
SEN. CANTWELL: Mr. Chairman --
SEN. STEVENS: This is not a business meeting. There's no way to put this into the rules. This is a matter for the chairman to decide, and I've made the decision. Now --
SEN. CANTWELL: Only a chairman --
SEN. : Mr. Chairman, I want to say I'm --
SEN. STEVENS: Pardon me. It specifically says in the rules the president of the Senate, the speaker of the House or a chairman of any committee can make the decision.

At the end of the day, this argument could be nothing more than political window dressing. But if there are legal ramifications to these guys not getting sworn in, then Stevens needs to answer some questions about why he chose to leave the oil execs unsworn.

December 17, 2005

New CBO Report on Long-term Deficits: Sobering News

Congressional Budget Office Director Douglas Holtz-Eakin gave a harrowing talk Thursday at the New America Foundation in which he gave a sneak preview of the findings from CBO's new report, The Long-Term Budget Outlook. You can see the whole thing on MP3 here at the NAF website.

As Holtz-Eakin himself points out, there's nothing new or novel in this report. The nation's fiscal future looks about as bleak now as it did the last time they released this biennial report. But there are a couple of exchanges that I think are worth listening to for the sheer drama of it.

First, here's Holtz-Eakin channelling the spirit of John Lennon in his bottom-line summary of the report's main finding, at about 4:45 of the MP3 file:

Imagine a world in which there was no Katrina, no Rita, no costs of the Gulf Coast cleanup or annual events of that type. Imagine a world in which there was no necessity to spend funds in Iraq and Afghanistan or elsewhere in the globe, fighting a war on terrorism. Imagine a world in which it was possible to meet all our nonsecurity needs, in highways and education and welfare, without earmarks and without pork barrel and which allowed us to keep such spending flat and not go up at all. Imagine that world also included tax increases as all the laws the Congress has passed in the last several years sunset. Imagine in that world there was no economic slack– the economy always performed at absolutely top notch perfect levels.
In that world, our Congress would face deficits as far as the eye could see and have enormous fiscal challenges.
Later, at 45:45 in the MP3 file, a CQ reporter asks Holtz-Eakin to respond to the supply-side argument that economic growth will help keep our deficits and debt in check:

CQ: For people who think current tax cuts or future tax cuts can create more economic growth ,what level of economic growth would we need annually to grow ourselves out of this problem?
Holtz-Eakin: It’s not possible. Don’t even think about it. [long pause] You can’t grow your way out of this problem, it’s just too big.

Dramatic stuff...

December 14, 2005

Tax Cuts for Companies in Michigan

Yesterday Reuters reported that Michigan Governor Jennifer Granholm will sign into law roughly $600 million in tax breaks over the next four years for large manufacturers.

Obviously the automotive industry is experiencing serious difficulties lately and passing these tax cuts is one attempt to try to "lessen the burden" to ensure the solvency of this industry.

I can't help but wonder though, if these tax incentives will actually do much good.

If companies are struggling so much that they are closing plants all over Michigan and across the region - will these incentives actually ensure that plants stay open and workers keep their jobs? Any thoughts?

December 07, 2005

Here's Hoping Virginia's Governor-Elect Will Change His Tune

It was surprising to see that all three candidates running to be Virginia's next governor were for repealing the estate tax. Candidates Potts and Kaine said they were in favor of a gradual reduction of Virginia's estate tax, while Candidate Kilgore said he wanted an immediate repeal of the tax that only the wealthiest of the wealthy pay.

Click here to read an op-ed in the Daily News (Hampton, Virginia) where the Governor Elect's position is explained a bit more.

PA Gov Vows To Veto Bad Tax Bill

Pennsylvania Governor Ed Rendell is vowing to veto a tax plan coming out of the state's legislature that would poorly cut corporate taxes. The bill would:
... trim the income tax rate to 3.05 percent, down from the current 3.07 percent. The rate was raised to its present level on Jan. 1, 2004, up from the previous 2.8 percent.

The tax cut would save someone earning $50,000 only $10 a year. But the bill was strongly supported by a coalition of 80 businesses because many small firms pay their state business taxes based on the personal income tax rate rather than the corporate net income tax rate of 9.99 percent.
And ...
It would change the formula used for figuring the corporate net income for Pennsylvania firms. The new formula would base a company's taxes only on sales made within Pennsylvania, not on out-of-state sales or investments a firm makes in Pennsylvania.

It also would gradually lift the current limit on the amount of business losses a company could carry forward from one fiscal year to the next.

The most egregious component of this tax plan is the change to the corporate net income tax formula to base a company's income taxes only on sales made within Pennsylvania. In tax policy, this is referred to as the Single Sales Factor (SSF). Here's a quick primer on SSF from ITEP's Policy Brief Corporate Income Tax Apportionment and the "Single Sales Factor":

  • While some companies will benefit from SSF, other companies will actually pay more taxes under SSF. Manufacturing companies that have more of their property and payroll in-state (and sell more of their products to customers in other states) will benefit from SSF, but companies with little in-state employment and property that sell proportionately more of their products in-state will be hurt by SSF. Whether SSF will cut, or hike, a state's corporate taxes overall depends on the importance of manufacturing in a state's economy.
  • When SSF is enacted in response to the threats of in-state corporations to relocate in other states, there is no guarantee that these corporations will not "take the money and run". For example, after the passage of SSF in Massachusetts, the Raytheon corporation who lobbied for it, cut thousands of MA jobs.
  • SSF creates harmful incentives for some businesses. A company that sells products in an SSF state, but does so only by shipping products into the state (and therefore has no nexus) will not have to pay any income tax to the state. But if such a company makes even a small investment of employees or property in the state, it will immediately have much of its income apportioned to the state because the sales factor counts so heavily. Thus, SSF gives these companies a clear incentive not to invest in the state. Even worse, SSF gives companies with in-state employees an incentive to move all of their employees out of the state to eliminate their nexus with the state - thus zeroing out their tax.
  • By discriminating against some companies and in favor of others, SSF makes corporate income taxes less fair - and can result in profitable companies paying no state income tax. For example, under the Illinois SSF rules, a corporation that has all of its employees and property in Illinois - but makes all of its sales to customers in other states - will pay no Illinois income tax, no matter how profitable it is. This unfairness reduces public confidence in the tax system.

Governor Rendell is doing the right thing by standing up to limited corporate interest. This bill is bad tax policy, clear and simple.

December 02, 2005

Prop. 13 Light

Nevada lawmakers have been grappling with how to provide property tax relief for its residents in the wake of rising home values. This is a laudable goal, however, not the way Nevada lawmakers are thinking of doing it. Lets call it the Prop. 13 Light Plan:

State legislators say Nevada's property tax limit law is better than California's Proposition 13 because when a home is sold, the new buyer gets the same tax relief as the former owner.

"It makes it in my view a better deal than Proposition 13," Assemblyman Joe Hardy, R-Boulder City, said Tuesday.

Hardy and other members of the Subcommittee to Study the Taxation of Real Property will have several meetings during the next year as they review Nevada's AB489, passed in April, which limits property tax increases on owner-occupied homes to 3 percent per year. The new law also places an 8 percent limit on commercial and other types of property.

Hardy lauded the new law after Douglas County Assessor Doug Sonneman explained how the it differs from Proposition 13, imposed by California voters in 1978.

Sonneman noted a home in his county had an assessed value of $162,500 last year and then was reassessed up to a value of $245,000. But because of the 3 percent limit, the property tax on the home went up $37, rising to $1,278 a year from $1,241 per year.

But, he added, the assessed value of most property today is far less than what the property sells for on the open market. The home in Douglas County sold in November for $357,000.

If that home had been in California, Sonneman said the new owner would pay $3,570 a year in property taxes. Under Proposition 13, property taxes can be increased by no more than 2 percent a year, but when the property is sold it is taxed at 1 percent of the fair market value.

In contrast, the Nevada law allows the new owner "a long time to enjoy" the property tax savings, Hardy said.

Under Nevada's Prop 13 Light Plan, lawmakers solve the issue of the inequity caused by resetting property taxes when the house is sold. No one disagrees that it would be unfair if two homeowners with identical homes in identical communities paid two different amounts of property tax solely because one them has lived there longer than the other. However, the Prop 13 Light Plan creates an inequitable system of property tax relief in another way.

Say you have two homeowners, Homeowner A and Homeowner B. Homeowners A & B have identical homes however they live in different communities. Homeowner A lives in a tight housing market with rapidly growing home values. Homeowner B lives in an area that doesn't have rapidly raising home values, perhaps a rural county. Under the Prop. 13 Light Plan, Homeowner A will receive more property tax relief than Homeowner B because the 3% cap will be more restrictive in fast-growth areas compared to low-growth areas. Think about it. If Homeowner A's property tax goes up by 5% in a given year, Homeowner A receives relief in the amount of 2%. On the other hand, if Homeowner B's property tax increases by 1%, Homeowner B wouldn't receive any relief because the cap is set at 3%. So, with a straight 3% restriction, Nevada's Prop. 13 Light Plan discriminates between people who live in fast-growth areas against those that don't. Regardless if Homeowner A needs more property tax relief than Homeowner B, Homeowner A is going to receive more because of geography. Ability to pay, not geography, should determine the amount a homeowner receives in property tax relief.

Additionally, Nevada's Prop. 13 Light Plan isn't cost effective because it grants property tax relief to people who don't even need it. Because the 3% restriction applies to all homeowners, regardless of their incomes, the Prop. 13 Light Plan will force Nevada residents to pay more in taxes than they have to. From millionaires to elderly widows living off their Social Security, they're all covered by the Prop. 13 Light Plan. Why should Nevada residents pay for property tax relief that goes to homeowners that don't need it? It's just wasteful. In order to be cost effective, property tax relief should be targeted to those they truly need it: low- and middle-income homeowners for whom property taxes are really a burden. Furthermore, what about renters? Nevada's Prop. 13 Light Plan provides absolutely no direct relief to renters at all.

Nevada's Prop. 13 Light Plan inequitably provides more tax relief to homeowners in fast growth areas compared to slow growth ones and provides property tax cuts to all homeowners regardless of their ability to pay. Nevada's Prop. 13 Light Plan is just simply inequitable and wasteful.