Maryland: Save the Poor Horse Racetracks?

Another day, another state contemplating the use of legalized gambling as an alternative to fixing its tax system. But there's an interesting twist in Maryland: some pro-gambling advocates are making an obscure economic development-based argument for gambling. A new report from Governor Martin O'Malley's administration argues that allowing slot machines at Maryland race tracks would help to save the state's horse-racing industry.

There's not much substance to the administration's "report." It's thinly-disguised pro-slot-machine propaganda that makes only a passing attempt at addressing the ethical and economic arguments against a "slots for tots" revenue-raising strategy. But the report does beg a couple of questions that are worth asking:

1) Why, at a time when the state faces a big budget crisis, should Maryland taxpayers be subsidizing the horse-racing industry?

2) Even if there's a plausible answer to the first question, why is giving racetracks a cut of the take from slot machines the best way to subsidize this industry?

The report, written by the state's secretary of labor, licensing and regulation, Thomas Perez, gives two answers to the first question:
(a) it's a job-creator: Perez says "the horse racing and breeding industry in Maryland accounts for over 9,000 jobs."
(b) it would save the environment. The report says that horse farms represent "roughly 10 percent of Maryland's open space."

A Washington Post editorial effectively disembowels each of these points, noting that in a state with 2.6 million jobs, saving 9,000 jobs in a distinctly 19th-century "industry" isn't an awfully compelling goal and that the state already has more direct tools at its disposal for preserving open spaces, including special agricultural zoning rules.

Of course, even if these 9,000 jobs are worth subsidizing, the big question is how relevant the "9,000" number really is--how many of those jobs are going to go away if the race tracks don't get slots? As long as a horse-racing industry exists in the mid-Atlantic reason, there will be a market for Maryland's thoroughbred racing horses. Even if Maryland's racetracks closed tomorrow, it doesn't follow that every horse farm in the state would simply vanish.

And there's a pretty dubious trickle-down theory behind the whole argument. Follow it if you can:

1) If you put a bunch of slot machines in race tracks, more gamblers will come to the race tracks, and in between throwing rolls of quarters at the slot machines will find time (and reserve a little cash) to play the ponies.

2) This will make racetracks more profitable, which will allow the tracks to have more races each week, which in turn will increase the demand for thoroughbred horses.

3) Maryland horse farms will thrive, selling horses galore.

Which brings us to question #2: why rely on such a convoluted, trickle-down approach to subsidizing horse racing and horse farms? If the state really thinks that this is an industry worth saving, why not provide direct, annually appropriated subsidies to the racetracks, or to horse farmers? The most likely answer is that in a time of fiscal shortfalls, this is not a budget priority that many people would value highly.

The sad thing, of course, is that if you put a gun to any economist's head and made her write up a list of what's wrong with Maryland's economy and tax system, it would take a pretty long time to get to "our racetracks aren't profitable enough." Much higher on the list would be eliminating a host of egregious loopholes in the state's sales, income and corporate tax that are making it harder and harder for the state to pay for needed services.

The only reason why pro-gambling advocates in the state legislature are beating this drum, instead of talking about needed tax reforms, is that they're afraid to say the "t" word. The O'Malley administration's ginned-up rationale of saving the horse-racing industry is a smoke-screen designed to hide policymakers' cowardice on this issue.

Federal Transportation Policy: At War With Itself?

The federal government is now providing cash subsidies designed to discourage people from driving to work. It's also providing an income tax break that encourages people to drive to work. The New York Times' William Neuman has the story.

The cash subsidy, which takes the form of $848 million in grants to local governments, is a new policy. But the tax break has been around for decades. Here's Neuman on how the tax break works:

Close to 400,000 commuters nationwide — about half of them in the New York City area — take advantage of a provision in the federal tax code that allows them to use up to $215 a month in pre-tax wages to pay for their parking at work... While some drivers use it to pay for parking at commuter rail stations or bus stops, most take advantage of it to pay for parking near their workplace, mostly in city centers.

One transportation policy expert summarizes the problem quite concisely:

“It is perverse,” said Jeffrey M. Zupan, a senior fellow for transportation at the Regional Plan Association in New York. “If you’re going to institute pricing measures that are intended to reduce the amount of driving, you don’t want to keep in place other measures that encourage people to drive. What you want is a set of policies that work together.”

How does this happen? The most obvious answer is that the two contradictory federal policies in question are operating in completely different worlds. One policy (the new local subsidy) shows up on the spending side of the federal government's budget, and is part of Congress' annual discussion of spending priorities. The other policy (the long-standing tax break) shows up on the tax side of the ledger, which means that it's essentially a permanent entitlement. It doesn't have to compete with other spending priorities in the annual federal budget, because it's written into the tax code. But make no mistake-- it is just as much a spending program as are the new subsidies.

A sensible starting point for rationalizing these warring federal transportation incentives would be to put both of these spending programs on the same budgetary footing. Repeal the tax subsidy and turn it into a spending program, which policymakers will have to annually evaluate on its merits right alongside the local subsidies that currently work at cross-purposes with it.

The $848 million subsidy was the brainchild of a bunch of wonks sitting in a room at the Department of Transportation. Those wonks didn't think about the obvious incompatibility between their spending initiative and the existing tax incentives because they're not in charge of the tax incentives-- no one is, in fact. If the tax incentive for employee parking were a spending subsidy for employee parking, it seems likely that this roomful of wonks at the Department of Transportation would see immediately, as part of their annual budget request, that the feds are spending millions of dollars on a program that directly counteracts the impact of a program that probably costs a lot more.

The current federal parking tax break, along with a host of other not-so-bright tax breaks, is discussed in Citizens for Tax Justice's "Hidden Entitlements" report, which you can access here. CTJ's weekly email report, the "Tax Justice Digest," frequently includes a fresh look at specific "Hidden Entitlements." (Click here to read a recent edition, which looks at the federal tax code's hidden entitlements for health care.) You can sign up to receive the weekly digest here.

Why Does Chris Dodd Oppose Closing the Carried Interest Loophole?

Connecticut Senator Chris Dodd is drawing increasing scrutiny for his reluctance to support to efforts to close the "carried interest" loophole, which allows wealthy hedge fund managers to claim capital gains tax breaks for income that can't really be described as capital gains.

To be clear, Dodd hasn't said he won't vote for these loophole-closing efforts-- he's just said he wants to think more about it:

"I am concerned about the potential adverse effects that these proposals would have on capital formation, on job creation, and on institutional investors like pension funds and college endowments," Dodd told the [Senate Banking] committee on July 31. "I have begun to hear arguments and analysis, but am not prepared to support any legislation before I have thoroughly analyzed the full impact it is likely to have on investors and markets."

As has been convincingly argued elsewhere, the tax loophole in question is pretty indefensible. It's an illegitimate use of a legal tax break. What makes Dodd's reluctance more puzzling is that back in 2003, Dodd opposed (correctly, in our view) an ultimately successful effort by the Republican-led Congress to drop the top tax rate on capital gains. (More generally, CTJ's 2006 Congressional Report Card gave Dodd an "A" for his tax policy votes.) So if he thinks the capital gains loophole is a bad thing, why would he be in favor of giving the capital gains break to income that isn't even plausibly capital gains?

Well, as the indefatigable Center for Responsive Politics points out, there's a pretty simple explanation for Dodd's position: he gets an awful lot of campaign contributions from folks who would be hurt by eliminating this loophole. In particular, employees of SAC Capital Advisers (a Connecticut-based hedge fund), in a breathtaking display of unity, have given Dodd's presidential campaign $344,000 so far.

There are good-news and bad-news ways of thinking about this linkage. The good-news way would be to say that part of a Senator's job is to reflect the interests of his constituents, and that looking after the interests of the businesses that are the backbone of Connecticut's economy is just a thing he should be doing.
The bad-news way would be to point out that Dodd is an awful lot more likely to "reflect the interests" of constituents who communicate their positions to him using suitcases stuffed with cash.

Either way, the choice Dodd faces is between acting in the narrow interest of an important constituent or acting in the broader interests of American (and Connecticut) working families. Stay tuned...

Newsday: End the Carried Interest Loophole

More editorial support for closing the egregious "carried interest" loophole for hedge fund managers, this time from Newsday:

People who earn millions of dollars a year shouldn't be taxed at a lower rate than ordinary working stiffs. That's just basic fairness. It's also why Congress should close a loophole that allows managers of private equity firms and a few other businesses to pay federal income taxes on their earnings at the 15 percent capital gains rate, rather than the usual individual tax rate that for such high earners would typically be 35 percent.

The loophole deprives Washington of billions of dollars a year that stays in the deep pockets of rich individuals rather than flowing into government coffers to pay for things such as homeland security or health care for children.

The bone of contention here is "carried interest." That's a share of an investment fund's profit paid to the people who manage the fund. Those managers, though often called partners, don't invest their own money in the funds. The carried interest is their pay - sometimes hundreds of millions of dollars a year - for providing a service. Taxing that income as capital gains rather than earned income is a sweet deal for the lucky few. But it's an outrageous affront to ordinary workers who earn a lot less and are taxed a lot more.
There are bills in Congress to close the lucrative loophole. All other things being equal, the best approach would be the most comprehensive. Nobody enjoying the tax break should escape the reform. Sen. Charles Schumer (D-N.Y.), who has taken heat for resisting legislation that he said unfairly singles out New York firms, has promised to introduce that sort of comprehensive reform. That would give new meaning to the term, the fix is in.

A nice statement of the problem-- and the solution.

Nevada: Putting the Lid on Ballot Initiatives?

Since the rise of the "direct democracy" movement in the early 20th century, the use of ballot initiatives and referenda has spread like wildfire around the nation-- for better or for worse. It's prompted questions (although probably not enough) about what sort of policy issues ought to be decided via direct democracy rather than by elected representatives.

And now, in Nevada, it's prompting interesting and vital questions about whether proponents of a ballot initiative should be able to show a baseline level of statewide support for an proposal before it's put on the ballot. What's prompted this debate, as the Las Vegas Review-Journal's Sean Whalley tells us, is a new law that does just that:

The law requires people to gather a set number of signatures in each of Nevada's 17 counties based on the population of each county to qualify a measure for the ballot. In the last election cycle, all the signatures needed could be collected in just one urban county.

The idea behind such a reform is that urban and rural interests in Nevada are likely to diverge radically in a way that might make it easy for urban taxpayers to gang up on rural taxpayers. To bring it home to tax policy: a proposed "Proposition 13" style property tax cap could have dramatically different impacts on different areas of a state-- so, the logic of this idea goes, people who are affected in very different ways should all have to show at least a modicum of support for such an idea to ensure that an unprincipled regional power grab isn't taking place.

Interestingly, Whalley tells us, this isn't the first time Nevada has tried to implement this sort of rule:

The previous requirement for Nevada petitioners was to collect signatures representing 10 percent of those who voted in the previous general election in 13 of 17 counties.
The 9th U.S. Circuit Court of Appeals overturned that requirement, however, saying it violated the constitutional principal of "one man, one vote" by allowing a small number of voters in a sparsely populated county to preempt the wishes of the majority.

Nevada lawmakers have tried to respond to the Court's concerns this time around by applying separate signature requirements for each of the state's counties, and weighting each of the county-specific requirements by the voting population:

The new formula requires signatures to be collected based on 10 percent of Nevadans who voted in the previous general election multiplied by the percentage of a county's share of the statewide population.
To determine the number of signatures required in Clark County, for example, the 10 percent who voted in the 2006 general election totaled 58,627. Multiplied by Clark County's share of the total state population, which is about 69 percent according to the 2000 census, the number of signatures needed in Clark County is 40,364.
Using the same formula for Lincoln County, the 10 percent of the vote in 2006 would be multiplied by .2 percent, the county's share of the state population, making the signature requirement would be 122.

The result is that any ballot initiative must show some baseline level of support in every county around the state.

If this seems anti-democratic, that's because it is--and that's OK by me. Virtually every governmental institution we've got at the federal or state level is designed to take us a step or two away from direct democracy. Remember all that stuff you learned in high school civics about preventing the "tyranny of the majority"? That's a big part of our republican (small R) form of government.

Of course, it's important to have an avenue for regular voters to take their case directly to the people, but it's also important to make sure that any such effort truly has widespread support. And in an age when ballot initiatives have increasingly become a tool of well-heeled corporate interests, this is absolutely a goal for which voters should have some sympathy.

Nevada's latest change to its ballot access rules may not put the ballot back in the hands of the people, as the populist advocates of direct democracy envisioned a century ago, but it will very likely prevent the ballot box from being used as a weapon by one county against another. And it helps ensure that the ballot initiatives that ultimately make it into the polling booth each November will be well-thought-out and defensible.

Washington Post Names Names on Carried Interest Loophole

When you run into a tax dodge as obviously egregious as the "carried interest" loophole for faux capital gains, you like to think that any lawmaker who cares a whit about tax fairness will be chomping at the bit to repeal it. So the Washington Post's editorial board is right on when they ask the hard question: what on Earth are some Congressional Democrats thinking when they don't line up against the carried interest loophole? There's one obvious answer:

Why Democrats are balking at these attempts to make the tax code fairer is unclear, but it may have something to do with the generosity these industries show their party.

In other words, the northeastern senators who have expressed reservations about repealing this unintended tax loophole tend to be those who have gotten beaucoup bucks from the hedge fund companies. Check out Connecticut Senator (and presidential candidate) Chris Dodd's war chest here.

The Post highlights (and debunks) the opposition of one western Democrat, Washington State Senator Maria Cantwell:

Some, such as Sen. Maria Cantwell (D-Wash.), say that increased tax costs might be passed along to investors, such as public employee pension funds or university endowments. This concern is also overblown, as some pension fund managers have acknowledged. Plenty of competing industries would not be affected by this bill, so if those affected by the bill raised their rates, they would lose their investors. And if private equity funds were going to pass along their higher tax costs to investors, it would logically follow that when their taxes were cut (as when the long-term capital gains tax was decreased in 1997 and 2003), they would have passed along their greater profitability to investors. Instead, the compensation structure appears to have remained steady.

But the Post breezes right by something that's worth thinking about a bit more: that "[p]lenty of competing industries would not be affected by this bill." New York Senator Chuck Schumer has expressed reservations about the loophole-closing bill because, as he tells it, it would disadvantage certain types of companies that take advantage of the loophole currently, but wouldn't go after other types of firm. If the unaffected "competing industries" the Post is talking about are getting the same sort of tax break that the hedge funds are claiming, the Congressional remedy wouldn't be all that much better than the disease. If Congress is gonna take steps to eliminate the carried interest loophole (and they should), they should do it right and do it completely.

GOP Candidates on Gas Tax Hike: No Way

It was an uncomfortable day for anti-taxers, or at least should have been. Two days after the Minnesota bridge collapse gave us our most blatant reminder since Katrina that we're starving our national infrastructure, the leading Republican presidential candidates found themselves forced to answer (or at least to dance around) this question from David Yepsen in a Sunday morning ABC debate:

[I]s it time we raise the federal gas tax to start fixing up our nation’s bridges and roads?

Here's how they answered, in chronological order:
Arkansas Governor Mike Huckabee suggested that we could use money that we're currently spending in Iraq and other foreign hot-spots:

Well, I think the obvious answer is, it’s not necessarily that we raise a tax to fix what we ought to fix of this country. We’re spending billions of dollars all over our country and around the world, but it may be time that we start spending some of those billions of dollars to deal with our own infrastructure.

So his prescription is that we should reallocate money that we're currently spending on international aid to help pay for transportation funding. Does he mean Iraq? Or does he mean those pesky UN dues we keep not paying? Not clear. In the absence of specific recommendations, this amounts to a standard "fraud, waste and abuse" argument: we don't need more taxes, we just need to better spend the money we've already got.

Next was former NYC Mayor Rudy Giuliani, who did Huckabee one better by suggesting that a hiking the gas tax is exactly the wrong way to come up with money for bridge-fixing: in fact, we need to cut taxes to raise this money:

The way to do it sometimes is to reduce taxes and raise more money... I ran a city with 759 bridges; probably the most used bridges in the nation, some of the most used in the world. I was able to acquire more money to fund capital programs. I reduced the number of poor bridges from 5 percent to 1.7 percent. I was able to raise more money to fix those bridges by lowering taxes. I lowered income taxes by 25 percent. I was collecting 40 percent more from the lower income tax than from the higher income tax.

We'll leave for a separate post the question of where Giuliani gets this math. For the moment, let the record show simply that Giuliani's answer to the question of "how do we pay for fixing our transportation system" is that we should cut taxes more.

This would have been a hard act for Mitt Romney to follow under any circumstances, and wasn't made any easier by George Stephanopoulos' phrasing of the question ("Governor Romney, do you want to cut taxes to fix more bridges?"). Romney sorta concurred, agreeing that low taxes are the best way to generate revenue but stopping short of suggesting that additional tax cuts right now would be the way to go. Instead, he retreated to the Huckabee approach: let's reallocate our current spending away from wasteful areas, toward bridges:

There’s no question but that the biggest source of revenue for this country -- if you really want to... repair our infrastructure and build for the future, the biggest source of that is a growing American economy. If the economy is growing slowly, when tax revenues hardly move at all, and, boy, you better raise taxes to get more money for all the things you want to do. But if the economy is growing quickly, then we generate all sorts of new revenue. And the best way to keep the economy rolling is to keep our taxes down. ... Growth helps us provide the revenue that we need. Our bridges -- let me tell you what we did in our state. We found that we had 500 bridges, roughly, that were deemed structurally deficient. And so we changed how we focused our money. Instead of spending it to build new projects -- the bridge to nowhere, new trophies for congressmen -- we instead said, “Fix it first.” We have to reorient how we spend our money.

John McCain was the last candidate who got to answer this one, and he took the "fraud, waste, abuse" tack as well:

We passed a $50 billion transportation bill that had $2 billion in pork barrel earmarked projects: $233 million for a bridge to nowhere in Alaska, to an island with 50 people on it. Not one dime in those pork barrel projects was for inspection or repair of bridges.

The unspoken implication of which is that if we'd just stop spending money on bad projects, we could reallocate the money to good ones.

A frank appraisal of the question "is our federal gas tax too low" is clearly too much to expect of these guys, and to some extent that's understandable. There's plenty of evidence that people are mad about gas prices, and that they're not all that mad about their federal taxes right now. So this is probably the last tax for which you're gonna see office-seekers express support right now. But Giuliani's response is, I would argue, far worse than the rest of them. Arguing that tax cuts should be enacted to pay for bridge construction is something that even President Bush (for whom tax cuts have consistently been the prescription for everyone's daily blues) chose not to pursue. As punishment, he should have to look an audience full of Twin Cities residents in the eye and explain which tax he would cut to pay for their bridge repairs.

The full transcript of Sunday's debate is here. Read it and weep.

Bush on Federal Gas Tax Hike: Not So Fast

One week after a deadly Interstate bridge collapse in Minnesota, members of Congress are talking seriously about increasing the federal gasoline tax to help pay for infrastructure improvements. But President Bush is having none of it-- not yet, anyway. In a White House press conference today, Bush didn't flat-out reject the notion of a gas tax increase, but clearly has no sympathy for the idea.

Here's what he was asked in today's press conference:

Mr. President, former Chairman of the House Transportation Committee, Republican Don Young, says there are about 500 bridges around the country like the one that collapsed in Minneapolis last week. And Young and other Transportation Committee members are recommending an increase in federal gasoline taxes to pay for repairs. Would you be willing to go along with an increase in gasoline taxes of five cents a gallon or more?

And here's his response:

You know, it's an interesting question about how Congress spends and prioritizes highway money. My suggestion would be that they revisit the process by which they spend gasoline money in the first place.
As you probably know, the Public Works Committee is the largest committee -- one of the largest committees in the House of Representatives. From my perspective, the way it seems to have worked is that each member on that committee gets to set his or her own priority first, and then whatever is left over is spent through a funding formula. That's not the right way to prioritize the people's money. So before we raise taxes which could affect economic growth, I would strongly urge the Congress to examine how they set priorities. And if bridges are a priority, let's make sure we set that priority first and foremost before we raise taxes.

Given the President's track record of insisting that tax cuts can solve every problem under the sun, I suppose congratulations are in order: he didn't actually say the two-letter word containing the letters "n" and "o". But that's almost certainly because he was (or his advisor were) wise enough to recognize that in the wake of major infrastructure failures, continuing to explicitly insist on "no new taxes" is akin to insisting the earth is flat. At a time when important chunks of our highway system are literally falling to pieces before our eyes, insisting that we can pay for needed improvements by eliminating the old "fraud waste and abuse" is pretty hard to stomach.

Anti-Tax Jihad Turns On Itself

Amid all the scurrying about on Capitol Hill last week before Congress left for its August recess, a remarkable story unfolded in the world of anti-tax activists and politicians that has not received enough attention.

Robert Novak tells the story, with great dismay, of how some Republican Senators considered introducing a proposal that would change the way the tax code treats health insurance purchased by individuals (as opposed to obtained through an employer) which is an idea that the President proposed in January. This plan would end the tax subsidy for employer-based health insurance and create one for individually purchased health care, and the net result over time would actually be a tax increase because most people would probably stay in employer-based health care. The proposal was taken up by a group of conservative Senators as an alternative to the bills passed by both chambers to expand the State Children's Health Insurance Program (SCHIP).

But the conservative Senators behind this effort would never dream of increasing taxes. So they included in their proposal a provision making the new tax credit for health insurance refundable for low-income people, making the bill budget-neutral.

Let's put aside for a moment the many, many problems with pushing families onto the individual health insurance market, where the plans offered are more expensive and less generous and probably encourage people to go without needed care. The Center on Budget and Policy Priorities does a good job of explaining this, so I won't dwell on it.

Let's assume for a moment that we are clueless enough to believe that this is a good proposal from a health policy perspective. Or let's say we don't even care about health care. Let's say we're conservatives who just don't want taxes raised. As conservatives, we might think that this proposal is reasonable because it's budget-neutral. Sure, it raises taxes in some places but it makes up for it by reducing taxes for low-income people who are purchasing health insurance, right? The Heritage Foundation, which is not exactly known for its bleeding heart concern for the poor or its fondness for tax hikes, found this reasoning persuasive and supported this proposal.

But apparently moving the tax burden around so that poor people have less of it constitutes a major sin in the anti-tax scriptures as set forth by Grover Norquist. His organization, Americans for Tax Reform, issued a statement that this proposal is a tax hike and anyone who signed the group's "Taxpayer Protection Pledge" and then voted for this proposal would be violating the pledge.

The logic ATR uses is that the refundable tax credit payments to people with no federal income tax liability is counted as "spending" in the budget process, so really this bill increases taxes to pay for increased spending.

This is ludicrous. Whether you want to call the refundable tax credit payments new "spending" or new "tax refunds" is really a matter of semantics. The families benefiting are not "non-taxpayers" as ATR's statement calls them. The vast majority of these families has at least one bread-winner who is paying federal payroll taxes (which are extremely regressive) so the refundable tax credits really could be said to offset a portion of payroll taxes. From this perspective, you could say that in most cases refundable tax credits are a "tax reduction" rather than "spending." That is, if you wanted to be that technical.

(Some people say payroll taxes are totally different from income taxes because payroll taxes pay for specific progressive benefit programs, but this is ridiculous. Social Security taxes can be used to pay for any government spending, since there is no "lock-box" that they go into to be truly "saved" for retirees, and the federal government is obviously spending the Social Security surplus right now to keep the government running).

The real problem that ATR has with this proposal is that the responsibility for funding the federal government would be moved slightly from people who can least afford to pay to the wealthy people who have benefited the most from Bush tax cuts. Any movement in that direction is not even worthy of discussion for the anti-tax crowd.

Think for a moment about what this rigid thinking by the anti-tax activists means for them. Imagine the House Democrats finally pass the plan they're developing to eliminate the Alternative Minimum Tax for tens of millions of families and pay for it by scaling back the Bush tax breaks for the richest one percent. ATR is sure to oppose this because it involves "tax increases" on a tiny elite even though the vast majority of families benefit. That sounds like a winning strategy.

The anti-tax people have long benefited from the simplicity of their message of "no tax hikes." But as we move into a time when everyone agrees that the government needs to do more about health care and national security, not to mention make some reforms to the tax code, this rigid, simple no-new-taxes ideology is becoming an albatross for them. Not that I'm terribly concerned for them.

Low Taxes Burden Virginia's Budget

The Commonwealth Institute for Fiscal Analysis released an interesting report yesterday discussing Virginia's budget and its inability to continue funding essential public services. The Institute's report shows that after 2007, there will already be a projected deficit of at least $200 million due to stunted growth in Northern Virginia's housing market. This, combined with a continued low income tax burden and increased state spending, will cause Virginia to face a shortfall of $1.2 billion. And the report shows this is a conservative number.

Personal and corporate income taxes and sales taxes represent a large portion of state revenue, but the budget will not have enough money to stretch over the course of the 2008-2010 period. Corporate and sales tax revenues are contingent upon economic conditions and thus have not produced as much revenue as orginally anticipated, causing a portion of the shortfall.

In fact, a spokesman for the Governor admitted in today's Washington Post:

"the 2008-2010 budget period will feature slower growth than anticipated, but we are not in a position to validate the numbers that the Commonwealth Institute is giving out"

Virginian officials seem not to be worried about the shortfall, expecting to rely on the state's Rainy Day Fund in case there is not enough money to cover expenses. But this fund can only be used in specific circumstances and does not hold nearly enough money to finance the deficit.

Virginians, on average, earn more than residents in most other states, coming in at #10 in average income. Meanwhile, its residents pay the 10th lowest tax rate in the country. The report discusses many issues in recent tax policy and advocates for reform of an outdated tax structure set in place in the 1920s.

This huge shortfall will hit hard on the state's various important needs such as education, healthcare, and transportation. The Institute's report outlines that a solution can be found in raising taxes to generate additional revenue. Because the state has a higher average income and a lower tax rate than most, there is potential for raising more money. One way to ensure increased revenue is to raise the personal income tax. So now the question for Virginia becomes: would you rather raise a little tax or not be able to provide free public education and low cost public transportation?

Who's ready for a carbon tax?

As I was driving back from New York to DC last weekend, I couldn’t help but notice the dismal industrial landscape that spoils the New Jersey foliage. Dilapidated, rusting buildings and machinery spewing pollution line the highway, the tools of coal-powered energy production. I couldn’t help but think at that moment, why would anyone prefer this scene to a simple white wind turbine?

But alternative energy usage is just one part of a multi-pronged solution to curb our country’s excessive carbon emissions. John Dingell writes a good article in the Washington Post today stating that, while alternative sources and new fuel standards for cars or appliances are a good start, they aren’t enough. Our solution must include a market instrument to raise the cost of emitting carbon. A carbon tax or fee would “be the most effective way to curb carbon emissions and make alternatives economically viable” Dingell writes.

He’s absolutely correct. Market forces will work, they have in the past. Taxes or fees on emissions-intensive energy producers mean higher costs to consumers, a powerful signal to reduce consumption. Taxes on carbon emissions would also encourage research and investigation into cost-effective alternative energies and investment in fuel-efficient items as a response to high energy costs.

Dingell furthermore argues that we must be ‘ambitious’ and challenge the political system to adopt a carbon tax instead of settling for the more palatable cap-and-trade program. But unfortunately he fails to address the fact that a cap-and-trade program could have the same effects as a tax, and at lower costs. In economic terms, the cap and trade system is just as efficient as a tax and is more flexible in allowing firms to trade pollution permits based on their ability to reduce emissions. Firms that emit heavily will have to buy permits to do so, raising costs and sending the same price signals to consumers to reduce consumption. Revenue could be raised in a cap-and-trade program by auctioning permits.

Most importantly, a cap-and-trade program sets a concrete limit on the amount of CO2 that can be emitted by all firms, guaranteeing a reduction if well-monitored. A tax merely encourages reduction, it doesn’t mandate it. In the very long run, a carbon tax may end up the most efficient option, but this doesn’t mean a cap-and-trade system should be overlooked because it has its merits.

And, of course, Dingell entirely overlooks the vital fairness questions that have dogged the carbon tax idea since the Clinton administration discussed a “BTU tax” more than a decade ago. Any carbon tax, as well as any cap-and-trade program, will hit low-income consumers hardest—and would come at a time when both federal and state taxes are already hitting low-income families harder, and letting wealthy families off easier, more so than at any time in recent memory. To meet even the most modest standards of fairness, a carbon tax or cap-and-trade program would have to provide low-income tax rebates, possibly through the federal payroll tax.

It’s nevertheless heartening to know that support is growing for the types of market tools necessary to cause a clear reduction in carbon emissions. Personally, I’m more than ready for the wind turbines.