February 29, 2008

Colorado Takes Business Tax Reform in a Refreshing Direction

There’s usually good reason to view proposed tax breaks for business with a bit of skepticism. Countless tax preferences granted to businesses lack any economic or policy justification, often instead being the result of the hard work of business lobbies or simply the nagging paranoia many legislators have of their state evolving into an “unfavorable” environment for business.

A recent business tax cut approved by Colorado’s House Finance Committee, however, enthusiastically breaks this mold. The proposal under consideration eliminates the business personal property tax for businesses with less than $7,000 in personal property (i.e. those least able to pay) such as furniture, computers, and software. The business personal property tax has been the subject of serious criticism and reform efforts across the country for quite some time, most recently in Arizona, Florida, Idaho, Maine, and Utah.

One of the primary complaints of those involved in these movements has been that the business personal property tax is too complicated. Calculating one’s tax involves taking account of every item used in the operation of the business, and then determining the item’s current value from fairly complicated depreciation tables. For larger businesses that have sufficient staff to undertake this process, the burden may be only a minor inconvenience. For small businesses, however, the costs associated with figuring out what one owes can easily exceed the actual tax bill. The government faces a similar hassle in reviewing the lengthy tax returns submitted by small businesses, often with gains in revenue of no more than $50 or $100 per return for businesses of the size that will be benefited by this proposal.

Colorado has taken a well-targeted approach to reducing the problems faced by small business (as well as government itself) as a result of this tax. By exempting businesses possessing less than $7,000 worth of property from paying, the state will have reduced the number of businesses subject to the tax by about 30,000. Not only will this save the government a lot of hassle, but by targeting the tax relief to businesses with the smallest amount property, only those that were paying the smallest amounts anyway will be affected. This is the reason that the price tag of the reform is quite low, at $2.6 million annually statewide with $600,000 of that picked up by the state. The cost is also kept low by the fact that the $7,000 exemption does not apply to businesses with more than $7,000 of property – large, likely more profitable, companies will see no windfall benefits as a result of this legislation as they must continue to pay taxes on even the first $7,000 of property they possess. And finally, as government tax agencies see their workloads decline significantly they will have more resources available to scrutinize the returns of those larger businesses that actually pay significant amounts in property taxes.

But the issue here is not a concern for most states. About ten states currently do not tax any business personal property, while most others have exemptions much higher than Colorado’s current $2,500. Nonetheless, if this proposal becomes law the state will deserve much credit for deciding to approach a business tax cut in a much more responsible manner than is often the case.

February 28, 2008

Regressive Tax Hike Gains Overwhelming Support in Minnesota

An unusual event took place in Minnesota this past week – support for increasing taxes was widespread enough in the Minnesota legislature to override Republican Governor Tim Pawlenty’s veto of a transportation finance bill. Unfortunately, the roughly $6 billion in transportation funds will come from a variety of regressive revenue sources, including increases in gasoline taxes, license fees, motor vehicle excise taxes, and general sales tax rates in several counties.

Also included, however, is one interesting measure designed to partially offset the disproportionate burden placed on low-income Minnesotans by the bill: a refundable gasoline tax credit. The credit, totaling $12.50 for single taxpayers and $25 for married filers, is available only to low-income Minnesotans. Though a credit this small would normally be seldom applied for, Minnesota’s generous EITC and property tax circuit breaker encourage more low-income persons to file state income tax forms than is the norm in many states. Applying for the additional $12.50 per-person credit should therefore be only a minor inconvenience for most eligible filers.

The credit does suffer from another problem, however. A credit of $12.50 per-person is enough to offset the 5 cent gasoline tax increase on only the first 250 gallons of gasoline purchased. Data released by the U.S. Department of Transportation, however, suggests that the average annual per-capita consumption of gasoline by Minnesota motorists is much closer to 500 gallons. Ultimately, while the idea behind the Minnesota gasoline tax credit is very sensible and relatively unique (and will hopefully catch on around the nation) the credit itself, as a mechanism for improving the fairness of the state's tax system, is not incredibly exciting.

The coupling of a slew of regressive tax increases with the insufficient gasoline tax credit prompted one Republican legislator to question what the bill would mean for “the little guy, the striver, the dreamer”. Though the impact on “strivers” and “dreamers” specifically is difficult to determine, the sentiment behind the statement is valid: low-income Minnesotans will be harmed by this bill.

The bottom line is this: Minnesota was justified in increasing its gasoline tax. Since gas taxes are traditionally levied on a per-gallon basis and not indexed for inflation, the real value of the revenue raised from gas taxes inevitably declines with time, leaving states with insufficient funds to maintain their transportation infrastructure unless they continually increase gas taxes to keep up with inflation. Given this reality, the gasoline tax credit enacted by Minnesota was simply too small. Preferably, the credit would have covered not only the entire gasoline tax increase, but also some of the existing (regressive) gasoline tax to which the increase was added. Aside from the gasoline tax issue, the local sales tax, license fee, and vehicle excise tax increases are regressive tax policies enacted only because they were easier to muster support for than an even higher gasoline tax increase would have been. The vehicle excise tax is especially poorly formulated - a $20 tax is levied on any vehicle bought through a retail establishment regardless of if that vehicle is worth $5,000 or $250,000. Not only is such a tax even more regressive than a regular sales tax, but the real returns on that tax, like the gasoline tax, can be expected to fall with time as inflation erodes the value of that $20 collected.

Despite its shortcomings, given political and budgetary realities in Minnesota and the obvious necessity of financing transportation, this bill should at the least be given praise as a fiscally responsible method of paying for transportation projects. At the very least, most everyone should be able to agree that the bill enacted by Minnesota is a better alternative than allowing the state’s transportation infrastructure to fall into disrepair.

Other states seeking solutions to their transportation funding shortfalls have plenty of lessons to learn from Minnesota, both good and bad.

February 22, 2008

Bush 41 Redux: McCain Says "No New Taxes"

Under the best of circumstances, this year's presidential candidates have been a little bit vague when discussing their plans for tax reform. There are, of course, politically sensible reasons for the candidates' caginess: presidents don't get to unilaterally make fiscal policy, and specific tax promises can blow up in your face. To make matters worse, tax policy topic #1 this year is a real hot potato: whether each candidate would repeal all (or some of) the Bush tax cuts. So it was a bit of a shock to hear likely Republican nominee John McCain take a page out of the George H.W. Bush playbook in an interview with George Stephanopoulos last weekend:

Stephanopoulos: The number one issue right now, the economy. Senator Obama went at that on Tuesday night as well.
(Plays clip of Obama speech) I admired Senator McCain when he stood up and said that it offended his conscience to support the Bush tax cuts for the wealthy in a time of war. But somewhere along the road to the Republican nomination, the straight talk express lost its wheels because now he's all for those same tax cuts. (End of Obama clip)
Stephanopoulos: He says basically you've sacrificed your principles for the sake of the nomination.
McCain: Well, for a long time, I have said that I thought the tax cuts ought to be made permanent. For a long time back, I said, look, we're going to have spending restraint the way that Reagan did when he restored our economy when it was in the tank, thanks to then President Carter's mismanagement of the economy. And we entered into a great period of prosperity in America. Spending restraint is why our base is not energized. Spending restraint is why we are having to borrow money from China. And we've got to have spending restraints in my view. But to impose on the American people what essentially would be a tax increase of thousands of dollars per family in America is not something I think - well, I'm sure would be bad for the economy of this country.
Stephanopoulos: So on taxes, are you a "read my lips" candidate, no new taxes, no matter what?
McCain: No new taxes. I do not - in fact, I could see an argument, if our economy continues to deteriorate, for lower interest rates, lower tax rates, and certainly decreasing corporate tax rates, which are the second highest in the world. Giving people the ability to write off depreciation in a year. Elimination of the AMT. There's a lot of things that I would think we should do to relieve that burden, including, obviously, as we all know, simplification of the tax code.
Stephanopoulos: But under no circumstances would you increase taxes?
McCain: No.

Whether he intended to or not, McCain went well beyond the scope of the original question here. He won't repeal the Bush tax cuts-- but he also said that he won't increase any other taxes.

Given the breadth of this extraordinary promise, a few follow-up questions are in order: did he really mean to issue a blanket "no new taxes" pledge, or was he still referring just to the Bush tax cuts? Does "loophole closing" count as a tax hike? What if loophole closers are combined with other tax cuts in a revenue neutral package?

Under any interpretation, though, McCain's pledge brings up an important question for his potential supporters: what good is "straight talk" if you can't back it up? The Fort Worth Star-Telegram's Jack Smith explains why McCain's pledge probably isn't worth the paper it was probably written on here.

February 06, 2008

Debating the Stimulus Package

It's funny how agreeable and bipartisan everyone becomes once it's decided that we need some new tax cuts that are not paid for.

The stimulus package being debated by Congress right now may do some real good for the economy. The theory is that there is excess capacity in the economy and not enough demand, and putting money in the hands of people who will spend it will boost demand and get the engine running again. The part that Democrats and Republicans agree on, naturally, is tax cuts.

They won't be paid for, which makes sense in the short-run since taking money away from the economy would theoretically undo the stimulative effect of giving people more money to spend. It would have been nice to have some revenue-raising provisions that kick in a couple years down the road, when any recession will be over, to ensure long-term budget neutrality, but the world Congress inhabits is far, far, far from a perfect world.

What's amusing about this process is that the President and his allies in Congress make a philosophical distinction between tax cuts and increased spending that has no basis in reality. Both tax cuts and increased spending mean less revenue for other priorities (or in our current situation, a higher budget deficit). And it's not as though the Republicans are against spending because it's targeted to very specific groups; they support countless tax cuts that are targeted towards specific groups and businesses.

Rather, they opppose spending increases because it represents larger government, while giving money back to people moves us closer to their ideal of smaller government in their minds. Of course, this is ludicrous because the government does not actually shrink to a degree that corresponds with any of these tax cuts (the bill is just sent to the next generation), but that seems to be besides the point.

Once we've decided that we're going to increase the deficit to stimulate the economy, we might as well do it in a way that really will be effective in warding off a recession. And as several economists have pointed out, the way to do that is to through benefit programs like unemployment insurance and food stamps because they put money in the hands of people who will spend it immediately rather than saving it, because they have so many needs that are unmet right now. Middle-income and especially high-income people are likely to save any money given to them, which does not have the immediate positive impact on the economy needed to prevent or counteract a recession.

But that would be spending, and spending, in the conservative mind, is always bad. It's better to use tax cuts. Even if the tax cuts cost more revenue and stimulate the economy less, they're still preferable to increased spending.

The plan negotiated between House leaders and the Bush administration includes a small tax rebate for people who work and pay federal payroll taxes but don't earn enough to pay federal income taxes. The White House apparently acted as though this was a concession and extracted, in return, tax cuts for business investment that will probably do little to help the economy because investment usually takes a while to arrange and will typically not really happen until after the recession has passed.

Now Republican leaders in the Senate and the White House have agreed to Senate Democrats' plans to extend those rebates to seniors and people with disabilities who receive Social Security and veterans with disabilities. But they have not yet agreed to extending unemployment benefits, even though that's one of the measures most likely to actually stimulate the economy.