Tag Archives: tax reform

Setting the record straight on business taxes again

Minnesota Revenue Commissioner Myron Frans made the rounds at the State Capitol today, appearing before both the Senate and House Tax Committees.  Frans got a decidedly chilly reception from Republicans on the respective committees, including our own State Senator Julianne Ortman (who went to so far as to call elements of the plan “a re-election ploy” — a rich assertion coming from a party that hasn’t hesitated to try their own ploys).

Meanwhile, other Republicans are already sounding the alarm about how Dayton’s plan would send businesses running for the borders because our tax system will be so out of whack.

Let’s take a deep breath here and look at some numbers.  A couple of years back, I looked at a study by the Council on State Taxation ( a consortium of 600 businesses) regarding state and local tax rates.  What we found in that Minnesota had lower taxes as a percentage of economic activity than the national average and many states in the region.  Maybe it’s time we look at how the numbers have changed over the last two years.  Here’s a link to the new study.

Well, not much has changed in two years.  Minnesota continues to be below the national average, and slightly ahead of neighboring states like South Dakota and Wisconsin.  And while Minnesota’s tax percentage has increased from 4.3% to 4.5% in that time, that rate of growth is slower than the national average (which increased by 0.5%).  What happens if Dayton gets his entire tax proposal?  Minnesota goes from 4.5% to 4.7%, which does slide it slightly behind Wisconsin and South Dakota.

salt2012

Is this enough to drive thousands of jobs away?

Seems unlikely, since our position slightly ahead of these states previously didn’t encourage large migration of jobs into the state — and the state out of all those on the chart experiencing the highest job rate increase is North Dakota, which also has the highest percentage of taxes as a percentage of gross state product.  The reality is that tax policy is one of many factors that drive economic growth and business investment.

There are plenty of reasons to like or dislike specific elements of the Dayton tax plan.  I’ve been clear about things that I do and don’t like.  The job of a minority party isn’t just to grandstand and say no.  They should be working to make the plan better where they can — certainly DFLers aren’t entirely united behind the plan and some would be glad to grab on to some reasonable alternatives.  Instead of biting Commissioner Frans’s head off, they should be offering their own suggestions.

Will they do so?  Sadly, I’m not optimistic.  The incentives in our political system today seem to favor confrontation over cooperation, and power-grabbing over problem-solving.

 

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2013 Legislative To-Do List [UPDATED]

The 2013 legislative session kicks off next week, and there’s a long list of things that the newly-minted Democratic majorities should look at as their top priorities.

#1:  Fix the budget.  It’s long past time for the folks in St. Paul to get on with it and take care of the structural problems in the state budget.  No more stalling, no more half-measures, no more one-time fixes or gimmicks to solve this year’s $1.1 billion projected deficit.  This means:

1a.) Get a plan in place to pay back the school shifts.  My talks with local school district officials indicate that they are more interested in certainty at this point, so we need not necessarily pay back the entire $1.1 billion still remaining (this is on top of the $1.1 billion deficit) in one budget cycle.  A bipartisan commitment, though, to repaying $275 million a year for the next four years should be sufficient.

1b.) Real tax reform.  The elements required here are pretty simple, but the devil is in the details.  First, broaden the base of the sales tax by removing distorting exemptions on some categories of goods and services — it should be possible to broaden the base, lower the rate, and still end up revenue-neutral to revenue-positive.  Second, recognize that the sales tax changes are regressive, so cut income taxes on lower- and middle-income taxpayers.  Third, remove unnecessary tax expenditures (credits and deductions) that essentially function as handouts via the tax code.  This should free up additional revenue that can be applied to across-the-board rate reductions in both the individual income and corporate income taxes.  And that’s all before addressing our overly complex property tax system.  It may be too much to ask legislators to fix that in 2013, too, but we can hope.

1c.) Accountability in state spending.  State government needs to do a much better job of measuring effectiveness of state programs, and requiring reforms for programs that don’t measure up.  Additionally, there are programs that just aren’t needed any more.  It’s time to end them, now.  That said, we should be wary of sound-bite proposals like legislative Republicans proposed last session that imposed across-the-board cuts without an analysis of the work required.

#2:  Improve the job-creation environment in the state.  An odd-year bonding bill seems unlikely at this point, but the Legislature can take some concrete steps to improve conditions for job creation in the state.  A commitment to infrastructure is paramount.  For starters, the legislature can begin indexing the gasoline tax to inflation in order to maintain its buying power. (Minnesota’s gasoline tax, even with the increase passed after the 35W bridge collapse, has less purchasing power than it did 20 years ago and our road and bridge construction needs are much more significant.)  Renewing our commitment to our public universities is vital as well.  Even though enrollment is up 23,000 over that time, funding for the University of Minnesota system and MnSCU has declined back to Ventura Administration levels.  This is a significant factor in the doubling of college tuition over the last decade.  In return, those institutions should provide concrete plans on how they can reform their operations and become more efficient.  The U of M, in particular, has some administrative bloat that needs to be addressed.

#3:  Support implementation of the Affordable Care Act.  Minnesota’s health insurance exchange, required as part of the Affordable Care Act, is scheduled to go live in October to enable enrollment in plans starting on January 1, 2014.  It is critical that the Department of Commerce have the necessary resources to finish development and provide ongoing support for the exchange.

#4:  Government accountability, campaign finance and election reform.  There’s a gaping hole in the finance disclosures that our elected officials have to provide.  If they work as an independent contractor or consultant, legislators don’t have to disclose who they work for.  That’s a problem, as demonstrated during the campaign in the case of Senator David Hann.  Unlike some, I don’t have a problem with Hann chairing the committee with critical oversight on health insurance while being licensed to sell it.  But I do have a problem with not knowing who’s paying Hann’s salary outside of the Capitol so I can fairly judge his actions in the legislature.  Same goes for anyone else.  It’s time to require folks in those categories to disclose who they’re getting paid by (over a limit, say $2,500).  From a campaign finance perspective, it’s time to bring some additional sunshine into the process and require additional disclosures.  I would recommend moving to a four times per year model (quarterly in odd years, then Q1, pre-primary, pre-general, and year-end in even years).  Finally, even though the Voter ID constitutional amendment failed, there are things that can be done in the realm of election law to improve perceptions of fraud incidence and improve access to the polls.  Such provisions should include the introduction of early voting (how about the two Saturdays before Election Day), automatic voter registration of holders of drivers licenses and identification cards, and a close look at the electronic poll book concept as an alternative to voter ID requirements.

Certainly, these won’t be the only items that come up — social issues like a push for recognition of same-sex marriage will undoubtedly be discussed (and eventually, I believe it should and will be passed) — but these are what should be at the top of the list.

[UPDATE, 1/4]:  Let me clarify a few points regarding Hann’s relationship with Boys & Tyler Financial.  Hann has completed his licensing requirements with the state of Minnesota, but has not been enrolled as an agent by an insurance company.  Until that has been completed, Hann cannot sell insurance in the state.  Hann works on a contract basis with Boys & Tyler, and claims to earn no compensation for that relationship. (Under current law, Hann would not be required to disclose any income earned on a contract basis.)  This seems to be an arrangement designed to fight efforts at disclosure, and leads me to believe that all contract employment/consulting relationships should be disclosed instead of those surpassing the dollar limit originally indicated in the post.

[State Capitol picture courtesy of Minnesota House of Representatives Public Information Services.]

Elites agree: it’s time for you and your kids to pay for their failures

Today’s POLITICO has one of those only-in-the-Beltway kinds of stories that make you wonder if there’s any signs of life there at all.  Reported by Jim VandeHei and Mike Allen, it’s a synthesis of elite opinion (lawmakers and staffers from both sides of the aisle, as well as business executives) about what needs to be done to get our economy back on track once and for all.  Now certainly, there’s some good stuff in there — expanding immigration for high-skilled workers, for instance, is something that is long overdue.  But let’s be clear here.  The elite agenda for “fixing” our economy calls for significant doses of sacrifice from the middle class and working poor and precious little sacrifice from them.

Let’s start off with the sacrifice that the elites are willing to make — an increase in taxes for those making over $250,000 a year.  This would raise the top marginal tax rate (on income over $250,000) from 35% to the Clinton-era rate of 39.6%.  That’s certainly something, although one could fairly argue that returning to the tax rates that coincided with the best period of economic growth this country has had in the last 20 years might not be the worst thing in the world.  But let’s look at what isn’t on the table.

Changes to capital gains taxes?  Nope.  They’ll continue to get their much lower rate, meaning that folks like Mitt Romney or Paris Hilton who live off of investment income will continue to pay tax rates in the 15% range — lower than many middle-class and working poor families.  Not only that, but hedge fund and private equity investors will still get to treat their regular earnings as investment income instead of wage income, saving some individuals millions in tax liability every year.

Taxes on financial transactions or financial speculation?  Nope.  In the wake of the financial market meltdown in 2008, some suggested using a transaction tax on stock or bond transactions or higher rates on short-term capital gains as a means to both discourage speculative activity that makes the markets more volatile as well as creating a fund to deal with the damage created by current (and future) market failures.  These are still not on the table.

Breakup of the largest financial institutions?  Nope.  The 2008 market meltdown required government intervention to prevent the collapse of institutions deemed “too big to fail”.  What largely happened in these cases is that other large banks ended up buying the failing banks.  So an industry that was already unduly concentrated and prone to risk has become even more concentrated and even more prone to risk (despite some of good provisions in Dodd-Frank).

All of these items would represent real sacrifice for the elites in our society, but they’re not on the table.  What are they asking of the middle class and the working poor?  Oh, not much, except the gutting of perhaps the two most effective government programs at providing income security and health care to Americans.  Banks and financial institutions get bailouts when they make bad decisions.  Now the government is poised to give you insecurity when you retire after decades of hard work.

Sacrifice for thee, not for me

Medicare is the largest contributor to the future deficit problem due the explosion in both the number of seniors citizens and the continuing rise in health care costs (at a rate much faster than inflation in the rest of the economy, which means it will have to be part of the solution.  But there’s smart ways to reform Medicare and stupid ways to reform Medicare.  As befits our current political dialogue, the ones that are being debated are the stupid ones.

One of most likely changes to Medicare is an increase in the age of eligibility from 65 to 67.  At a base level, this doesn’t sound like that big of a deal.  Well, the problem is that in trying to save the federal government a little money, we’re going to end up spending a lot more overall.  Increasing the age to 67 would save the federal government about $5.7 billion a year, but would raise individual out-of-pocket expenses by $3.7 billion, and increase the insurance premium expense for employers by $4.5 billion.  Already, we’ve made the overall system less efficient by $2.5 billion, but we’re not done yet.  Adding 65- and 66-year-olds to the general health insurance pool is going to make everyone else’s health insurance more expensive (because the overall population will be sicker) — that’s another $2.5 billion.  Finally, states are going to have additional health expense on some of these seniors totaling about $0.7 billion.  If you total it up, the financial cost to society of changing the Medicare eligibility age is twice as large the savings we would see in the deficit.  That’s not a good trade-off.  (And that’s before we look at some of the non-financial impacts.)

There are smart ways to save money — significant money — in Medicare going forward.  We can end fee-for-service payment policies and replace them with paying providers for results.  We can give Medicare enhanced power to negotiate prices with suppliers — particularly for prescription drugs.    We can research the statistically most effective and cost-efficient ways to treat conditions and encourage providers to use those guidelines.  These are the types of reforms that we should be pursuing.

Perhaps even more galling in the context of the current budget debate is the fact that Social Security is getting dragged into the mix.  Social Security contributes nothing to our nation’s current budget deficit.  In fact, Social Security ran a $69 million surplus in 2011 and is projected to run surpluses for the next decade.  We have 20 years before the Trust Fund is exhausted (under current projections), and the simple act of removing the cap on the payroll tax would resolve at least 95% of the projected deficit going forward.  And if we did nothing, the cost of filling the gap after the Trust Fund is exhausted is less than 1% of GDP — a relative pittance compared to Medicare.

Instead, we’re seeing the same shortsighted tactics on Social Security as we are on Medicare.  What’s on the table is an increase in the retirement age from 67 to 70, and changing the way inflation is calculated so that such increases would be smaller than they are today.  These changes would have severe negative impacts on future retirees, but they would only raise 1/3 of the money that removing the payroll cap on the wealthy would.  Yet, no one’s really talking seriously about major reform to the payroll tax cap.

Big bad ideas

These reform plans for Medicare and Social Security are based on two big ideas, both of which are misguided.  The first bad big idea is “People are living longer, so increasing the eligibility ages is no big deal!”.  And while that’s true, it’s not true in the same way for everybody.  Wealthy Americans have seen their life expectancies improve by six years since 1977, while folks in the lower half of the income distribution have seen only an increase of one year in that time period.  These workers are more likely to be in blue-collar industries that are more reliant on physical labor.  Working in those jobs in their upper-sixties with questionable health insurance just isn’t a winning proposition.

Source:  The Incidental Economist

Source: The Incidental Economist

The other really bad big idea in these plans is “We have to protect current seniors”.  It’s certainly true that low- and middle-income seniors shouldn’t be expected to see substantial changes to these programs.  But if this is the kind of crisis that makes one of our political parties willing to risk defaulting on our bonds, maybe rich seniors should make some sort of contribution to solving the problem?  Certainly, there are wealthy seniors (and seniors-to-be) who could afford to pay co-pays for Medicare or take some means testing on their Social Security check today.  It hardly seems fair to think that the bill for this financial mess should be borne primarily by the children and grandchildren of those who ran up the credit card in the first place.  If we’re not willing to require any sort of contribution by today’s seniors (and seniors-to-be) to solving this crisis, aren’t we in fact admitting that it isn’t a crisis and just a problem that needs to be addressed in a reasoned manner?

Passing the buck and the bill

And it gets worse yet.  Many of the elites pushing these sorts of “solutions” to the problem are simultaneously pushing for so-called tax reform that would lower corporate taxes.  David Cote, the CEO of Honeywell, has been one of the key public faces behind Fix the Debt, a business organization that has made a large effort to influence the debate.  Cote loves to talk about tax reform as a part of this process, but what he doesn’t like to talk about is that he’s really trying to eliminate the corporate income tax.  If corporate taxes are eliminated, guess who’s going to get the bill to make up the lost revenue?  (Hint:  It’s not David Cote.)

I’m not opposed to tax reform.  But tax reform shouldn’t consist of a series of handouts to one group while demanding sacrifices from another.

And guess what else isn’t on the table as part of these negotiations?  Any real attempt to focus on the unemployment problem.  Basically, at this point we’re left to hope that if the elites get their way and extract the appropriate sacrifice from everyone else that the certainty created by such maneuvers will suddenly convince business owners to start creating jobs.  Of course, that notion in and of itself is misguided.  Businesses don’t create jobs out of certainty — they create jobs because there is demand for their product and services.  To create demand for their products and services, we need to have a population that has jobs and disposable income to spend.  Cutting Medicare and Social Security while squeezing government spending through austerity does nothing to improve the employment picture or improve household income.

We have a medium- to long-term deficit problem that needs to be addressed.  The important thing we need to remember is that it’s far more important to do the right thing for all of our citizens than to just earn political scalps by “raising taxes on the wealthy” or “cutting entitlements”.  These problems are about more than numbers on a spreadsheet — they have real world impacts that CEOs or lawmakers or writers for Washington D.C. political journals will never have to deal with.  It’s time for the voices of those who don’t attend Georgetown cocktail parties to be heard as part of this process as well.

It’s gonna be a long session

The Strib did a lengthy piece in Sunday’s paper on the Dayton Administration’s efforts to draft a comprehensive tax reform bill.  Practically all of the piece is devoted to the mechanics of what could go into the proposal as well as looking at the potential impacts of making certain changes.  It’s a good read, as is this piece at Wry Wing Politics which points out that Dayton’s final proposal may end up looking a lot like Tom Horner’s 2010 platform.  This is an effort that has been neglected for too long by both parties.  The depressing part comes at the end, when we get the first reaction from a member of the Republican legislative minority.

Preston GOP Rep. Greg Davids, the outgoing House Taxes chair, offered a gloomy prediction: “This next session has disaster written all over it. You get what you voted for. I guess Minnesotans want two years of higher taxes and misery.”

This reaction doesn’t really make any sense at this point.  The reform proposal hasn’t even been finalized yet, much less introduced as actual legislation.  Many of Dayton’s goals line up with goals that Republicans have advocated for in the past.  Shouldn’t Republicans at least wait until they see an actual bill, before they decide that they’re opposed to it?

It’s this sort of short-sighted, partisan-for-partisan sake nonsense that ended the Republican legislative majorities after two unproductive years.  Can’t we at least entertain the possibility that there might be some common ground here that could be built upon before we descend into partisan gridlock again?

Popping the bubble: more data that bursts commonly-held GOP tax beliefs

We’ve talked about this on more than one occasion, but the data shows that many conservative/Republican talking points on tax policy just don’t reflect reality.  Let’s look at some (relatively) new data on this subject that continues the trend.

A recent study by the Congressional Research Service (CRS) looked at the effects of the top marginal individual income on various measure of economic growth.  As the study itself concluded:

The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.

However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.

Here are two graphs from the study that give a little more color on that conclusion.

 

This graph plots GDP growth against the top marginal and capital gains tax rate going back to 1945.  Note that the trendline on both graphs is essentially flat.  That represents the fact that as the tax rate increases, GDP growth is unaffected.  In fact, the right graph (which looks at the capital gains tax rate) shows that higher capital gains taxes correlate to higher GDP growth.

This graph shows how the lower top marginal tax rates work to change the distribution of income — favoring the most wealthy in society.  Each graph shows that lower tax rates result in higher concentrations of income at the top of the income scale.

What happened when the CRS tried to release this study?  Senate Republicans had it killed.  After all, if their narrative is found to be untrue, it pretty much undercuts their entire reason for existence at this point.

Well, that, and the unending Republican desire for cutting taxes on corporations. Well, a Congressional Budget Office study from earlier in the year shed some light on that situation.  In 2011, corporate taxes as a percentage of profits hit a 40-year low.

Some of this drop in recent years can be attributed to temporary measures (such as a change in depreciation rules) that were part of the stimulus package, but overall, the tax environment for business has been getting more friendly over recent decades — not less.

Republicans and Democrats should work together to find solutions that will make our tax code simpler and fairer — and I believe there are significant areas of agreement to be found there.  But if we’re going to have solutions that really work for all Americans, we need to start with a real understanding of the facts and not persist with myths, talking points, and empty rhetoric.

The impact of Herman Cain’s 9-9-9 plan, in graphs

The nonpartisan Tax Policy Center has done a detailed evaluation of Republican presidential candidate Herman Cain’s 9-9-9 Plan.

The plan would replace the existing federal individual income tax, corporate income tax, payroll tax, and estate tax with three taxes:   a nine percent flat individual income tax, a nine percent flat corporate tax rate, and a nine percent national sales tax.  Deductions on the plan would be minimal.  Corporation could deduct dividends paid to shareholders from their tax base, individuals would be able to deduct charitable contributions and capital gains would be exempt from taxation.

Cain claims that this plan would unleash the American economy and would be “fair, simple, efficient, neutral, and transparent“.

Well, let’s look at how the numbers actually shake out.  First, let’s look at how many people would be getting a tax cut or  seeing their taxes increase because of this plan.

Fully 84% of households would see an increase in their federal taxes under the 9-9-9 Plan.  Let’s check on the distributional effects of the 9-9-9 Plan.

This graph shows that the effective tax rates paid by income level would effectively flip under the 9-9-9 Plan.  Under current law (blue line), the poorest taxpayers pay the least percentage of their income in taxes, while the wealthiest pay the most.  Under the 9-9-9 Plan (red line), middle class taxpayers (between $40,000 and $100,000) would pay the highest percentage of their income (23.8%) in taxes, while millionaires would pay the least (17.9%).

Let’s look at these impacts further.

This graph shows the change in after tax income by income level under the 9-9-9 Plan.  This shows just how large of a giveaway this plan is to the wealthy.  Those with incomes under $10,000 would see their after-tax incomes reduced by 20%, or an average of $1,1,22.  Meanwhile, millionaires would receive an average tax cut of $455,247, a boost in their after-tax income of 22.4%.

Most Americans can agree that the federal tax code needs to be made more simple.  Just because a plan is simple, though, doesn’t mean it is good.  Americans should expect a better and more fair plan than Herman Cain’s 9-9-9 Plan.

 

 

 

Republicans driving the car over a cliff

When he was White House Chief of Staff, Rahm Emanuel famously said “Never allow a crisis to go to waste.”  Republicans in Washington D.C. have certainly learned that rule, and learned it well.  So much so that they are in the process of manufacturing a crisis in order to create the opportunity to get reforms they feel are necessary.

Let’s leave aside for the purposes of this post the sheer absurdity of the notion that after having passed a budget that increases the amount of the national debt over the debt ceiling that Congress then has to re-approve spending to that level.  What Congressional Republicans are doing right now is even more reckless than how Minnesota Republicans handled budget negotiations over the last few months.

President Obama has offered significant spending cuts and pared back his tax increases to the bare minimum.  In fact, what President Obama has offered as part of these negotiations is well to the right of Alan Simpson-Erskine Bowles Bipartisan Deficit Commission, the Senate  “Gang of Six”,  and the Alice Rivlin-Pete Domenici Deficit Commission.

President Obama has offered a plan that is almost 4:1 spending cuts to revenue increases.  The revenue increases consist of eliminating loopholes, subsidies, and deductions — many of which Republicans have supported in the past.  The tax code should not be used to pick winners and losers, but rather to ensure a level playing field and to provide the necessary resources for government to perform its functions.  They would be accompanied by a lowering of rates overall to make the changes generate far less revenue than they otherwise would.  This used to be a core Republican value.

Normal people would jump at such a deal — a chance for real entitlement reform ($650 billion in savings over the next 10 years), real cuts in discretionary spending ($1 trillion over the next 10 years, taking such spending back to pre-WWII levels), and rational tax reform that generates about 20% of the overall solution.

But today’s Republicans aren’t normal.  They are devoted to “no new tax” ideology at any cost.  They are willing to drive the car off the cliff as opposed to forcing their wealthy and corporate patrons — who have benefitted the most over the past decade while the labor market and median incomes for the rest of us have stagnated — to chip in just a little bit more.

If Congressional Republicans can’t come to an agreement on the debt ceiling and the country goes into default, they will effectively raise the taxes of every American through increased interest rates.  Our stock market will feel the impact of lost confidence of investors.  There could even be a run on the banks.  This is not a risk we should even be considering, but Republicans are still — even at this late date — still holding out for complete capitulation from the President.

We shouldn’t also fail to point the rank hypocrisy of many of the Congressional Republicans at the heart of this crisis today.  During the Bush Administration, these same leaders voted seven times to raise the debt ceiling — from $5.95 trillion to $11.315 trillion.  They also voted for policies that destroyed our financial future.  As the New York Times pointed out over the weekend, if you take out the impacts of the recession and only look at policy changes, what happened in the Bush Administration caused far more damage than anything that has happened under President Obama (even extending out the impacts of the Obama policy changes to 2017).  Note that the cost of the Bush tax cuts alone is more than all of the policy changes under President Obama combined.

It’s time to stop the false equivalency.  There is a very real difference between Democrats and Republicans — both in Washington D.C. and in St. Paul.  Democrats aren’t willing to put their partisan goals ahead of the well-being of the American people.  Republicans are seemingly content to “take hostages” — including the American economy — to fulfill their ideological goals.

Compromise isn’t a dirty word.  Compromise isn’t weakness.  Compromise is necessary in a divided government, and it’s time Republicans started getting back to doing the serious work of the people instead of being led around by their special interest groups.


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