Companies taking advantage of lucrative tax incentives are jumping from state to state—and bringing their jobs with them. Sure, some states will see job gains, but they may be only temporary. As a result, the states' efforts likely won't improve the national jobs picture. The tax-break boom "undermines the economic union, and it misallocates resources," says Arthur J. Rolnick, senior vice-president and research director for the Federal Reserve Bank of Minneapolis. "It amounts to economic warfare among states."
Without a state budget and about out of cash anyway, California Controller John Chiang began issuing the first state IOUs to pay state bills. Here are items from a helpful FAQ on these new California bucks (an unrelated collectible currency is pictured at right):
1. What is a registered warrant?
A registered warrant is a “promise to pay,” or an IOU, that is issued by the State when there are not enough funds to pay all of its General Fund obligations. Registered warrants bear interest and are redeemable by the State Treasury only when the General Fund has sufficient money. If the Legislature and Governor fail to enact budgetary solutions that provide enough cash for the State to pay all of its bills by July 2, the Controller will begin issuing registered warrants. Assuming there is adequate cash in the Treasury, those warrants may be redeemed on October 1, 2009. Both the issue and the maturity date will be printed on the warrant.
3. Why is the State issuing registered warrants?
Without action by the Governor and Legislature to stave off a severe cash deficit of almost $3 billion at the end of July, and more than $3.5 billion in August, the Controller will be forced to issue individual registered warrants, also called IOUs, for many payments.
7. What happens if my financial institution will not accept the registered warrant?
You may decide to open an account at another financial institution that will accept registered warrants, or you will have to hold the warrant until it matures on October 1, 2009.
14. How much interest will the State pay?
The State’s Pooled Money Investment Board will set the interest rate for registered warrants at an emergency meeting on July 2. The State will pay that interest from the time the warrant is issued until it matures on October 1, 2009. As soon as the rate is set, this Web site will be updated with more information.
That meeting, by the way, set an interest rate of 3.75%. I wonder how much of a discount people will demand to take California dollars instead of U.S. dollars?
Gov. John Lynch (D) signed into law the state's budget, which increases the cigarette tax by one-third, to $1.78 per pack, increases restaurant and hotel taxes to 9%, and imposes a 5% dividends tax on limited liability companies (LLCs). A new 10% tax on gambling winnings over $600 was also enacted, as well as increased car and boat registration fees.
The cigarette tax is an easy political gimmick because it is targeted at a minority; however, it is poor tax policy. For Governor Lynch, it's nice to pretend that cigarette taxes will come out of the pockets of Big Tobacco. In reality, cigarette taxes hit mostly low-income individuals more than any other income group. Notice, however, that N.H. has been careful to keep its rate lower than Massachusetts's so as not to stifle the bargain hunting traffic coming across the border to shop.
One tax which has seen some resistance from the business community is an extension of the Rooms Tax to campers. Typically, room and meal tax just applies to places like hotels. David Edgerly, manager of Great Bay Camping in Newfield N.H., says a 9 percent meal and room tax increase could put many campgrounds out of business. However, principled tax policy calls for all lodging to be taxed equally, so the state is not without justification for this change.
This budget continues the recent trend in the Northeast of taxing out-of-staters. Maine just passed numerous items specifically designed to disproportionately tax tourists such as car rentals, entertainment and recreation services. My colleague Kail Padgitt predicted in a recent report that "this tax-your-neighbor strategy is likely to draw retaliation from neighboring states and distort economic decision making." Were New Hampshire legislators more comfortable hiking taxes on tourists because of this trend?
Governor Lynch is imposing a 5% dividends tax on the owners of limited liability corporations (LLCs). While all types of businesses, including C-Corporations, S-Corporations and LLCs, pay the same state business profits and enterprise tax in New Hampshire, the owners of LLCs have been the only ones to avoid tax on any interest or dividends earned. No longer.
By extending the 5% interest and dividends tax to include the owners of LLCs, the state seems to be moving closer to treating three business structures equally. People who accuse the state of levying a double tax are correct: by taxing business income at the entity level and then again at the personal level, the state is double-taxing business income. However, there's no good reason to favor LLCs over other business forms. Unsurprisingly, it has been the fastest growing business structure in the state.
Ideally, the goal should be to create a tax structure which fosters competition and should be neutral to firm structure. If this truly closed loopholes, it ought to reduce the rate as well in order to encourage a competitive business environment. This tax may move closer to treating firms equally. However, there are many variables in corporate laws that create distortions outside of just the tax rate. Preferably, there should be a low, broad rate which is neutral to firm structure, and business owners would choose the best firm structure for other reasons than tax liability.
Our friends at the John Locke Foundation in North Carolina offer some insight into the recent change to their state gas tax. As we mentioned yesterday, expiring yesterday was a cap on the state's gas tax, which normally should change with the wholesale price (not inflation) each year but has been prevented from doing so for several years.
The cap has now been transformed into a floor, which prevents the gas tax from going any lower. Experts predict that the gas tax may go up about 10 cents per gallon due to the change. According to Joe Coletti at John Locke, the tax would have fallen to 27 cents per gallon yesterday, but the floor prevented it from dropping below 29 cents per gallon.
Guess legislators aren't listening to complaints about high gas taxes anymore.
California has lost the distinction of having the highest personal income tax rate among the 50 states.
True! Following a flurry of legislative activity in recent weeks, California no longer has the highest individual income tax top rate in the United States. Here are state income tax rates over 8% now:
State
Individual Income Tax Rates
Hawaii
11% (on income over $200,000)
Oregon
11% (on income over $250,000)
New Jersey
10.75% (on income over $1 million)
California
10.55% (on income over $1 million)
New Jersey (2nd bracket)
10.25% (on income over $500,000)
Hawaii (2nd bracket)
10% (on income over $175,000)
Oregon (2nd bracket)
9.9% (on income over $125,000)
Rhode Island
9.9% (on income at the federal top rate)
California (2nd bracket)
9.55% (on income over $47,055)
Vermont
9.4% (on income at the federal top rate)
Oregon (3rd bracket)
9% (on income over $7,600)
Hawaii (3rd bracket)
9% (on income over $150,000)
Rhode Island (2nd bracket)
9% (on income at the second highest federal rate)
Iowa
8.98% (on income over $63,315)
New York
8.97% (on income over $500,000)
Vermont (2nd bracket)
8.9% (on income at the second highest federal rate)
Maine
8.5% (on income over $19,450)
California (3rd bracket)
8.25% (on income over $37,233)
Hawaii (4th bracket)
8.25% (on income over $48,000)
Vermont (3rd bracket)
8.25% (on income at the third highest federal rate)
New Jersey (3rd bracket)
8% (on income over $400,000)
Notes: Rhode Island offers an optional flat tax with fewer deductions, not shown here. Iowa allows deduction of federal income tax, reducing their effective tax rate. Maryland is not included, although substantial county income taxes produce a top rate of over 9%. Maine has passed a bill to reduce their income tax top rate to 6.85%, effective January 1, 2010. Local income taxes not included.
The National Center for Policy Analysis summarized recent studies on the effect of soda taxes:
Increasing the soft drink tax by 55 percentage points would decrease the obese and overweight population by only 0.7 percentage points.
That means a 27.5 cent tax on a 50 cent can of soda would only lower the number of the obese and overweight from 66 percent to 65.3 percent of the population.
Such excise taxes are also highly regressive:
On average, the bottom fifth of income earners spend 1.7 percent of their gross income on alcoholic beverages compared to 0.6 percent for the top 20 percent.
They spend 2.5 percent of income on tobacco products versus 0.2 percent for the top 20 percent.
They spend 9.9 percent on gasoline and motor oil compared to 2.3 percent for the top 20 percent.
Today marks the first day of Fiscal Year 2010 for most states.
There are four states that will begin fiscal year 2010 at some other point, including:
New York (April 1st), technically called fiscal year 2009-2010 Texas (Sept. 1st), if anybody knows why they chose a month that is not even the end of a quarter, send us a note as we're curious Michigan (Oct. 1st), same as federal government Alabama (Oct. 1st), same as federal government
The federal government's fiscal year 2010 will begin on October 1st with a projected deficit of about $1.4 trillion. Like the federal government, most states are probably saying good riddance to F.Y. 2009, but will F.Y. 2010 be any better?
Note: The federal government's fiscal year used to begin on July 1 each year, but was changed in 1976 to allow Congress more time to enact a budget. Yeah...that worked well.
For many states, Fiscal Year 2010 starts today. Several states went down to the wire in passing their budgets:
Arizona Sends Budget to Governor Without Sales Tax Increase: At about 3AM, lawmakers approved a budget plan that does not include either Gov. Jan Brewer's (R) requested 1% increase in the sales tax, nor a suggested 2.8% flat income tax proposal. Brewer has ten days to sign or reject the budget.
California Still Negotiating: Gov. Arnold Schwarzenegger (R) has threatened to veto any budget that includes tax increases, but the Legislature is pushing a plan that raises vehicle and tobacco taxes, and imposes an oil severance tax, and no agreement is close. Without changes, the state's continuation budget would involve spending $2 billion more per month than the state takes in with revenue. The state's comptroller is preparing to issue $3 billion in IOUs to fund July expenses.
Connecticut Still Negotiating: Last-minute talks did not reach agreement, and Gov. M. Jodi Rell (R) issued an executive order to spend $1.4 billion on essential services through July (essentially all state operations except local grants). Rell has previously vetoed a spending plan that included an increase in the state income tax from 5% to 7.5%.
Delaware Hikes Income Tax and Franchise Tax: Just before dawn, Gov. Jack Markell (D) signed into law the state's budget, which cuts state employee pay by 2.5% and raises the state's top income tax rate by 1% to 6.95% for four years, following rejection of an effort to increase liquor taxes. The state's gross receipts and corporate franchise taxes also went up.
Illinois Still Negotiating: For the third year in a row, Illinois started July 1 without a budget. Gov. Pat Quinn (D) has threatened to veto any budget that is "underfunded," and is urging a 50% increase in income taxes. The House this week passed a measure to borrow $2.2 billion, paid off over the next five years, to fund initial operating expenses, but Quinn urged the Senate to reject the measure. The Legislature has been in special session since last week and continues to meet.
Indiana Approves Budget With No Tax Increases: The Legislature approved the budget with five hours to spare, and it includes parameters set by Gov. Mitch Daniels (R): no tax increases, keeps $1 billion in state reserves, has cuts for any spending increases above his recommended spending level, does not borrow from pension funds, and uses stimulus funds for one-time purposes (infrastructure and final grant installments). Democrats say the plan will kill off public schools (the plan increases education spending by 1.3%).
Massachusetts Hikes Sales Tax: Gov. Deval Patrick (D) signed the state's budget on Monday, which includes an increase in the state sales tax from 5% to 6.25%. Taxes on hotels, alcohol, meals, and satellite dishes also went up. Towns bordering New Hampshire are especially wary of the sales tax increase.
Mississippi Budget Includes Hospital Tax: Mississippi lawmakers reportedly approved the state's budget late last night after a three-day special session. The bill includes a proposal by Gov. Haley Barbour (R) to tax hospitals to fund Medicaid, a key sticking point.
New Hampshire Hikes Some Taxes: Gov. Jon Lynch (D) signed into law the state's budget, which increases the cigarette tax by one-third to $1.78 per pack, increases restaurant and hotel taxes to 9%, and imposes a 5% dividends tax on limited liability companies (LLCs). A new 10% tax on gambling winnings over $600 was also enacted, as well as increased car and boat registration fees.
New Jersey Raises Taxes: Gov. Jon Corzine (D) signed into law the state's budget, which imposes three-year taxes on high-income earners: 8% on income over $400,000; 10.25% on income over $500,000; and 10.75% on income over $1 million. [Different news reports say the top rate is 10.75%, 10.76%, or 10.97%. We're fairly sure it's 10.75%.] The cigarette tax goes up to $2.70 per pack, and taxes on liquor and wine (but not beer) are also increasing.
North Carolina Still Negotiating: Lawmakers approved a two-week temporary budget, cutting General Fund spending by 15%, while they debate between the House plan to raise the sales tax by a quarter point and impose a higher income tax on those making more than $200,000 a year, and the Senate plan to lower sales and income tax rates but broaden the sales tax. Expiring today is a cap on the state's gas tax, which normally changes with wholesale prices each year but has been prevented from doing so for several years. Experts predict that the gas tax may go up about 10 cents per gallon due to the change, which includes a new floor to prevent the gas tax from dropping. Suggestions that North Carolina may force out-of-state Internet companies with in-state affiliates to collect North Carolina taxes led to Amazon.com ending its North Carolina commission program.
Ohio Still Negotiating: Gov. Ted Strickland (D) approved a 7-day temporary budget, cutting General Fund spending by 30%. Strickland is pushing to raise money by installing video lottery terminals in state horse-racing tracks.
Oregon Hikes Income Tax: Gov. Ted Kulongoski (D) plans to sign a budget that imposes a three-year high-income earners income tax of 11%, tied with Hawaii for the highest state income tax rate in the country. The bill also increases the corporate minimum tax from $10 to a sliding scale topping out at $100,000. Opponents of the tax increases may take them to the ballot.
Pennsylvania Still Negotiating: Officials continued negotiations last night with no breakthrough. Gov. Ed Rendell (D) is pushing a three-year increase in the state's flat income tax from 3.07% to 3.57% and rejects the idea of spending less than last year, while Republicans are pushing spending cuts. Unless a budget is enacted, state workers will receive partial paychecks on July 17 and 24 and none thereafter.
Rhode Island Keeps Optional Flat Tax: Gov. Don Carcieri (R) said in a statement that would have preferred to veto the budget or let it become law without his signature, but the inevitability of it being enacted over his objections and the short timeframe led to him signing it yesterday. Carcieri's proposal to eliminate the corporate income tax was not enacted, although the state will keep its optional flat tax, which we discussed here. The estate tax exemption was increased to $850,000, short of Carcieri's recommended $1 million. The budget also increases the state's unique lower rate capital gains taxes, raises the gas tax by 2 cents, and imposes a tax collection obligation on out-of-state Internet companies with in-state associates. Amazon.com responded to the budget by firing its Rhode Island affiliates.
Wisconsin Raises Income Tax: Wisconsin's budget, approved by Gov. Jim Doyle (D), imposes a new top income tax bracket of 7.75% on income over $225,000, up from 6.75%. The film tax credit also becomes refundable.
The City of Colorado Springs (City) has established a Tax amnesty program to run for three months, from May 12, 2009 through August 14, 2009, which will include sales and use taxes paid to the City.
The program provides an opportunity for taxpayers to pay any unreported taxes while avoiding penalties. In addition, interest charges on delinquent taxes will be reduced to 6% per annum or 1/2% per month.
Taxes eligible for amnesty includes City sales, use, lodgers, auto rental, bicycle and movie admission.
Amnesty programs have a downside in that people who've dutifully paid their state taxes will feel left out. (Those who have already been caught and are paying back taxes are also ineligible.) Tax cheats may wait for such programs to come around again if a state repeatedly offers amnesty over a several-year period, he said. People will come to expect them.
So the House of Represenatives has passed the Waxman-Markey cap-and-trade bill, and the issue now heads to the Senate. In his weekly address on Saturday, Pres. Obama urged the Senate to pass the measure. What was his main selling point? Green jobs.
It's nonsense to consider these new "green" jobs as a benefit of cap-and-trade. Not only do most of the green jobs just come at the expense of jobs in the "dirty" job sector, this whole talk of "jobs" is a red herring.
Using Obama's argument, if government heavily taxed coffee, we could not only reduce our dependence on foreign coffee beans, we would create more jobs in industries whose products were substitutes for coffee (say milk or orange juice). Imagine all the new dairy farmers there would be or citrus growers out there working to meet the increased demand for milk and orange juice.
The reality is that cap-and-trade can really only be beneficial if greenhouse gas emissions are truly a negative externality going forward (i.e. essentially whether global warming exists or not).
Is cap-and-trade a tax? As an economist, I'd say yes. If you don't want to call it a "tax" and want to get into semantics or legal mumbo jumbo over what is a tax, we can argue that until we're blue in the face (and that is what the talking head shows have mostly done). But it is essentially equivalent to a tax in terms of its economic effects.
So cap-and-trade is economically equivalent to a tax, and it can be a beneficial one from society's perspective. But its only real purpose from the perspective of making sound public policy should be to reduce any harm from climate change. This morning on ABC's This Week, liberal talk show host and Georgetown professor Michael Eric Dyson actually put the issue in its proper perspective:
DYSON: The point is, you're paying a tax, however, on the preservation -- I hate to sound cosmic here, but on the preservation of the environment. I'm sure that Chancellor Merkel and Al Gore are toasting each other this morning because -- this doesn't go nearly far enough, I disagree with Warren Buffett. I mean, I agree with him that it's about a tax..
(CROSSTALK)
STEPHANOPOULOS: ... a tax, but you're saying it's a tax worth paying...
(CROSSTALK)
DYSON: Let's not lie. Let's not lie about it. It's a tax. It's worth paying. It's the environment. It's about these carbon dioxide emissions that we've been trying to deal with for years and years and years.
The true benefit from a cap-and-trade system is the value to society of an improved environment. The relevant questions for policymakers are thereby whether global warming exists, what its harms are, and the impact that greenhouse gas emissions have on climate change. How many new jobs will be "created" from our economy having to make tax-induced adjustments is not one such relevant question, despite what you may hear from renewable energy lobbyists or politicians like our president.
As Congress prepares to vote on cap-and-trade, the Tax Foundation is releasing a new video on YouTube created by the popular video parody artist Remy. The video presents a humorous take on Uncle Sam's very serious attempts to "go green."
The New Jersey state Assembly passed legislation on Thursday that includes several tax increases to help balance the governor’s proposed $29 billion budget. Like most states, New Jersey’s revenues have been hit hard by the struggling economy and now lawmakers are unable to meet desired spending levels. As a result lawmakers want to increase taxes on high income earners, increase excise taxes on cigarettes and alcohol, and reduce property tax rebates and deductions.
My colleague Joe Henchman outlined the income tax increases in May. There are three new temporary rates included in the budget proposal that will last one year: 8% on income over $400K, 10.25% on income over $500,000, and 10.75% on income over $1,000,000.
The new budget includes a $5000 limit on the property tax deduction for fliers with income between $150,000 and $250,000. Those with income over $250,000 will not be allowed to take a deduction for property taxes paid. In addition, the state’s property tax rebate program will be scaled back to include only taxpayers earning less than $75,000, with exceptions for seniors and the disabled. The plan also eliminates property tax rebates for renters.
The budget also includes some tax changes that were not under consideration back in May. The cigarette excise tax rate will increase by 12.5 cents to $2.70 per pack, giving the state the third highest cigarette excise tax in the country. The wine and spirits excise tax rates will increase by 25%, rising to 87.5 cents per gallon and $5.5 per gallon, respectively.
As one would expect, conservative bloggers, politicians and talk radio are on the attack against the Waxman-Markey cap-and-trade bill that is expected to be voted on by the House sometime today. Their criticism can basically be summed up like this: Cap-and-trade is just another tax on the American people and is therefore bad.
It's true that in principle, a well-designed cap-and-trade system is virtually the same as a carbon tax, but from the interest of societal well-being (not just GDP-measured economic growth), it should only be opposed for one of two reasons: (1) greenhouse gas emissions have small enough externalities that don't warrant this policy, and/or (2) government cannot be trusted to implement an optimal cap-and-trade tax policy.
From a first-best situation, the only relevant question would be the first, which is a question of what the actual externalities are from greenhouse gas emissions. I leave that first for the scientists (and then the economists).
But assuming that under a first-best situation, cap-and-trade is optimal, we live in a real world where some government has to determine what the optimal policy is. And that brings me to this Waxman-Markey bill. AEI's Alan Viard has an excellent article (linked from Greg Mankiw) that gives us one reason this bill isn't a very good cap-and-trade bill: the windfall that goes to most current emitters. At a time when members of Congress are looking everywhere for money, this bill is a giveaway to most existing polluters because only a small fraction of the emissions permits are to be auctioned off. While environmentalists often talk about the virtue of cap-and-trade having a known level of emissions as opposed to a carbon tax, as Viard points out, we have to account for the benefit that a carbon tax actually raises revenue and would allow us to possibly cut marginal tax rates (which cause distortions) as opposed to just giving a windfall to existing owners of capital.
This problem with the bill is on top of the vote-buying that is going on behind closed doors for the agriculture industry as if the emissions from farmers are less harmful than the emissions from oil companies. As one of my co-workers pointed out, Congress would vote to install Satan as dictator as long as the measure included more handouts to farmers.
Some environmentalists will argue that such is the game in Washington and that anything is better than nothing. But I'm not so sure.
In the news this week has of course been the tragic Metrorail collision in Washington, DC. Officials continue to investigate what went wrong, with the National Transportation Safety Board emphasizing their previously-ignored recommendation that the D.C. Metro retire or strengthen a series of 30+ year old railcars (the "1000 series") dating from the system's founding. Metro, which estimates the cost of buying new cars to replace the 1000 series at $800 million to $1 billion, claims it didn't have the money. (Metro receives over half a billion dollars a year in operating subsidies, not counting capital subsidies of several hundred million dollars more.)
Now comes a revelation that Metro may have signed contracts requiring them to keep these old railcars in service until 2014. Sarah Lawsky at Concurring Opinions, drawing a quotation in the Washington City Paper, IRS records, and previous Tax Foundation research, put the dots together:
They appear to be standard sale-leaseback transactions, in which WMATA sold equipment, including train cars, to another party and now leases it back. The other party gets various tax advantages (depreciation, credits, and so forth) associated with owning the equipment, and WMATA, which as a tax-exempt organization cannot use these advantages, gets cash. But apparently the leases did not include language that permits WMATA to break the leases if newer, safer equipment comes along.
Thus sale-leasebacks, which are purely tax-motivated transactions, may have locked Metro into using outdated and unsafe equipment and thus made this crash even more deadly than it might otherwise have been.
Our previous report on these transactions is here. We researched the issue because Metro (and many other agencies) were put into default on the agreements after the collapse of their insurer, AIG. Most of the agreements are now in a holding pattern, with transit agencies continuing to make payments and negotiating with the foreign banks that technically own the railcars purchased with public funds.
It's hard to say more since most of these agreements are under wraps. Transit agencies, Metro included, have been secretive about the agreements and reporters have had difficulty getting answers. It remains to be seen if Metro signed a contract obligating them to run railcars long past their expected service life.
California's legislature yesterday rejected a proposal to cut $11 billion from its budget. With spending greatly exceeding revenue, the state is due to run out of cash on July 28. Comptroller John Chiang says he will then beginning issuing IOUs:
"Next Wednesday we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression," Controller John Chiang said in a statement announcing that he would be forced to use IOUs to pay the state's bills beginning on July 2.
"The state's $2.8 billion cash shortage in July grows to $6.5 billion in September and after that we see a double digit freefall," Chiang said. "Unfortunately, the state's inability to balance its checkbook will now mean short-changing taxpayers, local governments and small businesses."
The current spending proposal for Fiscal Year 2010 has the state spending $2 billion more a month than it gets in revenues. Some point fingers at Proposition 13 (which has been around for 30 years, so an unlikely cause for a recent fiscal crisis) or the legislative supermajority (which states like Arkansas also have without calamity happening, and as if turning California into a one-party state would cause better policy outcomes). But those "answers" are premised on the idea that California's taxes are too low.
The Tax Foundation's annual State Business Tax Climate Indexevaluates tax structures for business-friendliness, and the 2009 edition ranked California 48th, or third worst. The individual income tax ranked second to last, corporate income tax ranked 45th, and sales tax ranked 43rd. (Property tax structure was a bright spot, ranking 15th in the country.)
With these comparisons, and the enormous growth in state spending, it's hard to say that California's problem is insufficient taxation. Ultimately, California voters need to decide whether they are willing to pay the taxes to fund the programs they want. The tax system prevents this from happening now, due to the state's overreliance on taxing capital gains, corporations, and high-income earners. Most Californians rightly think additional spending is a free lunch that they won't have to pay for.
"When was the last time human beings modernized our energy sources by making older power sources more expensive?" he asks the interns. "And, of course, by now you probably know that the answer is never."
Personal computers didn't take off because there was a tax on typewriters, he says. And the Internet didn't sprout up because the government made telegraphs more expensive.
If we've concluded that a product is harmful to society, imposing a tax equal to the amount of that harm is at least defendable. But taxing a product just because you think a better one should come along is just another example of politicians pretending they can be effective venture capitalists. Reminds me of the Tanganyika Ground Nut Scheme.
An editorial in today's Wall Street Journal railed against the proposed cap-and-trade bill that the House will apparently be voting on Friday. The editorial closes with what seems like an outlandish statement:
Americans should know that those Members who vote for this climate bill are voting for what is likely to be the biggest tax in American history. Even Democrats can't repeal that reality.
What does "the biggest tax in American history" mean? Is the editorial board really saying that in 15 years or so, the cap-and-trade "tax" will have a greater burden on the American public than the individual income tax (ignoring the benefits of cap-and-trade and/or government spending)? The individual income tax raises around $1 trillion in revenue, and if the average deadweight losses of that equal say 10 percent, that's a $1.1 trillion burden. I highly doubt that the income loss to American taxpayers from cap-and-trade would exceed $1.1 trillion (even if you added in the loss to GDP which can be somewhat misleading given that GDP excludes environmental quality benefits).
The editorial cites a Heritage Foundation study which says that the bill's cost to a typical household in 2035 would be $6,800. Considering that the individual income tax today (in 2009 dollars) has an average liability per household of $8,300 (ignoring deadweight loss), I don't see where that claim is coming from.
It may sound good to say "biggest tax in American history," (Drudge uses that quote when linking to the article) but it will not be the biggest tax in American history unless the individual income tax is repealed. (And it would probably require that the payroll tax be repealed too.)
New analysis of President Obama's Budget finds that he is targeting the nation's highest earners for greater income redistributions. By 2012, the federal government is scheduled to be redistributing an extra $79 billion from the top-earning 5 percent of American families, and $71 billion of that will be paid by the top-earning 1 percent of families.
That's an additional $64,000 per family redistributed from the top-earning 1 percent, on top of the $368,000 that would have been redistributed from each family even without Obama's new policies. Part of that change is higher taxes, and part is lower spending on items that benefit high-income people.
The new study, "How Much Does President Obama's Budget Redistribute Income?," by Tax Foundation Senior Economist Gerald Prante and Chief Economist Patrick Fleenor, is the first in a projected series of reports based on the Tax Foundation's "fiscal incidence" model, a computer simulation of the U.S. fiscal system with an innovation: it measures the redistributive effects of both spending and tax policies.
Thanks to numerous studies of tax laws by the Congressional Budget Office, the Joint Tax Committee and others, policymakers are well aware of how much money the tax system by itself redistributes from high- to middle- and low-income Americans. Now the Tax Foundation is measuring the redistributive effects of spending as well.
Tampa will lose part of its cigar heritage in August when Hav-A-Tampa shuts its factory near Seffner and lays off about 495 employees, closing a factory that has been operating since 1902.[...]
However, the company attributed much of its trouble to the State Children's Health Insurance Program, or SCHIP, a federal program that provides health insurance to low-income children. It is funded, in part, by a new federal tax on cigars and cigarettes. McKenzie couldn't say how much sales of Hav-A-Tampa cigars had fallen off, but the numbers have dropped significantly, he said.
Previously, federal excise taxes on cigars were limited to no more than a nickel, said Norman Sharp, president of the Cigar Association of America trade group. The tax increase, which took effect April 1, raises the maximum tax on cigars to about 40 cents, Sharp said.
Senate Bill 1244, sponsored by Sen. Jeff Merkley (D-OR), would create an income tax credit for "50 percent of the qualified breastfeeding promotion and support expenditures of the taxpayer for such taxable year." Such "support expenditures" would include:
(A) for breast pumps and other equipment specially designed to assist mothers who are employees of the taxpayer to breastfeed or express milk for their children but only if such pumps and equipment meet such standards (if any) prescribed by the Secretary of Health and Human Services, and
(B) for consultation services to the taxpayer or employees of the taxpayer relating to breastfeeding.
This is another example of why our tax code is so complex and difficult to navigate. No doubt breastfeeding has supporters who think it's a good idea. But rather than relying on persuasion, or even direct spending programs that have to prove themselves each year, many special interests resort to using the tax code to encourage or discourage their vision of the world. Subject to less oversight and scrutiny, credits clutter up the tax code and distort decision-making.
As Illinois legislators gather in Springfield for a special session called by Governor Pat Quinn (D), a Tax Foundation expert warned that Quinn's proposal to increase individual and corporate income taxes would sharply reduce Illinois's state business tax climate ranking, moving it from the top half to the bottom half in the nation when it comes to "business-friendliness."
Illinois has high property taxes and high sales taxes. Currently, those taxes are partly offset by a low personal income tax. With a 50% increase in the income tax rate, Illinois legislators would give up the state's one tax climate advantage.
Quinn's plan would raise the personal income tax rate from 3% to 4.5% and the corporate income tax rate from 7.3% to 9.7%. The plan would also increase the personal exemption on the individual income tax from $2,000 to $3,000.
Quinn's proposed new top corporate tax rate would be the fourth highest in the country, behind only Minnesota, Pennsylvania, and the District of Columbia.
The Tax Foundation annually produces a State Business Tax Climate Index, which measures how well a state's tax system encourages investment by maintaining a broad tax base and low rates. Based on current tax law, Illinois ranked 23rd out of 50 states for business-friendliness at the beginning of this fiscal year. With Quinn's plan in effect, Illinois's ranking would have sunk to 31st.
Illinois should also be criticized for claiming that its corporate rate is lower than it actually is. Illinois imposes a 4.8% corporate income tax, plus a 2.5% 'replacement tax,' for a total of 7.3%. Quinn's plan would raise that 4.8% rate to 7.2% while retaining the replacement tax, for a total rate of 9.7%.
Corporate tax burdens are ultimately borne by individuals, as businesses pass these costs onto their employees, customers and shareholders. A growing body of scholarly evidence finds that increasing corporate taxes leads to depressed wages as businesses try to stay competitive. The proposed corporate tax increase would hurt Illinois's ability to attract investment and create jobs.
This month Maine passed the most sweeping changes to the state's tax code since the establishment of its income tax in 1969. According to Tax FoundationStaff Economist Kail Padgittt, author of the new Tax Foundation Fiscal Fact "The Pine Tree State Chops Down Income Tax: Maine Enacts Major Tax Reform," the reform has both good and bad aspects, but overall is a positive change:
The Maine legislature has attempted broad and far-reaching reform of their tax system, Ultimately the reform effort is a positive step forward. It would have been better if LD 1088 had been enacted into law instead of LD 1495. However, both represent an attempt to simplify and stabilize the Maine tax system. The Maine legislature should remain focused on creating a tax code that pushes for simplicity, neutrality and stability. Whether this marks the beginning of larger tide of beneficial tax reform or the high watermark is yet to be seen.
So the Wall Street Journal is reporting that the House has reached an agreement on a cap-and-trade bill and will vote on it Friday. A few comments:
Many critics of the bill (mostly Republicans) are saying this will kill the economy. The problem with this view is that if the negative externality from greenhouse gas emissions is truly there and sizeable, then a cap-and-trade program would improve economic well-being. It may lower GDP due to the fact that its measure doesn't include environmental quality, but it would increase economic well-being for the nation as a whole. (Obviously, it will have its costs in the form of higher energy prices, but that's intentional.) The true question for critics is whether or not global warming exists. They rarely address that question, which is really the most important one. It sounds better to use Armageddon talk of "this will kill the economy." And speaking of nice-sounding phrases that mean nothing...
It wouldn't improve economic well-being for the ridiculous reason Obama says, which is that this will create "green jobs." If we could save the planet by enacting a policy that didn't require any jobs, that would be better. Bragging about how many new jobs will be needed is actually an admission that it will use up society's resources to "save the planet." It's a cost; not a benefit. We could help save the environment and create a lot of jobs in the process by banning farm machinery, forcing farmers to hire people to do everything in the field by hand. I guess Obama would call those "green jobs."
Finally, if you are going to force emitters to purchase permits, why is this bill giving so many of them away (82 percent of them)? Obama supposedly needs money to pay for healthcare. Instead of enacting some distortionary tax like a VAT or a ridiculous tax like a soda tax, why not give fewer emission permits away?
Detroit had a population of close to 2 million. Since then it's shed more than half its population and now, according to City Farmer, "about 30% of Detroit is now vacant land — about 40 square miles, by one estimate." Forty square miles is roughly the size of San Francisco.
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