Category Archives: Taxes

Shining the Light on Tax Cronyism

cronies

Image credit: The Economist

Virginia has one of the least transparent systems in the country for reporting tax carve-outs for special interests, reports the American Legislative Exchange Council (ALEC) in a report on tax cronyism, “The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth.” While five states report nothing at all, Virginia is one of eight that ALEC classified as “infrequent or incomplete” in its reporting.

The most recent report was in FY 2009. Individual and corporate tax breaks in Virginia amount to $791 million, or more than two percent of the budget, ALEC reports.

ALEC also cites a New York Times study of targeted business incentives, which typically entail tax breaks, that identified 1,125 Virginia grants to companies. While Virginia’s tax carve-outs pale in comparison to, say New York’s (more than 50,000 grants to companies), it is massive compared to Wyoming (only 8) or even neighboring Maryland (260).

“Cronyism,” writes ALEC, “refers to the use of public policy to benefit a specific industry, firm, or individual, as opposed to setting broad and generally applicable rules and polices that apply to society as a whole.” While tax preferences can be used to induce corporations to invest in a state, the cumulative result is to shift the tax burden to existing companies with less political clout, thereby, inhibiting their growth of those firms — and the state economy as a whole.

Government does not know which firms will provide innovation, employment growth and tax revenue growth for the state. Empowering government to cater to a few high-profile firms while not fixing underlying problems in the state tax code is poor policy, as policy makers and bureaucrats are unlikely to outperform diversified market performance relative to their narrow picks.

ALEC advocates eliminating special tax carve-outs in a tax-neutral fashion by decreasing general corporate tax rates. If cronyism cannot be eliminated entirely, inducements should be restructured from the tax breaks (which tend to be permanent and rarely subject to review) to budgetary outlays (where the spending is subject to annual review). At the very least, tax cronyism should be subject to rigorous reporting standards to ensure transparency.

Bacon’s bottom line: Yeah, yeah, I know, ALEC is a tool of the evil oil-guzzling Koch Brothers and, therefore, everything it says and does is ipso facto tainted and illegitimate. But can we, for once, focus on the merits of ALEC’s arguments instead of the provenance of its funding? I think ALEC’s tax principles are sound, and the evidence suggests that Virginia’s practices fall far short of openness and transparency.

Who Are the Real Fiscal Conservatives?

Source: "Truth and Integrity  in State Budgeting"

Source: “Truth and Integrity in State Budgeting”

Paul Volcker is one of the real heroes of the modern economic profession. During the late 1970’s and early 1980’s he conquered the “Great Inflation” by taming the growth of the money supply. Interest rates rose to levels unprecedented in modern American history. During my time in charge of cash management at AIG, I bought and sold money market securities yielding 20%; today similar instruments yield less than 1%. His efforts led to President Ronald Reagan’s “Morning in America” and a renewed attention to monetary policy. His success, as painful as it was,  gives him lots of “street cred.”

The Volcker Alliance recently published an analysis of the budgets in three states:  California, Virginia, and New Jersey.  The results will be surprising to many.  He gives kudos to California and Virginia, and holds a dim view of New Jersey, home of Republican presidential wanne-be, Chris Christie.

Standing alone, California would be the world’s eighth biggest economy with domestic output equaling US$2.1 trillion. Under Democratic Governor Jerry Brown, the Golden State’s credit ratings have been raised multiple times by the rating agencies.  Under his leadership,  voters have approved some temporary tax hikes, increasing budget reserves and improved funding for pension liabilities of teachers and other government employees.  According to Volcker, California’s outstanding debt has been reduced by approximately US$10 billion in three years.

The Old Dominion comes in for praise by the former Fed Chairman.  In an interesting comment he states that the budget professionals in Richmond serve for many years while the Governor is restricted to one 4-year term.  Budget cycle planning, which takes as long as 6 years, removes some of the politics out of Virginia’s budget process.  Virginia’s unfunded pension liability of US$ 3,436 per employee is only a few dollars more than that of the Golden State.

New Jersey, home of Gov Christie, leaves much to be desired according to the former Fed Chairman.  Volcker’s analysis paints a messy picture of the Garden State’s fiscal condition.  Volcker lists myriad accounting and financial tricks that have been employed to balance the home of the Jersey Boys: these do include not using the proceeds of bond sales for their stated purposes.  Frequent use of non-recurring revenues for operating purposes.  And diverting tolls from the turnpike from their stated use to maintain that highway.

It is a shame that Volcker did not include Kansas in his analysis.  Governor Sam Brownback, a Tea Party favorite, has enacted a budget cutting, tax reducing program that only a “fauxconomist” like David Bratt would endorse.  The budget deficit has ballooned, school systems in some detracts have closed early due to lack of funding, and a liberal website reports today that the Kansas Gov has threatened to cut off funding for the judicial system if it does not rule in his favor should a court challenge arise to his policies.

— D. Leslie Schreiber

Taxation and the Creative Class

science_stars

Urban geographer Richard Florida has famously argued that members of the “creative class” — scientists, entrepreneurs, artists and other professions who contribute disproportionately to economic growth — gravitate to metropolitan regions marked by the three “t’s” — technology, talent and tolerance. Now new research suggests that he may have to add a fourth “t” — taxes.

A National Bureau of Economic Research paper, “Taxation and the International Mobility of Inventors,” studies the effects of taxation on the international mobility of inventors, with an emphasis on the superstars who have the most, or most valuable patents. The results suggest that a 10 percentage-point cut in a nation’s top tax rates is associated with about a 1% increase in the number of domestic superstar inventors. The number is even higher for the number of foreign inventors — a 10 percentage-point increase drop is associated with a 38% increase for this group. Inventors who have worked for multinational firms appear to be most likely to respond to tax differentials.

Another study, “The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists,” finds that tax sensitivity is even greater when accounting for cross-state location of top corporate scientists in the U.S.; there is little effect on academic or government researchers.  “Overall, we conclude that state taxes have a significant effect on the geographical location of star scientists and possibly other highly skilled workers. While there are many other factors that drive when innovative individual and innovative companies decide to locate, there are enough firms and workers on the margin that relative taxes matter.”

Sad to say, Virginia doesn’t even rank in the list of the ten states with the largest populations of star scientists. But if we’re serious about wanting to attract corporate research here, personal tax rates are a factor that must be considered.

— JAB

How Tax Policy Favors Trucks over Rail

Source: Congressional Budget Office. Instead of publishing a range of costs, I include here an average cost figure for the top four categories. For CO2 emissions, I include CBO's middle-rage estimate.

Source: Congressional Budget Office. Instead of publishing a range of costs, I include here an average cost figure for the top four categories. For CO2 emissions, I include CBO’s middle-range estimate.

The “external” costs of transporting goods differ widely by truck and rail, but freight-transport prices do not reflect those costs, argues a new report by the Congressional Budget Office (CBO). In very rough numbers, I calculate from the CBO numbers, the differential amounts to $.03 per ton-mile transported.

That differential is not reflected in the taxes paid by trucking and rail companies. The result is that a far greater share of products are shipped by truck than by rail. Writes David Austin, author of “Pricing Freight Transport to Account for External Costs“:

Adding unpriced external costs to the rates charged by each mode of transport—via a weight-distance tax plus an increase in the tax on diesel fuel—would have caused a 3.6 percent shift of ton-miles from truck to rail and a 0.8 percent reduction in the total amount of tonnage transported. Such a policy would have eliminated 3.2 million highway truck trips per year and saved about 670 million gallons of fuel annually (including the increase in fuel used for rail freight). On net, accounting for the effect of fuel savings on revenue from the fuel tax, such a policy would also have generated about $68 billion per year in new tax revenue and reduced external costs by $2.3 billion.

I don’t know the odds of such a weight-distance tax being implemented on the federal level. I wonder if Virginia could implement it on the state level. One consideration not included here: the cost of administering such a tax.

— JAB

Two Stories on Change in Richmond’s Suburbs

 

New wegmans site

New wegmans site

By Peter Galuszka

Well, well,

Jim Bacon has this month’s cover story in the Henrico Monthly about the changing nature of office parks in one county that has plenty of them.

Not to be outdone, I have my own cover story in the Chesterfield Monthly, a sister magazine published by the same people.

My piece is about how Midlothian Turnpike, the main artery of suburban sprawl in Chesterfield County, is being led into its next iteration y two new types of grocery stores.

One is the high-end Wegmans. The other is New Grand Market, a large-scale international food store that reflects Richmond’s fast-growing diversity and foreign flare.

I think both of our pieces, in different ways, reflect big shifts in two of the largest counties in the state. (I wonder if I got paid more than he did).

Private Immigrant Jail May Face Woes

Farmville jail protest

Farmville jail protest

By Peter Galuszka

Privatization in Virginia has been a buzzword for years among both parties. In this tax-averse state, contracting off public functions is seen as a wise and worthy approach.

But then you get debacles such as the U.S. 460 highway project. And now, you might have one brewing down in Farmville.

The small college town is in Prince Edward County, which gained international notoriety from 1959 to 1964 when it decided to shut down its entire school system rather than integrate. Many white kids ended up in all-white private schools and many African-American children were cheated out of an education entirely.

About six years ago, another creepy project started there – a private, for-profit prison designed exclusively to imprison undocumented aliens. It’s a cozy little deal, as I outline in a piece in Sunday’s Washington Post.

Farmville gets a $1 per head, per day (sounds like slavery) from the U.S. Immigration and Customs Enforcement agency. Immigration Centers of America, the private firm run by Richmond executives Ken Newsome and Russell Harper, gets profits. Then, in turn, also pay taxes to Farmville and the county.

The ICA facility, whose logo includes an American flag, pays taxes as well and provides about 250 jobs locally. The project even got a $400,000 grant from the scandal-ridden Virginia Tobacco Indemnification and Community Revitalization Commission for water and sewer works.

What might sound like a no-lose operation, except for the mostly Hispanic inmates who might have entered the country illegally, overstayed their visas, or had other bureaucratic problems, may face problems.

The census now at the jail is about 75 percent of what it could be. President Obama has issued an executive order that could free some five million undocumented aliens. It is being challenged by 26 states but Virginia Atty. Gen Mark Herring has filed an amicus brief in favor of Obama.

So what happens to Farmville if Obama wins? It could affect 96,000 aliens in Virginia. Could there someday be no prisoners? Wouldn’t that be too bad for Farmville?

Recent history is instructive. Back in the 1990s, Gov. George Allen, a conservative darling, was pushing private prisons in Virginia as he successfully got rid of parole in part of his crime crackdown. Slave labor was part of the deal.

Executive Intelligence Weekly wrote in 1994:

“Slave labor in American prisons is increasingly being carried out in what are called “private prisons.” In his campaign to “reform” Virginia’s penal laws, Gov. George Allen pointed to prison privatization as the wave of the future, a moneymaking enterprise for the investor, and a source of good, cheap labor for Virginia’s municipalities. Indeed, after taxes, pay-back to the prison, and victim restitution are removed, the inmate earns an average of $1 per hour in these facilities.”

Well guess what happened. Allen pushed for more public and private prisons. They were overbuilt. Demographics changed. Crime rates dropped. Prisons had to be shut down.

So, if immigration reform ever comes about what happens in Farmville? Don’t forget, the private jail came at a time when a construction boom, especially in Northern Virginia had drawn in many immigrants especially from Latin America. Their papers may not have been in order.

Neo-racists like Corey Stewart, chairman of the board of supervisors of Prince William County, ordered a crackdown on brown-skinned people who spoke Spanish. But when the real estate market crashed, fewer Latinos arrived. And, if they did, they avoided Stewart’s home county.

Wither Farmville?

Dave Brat’s Bizarre Statements

 By Peter Galuszka

Almost a year ago, Dave Brat, an obscure economics professor at Randolph- Macon College, made national headlines when he defeated Eric Cantor, the powerful House Majority Leader, in the 7th District Brat Republican primary.

Brat’s victory was regarded as a sensation since it showed how the GOP was splintered between Main Street traditionalists such as Cantor and radically conservative, Tea Party favorites such as Brat. His ascendance has fueled the polarization that has seized national politics and prevented much from being accomplished in Congress.

So, nearly a year later, what has Brat actually done? From reading headlines, not much, except for making a number of bizarre and often false statements.
A few examples:

  • When the House Education and Workforce Committee was working on reauthorizing a law that spends about $14 billion to teach low-income students, Brat said such funding may not be necessary because: “Socrates trained Plato in on a rock and the Plato trained Aristotle roughly speaking on a rock. So, huge funding is not necessary to achieve the greatest minds and the greatest intellects in history.”
  • Brat says that the Affordable Care Act (Obamacare) is a step towards making the country be more like North Korea. He compares North and South Korea this way:  “. . . it’s the same culture, it’s the same people, look at a map at night, half the, one of the countries is not lit, there’s no lights, and the bottom free-market country, all Koreans is lit up. See you make your bet on which country you want to be, right? You want to go to the free market.” One problem with his argument:  Free market South Korea has had a single payer, government-subsidized health care system for 40 years. The conservative blog, BearingDrift, called him out on that one.
  • Politifact, the journalism group that tests the veracity of politicians’ statements, has been very busy with Brat. They have rated as “false” or “mostly false” such statements that repealing Obamacare would save the nation more than $3 trillion and that President Obama has issued 468,500 pages of regulations in the Federal Register. In the former case, Brat’s team used an old government report that estimated mandatory federal spending provisions for the ACA. In the latter case, Politifact found that there were actually more pages issued than Brat said, but they were not all regulations. They included notices about agency meetings and public comment periods. What’s more, during a comparable period under former President George W. Bush, the Federal Register had 465,948 pages, Politifact found. There were some cases, however, where Politifact verified what Brat said.
  • Last fall, after Obama issued an executive order that would protect up to five million undocumented aliens from arrest and deportation, Brat vowed that “not one thin dime” of public money should go to support Obama’s plan. He vowed to defund U.S. Citizen and Immigration Services but then was told he couldn’t do so because the agency was self-funded by fees from immigration applications. He then said he would examine how it spent its money.

The odd thing about Brat is that he has a doctorate in economics and has been a professor. Why is he making such bizarre, misleading and downright false statements?

How to Reform Virginia’s Conservation Tax Credit

This map, taken from the Virginia Department of Conservation and Recreation website, shows the fragmented distribution of conservation easements on Virginia's upper peninsula.

This map, taken from the Virginia Department of Conservation and Recreation website, shows the fragmented distribution of conservation easements on Virginia’s upper peninsula.

by James A. Bacon

The state of Virginia spends $100 million a year in the form of tax expenditures to place conservation easements on land parcels around the state. Could the state get more for its investment? Amy Murphy, an environmental studies major at the University of Richmond, thinks so. In a paper presented to the  Climate Change and Resiliency Update Commission Tuesday, she recommended three changes t0 make the law more effective, including a restructuring of the tax credit to favor easements that offered greater environmental benefits.

Murphy’s paper on conservation easement reform was one of 11 prepared under the tutelage of biology professor Peter D. Smallwood and journalism professor Stephen D. Nash that were packaged for consideration by the climate change commission. Each paper focused on a practical, small-bore proposal for helping Virginia ecosystems adapt to warming temperatures. While climate change was the unifying theme, it struck me that many of the proposals make sense whether you believe in catastrophic global warming or not.

Murphy’s paper, in particular, addressed concerns that I have long harbored about Virginia’s conservation easement program. On the plus side, the program provides a way to protect Virginia lands from development that is far cheaper than purchasing the land outright. Landowners receive a tax credit worth 40% of the fair market of the value of the land, with deductions up to $100,000 for the year of donation and 10 subsequent years. In effect, taxpayers pay 40 cents on the dollar to protect land from development beyond its current use, typically agriculture or forestry. Not a bad deal.

The problem is that not all land is equally worth conserving. Some lands harbor endangered species and biological diversity; others don’t. Some easements abut other easements, creating larger bodies of protected habitat; others are tiny islands, creating fragments of little ecological value. The state caps the easement credits at $100 million per year but has no system for prioritizing one easement over another.

Murphy proposes creating a statewide plan, to be administered by the Department of Conservation and Natural Resources, to rank and prioritize land based on conservation value. Factors to be considered would include biodiversity, land resilience, land cover, proximity to existing lands and threat of development. Parcels would be scored. Parcels with high scores (of greater conservation value) would receive higher tax credits, while lower-scoring parcels would receive lower credits.

“Ideally, implementing these changes will result in obtaining easements on more land of high ecological importance without altering the total amount of tax credits given annually,” she writes.

A second tweak to the program would address problems created by freezing an easement in judicial stone. Static easements that prescribe specific responsibilities and expectations of future land owners can become outdated over the decades, limiting adaptation to changes in scientific knowledge and climate conditions. Murphy recommends that Virginia require the inclusion of “adaptive management plans” in easement terms. “These plans should require that the landowner manages the land in a manner consistent with preserving the conservation purpose of the easement rather than require specific management techniques.”

Finally, Murphy recommends setting up a system for monitoring easements to ensure that the terms are being adhered to. In Maine, which requires monitoring, 90% of the easements were in compliance — which implies that 10% were not. There is a cost to monitoring, she acknowledges, but the burden “may have a positive influence as [it] may force landowners to limit their holdings so they can provide proper stewardship to them. This may cause a selective pressure away from low value easements.”

Bacon’s bottom line: Virginia’s conservation easement program is a valuable tool for protecting the natural environment. It’s also a great tax break for landowners, some of whom may be motivated to participate for less-than-altruistic motives. Murphy’s recommendations would ensure that this significant state investment yields maximum benefits.

Pulitzer-Winning Series Exposed Richmond Firm

HDL LogoBy Peter Galuszka

There’s been plenty of discussion about the evils of rising health care costs, but unfortunately, one only hears of government wrong-doing.

Private industry actually spearheads a lot of the price gouging — sometimes with government complicity.

And it just so turned out that a high-flying Richmond firm — Health Diagnostic Laboratory  — was at the heart of a scandal that involved ripping off the Medicare program.

The Wall Street Journal on Monday was awarded a Pulitzer Prize for investigative reporting for exposing Medicare fraud. As a result of a front-page story published last Sept. 8, Tonya Mallory, the chief executive and co-founder of HDL, resigned. A few weeks ago, HDL was fined $47 million (while admitting no wrongdoing) after  their Sept. 8 story last year, for paying doctors kickbacks to use their blood tests.

The Journal broke the story after a court battle. It fought to lift a 33-year-old injunction that kept private data regarding Medicare patients. Once the data floodgates were opened, reporters pieced together all kinds of juicy information about health care firms, including HDL.

I have the story here on my “The Deal” blog in Style Weekly.

The upshot? Unlike what you often read on this blog, the problems of rising health care costs may not exactly be government sloth and inefficiency. It can be the private sector gaming the system to their benefit.

Beware Stalling Growth in Northern Virginia

northern virginia mapBy Peter Galuszka

For at least a half a century, Fairfax County, Alexandria and Arlington County have been a growth engine that that has reshaped how things are in the Greater Washington area as well as the Old Dominion.

But now, apparently for the first time ever, these Northern Virginia localities have stopped growing, according to an intriguing article in The Washington Post.

In 2013, the county saw 4,673 arrivals but in 2014 saw 7,518 departures. For the same time period, Alexandria saw 493 arrivals and then 887 departures. Arlington County showed 2,004 arrivals in 2013 followed by 1,520 departures last year.

The chief reason appears to be sequestration and the reduction of federal spending. According to a George Mason University study, federal spending in the area was $11 billion less  last year than in 2010. From 2013 to 2014, the area lost 10,800 federal jobs and more private sectors ones that worked on government contracts. Many of the cuts are in defense which is being squeezed after the wars in Afghanistan and Iraq.

The most dramatic cuts appear to be in Fairfax which saw a huge burst of growth in 1970 when it had 450,000 people but has been slowing for the most part ever since. It still grew to 1.14 million people, but the negative growth last year is a vitally important trend.

Another reason for the drop offs is that residents are tired of the high cost and transit frustrations that living in Northern Virginia brings.

To be sure, Loudoun County still grew from 2013 to 2014, but the growth slowed last year from 8,904 newcomers in 2013 to 8,021 last year.

My takeaways are these:

  • The slowing growth in NOVA will likely put the brakes on Virginia’s move from being a “red” to a “blue” state. In 2010, Fairfax had become more diverse and older, with the county’s racial and ethnic minority population growing by 43 percent. This has been part of the reason why Virginia went for Barack Obama in the last two elections and has Democrats in the U.S. Senate and as governor. Will this trend change?
  • Economically, this is bad news for the rest of Virginia since NOVA is the economic engine for the state and pumps in plenty of tax revenues that end up being used in other regions. Usually, when people talk about Virginia out-migration, they mean people moving from the declining furniture and tobacco areas of Southside or the southwestern coalfields.
  • A shift in land use patterns and development is inevitable. The continued strong growth of an outer county like Loudoun suggests that suburban and exurban land use patterns, many of them wasteful, will continue there. The danger is that inner localities such as Fairfax, Arlington and Alexandria, will be stuck with more lower-income residents and deteriorating neighborhoods. The result will be that localities won’t have as much tax money to pay for better roads, schools and other services.
  • Virginia Republicans pay lip service to the evils of government spending and have championed sequestration. Well, look what a fine mess they have gotten us into.

The rest of the Washington area is seeing slowing growth, but appears to be better off. The District’s in-migration was cut in half from 2013 to 2014 but it is still on the plus side. Ditto Montgomery and Prince George’s Counties.

NOVA has benefited enormously from both federal spending and the rise of telecommunications and Web-based businesses. It is uncertain where federal spending might go and maybe increased private sector investment could mitigate the decline. Another bad sign came in 2012 when ExxonMobil announced it was moving its headquarters from Fairfax to Houston.

In any event, this is very bad news for NOVA.