Category Archives: Taxation

Tax Foundatation State and Local Tax Burden, August 2014

State and local tax burdens presented

For two decades the Tax Foundation has estimated the combined state and local tax burden for all the states. I’ve created an interactive visualization that lets you compare states and see trends in rank over time.

In its publication, the Tax Foundation explains:

For nearly two decades, the Tax Foundation has published an estimate of the combined state and local tax burden shouldered by the residents of each of the fifty states, regardless of the jurisdictions to which those taxes are paid. We argue that it is important to note that a taxpayer’s true tax burden must include the substantial taxes they pay directly or indirectly to out-of-state governments.

Tax Foundatation State and Local Tax Burden, August 2014When organizations analyzing federal tax burdens, such as the Congressional Budget Office or the Urban-Brookings Tax Policy Center, measure tax burdens by income group, they go beyond measuring the legal incidence of a tax (who writes the check to the government) and account for the fact that taxes legally imposed on a given person in one income group (such as employers via the payroll tax) can be shifted to a different person in another income group (like employees). Similarly, our state and local tax burden estimates account for the shifting of taxes from one group to another under a different variable by which household are organized: state of residence rather than income level. …

In this annual study, our goal is to move the focus from the tax collector (how much revenue is collected) to the taxpayer (how much income is foregone). We aim to find what percentage of state income residents are paying in state and local taxes and whether those taxes are paid to their state of residence or to others. …

When answering the question of which state’s residents pay the most in state and local taxes, it should be clear that such tax burden measures are not measures of the size of government in a state, nor are they technically measures of the complete burden of taxation faced by a given state’s residents.

The most recent version of the report is located at Annual State-Local Tax Burden Ranking FY 2011.

To use the visualization, hover over any state from the map. Click here to open the visualization in a new window. The most recent data is for fiscal year 2011. Data from Tax Foundation; visualization created using Tableau Public.

Using the visualization.

Tax collections by the states

Kansas state government collects more tax revenue than most surrounding states. Additionally, severance taxes are a minor contribution to collections, even in Texas.

The United States Census Bureau conducts an Annual Survey of State Government Tax Collections. It’s useful to gather figures for Kansas and some nearby states.

The data considers only tax collections by state government. It does not include cities, counties, school districts, or the many other taxing jurisdictions that states may have formed. I have computed this data on a per-person basis. Data is for 2013.

State tax collections for Kansas and some nearby states. Click for a larger version.
State tax collections for Kansas and some nearby states. Click for a larger version.
Considering total tax collections by state governments, note that Kansas, at $2,633 per person per year, is only slightly below the average for all states. For a group of nearby states, Arkansas and Iowa have higher state tax collections than Kansas. Nebraska, Oklahoma, Colorado, Texas, and Missouri are lower.

In some cases, state tax collections are substantially lower. Texas collects $1,955 per person per year, which is 25.75 percent less than Kansas.

Using the visualization.
Using the visualization.
Of note are severance taxes, which are taxes collected based on the extraction of oil, gas, and sometimes minerals. Kansas has a severance tax that produces, on a per person basis, $26 per year. In Texas the same tax produces $176 per person per year, and in Oklahoma, $134.

I’ve created an interactive visualization of this data that you may use. Click here to open the visualization in a new window.

Wichita City Budget Cover, 1994

Wichita property taxes compared

An ongoing study reveals that generally, property taxes on commercial and industrial property in Wichita are high. In particular, taxes on commercial property in Wichita are among the highest in the nation.

The study is produced by Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence. It’s titled “50 State Property Tax Comparison Study, March 2014″ and may be read here. It uses a variety of residential, apartment, commercial, and industrial property scenarios to analyze the nature of property taxation across the country. I’ve gathered data from selected tables for Wichita. A pdf version of the table is available here.

A pdf version of this table is available.
A pdf version of this table is available; click here.
In Kansas, residential property is assessed at 11.5 percent of its appraised value. (Appraised value is the market value as determined by the assessor. Assessed value is multiplied by the mill levy rates of taxing jurisdictions in order to compute tax.) Commercial property is assessed at 25 percent of appraised value, and public utility property at 33 percent.

This means that commercial property pays 25 / 11.5 or 2.18 times the property tax rate as residential property. (The study reports a value of 2.263 for Wichita. The difference is likely due to the inclusion on utility property in their calculation.) The U.S. average is 1.716.

Whether higher assessment ratios on commercial property as compared to residential property is good public policy is a subject for debate. But because Wichita’s ratio is high, it leads to high property taxes on commercial property.

For residential property taxes, Wichita ranks below the national average. For a property valued at $150,000, the effective property tax rate in Wichita is 1.324 percent, while the national average is 1.508 percent. The results for a $300,000 property were similar.

Wichita commercial property tax rates compared to national average
Wichita commercial property tax rates compared to national average
Looking at commercial property, the study uses several scenarios with different total values and different values for fixtures. For example, for a $100,000 valued property with $20,000 fixtures (table 25), the study found that the national average for property tax is $2,591 or 2.159 percent of the property value. For Wichita the corresponding values are $3,588 or 2.990 percent, ranking ninth from the top. Wichita property taxes for this scenario are 38.5 percent higher than the national average.

In other scenarios, as the proportion of property value that is machinery and equipment increases, Wichita taxes are lower, compared to other states and cities. This is because Kansas no longer taxes this type of property.

Click image for larger version.

The relevance of income tax rates

Bar char statistics

Jim Pinkerton, the journalist, Fox News contributor, and co-founder of the RATE (Reforming America’s Taxes Equitably) Coalition told an audience this: “The purpose of high taxes on the rich is not to get the rich to pay money, it’s to get the middle class to feel better about paying high taxes.”

Pinkerton was speaking last week at a conference titled “The Tax & Regulatory Impact on Industry, Jobs & The Economy, and Consumers” produced by the Franklin Center for Government and Public Integrity. His remarks, as he told the conference attendees, were based on the work of economist F.A. Hayek. Others have also noted that changes to marginal tax rates often have little impact on the amount of taxes actually paid. The top marginal tax rate — that’s the rate that applies to high income earners on most of their income — was above 90 percent during most of the 1950s. From 2003 to 2012 it was 35 percent, and is now 39.6 percent.

The top marginal tax rate is the rate that applies to income. It’s not the same as what is actually paid. This fact is unknown or ignored by those who clamor for higher taxes on the rich. They often cite the rising prosperity of the 1950s as caused by the high marginal tax rate in effect at the time.

A common mistake is equating tax rates with the tax actually paid. For many taxpayers, there is a direct relationship. For those who earn a paycheck, there’s not much they can do to change the timing of their income, find tax shelters, or shift income to capital gains. When income tax rates rise, they have to pay more. But rich people can use these (and other) strategies to reduce the taxes they pay.

Click image for larger version.
Click image for larger version.

In The purpose of high tax rates on the rich I showed that despite wide fluctuations in the top marginal tax rate, the tax revenue collected since World War II is remarkably constant, when measured as a percent of gross domestic product.

This is not the only way to consider the effect of tax rates. Using data from the Internal Revenue Service and Congressional Budget Office, I developed two charts. One shows the share of total federal taxes paid by top income earners, in this case the top five percent and the top one percent. For the range of years for which CBO provides data, the top marginal income tax rate has varied widely and has mostly fallen, and the share of federal taxes paid by top income earners has risen slightly.

Click image for larger version.
Click image for larger version.

A second chart shows the average federal tax rate for these two groups of top earners. The average federal tax rates paid by top earners has varied much less than the variation in tax rates.

As Pinkerton told the Franklin Center conference attendees, high tax rates make the middle class feel better about paying their own taxes. They may take comfort in the fact that someone else is worse off — that rich people are paying higher tax rates. But as the data shows, it’s a misconception that high tax rates mean rich people actually pay taxes at correspondingly higher rates.

Click image for larger version

The purpose of high tax rates on the rich

Taxes

“The purpose of high taxes on the rich is not to get the rich to pay money, it’s to get the middle class to feel better about paying high taxes.”

This is what Jim Pinkerton, the journalist, Fox News contributor, and co-founder of the RATE (Reforming America’s Taxes Equitably) Coalition told an audience at a conference titled “The Tax & Regulatory Impact on Industry, Jobs & The Economy, and Consumers” produced by the Franklin Center for Government and Public Integrity.

Pinkerton was referring to the economist F.A. Hayek. Others have also noted that changes to marginal tax rates often have little impact on the amount of taxes actually paid. The top marginal tax rate — that’s the rate that applies to high income earners on most of their income — was above 90 percent during most of the 1950s. From 2003 to 2012 it was 35 percent, and is now 39.6 percent.

The top marginal tax rate is the rate that applies to income. It’s not the same as what is actually paid. This fact is unknown or ignored by those who clamor for higher taxes on the rich. They often cite the rising prosperity of the 1950s as caused by the high marginal tax rate in effect at the time.

The mistake the progressives make is equating tax rates with the tax actually paid. For many people, there is a direct relationship. For workers who earn a paycheck, there’s not much they can do to change the timing of their income, find tax shelters, or shift income to capital gains. When income tax rates rise, they have to pay more. But rich people can use these and other strategies to reduce the taxes they pay.

But as Pinkerton told the conference attendees, the high tax rates make the middle class feel better about paying their own taxes. They may take comfort in the fact that someone else is worse off, at least based on the misconception that high tax rates mean rich people actually pay correspondingly higher tax.

In 2010 W. Kurt Hauser explained in The Wall Street Journal: “Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues. Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this ‘Hauser’s Law.’”

Incentives matter, economists tell us. People react to changes in tax law. As tax rates rise, people seek to reduce their taxable income. A common strategy is to make investments in economically unproductive tax shelters. There is less incentive to work, to save and build up capital stocks, and invest. These are some of the reasons why tax rate hikes usually don’t generate the promised revenue.

Click image for larger version
Click image for larger version

The subtitle to Hauser’s article is “Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie.” The nearby chart illustrates. The top line, the top marginal tax rate in effect for year year, varies widely. The other two lines show total taxes and federal income taxes as a percent of gross domestic product. Since World War II, these lines are fairly constant, even as the top marginal tax rate varies.

Data is from Bureau of Economic Analysis (part of the U.S. Department of Commerce) along with my calculations.

Federal grants seen to increase future local spending

graph-1“Nothing is so permanent as a temporary government program.” — Nobel Laureate Milton Friedman

Is this true? Do federal grants cause state and/or local tax increases in the future after the government grant ends? Economists Russell S. Sobel and George R. Crowley have examined the evidence, and they find the answer is yes.

This paper is especially important as south-central Kansas starts a comprehensive planning process under a HUD Sustainable Communities Regional Planning Grant — a federal grant. Some officials have justified their votes in favor of the planning grant because the grant is “just for planning purposes.” It does not bind us to future actions that might raise taxes, they say. But this attitude is naive and dangerous.

The research paper is titled Do Intergovernmental Grants Create Ratchets in State and Local Taxes? Testing the Friedman-Sanford Hypothesis.

The difference between this research and most other is that Sobel and Crowley look at the impact of federal grants on state and local tax policy in future periods.

This is important because, in their words, “Federal grants often result in states creating new programs and hiring new employees, and when the federal funding for that specific purpose is discontinued, these new state programs must either be discontinued or financed through increases in state own source taxes.”

The authors caution: “Far from always being an unintended consequence, some federal grants are made with the intention that states will pick up funding the program in the future.”

The conclusion to their research paper states:

Our results clearly demonstrate that grant funding to state and local governments results in higher own source revenue and taxes in the future to support the programs initiated with the federal grant monies. Our results are consistent with Friedman’s quote regarding the permanence of temporary government programs started through grant funding, as well as South Carolina Governor Mark Sanford’s reasoning for trying to deny some federal stimulus monies for his state due to the future tax implications. Most importantly, our results suggest that the recent large increase in federal grants to state and local governments that has occurred as part of the American Recovery and Reinvestment Act (ARRA) will have significant future tax implications at the state and local level as these governments raise revenue to continue these newly funded programs into the future. Federal grants to state and local governments have risen from $461 billion in 2008 to $654 billion in 2010. Based on our estimates, future state taxes will rise by between 33 and 42 cents for every dollar in federal grants states received today, while local revenues will rise by between 23 and 46 cents for every dollar in federal (or state) grants received today. Using our estimates, this increase of $200 billion in federal grants will eventually result in roughly $80 billion in future state and local tax and own source revenue increases. This suggests the true cost of fiscal stimulus is underestimated when the costs of future state and local tax increases are overlooked.

So: Not only are we taxed to pay for the cost of funding federal and state grants, the units of government that receive grants are very likely to raise their own levels of taxation in response to the receipt of the grants. This is a cycle of ever-expanding government that needs to end, and right now.

An introduction to the paper is Do Intergovernmental Grants Create Ratchets in State and Local Taxes?.

Part of Kansas tax law has something for everyone

Kansas Legislature

The just-signed Kansas tax bill contains a future provision that, based on recent research, may satisfy everyone.

As described by Kansas Legislative Research:

Future formulaic income tax rate relief could be provided under certain circumstances, beginning as early as tax year 2019, based on the extent to which a specified group of SGF tax sources has increased over the previous fiscal year. Generally, rate relief will be triggered under the formula once that group of taxes exceeds the previous fiscal year’s levels (beginning with FY 2018 growth over FY 2017) by 2 percent or more.

What will happen — may happen — is that when state general fund tax receipts increase by more than two percent, some of that increase will be used to “buy down” individual income tax rates.

This is a form of a policy known as tax and expenditure limits, or TELs. These have been implemented in many states, and in many different forms. Kansas has not had a TEL, but starting in fiscal year 2019, we may have one.

While not specifically promoted as a TEL, this law has the same effect: Instead of spending increased tax revenue, that revenue will be given back to taxpayers in the form of lower rates. Sort of, because the state will spend the first two percent, and then tax rates are reduced by something less than the margin above that.

This may happen, or it may not. Fiscal year 2019 doesn’t start for five years and two weeks. A lot may happen between now and then, including several elections. The legislature also may ignore laws it doesn’t like, as when it has sometimes violated the law requiring a 7.5 percent ending general fund balance.

But either way, this TEL has something to benefit everyone. Spending hawks can point to this as an step in reigning in government spending — even if it’s in the distant future.
state-local-spending-tel-cover

Those who like government spending can take comfort in this: According to recently released research published by American Enterprise Institute, laws like this don’t have have their intended effect.

The executive summary for its paper State and local spending: Do tax and expenditure limits work? reads:

Since 1978, 30 states have enacted formal limitations on taxes, budgets, or outlays as tools with which to strengthen fiscal discipline. These tax and expenditure limits (TELs) vary substantially in terms of their details, definitions, and underlying structures, but the empirical finding reported here is simple and powerful: TELs are not effective.

A little later:

The almost-universal weakness of TELs is striking, but the empirical evidence by itself does not explain these findings. In part, it is likely that the limits themselves are the products of the same political pressures and election dynamics that yield fiscal outcomes. Moreover, the competition among political interests that results in budget outcomes also is likely to weaken or circumvent limits that otherwise would be effective. This raises a larger overall question: what are the sources of government growth? Five hypotheses are discussed in this study, the upshot of which is that TELs by themselves are unlikely to affect the demand for or the cost of government spending. …

It is likely to be the case that such mechanical tools as TELs cannot substitute for the hard work of long-term public education and persuasion about the central benefits of limited government. In the long run under democratic institutions, popular will is likely to impose sharp constraints on the behavior of government; this means that attitudes must be changed through a process of debate and enlightenment.

So there’s something for everyone: Passage of a law that (on the surface) looks good to one group, but one with little ability to produce its stated goals, which should placate the other group.

Derby forms a TIF district

The city of Derby, Kansas has formed a tax increment financing (TIF) district. TIF is a method of diverting the normal flow of property tax revenue so that it benefits private interests rather than the public treasury.

In Kansas, cities form TIF districts. Then, any affected county and school district may vote to veto its formation. They have 30 days to do this. If they take no action, they lose their ability to veto, and the TIF district is created.

The Sedgwick County Commission will consider whether to veto the formation of this TIF district next Wednesday.

Here are documents related to this project:

Derby North Gateway TIF Analysis. Analysis of Derby North Gateway Tax Increment Financing (TIF) District, prepared by Sedgwick County finance department.

Derby North Gateway TIF District Feasibility Study. Redevelopment Project Financial Feasibility Study, Derby North Gateway TIF District, City of Derby, Kansas, March 29, 2013.

New city taxing district dependent upon Menards. Derby Informer news article.

For background on TIF, I’ve prepared a collection of resources at Tax increment financing district (TIF) resources.

Tax burden in the states

As Kansas debates tax reform, and as our state is frequently compared to Texas, we should take a look at the two states and their taxes.

Texas has no income tax. Supporters of keeping Kansas income tax rates high say that Texas has high property taxes in order to “pay for” the zero income tax rate.

It’s true that property tax rates in Texas are higher than in Kansas, according to 50-State Property Tax Comparison Study from Minnesota Taxpayers Association.

But what’s not often mentioned is that Texas state and local governments collect less tax from their citizens, compared to Kansas. This means that Texas is not burdened with costly government as is Kansas, and more money is left for taxpayers to spend in the productive private sector. And, spend it how they see fit.

State and Local Taxes Paid Per Capita, 2010

State and local tax burden visualized

For two decades the Tax Foundation has estimated the combined state and local tax burden for all the states. I’ve created an interactive visualization that lets you compare states and see trends in rank over time.

In its publication, the Tax Foundation explains:

For each state, we compute this measure of tax burden by totaling the amount of state and local taxes paid by state residents to both their own and other governments and then divide these totals by each state’s total income. We not only make this calculation for the most recent year, but also for earlier years due to the fact that income and tax revenue data are periodically revised by government agencies.

Our goal here is to move the focus from the tax collector to the taxpayer. We aim to find what percentage of state income residents are paying in state and local taxes and whether those taxes are paid to their own state or to others.

The most recent version of the report is located at Annual State-Local Tax Burden Ranking (2010) – New York Citizens Pay the Most, Alaska the Least.

To use the visualization, click on any state from the map. To add states, use Ctrl+click. Use the visualization below, or click here to open it in a new window. Data from Tax Foundation; visualization created using Tableau Public.

Eliminate mortgage interest deduction

As part of simplification of income taxes, eliminating the mortgage interest deduction should be at the top of the list. This will be difficult to accomplish, as the real estate industry pitches the deduction as a way to help middle-class families afford home ownership.

The math, however, doesn’t add up. Consider a family of four. Its standard deduction for federal income taxes is $11,900. Itemizing deductions — which is what you must do in order to received the mortgage interest deduction — is beneficial only when the deductions exceed the standard deduction amount.

With interest rates for a 30 year mortgage at 3.356 percent APR (Wells Fargo 30 year fixed), $11,900 of interest payments implies a mortgage loan of $354,000. For a 15 year fixed loan, it would be $406,000.

The national median sales price of a house, according to the National Association of Realtors, is $178,600. In many parts of the country like Wichita, it’s much less. The mortgage loan amounts calculated above are beyond the reach of most middle class families.

But once you start itemizing deductions, most families will have additional amounts to deduct beyond mortgage interest, which means additional tax savings. But families should also be aware that the benefit of these deductions exists only for the amount above the standard deduction threshold. So if a family was able to deduct $14,000, the marginal benefit is only $2,100.

Then, many people seem to believe that income tax deductions like mortgage interest are deducted from the tax bill. That describes the mechanism of tax credits. Mortgage interest is a deduction from income. After the deduction, there is less income to pay taxes on, and that’s the benefit.

The amount of the benefit, however, for middle class families is small. Most of these families probably fall into the tax bracket where the marginal rate is 15 percent, meaning that a dollar’s change in taxable income changes taxes by 15 cents. So $2,100 of additional deductions saves $315 in taxes.

There’s another policy consideration. The mortgage tax deduction incentivizes borrowing to buy a home, not the actual ownership.

The mortgage tax deduction is seen as promoting home ownership, which has been a goal of government for a long time. A few years ago we saw what happens when government intervenes in markets like housing. Most people are perfectly capable of deciding for themselves whether to be renters or owners. The government should stop social engineering programs that sway people to act one way or another, and the home mortgage interest deduction is a prime example.

Tax increment financing district (TIF) resources

Resources on tax increment financing (TIF) districts.

Wichita should reject Bowllagio TIF district. Wichita should reject the formation of a harmful tax increment financing (TIF) district.

Wichita TIF: Taxpayer-funded benefits to political players. It is now confirmed: In Wichita, tax increment financing (TIF) leads to taxpayer-funded waste that benefits those with political connections at city hall.

Tax increment financing (TIF) and economic growth. There is clear and consistent evidence that municipalities that adopt tax increment financing, or TIF, grow more slowly after adoption than those that do not.

Does tax increment financing (TIF) deliver on its promise of jobs? When looking at the entire picture, the effect on employment of tax increment financing, or TIF districts, used for retail development is negative.

Crony Capitalism and Social Engineering: The Case against Tax-Increment Financing. Randal O’Toole, Cato Institute. While cities often claim that TIF is “free money” because it represents the taxes collected from developments that might not have taken place without the subsidy, there is plenty of evidence that this is not true. First, several studies have found that the developments subsidized by TIF would have happened anyway in the same urban area, though not necessarily the same location. Second, new developments impose costs on schools, fire departments, and other urban services, so other taxpayers must either pay more to cover those costs or accept a lower level of services as services are spread to developments that are not paying for them. Moreover, rather than promoting economic development, many if not most TIF subsidies are used for entirely different purposes. First, many states give cities enormous discretion for how they use TIF funds, turning TIF into a way for cities to capture taxes that would otherwise go to rival tax entities such as school or library districts. Second, no matter how well-intentioned, city officials will always be tempted to use TIF as a vehicle for crony capitalism, providing subsidies to developers who in turn provide campaign funds to politicians.

Tax Increment Financing: A Tool for Local Economic Development. Richard F. Dye and David F. Merriman. Tax increment financing (TIF) is an alluring tool that allows municipalities to promote economic development by earmarking property tax revenue from increases in assessed values within a designated TIF district. Proponents point to evidence that assessed property value within TIF districts generally grows much faster than in the rest of the municipality and infer that TIF benefits the entire municipality. Our own empirical analysis, using data from Illinois, suggests to the contrary that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.

The effects of tax increment financing on economic development. Richard F. Dye and David F. Merriman. Local governments attempt to influence business location decisions and economic development through use of the property tax. Tax increment financing (TIF) sequesters property tax revenues that result from growth in assessed valuation. The TIF revenues are to be used for economic development projects but may also be diverted for other purposes. We have constructed an extensive data set for the Chicago metropolitan area that includes information on property value growth before and after TIF adoption. In contrast to the conventional wisdom, we find evidence that cities that adopt TIF grow more slowly than those that do not. We test for and reject sample selection bias as an explanation of this finding. We argue that our empirical finding is plausible and present a theoretical argument explaining why TIF might reduce municipal growth.

TIF is not Free Money. Randal O’Toole. Originally created with good intentions, tax-increment financing (TIF) has become a way for city officials to enhance their power by taking money from schools and other essential urban services and giving it to politically connected developers. It is also often used to promote the social engineering goals of urban planners. … Legislators should recognize that TIF no longer has a reason to exist, and it didn’t even work when it did. They should repeal the laws allowing cities to use TIF and encourage cities to instead rely on developers who build things that people want, not things that planners think they should have.

Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth. Paul F. Byrne. Increasingly, municipal leaders justify their use of tax increment financing (TIF) by touting its role in improving municipal employment. However, empirical studies on TIF have primarily examined TIF’s impact on property values, ignoring the claim that serves as the primary justification for its use. This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.

Tax Increment Financing and Missouri: An Overview Of How TIF Impacts Local Jurisdictions. Paul F. Byrne. Tax Increment Financing (TIF) has become a common economic development tool throughout the United States. TIF takes the new taxes that a development generates and directs a portion of them to repay the costs of the project itself. … Supporters of TIF argue that it is a necessary tool for redevelopment in older communities. Detractors contend that it is used to simply subsidize development, and that variances in tax systems allow some governments to implement and benefit from TIF even if its use harms other levels of government. This study provides an overview of the history and basic structure of TIF. It then analyzes the basic tax components of a TIF plan and compares how various aspects, such as tax capture and tax competition, play out in the standard system of TIF. The study then reviews the economic literature on TIF, and ends with a direct application of how TIF operates within Missouri.

The Right Tool for the Job? An analysis of Tax Increment Financing. Heartland Institute. Tax Increment Financing (TIF) is an economic development tool that uses the expected growth (or increment) in property tax revenues from a designated geographic area of a municipality to finance bonds used to pay for goods and services calculated to spur growth in the TIF district. The analysis performed for this study found TIF does not tend to produce a net increase in economic activity; favors large businesses over small businesses; often excludes local businesses and residents from the planning process; and operates in a manner that contradicts conventional notions of justice and fairness. We recommend seeking alternatives to TIF and reforms to TIF that make the process more democratic and the distribution of benefits more fair to residents of TIF districts.

Giving Away the Store to Get a Store. Daniel McGraw, Reason. Largely because it promises something for nothing — an economic stimulus in exchange for tax revenue that otherwise would not materialize — this tool is becoming increasingly popular across the country. Originally used to help revive blighted or depressed areas, TIFs now appear in affluent neighborhoods, subsidizing high-end housing developments, big-box retailers, and shopping malls. And since most cities are using TIFs, businesses such as Cabela’s can play them off against each other to boost the handouts they receive simply to operate profit-making enterprises. … At a time when local governments’ efforts to foster development, from direct subsidies to the use of eminent domain to seize property for private development, are already out of control, TIFs only add to the problem: Although politicians portray TIFs as a great way to boost the local economy, there are hidden costs they don’t want taxpayers to know about. Cities generally assume they are not really giving anything up because the forgone tax revenue would not have been available in the absence of the development generated by the TIF. That assumption is often wrong.

Do Tax Increment Finance Districts in Iowa Spur Regional Economic and Demographic Growth? David Swenson and Liesl Eathington. We found virtually no statistically meaningful economic, fiscal, and social correlates with this practice in our assessment; consequently, the evidence that we analyzed suggests that net positions are not being enhanced — that the overall expected benefits do not exceed the public’s costs.

The rich don’t have enough money

Even if President Barack Obama gets his way in upcoming tax negotiations, we’ll still be a long way from tackling the deficit.

The document General Explanations of the
Administration’s Fiscal Year 2013 Revenue Proposals, Table of Revenue Estimates
holds the details:

Obama Administration projection of increased tax revenue

If Obama is successful in his plan to increase taxes on upper-income taxpayers, it will bring in — according to this estimate by the Treasury Department — $56 billion in 2013. If additional tax expenditures are eliminated, revenue could increase by $83 billion. Both of these numbers are projected to rise in future years.

To place these numbers in context: In fiscal year 2012, which ended just one month ago, the federal government spent an estimated $3,500 billion. The largest tax revenue increase Obama hopes for is 2.4 percent of this.

Considering only the deficit from 2012, estimated at $1,100 billion, the $83 billion tax hike is 7.54 percent. But that’s only the deficit, which is the amount we borrow, not the amount we spend.

These tax increases are not going to solve our problems with the federal budget. That’s assuming that the tax hikes will not cause economic harm.

The federal budget is so out of balance compared to the size of the economy that even the wildest dreams of liberals won’t balance the budget. The Tax Foundation has calculated from IRS data that if government taxed 100 percent of the income earned by those who earn over $1 million, it would raise $709 billion. That’s not really close to last year’s deficit of $1,100 billion.

And then, why would these people work?

Wichita’s $60 million gift to Spirit Aerosystems — not

When I read that Wichita had invested nearly $60 million in its Spirit AeroSystems plant, I thought I must have been napping during a city council meeting. Instead, the lede of the story in the Tulsa World newspaper was a misstatement of the mechanism of Industrial Revenue Bonds (IRBs).

The News reported “News that the city of Wichita is moving to invest nearly $60 million in its Spirit AeroSystems plant has Vision2 backers warning that Tulsa’s aerospace jobs are at risk of poaching by other cities.”

A Tulsa television news report offered similar reporting: “… after the City of Wichita, Kansas offered roughly $60 million in incentives to try and steal Spirit Aerosystems away from Tulsa.”

When news stories cover IRBs, the stories usually focus on the amount of the bonds, as in these two examples. That’s unfortunate, as the amount of the bonds is really a minor component of the story.

You see this misunderstanding revealed in comments left to newspaper articles reporting the issuance of IRBs, where comment writers complain that the city shouldn’t be in the business of lending companies money.

This confusion hides the reason why IRB transactions take place, which is tax avoidance. That’s the real story of Industrial Revenue Bonds: Companies escape paying the property and sales taxes that you and I — as well as most business firms — must pay.

Reading the city council agenda packet regarding the IRB issue tells the story. The city is not lending Spirit money. In fact, no one is, according to the city document: “Spirit AeroSystems, Inc. intends to purchase the bonds itself, through direct placement, and the bonds will not be reoffered for sale to the public.”

Also, the city has no obligation to pay the bondholders should Spirit default. This is a moot point in this case, as the issue of the bonds is also the buyer. But this is the case with all IRBs.

It’s not uncommon for the issuing company to buy the bonds. So why issue the bonds? The agenda packet has the answer: “The bond financed property will be eligible for sales tax exemption and property tax exemption for a term of ten years, subject to fulfillment of the conditions of the City’s public incentives policy.”

City documents didn’t give the amount of tax Spirit will avoid paying, so we’re left to surmise. Bonds could be issued up to $59.5 million. Taxable business property of that value would generate an annual tax bill of around $1.8 million per year, but Spirit would not pay that for up to ten years. If all the purchased property was subject to sales tax, that one-time tax exemption would be $4.3 million. These are the upper bounds of the tax savings Spirit Aerosystems may receive. Its actual savings will probably be lower, but still substantial.

These numbers are the economic benefit of the bonds to Spirit, and the opportunity cost of the bonds to taxing jurisdictions. The $60 million “investment” or “incentive” reported by two Tulsa news sources is incorrect.

Industrial Revenue Bonds, a confusing program

IRBs are a confusing economic development program. It sounds like a loan from the city or state, but it’s not. The purpose is to convey tax avoidance.

Here’s language from the Wichita ordinance that was passed to implement the bonds: “The Bonds, together with the interest thereon, are not general obligations of the City, but are special obligations payable (except to the extent paid out of moneys attributable to the proceeds derived from the sale of the Bonds or to the income from the temporary investment thereof) solely from the lease payments under the Lease, and the Bond Fund and other moneys held by the Trustee, as provided in the Indenture. Neither the credit nor the taxing power of the State of Kansas or of any political subdivision of such State is pledged to the payment of the principal of the Bonds and premium, if any, and interest thereon or other costs incident thereto.”

So no governmental body has obligations to pay the bondholders in case of default. But this language hints at another complicating factor of IRBs: The city actually owns the property purchased with the bond proceeds, and leases it to Spirit. Here’s the preamble of the ordinance: “An ordinance approving and authorizing the execution of a lease agreement between Spirit Aerosystems, Inc. and the City of Wichita, Kansas.”

Other language in the ordinance is “WHEREAS, the Company will acquire a leasehold interest in the Project from the City pursuant to said Lease Agreement.” There’s other language detailing the lease.

We create this imaginary lease agreement — and that’s what it is, as it doesn’t have the same purpose and economic meaning as most leases — for what purpose? Just so that certain companies can avoid paying taxes.

The city does have another program that allows it to exempt these taxes under some circumstances without having to issue bonds. In this case the goal of the program is laid clear: tax avoidance.

IRBs are a confusing program that obfuscates the actual economic transaction. That’s not good public policy, whether or not you agree with the concept of selective tax abatements as economic development.

Similarly, a principle of good tax policy is that those in similar situations should face the same laws. IRBs are contrary to this.

While we can understand that citizens — with their busy lives — may not be informed or concerned about the complex workings of IRBs, we should expect more from our elected (and paid) officials. But we find often they are not informed.

As an example, in 2004 the Wichita Eagle reported: “In July, the council approved industrial revenue bond financing and a $1.7 million property tax abatement for Genesis Health Clubs. Council members later said they didn’t realize they had also approved a sales-tax break.” (Kolb goal : Full facts in future city deals, September 26, 2004)

Here we see Wichita City Council members not aware of the basic mechanism of a major city program that is frequently used. This is in spite of an informative city web page devoted to IRBs which prominently states: “Generally, property and services acquired with the proceeds of IRBs are eligible for sales tax exemption.”

Yes, that page was active in 2004.

The Obama tax cuts

In the presidential debate last week, President Barack Obama spoke of his tax cuts: “So at the same time that my tax plan has already lowered taxes for 98 percent of families, I also lowered taxes for small businesses 18 times. And what I want to do is continue the tax rate — the tax cuts that we put into place for small businesses and families.”

Are these Obama tax cuts “real” cuts that will lead to economic growth, or just government spending programs in disguise? For tax cuts to be productive in growing the economy, they have to be associated with something positive, namely with work, saving, or investment. What many people positively respond to is a reduction in marginal tax rates, that is, the tax that must be paid on the next dollar earned.

Many of the Obama tax cuts were part of the stimulus bill passed in February 2009. Polls show that very people know of these tax cuts. Many were temporary.

The largest item that benefited most people was the Making Work Pay Tax Credit, a two-year program that rebates $400 per year to individual taxpayers, or $800 per year for married couples. The program was effective for tax years 2009 and 2010 only. This is not a reduction in marginal tax rates, although the program will reduce the average tax rate that people pay. It is simply a reduction in the overall amount of tax someone must pay.

This tax credit is not associated with any positive effort or activity by the recipients other than doing what they already do. The same criticism applies to the Bush tax rebate in 2008, too.

Besides the Making Work Pay Tax Credit, the Obama tax cuts consisted of other tax credits that apply not to everyone, but only to people who qualify.

For example, a child care tax credit pays up to $1,200 per year in child care expenses. Obviously, the only people who can claim this credit are working people with children who chose to place them in daycare. Beyond that, it is not a “tax cut” by any stretch of the imagination. Properly, it is a spending program implemented through the tax system. Sometimes called tax expenditures, these measures often escape the usual scrutiny and appropriations process that spending receives. Since they’re billed as a “tax cut,” they sound like a good thing to most people, as few like paying taxes.

If we need any more evidence that these programs are really spending disguised as tax cuts, consider the description of the child care tax credit as provided by the Internal Revenue Service: “It is a refundable credit, which means taxpayers may receive refunds even when they do not owe any tax.” That’s right. Even if you have no income tax liability, you can still get a tax credit — that is, a payment from the government.

As to the claim of 18 business tax cuts, a CNN analysis finds “If extensions or expansions aren’t double counted, the list comes out to 14 tax breaks — and only five are still around.”

In its analysis of the business tax cuts, a New York Times article concluded “As you can see, some of these aren’t tax cuts in the way many people would define them. Rather, they’re tax incentives — you’ve got to spend money (on health insurance, a new employee or new equipment) to save money.”

An example of one of the temporary business tax measures that were part of the ARRA stimulus bill was bonus depreciation. This measure allowed businesses to capture depreciation of assets more quickly than usual. This reduces taxable income, and therefore would act as an incentive for businesses to make capital investments.

Ironically, when business jets received a similar accelerated depreciation benefit, President Obama denounces this as a harmful tax break.

These measures, while reducing the amount of tax a business might pay, don’t change the marginal tax rate. Reducing marginal tax rates is what contributes to growth.

There has been the temporary payroll tax cut, which is a reduction in tax rates that pay for Social Security and Medicare. This tax, however, applies only to income up to $110,100, so after that level, the reduction no longer applies. Further, this is an example of reducing taxes, but not making corresponding reductions in spending. This means that government has to borrow more, which is a negative factor for economic growth.

Programs that reduce the average tax rate like Obama’s Making Work Pay Tax Credit and the Bush tax rebates of 2008 aren’t effective because they don’t affect the marginal rate — the rate paid on the next dollar earned. While anything that reduces the burden of taxes is welcome, we ought to implement the type of tax cuts that spur economic growth.

Who responds most positively to reductions in marginal tax rates? As Jeffrey A. Miron explains, it is the most economically productive members of society:

The Bush cuts provided lower taxes on ordinary income, especially for taxpayers at the high end of the income distribution. These are some of the most energetic and productive people in society; raising tax rates would discourage their effort and entrepreneurship. High-income taxpayers also have multiple ways of avoiding high tax rates, so any revenue gain from raising rates would be modest. The Bush cuts also lowered taxes on dividend and capital gains income; maintaining these lower rates is even more important for economic performance. Capital is mobile: when it is taxed heavily here, it flees somewhere else, meaning lower investment and employment in the United States. And because capital income taxes discourage investment or drive it overseas, they generate little if any tax revenue. (Jeffrey A. Miron, “Why the Bush Tax Cuts Worked”)

It is these “energetic and productive” people that are responsible for a great deal of business activity and job creation. When these people take steps to avoid taxes it means less productive economic activity and more unproductive tax shelters.

In Slaying Leviathan: The Moral Case for Tax Reform, author Leslie Carbone explains the harm of high marginal taxes, especially progressive taxes, where rates become higher as more income is earned:

The discouragement of earning money by working, saving, or investing inherent in any income tax is exacerbated by progressivity. While any high tax rates are economically destructive, high marginal rates are even worse, because high marginal rates particularly discourage productivity and inhibit economic growth. … By lowering potential pay off, high investment taxes especially discourage risky investment. Discouragement of risky investment squelches technological advancement, because new technologies are the most risky. This means our progressive tax system actually reduces progress and inhibits improve quality of life.

If the goal of the Obama Administration is to create private sector economic growth instead of growth in government, it needs to keep the Bush tax cuts in place and avoid increases in marginal tax rates for everyone, especially the most productive members of society. A better strategy would be to reduce these tax rates farther to create even more economic growth.

Pompeo: Impending tax increases threaten economic growth and jobs

Following is an article from U.S. Representative Mike Pompeo, a Republican who represents the Kansas fourth district, which includes the Wichita metropolitan area.

This week the House of Representatives will vote to stop the largest tax hike in American history, which, absent legislative action, is set to occur on January 1, 2013. I hope the Senate and President Obama will join us. Last week’s report of the economy growing at an anemic 1.5 percent is further evidence that tax increases are not what our nation needs.

Don’t be fooled into thinking this impending tax hike is “on the other guy” or “only on the rich.” President Obama is demanding that federal taxes go up on nearly every single American and nearly every single business. Whether you make more or less than $250,000, whether you own a business or work at one, whether you are retired and receiving dividend income or whether you are a Kansas school teacher who is provided health care under your employer’s plan — your taxes will go up. It will even become far more expensive for many people to die, with a major increase in the estate tax taking effect. All of this will occur as a direct result of the President’s deep and open desire to raise taxes and spread the wealth.

This pending federal tax increase would be on top of several tax increases the Democrats have already given each of us. President Obama’s health care takeover increases taxes by $800 billion over the next ten years alone. More than a dozen of those tax increases — including the individual mandate — hit the middle class squarely. These increases violate his oft-repeated promise not to raise taxes on those making less than $200,000. They also lower incomes as the threat of tax increases has caused the economy to remain stagnant with unemployment above 8 percent for 41 consecutive months.

The anticipated economic consequence of such an enormous tax hike is so devastating that the media has coined the term “Taxmageddon” to describe it and suggested that a failure to stop it would be equivalent to driving our economic car off a “fiscal cliff.”

How big is the impending tax increase? In 2013, every taxpayer in Kansas will be charged with paying an additional $2,984 in federal income taxes. The increased tax payments of all the families in Kansas’ Fourth District put together totals a staggering $1 billion, $4.2 billion from all Kansans, and $494 billion nationwide. The tax increase would target Kansas families, low-income workers, and retirees — and it would be the largest tax hike our state has ever had to endure.

The President has it backwards. We don’t have a problem with too few taxes. Our problem, rather, is that we have too much federal spending. The federal government is already 20% bigger than when President Obama took over. We have more people on food stamps and more people drawing federal disability benefits than ever before in our nation’s history. A tax increase will just make these problems worse by further stunting economic growth.

I firmly believe that the first thing Congress must do to provide economic certainty is to stop the tax hike now. Until American families and job creators are certain their federal taxes will not be increased, we cannot get the economy back on track. This week I will vote in the House of Representatives to approve a bill that would provide that certainty by halting Taxmageddon in its tracks. If President Obama and Senate Democrats follow suit, the result will be relief and certainty for small businesses and families that would propel economic growth and create a job for every American who wants one.

Brownback on wind, again

This week Kansas Governor Sam Brownback again made the case for government spending on a particular industry. The industry is wind power, and the governor made his remarks at a national conference of the wind industry.

The wind industry, with Brownback’s support, wants to extend the production tax credit (PTC) for the production of electrical power by wind. In March Brownback and U.S. Senator Jerry Moran of Kansas wrote an op-ed making the case for extending the PTC. At the conference this week, Brownback called for extending the PTC, although he did support a four-year phaseout.

The PTC pays generators of wind power 2.2 cents per kilowatt-hour produced. To place that in context, a typical Westar customer in Kansas that uses 1,000 kilowatt-hours in the summer pays $95.22 (before local sales tax), for a rate of 9.5 cents per kilowatt-hour. (This is the total cost including energy charge, fuel charge, transmission charge, environment cost recovery rider, property tax surcharge, and franchise fee, according to a March 2010 illustration provided by Westar.) So 2.2 cents is a high rate of subsidy for a product that sells for 9.5 cents.

Brownback and Moran contend that the PTC is necessary to let the wind power industry “complete its transformation from being a high tech startup to becoming cost competitive in the energy marketplace.” The problem with this line of argument is that wind is not an industry in its infancy. The PTC has been in place since 1992, a period of twenty years. If an industry can’t get established in that period, when will it be ready to stand in its own?

The authors also contend that canceling the PTC is, in effect, a “tax hike on wind energy companies.” To some extent this is true — but only because the industry has enjoyed preferential tax treatment that it should never have received, coupled with a misunderstanding of the tax credit mechanism.

The proper way to view the PTC is as a government spending program. That’s the true economic effect of tax credits. Only recently are Americans coming to realize this, and as a result, the term “tax expenditures” is coming into use to accurately characterize the mechanism of tax credits.

Amazingly, Brownback and Moran do not realize this, at least if we take them at their written word when they write: “But the wind PTC is a winning solution because it allows companies to keep more of their own dollars in exchange for the production of energy. These are not cash handouts; they are reductions in taxes that help cover the cost of doing business.” (Emphasis added.)

It is the mixing of spending programs with taxation that leads these politicians to wrongly claim that tax credits are not cash handouts. Fortunately, not everyone falls for this seductive trap. In an excellent article on the topic that appeared in Cato Institute’s Regulation magazine, Edward D. Kleinbard explains:

Specialists term these synthetic government spending programs “tax expenditures.” Tax expenditures are really spending programs, not tax rollbacks, because the missing tax revenues must be financed by more taxes on somebody else. Like any other form of deficit spending, a targeted tax break without a revenue offset simply means more deficits (and ultimately more taxes); a targeted tax break coupled with a specific revenue “payfor” means that one group of Americans is required to pay (in the form of higher taxes) for a subsidy to be delivered to others through the mechanism of the tax system. … Tax expenditures dissolve the boundaries between government revenues and government spending. They reduce both the coherence of the tax law and our ability to conceptualize the very size and activities of our government. (The Hidden Hand of Government Spending, Fall 2010)

U.S. Representative Mike Pompeo of Wichita recognized the cost of paying for tax credit expenditures when he recently wrote: “Moreover, what about the jobs lost because everyone else’s taxes went up to pay for the subsidy and to pay for the high utility bills from wind-powered energy? There will be no ribbon-cuttings for those out-of-work families.” See Mike Pompeo: We need capitalism, not cronyism.

So when Brownback and Moran write of the loss of income to those who profit from wind power, we should remember that these profits do not arise from transactions between willing partners. Instead, they result from politicians like these who are willing to override the judgment of free people and free markets with their own political preferences — along with looking out for the parochial interests of the home state. We need less of this type of wind power.

Corporations are people, too

“As it turns out, if we tax corporations, we’re not just taxing the rich. We’re taxing everybody.” That’s the conclusion of Steven Horwitz in the following video. He explains that a tax on corporations is not the equivalent of a tax on the wealthy; instead individual people will pay these taxes, regardless of wealth. Working people bear the costs of the corporate income tax.

In summarizing the findings of economists, Horwitz says: “So yes, corporations are indeed comprised of people in the sense that it is individuals who ultimately bear the burden of increased corporate taxation. There is an ongoing debate about who bears that burden and how much. But anyone who thinks that taxing corporations means taxing the rich is fooling themselves. It’s us, actual people, who bear the burden of corporate taxation, not the abstract entity called the corporation.”

Pompeo: Ending tax credits for energy doesn’t violate pledge

In a news conference last week, U.S. Representative Mike Pompeo of Wichita and two others criticized President Barack Obama for misunderstanding of the meaning of a taxpayer protection pledge that Pompeo has signed.

The pledge is the famous pledge advanced by Grover Norquist of Americans for Tax Reform, where signers pledge not to increase taxes. The “tax increase” the president refers to are various tax credits that benefit some forms of energy production, particularly wind and solar power. Norquist, along with Senator Jim DeMint of South Carolina, participated in the conference.

Pompeo said the president “called out” those who signed the ATR pledge, specifically arguing that allowing the wind production tax credit (PTC) to expire would be a violation of the pledge. The ATR taxpayer protection pledge is to “One, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and two, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.”

Pompeo has introduced legislation in the House of Representatives that would end tax credits on all forms of energy production. By itself, that might be a violation of the pledge. The bill, however, specifies that the savings from the elimination of the spending on tax credits would be used to lower the corporate income tax rate. The use of the savings to reduce tax rates is in agreement with the second plank of the ATR pledge.

Pompeo’s bill is H.R. 3308: Energy Freedom and Economic Prosperity Act. This bill is currently in committee. Sen. DeMint introduced an amendment to a Senate bill that would have accomplished the same, but the amendment received only 26 votes. Pompeo characterized this as an advance, as just a few years ago, he said such a bill or amendment would have received only a few votes. But this received the votes of a majority of Republican members of the Senate, including that of minority leader Mitch McConnell.

In his remarks, DeMint said that while the president talks about eliminating corporate loopholes, he is hypocritical in his criticism of this legislation. If Congress could eliminate the tax credits — loopholes — for big oil and all energy and lower tax rates for all, it would be “a model for what we could do across our whole tax code.”

Norquist emphasized the temporary nature of many loopholes or tax advantaged treatment added to the tax code. These are usually pitched as temporary measures, needed because the policy goal is good, the industry is in its infancy, and it needs temporary help. But as in the case of the wind PTC, these special advantages are often extended or made permanent.

The issue of special tax treatment for the oil and gas industry arose. Norquist said that these tax considerations almost always fall into the categories of depreciation and expensing, which are available to all industries. He said if these are available to General Electric and Wal-Mart, they should also be available to all industries, including oil and gas.

Not everyone, including all conservatives, agree that tax credits are a form of spending implemented through the tax code. Recently Kansas Governor Sam Brownback and U.S. Senator Jerry Moran of Kansas made the case for extending the production tax credit for the production of electrical power by wind. See Wind tax credits are government spending in disguise.

In their op-ed, the Kansans argued the PTC is necessary to let the wind power industry “complete its transformation from being a high tech startup to becoming cost competitive in the energy marketplace.” As the PTC has been in effect is 1992, a period of 20 years, Norquist’s warning about the temporary nature of these programs is relevant.

The proper way to view the PTC is as a government spending program, recognizing the true economic effect of tax credits. Only recently are Americans coming to realize this, and as a result, the term “tax expenditures” is coming into use to accurately characterize the mechanism of tax credits. Canceling this spending is what would let tax rates be reduced, according to Pompeo’s proposed legislation.

Amazingly, Brownback and Moran do not realize this, at least if we take them at their written word when they write: “But the wind PTC is a winning solution because it allows companies to keep more of their own dollars in exchange for the production of energy. These are not cash handouts; they are reductions in taxes that help cover the cost of doing business.” (Emphasis added.)

Does government have a revenue or spending problem?

“People say the government has a debt problem. Debt is caused by deficits, which is the difference between what the government collects in tax revenue and the amount of government spending. Every time the government runs a deficit, the government debt increases. So what’s to blame: too much spending, or too little tax revenue? Economics professor Antony Davies examines the data and concludes that the root cause of the debt is too much government spending.” This is a video from from LearnLiberty.org, a project of Institute for Humane Studies.

Tax costs block progress in Kansas

If we in Kansas and Wichita wonder why our economic growth is slow and our economic development programs don’t seem to be producing results, there is now data to answer the question why: Our tax costs are high — way too high.

Recently the Tax Foundation released a report that examines the tax costs on business in the states and in selected cities in each state. The news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms.

The report is Location Matters: A Comparative Analysis of State Tax Costs on Business.

The study is unusual in that it looks at the impact of states’ tax burden on mature and new firms. This, according to report authors, “allows us to understand the effects of state tax incentives compared to a state’s core tax system.” In further explanation, the authors write: “The second measure is for the tax burden faced by newly established operations, those that have been in operation less than three years. This represents a state’s competitiveness after we have taken into account the various tax incentive programs it makes available to new investments.”

The report also looks at the tax costs for specific types of business firms. For Kansas, some individual results are better than overall, but still not good. For a mature corporate headquarters, Kansas ranks 30th. For locating a new corporate headquarters — one that would benefit from tax incentive programs — Kansas ranked 42nd. For a mature research and development facility, 46th; while new is ranked 49th. For a mature retail store, 38th, while new is ranked 45th.

There are more categories. Kansas ranks well in none.

The report also looked at two cities in each state, a major city and a mid-size city. For Kansas, the two cities are Wichita and Topeka.

Among the 50 cities chosen, Wichita ranks 30th for a mature corporate headquarters, but 42nd for a new corporate headquarters.

For a mature research and development facility, Wichita ranks 46th, and 49th for a new facility.

For a mature and new retail store, Wichita ranks 38th and 45th, respectively.

For a mature and new call center, Wichita ranks 43rd and 47th, respectively.

In its summary for Kansas, the authors note the fecklessness of Kansas economic development incentives: “Kansas offers among the most generous property tax abatements and investment tax credits across most firm types, yet these incentives seem to have little impact on the state’s rankings for new operations.”

Kansas tax cost compared to neighbors. Click here for a larger version.

It’s also useful to compare Kansas to our neighbors. The comparison is not favorable for Kansas.

More evidence of failure

Recently the Greater Wichita Economic Development Coalition issued its annual report on its economic development activities for the year. This report shows us that power of government to influence economic development is weak. In its recent press release, the organization claimed to have created 1,509 jobs in Sedgwick County during 2011. According to the Bureau of Labor Statistics, the labor force in Sedgwick County in 2011 was 253,940 persons. So the jobs created by GWEDC’s actions amounted to 0.59 percent of the labor force. This is a very small fraction, and other economic events are likely to overwhelm these efforts.

In his 2012 State of the City address, Wichita Mayor Carl Brewer took credit for creating a similar percentage of jobs in Wichita.

The report by the Tax Foundation helps us understand why the economic development efforts of GWEDC, Sedgwick County, and Wichita are not working well: Our tax costs are too high.

While economic development incentives can help reduce the cost of taxes for selected firms, incentives don’t help the many firms that don’t receive them. In fact, the cost of these incentives is harmful to other firms. The Tax Foundation report points to this harm: “While many state officials view tax incentives as a necessary tool in their state’s ability to be competitive, others are beginning to question the cost-benefit of incentives and whether they are fair to mature firms that are paying full freight. Indeed, there is growing animosity among many business owners and executives to the generous tax incentives enjoyed by some of their direct competitors.”

But there is one incentive that can be offered to all firms: Reduce tax costs for everyone. The policy of reducing tax costs for the selected few is not working. This “active investor” approach to economic development is what has led companies in Wichita and Kansas escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and Kansas has been pursuing and which Wichita’s Brewer wants to step up: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”

There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Abating taxes for specific companies through programs like IRBs is an example of precisely the wrong policy.

We need to move away from economic development based on this active investor approach. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances, except to reduce the cost of government for everyone.

Hauser’s law, or raising taxes won’t work

There are many who call for raising taxes, especially on the rich, as a way to generate more revenue and balance the budget. But try as we might, raising tax rates won’t generate higher revenues (as a percentage of gross domestic product), due to Hauser’s law. W. Kurt Hauser explains in The Wall Street Journal: “Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues. Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this ‘Hauser’s Law.’”

People react to changes in tax law. As tax rates rise, people seek to reduce their taxable income, and make investments in unproductive tax shelters. There is less incentive to work and invest. These are some of the reasons why tax hikes usually don’t generate the promised revenue.

The subtitle to Hauser’s article is “Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie.”

Hauser's LawHauser’s Law illustrated. No matter what the top marginal tax rate, taxes collected remain an almost constant percentage of GDP.

Taxes are expensive

The IRS estimates that the amount of time spent complying with the federal tax code is 7 billion hours per year. That’s 3,500,000 people working full-time on taxes.

Not to pay the taxes, mind you. This is the effort required just to figure out who owes how much tax — in other words, complying.

A few years ago the Tax Foundation looked at the cost of tax compliance and found this: “In 2005 individuals, businesses and nonprofits will spend an estimated 6 billion hours complying with the federal income tax code, with an estimated compliance cost of over $265.1 billion. This amounts to imposing a 22-cent tax compliance surcharge for every dollar the income tax system collects.”

In Kansas for 2005, compliance costs for the income tax were estimated at 27.1 percent of the tax collected. That’s almost $2.5 billion in total costs, or $877 per person. To place this number in context, Kansas spends about $2.9 billion on public schools each year.

It’s expensive to collect income taxes. We also have evidence that it’s expensive for governments to spend the taxes they’ve collected.

A curiosity is that the cost of complying with the federal tax code is highly regressive. Those earning less than $20,000 spent nearly 6 percent of their income on compliance. Those with incomes of over $200,000 spent just 0.45 percent of their income on compliance. Those earning less than $20,000 will generally pay no income tax, yet they still pay to comply. (Many of these low earners will qualify for various spending programs that are implemented through the income tax system.)

By simplifying our tax code, we could eliminate much of this cost, and return that effort to productive use. As Paul Jacob wrote in a commentary: “This complexity has costs. And not just to my sanity. A whole industry has risen to ease the burden of figuring out our taxes. One hates to begrudge anyone an honest living, but really, most of today’s tax accountants would better serve humanity in some other job.”

For those who do pay taxes, they often aren’t aware, on a continual basis, of just how much tax they pay. That’s because for wage earners federal and state taxes are conveniently withheld from their paychecks. Many people, I suspect, look at the bottom line — the amount they receive as a check or automatic bank deposit — and don’t really take notice of the taxes that were withheld. This makes paying taxes almost painless.

For property taxes, anyone who has a mortgage probably has these taxes incorporated into their monthly mortgage payment, so they’re not aware of the taxes on a monthly basis. Renters pay them as part of their rent. Everyone who trades with a business pays them, as taxes such as the sales tax are part of what people have to pay to buy something.

To increase tax awareness, we should eliminate the withholding of taxes from paychecks and from monthly mortgage payments. Instead, each month or year the various taxing governments should send a bill to each taxpayer, and they would pay it just like the rest of their periodic bills. In this way, we would all be acutely aware of just how much tax we pay.

Since tax withholding from paychecks and mortgage payments reduces our awareness of just how much tax we pay, it’s unlikely that governments will stop the withholding of taxes and submit a bill to taxpayers. Instead, it’s left to ourselves to remain aware of how much we are paying. Politicians just hope we don’t notice.

Federal grants increase future local spending

“Nothing is so permanent as a temporary government program.” — Nobel Laureate Milton Friedman

Is this true? Do federal grants cause state and/or local tax increases in the future after the government grant ends? Economists Russell S. Sobel and George R. Crowley have examined the evidence, and they find the answer is yes.

This paper is especially important as south-central Kansas starts a comprehensive planning process under a HUD Sustainable Communities Regional Planning Grant — a federal grant. Some officials have justified their votes in favor of the planning grant because the grant is “just for planning purposes.” It does not bind us to future actions that might raise taxes, they say. But this attitude is naive and dangerous.

The research paper is titled Do Intergovernmental Grants Create Ratchets in State and Local Taxes? Testing the Friedman-Sanford Hypothesis.

The difference between this research and most other is that Sobel and Crowley look at the impact of federal grants on state and local tax policy in future periods.

This is important because, in their words, “Federal grants often result in states creating new programs and hiring new employees, and when the federal funding for that specific purpose is discontinued, these new state programs must either be discontinued or financed through increases in state own source taxes.”

The authors caution: “Far from always being an unintended consequence, some federal grants are made with the intention that states will pick up funding the program in the future.”

The conclusion to their research paper states:

Our results clearly demonstrate that grant funding to state and local governments results in higher own source revenue and taxes in the future to support the programs initiated with the federal grant monies. Our results are consistent with Friedman’s quote regarding the permanence of temporary government programs started through grant funding, as well as South Carolina Governor Mark Sanford’s reasoning for trying to deny some federal stimulus monies for his state due to the future tax implications. Most importantly, our results suggest that the recent large increase in federal grants to state and local governments that has occurred as part of the American Recovery and Reinvestment Act (ARRA) will have significant future tax implications at the state and local level as these governments raise revenue to continue these newly funded programs into the future. Federal grants to state and local governments have risen from $461 billion in 2008 to $654 billion in 2010. Based on our estimates, future state taxes will rise by between 33 and 42 cents for every dollar in federal grants states received today, while local revenues will rise by between 23 and 46 cents for every dollar in federal (or state) grants received today. Using our estimates, this increase of $200 billion in federal grants will eventually result in roughly $80 billion in future state and local tax and own source revenue increases. This suggests the true cost of fiscal stimulus is underestimated when the costs of future state and local tax increases are overlooked.

So: Not only are we taxed to pay for the cost of funding federal and state grants, the units of government that receive grants are very likely to raise their own levels of taxation in response to the receipt of the grants. This is a cycle of ever-expanding government that needs to end, and right now.

An introduction to the paper is Do Intergovernmental Grants Create Ratchets in State and Local Taxes?.

Cronyism in the tax code

Why is so much money spent on lobbying government? In a short video, Professor Randall G. Holcombe explains: “The reason you have so much lobbying and so much special interest activity in Congress is because government is so big. Government taxes a lot, government spends a lot, and so as a result there’s a lot of reward to people from going to Congress trying to get a piece of the action. Whether the piece of the action is a tax cut or a subsidy, I don’t think there’s any real solution to those special interest benefits outside of cutting the size of government.”

Holcombe also explained how tax law is formed: “If you really want to understand the nature of our tax code, don’t ask yourself ‘Why are these provisions in the public interest?’ That’s not how taxes are passed. Ask yourself ‘Who benefits from these taxes, and how much political power do they have?’”

This is not only a problem at the federal level. In Kansas last week special interest groups were able to extend using the Kansas tax code to funnel millions to special interests at the expense of the general public by extending the STAR bonds program.

In Wichita, a special interest group recently persuaded the city council to manipulate property tax law in their favor by forgiving property taxes to new home buyers, again at the expense of the general public.

I do have one disagreement with Holcombe when he says there are not groups that lobby Congress on behalf of the general public for tax reform. There are groups like Americans for Prosperity, Cato Institute, Tax Foundation, Americans for Tax Reform, Heritage Foundation, and many others that advocate for tax simplification and lower rates that benefit everyone. Not all these groups explicitly engage in lobbying, but they produce research and spread the message.

Brownback, Moran wrong on wind tax credits

In the following commentary, Kansas Governor Sam Brownback and U.S. Senator Jerry Moran of Kansas make the case for extending the production tax credit (PTC) for the production of electrical power by wind.

The PTC pays generators of wind power 2.2 cents per kilowatt-hour produced. To place that in context, a typical Westar customer in Kansas that uses 1,000 kilowatt-hours in the summer pays $95.22 (before local sales tax), for a rate of 9.5 cents per kilowatt-hour. (This is the total cost including energy charge, fuel charge, transmission charge, environment cost recovery rider, property tax surcharge, and franchise fee, according to a March 2010 illustration provided by Westar.) So 2.2 cents is a high rate of subsidy for a product that sells for 9.5 cents.

The authors contend that the PTC is necessary to let the wind power industry “complete its transformation from being a high tech startup to becoming cost competitive in the energy marketplace.” The problem with this line of argument is that wind is not an industry in its infancy. The PTC has been in place since 1992, a period of twenty years. If an industry can’t get established in that period, when will it be ready to stand in its own?

The authors also contend that canceling the PTC is, in effect, a “tax hike on wind energy companies.” To some extent this is true — but only because the industry has enjoyed preferential tax treatment that it should never have received, coupled with a misunderstanding of the tax credit mechanism.

The proper way to view the PTC is as a government spending program. That’s the true economic effect of tax credits. Only recently are Americans coming to realize this, and as a result, the term “tax expenditures” is coming into use to accurately characterize the mechanism of tax credits.

Amazingly, Brownback and Moran do not realize this, at least if we take them at their written word when they write: “But the wind PTC is a winning solution because it allows companies to keep more of their own dollars in exchange for the production of energy. These are not cash handouts; they are reductions in taxes that help cover the cost of doing business.” (Emphasis added.)

It is the mixing of spending programs with taxation that leads these politicians to wrongly claim that tax credits are not cash handouts. Fortunately, not everyone falls for this seductive trap. In an excellent article on the topic that appeared in Cato Institute’s Regulation magazine, Edward D. Kleinbard explains:

Specialists term these synthetic government spending programs “tax expenditures.” Tax expenditures are really spending programs, not tax rollbacks, because the missing tax revenues must be financed by more taxes on somebody else. Like any other form of deficit spending, a targeted tax break without a revenue offset simply means more deficits (and ultimately more taxes); a targeted tax break coupled with a specific revenue “payfor” means that one group of Americans is required to pay (in the form of higher taxes) for a subsidy to be delivered to others through the mechanism of the tax system. … Tax expenditures dissolve the boundaries between government revenues and government spending. They reduce both the coherence of the tax law and our ability to conceptualize the very size and activities of our government. (The Hidden Hand of Government Spending, Fall 2010)

U.S. Representative Mike Pompeo of Wichita recognized the cost of paying for tax credit expenditures when he recently wrote: “Moreover, what about the jobs lost because everyone else’s taxes went up to pay for the subsidy and to pay for the high utility bills from wind-powered energy? There will be no ribbon-cuttings for those out-of-work families.” See Mike Pompeo: We need capitalism, not cronyism.

So when Brownback and Moran write of the loss of income to those who profit from wind power, we should remember that these profits do not arise from transactions between willing partners. Instead, they result from politicians like these who are willing to override the judgment of free people and free markets with their own political preferences — along with looking out for the parochial interests of the home state. We need less of this type of wind power.

Strengthening our Nation’s Domestic Energy Supply

By Kansas Governor Sam Brownback and U.S. Senator Jerry Moran of Kansas.

The increasing cost of conducting business in the United States threatens innovation and investment in new technologies. In today’s unstable business environment, American industries are understandably reluctant to invest the time and resources necessary to grow their businesses. This is especially true for domestic energy production.

Energy production is one of the most highly regulated markets in the United States today. Government policies are hurting our country’s ability to compete within the global economy, limiting our domestic energy supply and driving up the cost of energy for consumers. To ensure Kansans have access to a reliable and affordable supply of energy, we must develop more of our nation’s natural resources.

One resource that is plentiful in Kansas is wind. Our state has the second highest wind resource potential in our country and leads the nation in wind production capacity currently under construction. If we expect the wind energy industry to provide for our country’s future energy needs and make long-term investments in their businesses, Congress must reauthorize the wind production tax credit (PTC) that expires this year. By extending the wind PTC, Congress will allow the wind industry to complete its transformation from being a high tech startup to becoming cost competitive in the energy marketplace. Failure to do so will result in a tax hike on wind energy companies and will only further delay this industry’s ability to compete.

There are those who view government intervention in the energy sector as picking winners and losers. But the wind PTC is a winning solution because it allows companies to keep more of their own dollars in exchange for the production of energy. These are not cash handouts; they are reductions in taxes that help cover the cost of doing business. Unlike President Obama’s failed stimulus plan that rewards individual, unproven companies like Solyndra with cash handouts, the wind PTC is an industry tax credit that has led to $20 billion in annual private investment in our energy infrastructure.

Today, the American wind industry includes more than 400 manufacturing facilities in 43 states. In 2005, just 25 percent of the value of a wind turbine was produced in the United States compared to more than 60 percent today. Because of their close proximity to wind farms, American workers can produce the critical components at a lower cost than their European and Asian counterparts. As more components are manufactured in the United States and not overseas, the cost to produce electricity from wind farms will be further driven down.

If the wind PTC is allowed to expire, local economies across our state will suffer. Kansas counties will lose $3.7 million in annual payments from wind companies. Kansas landowners will lose nearly $4 million annually in additional income they earn from leasing or selling their land for wind farms. And every Kansan will ultimately be affected because the power generated by these wind facilities contributes to our supply of electricity. By eliminating additional sources of electricity, utility rates will climb.

To meet our country’s energy needs and remain competitive in the global market, Congress must develop a national energy policy. Recent events in the Middle East have demonstrated once again the importance of having access to an ample domestic energy supply so we are less dependent on foreign sources. If Congress fails, Kansans will soon be paying much higher energy prices — for the gas to fill up our cars, for the fuel to power our farm equipment, and for the electricity to turn on our lights.

Temporarily extending the wind PTC is not about picking winners and losers — it is about preparing our country to meet our growing energy demand. Rather than make it more difficult for the private sector to develop energy sources, we should lower taxes, reduce regulations, and allow the private sector to succeed in the free market. In turn, the wind industry will grow and become fully competitive — no longer needing the wind PTC. By strengthening American energy production, our country’s future will be stronger and more secure.

Wichita turns taxation over to private interests

In a free society with a limited government, taxation should be restricted to being a way for government to raise funds to pay for services that all people benefit from. But in the city of Wichita, taxation for private gain is overtaking our city.

The Ambassador Hotel, part of a project known as Douglas Place, makes use of several of these private tax policy strategies. By private tax policy, I mean that the proceeds of a tax are used for the exclusive benefit of one person (or business firm), instead of used for the benefit of all. In one example related to this hotel, the Wichita City Council is allowing private parties to determine the city’s tax policy at their discretion, not the city’s.

The tax in question is Wichita’s hotel guest tax. According to a description of the Tourism and Convention Fund in the city’s budget document, the goal of the guest tax is to “support tourism and convention, infrastructure, and promotion of the City.” Its priorities are to be “Fund priorities are: 1) debt service for tourism and convention facilities, 2) operational deficit subsidies and 3) care and maintenance of Century II.”

But in the case of the Ambassador Hotel project, the city passed a charter ordinance that would route 75 percent of this tax directly back to the hotel owners for their own use. That’s not the proclaimed purpose of the guest tax.

Instead, this is public taxation for private enrichment.

Those who benefit from things like this and tax increment financing (TIF) districts say they aren’t really benefiting, as they are, in fact, paying taxes.

But when taxes you must pay are routed back to you for your own exclusive use, what else can you call it except capture of a public function for your own personal use?

Failure of Wichita city leadership

If you need further evidence that Wichita is turning over taxation to private hands, consider this: The charter ordinance is subject to a protest petition. In the normal case, if sufficient signatures are gathered, the city council would have to either a) overturn the ordinance, or b) hold an election to let voters decide whether the ordinance takes effect. An effort that I have been involved with expects to turn in enough signatures this week to force this decision.

Now, if this tax policy regarding the Ambassador Hotel is truly in the public interest, we would expect that the city council would decide whether to hold such an election and bear its costs itself. But that’s not the case. In the agreement between the city and the Douglas Place developers, we see this: “If Developer requests a special election solely for the purpose of passing the charter ordinance in the event a sufficient protest petition is submitted, Developer shall reimburse the City for the actual out of pocket costs and expenses of conducting such election.”

In other words, the city is turning over to private interests the decision as to whether to have such an election, and also the responsibility for paying for it. This is a failure of Wichita city leadership to do the things that government, not private interests, should do.

Private taxation funds political entrepreneurship

In Wichita, especially in downtown, we see the rise of private tax policy, that is, the taxing power of government being used for private purposes. The above example is just one example. This private tax policy is pushed by Wichita’s political entrepreneurs. These are the people who would rather compete in the realm of politics rather than in the market.

Examples of Wichita’s political entrepreneurs include the developers the Ambassador Hotel: David Burk of Marketplace Properties, and the principals of Key Construction.

Competing in the political arena is easier than competing in the market. To win in the political arena, you only have to convince a majority of the legislative body that controls your situation. Once you’ve convinced them the power of government takes over, and the people at large are forced to transfer money to the political entrepreneurs. In other words, they must engage in transactions they would not elect to perform, if left to their own free will.

In the free marketplace, however, entrepreneurs have to compete by offering products or services that people are willing to buy, free of coercion. That’s hard to do. But it’s the only way to gauge whether people really want what the entrepreneurs are selling. It’s also the way that wealth and prosperity are created. Government spending on business does not have this effect.

One of the ways that political entrepreneurs compete is by making campaign contributions, and the developers of Douglas Place have mastered this technique. Key Construction principles contributed $13,500 to Mayor Carl Brewer and four city council members during their most recent campaigns. Council Member Jeff Longwell alone received $4,000 of that sum, and he also accepted another $2,000 from managing member David Burk and his wife.

All told, Burk and his wife contributed at least $7,500 to city council candidates who will be voting whether to give Burk money. Burk and others routinely make the maximum contribution to all — or nearly all — candidates, even those with widely varying political stances. How can someone explain Burk’s (and his wife’s) contributions to liberals like Miller and Williams, and also to conservatives like Longwell, Meitzner, and former council member Sue Schlapp?

The answer is: Burk will be asking these people for money.

Wichitans need to rise against these political entrepreneurs and their usurpation of a public function — taxation — for their own benefit. The politicians and bureaucrats who enable this should realize they should be serving the public interest, not the narrow and private enrichment of the few at the cost of many.

Pompeo to introduce ‘Energy Freedom and Economic Prosperity Act’

This week U. S. Representative Mike Pompeo of Wichita plans to introduce the “Energy Freedom and Economic Prosperity Act,” a bill that would eliminate all tax credits related to energy.

Tax credits, sometimes called tax expenditures, are spending accomplished through the tax code rather than by legislative appropriations. Two prominent tax credits related to energy production are the tax credit for producing and blending ethanol with gasoline, and the production tax credit for wind and solar power production. These industries have claimed that the tax credits are necessary for these forms of energy to be economically viable.

Pompeo’s office estimates that the bill could save up to $90 billion in tax expenditures over the next ten years. The legislation proposes that these savings be used to reduce the corporate income tax rate.

The subsidies that would be repealed include, according to Pompeo’s office: Plug-In electric and fuel cell vehicles, Alternative fuel and alternative fuel mixtures, Cellulosic Biofuel Producer Credit, Alternative fuel infrastructure, Production Tax Credit for electricity produced from renewable sources, including wind, biomass, and hydropower, Investment Tax Credit for equipment powered by solar, fuel cells, geothermal or other specified renewable sources, Enhanced oil recovery credit, and credit for producing oil and gas from marginal wells, Advanced Nuclear Power Generation Credit, and Clean coal investment credits.

This bill targets tax credits only. Loans and loan guarantees are not a subject. This bill would not affect the programs that funded Solyndra, a high-profile example of failure. This bill would not affect the $132.4 million loan guarantee recently given to a cellulosic ethanol plant in southwest Kansas, either.

Pompeo’s office stresses that this is not a bill targeted at renewable forms of energy like ethanol and wind. It affects all tax credits, including those that are directed at the nuclear, coal, and oil and gas. The goal is to get government out of the energy sector and let markets direct energy investment.

This bill represents a continued effort by Pompeo to reduce government intervention and to give more freedom to markets. Politically, it puts him at odds with many in this state who favor expansion of wind energy in Kansas. In particular, Kansas Governor Sam Brownback is a proponent of wind power and ethanol. Wichita Mayor Carl Brewer is also promoting Wichita as a place for wind power companies to locate.

Warren Buffet’s secretary: marginal vs. average, Hauser’s Law

Some of the confusion surrounding Warren Buffet’s secretary and her taxes comes from the failure to distinguish between average and marginal tax rates. There’s also the fact that Social Security and Medicare payroll taxes are paid on only the first $106,800 of income.

But considering income taxes alone and not payroll taxes, there’s often confusion between average tax rates (the total amount of tax paid divided by the amount earned) and marginal tax rates (the amount of tax paid on the next dollar earned).

As an illustration, consider a single person earning $60,000. Plugging the numbers into the tax calculator at efile.com, and not taking any deductions other than standard and personal, produces a tax liability of $8,444. On income of $60,000, this is an average tax rate of 14.07 percent.

But consider if the person earns another $100. (The calculator doesn’t work with fractional dollars, so we’ll use $100 instead of $1.)

Now, the tax liability is $8,469. That’s an increase of $25 in taxes for an increase of $100 in income. In other words, this person is in the 25 percent tax bracket, meaning that each additional dollar earned results in an additional $0.25 in tax.

Not all earnings are taxed at this 25 percent rate. Some is taxed at a much lower rate, and some not at all. By the way, the average tax rate has now increased to 14.09 percent.

If the $60,000 wage earner is married with two children, the tax bill falls to $3,463, producing an average tax rate of 5.77 percent, and the marginal rate on the next dollar earned is 15 percent. This again assumes no deductions beyond the standard and personal.

So what tax rate does Warren Buffet’s secretary pay? There can be many answers.

One thing we can be certain of, however, is that wealthy people like Buffet have options in structuring their income that ordinary wage earners don’t. Buffet, for example, says he receives most of his income in the form of capital gains or dividends, which are taxed at 15 percent.

This is an illustration of Hauser’s Law at work. Try as we might, raising tax rates won’t generate higher revenues (as a percentage of gross domestic product), due to Hauser’s law. W. Kurt Hauser explains in The Wall Street Journal: “Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues. Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this ‘Hauser’s Law.’”

People react to changes in tax law. As tax rates rise, people seek to reduce their taxable income and make investments in unproductive tax shelters. There is less incentive to work and invest. These are some of the reasons why tax hikes usually don’t generate the promised revenue.

Any plan to generate substantially more revenue by raising tax rates will have to overcome this tax-avoiding behavior. Hauser’s law says this is not likely to happen.

Hauser's LawHauser’s Law illustrated. No matter what the top marginal tax rate, taxes collected remain an almost constant percentage of GDP.

Tax expenditures, or loopholes

While most critics of government spending focus on entitlements, regular appropriations, and earmarks, there is a category of spending that not many have paid much attention. This spending is called “tax expenditures.” This year as part of the debate or controversy over raising the federal debt ceiling, attention is being paid to the cost of these tax expenditures, although the term commonly used is “loophole.”

It’s a big issue. As economist Martin Feldstein wrote in the Wall Street Journal, tax expenditures were thought to increase the federal budget deficit by $1 trillion in 2010.

We know where President Barack Obama stands. He is firm in wanting to increase tax revenue by eliminating tax expenditures. He focuses on those that apply to the rich, although there are plenty of tax expenditures that apply to the working poor and middle class, such as the earned income tax credit and child care credit.

To speak of these tax expenditures or loopholes having a “cost” makes sense only if you adopt a certain view of the world. It has to do with who owns what — you or government. George Reisman recently explained: “The underlying assumption of those who hold this view is that the government already owns the funds in question whether it has collected them in taxes or not. The government is the alleged owner of funds that belong to the taxpayer and which it abstains from taking. It allegedly spends these funds in allowing the taxpayers to keep them.”

Reisman further explained that eliminating tax expenditures is a tax increase, pure and simple, and must not be embraced: “The notion of tax expenditures provides the pretext for massive tax increases in the name of reducing government spending. This notion must be cast aside, so that the target of tax reform will be reductions in actual government spending, which then must be followed by reductions in taxes.”

Other economists agree. Thomas J. DiLorenzo, in his essay More Loophole Lobbyists, Please warns of the “oldest trick in the book,” which he says is “Give up your deductions, and we will reduce your income tax rate.”

I agree with their arguments. Increasing tax revenue to the state by eliminating tax expenditures is not a good thing. At the same time, the tax expenditures are a problem. Their very existence, and the continual effort to expand them or prevent their closing, is harmful to the economy, too. Spending through the tax system is a major way of implementing crony capitalism, that is, political entrepreneurship instead of market entrepreneurship, as explained by Charles G. Koch in The Wall Street Journal: “Crony capitalism is much easier than competing in an open market. But it erodes our overall standard of living and stifles entrepreneurs by rewarding the politically favored rather than those who provide what consumers want.”

Koch went on to explain that “Our elected officials would do well to remember that the most prosperous countries are those that allow consumers — not governments — to direct the use of resources. Allowing the government to pick winners and losers hurts almost everyone, especially our poorest citizens.”

I agree with that, too. This is why this is a difficult issue.

Tax expenditures are implemented through the tax system. It’s usually the income tax system, especially at the federal level, but also at the state level.

Some of the tax expenditures consist of deductions: The government deciding not to collect tax on income that is spent for a specific purpose. An example is the deduction for home mortgage interest. For 2010, this is estimated to “cost” the federal government $103.7 billion in taxes that it would otherwise collect, according to the Joint Committee on Taxation.

The tax expenditures that really “cost” the government — and by extension, other taxpayers that must pay unless spending is also reduced — are tax credits. These reduce the tax that must be paid dollar for dollar. An example is the “credit for alcohol fuels,” which is to say ethanol. The cost of this tax credit program for 2010 is given as $10.1 billion. Many credits are refundable, meaning that if the taxpayer has no tax liability, the government will send the recipient a check.

Other examples of tax credits cited by Feldstein include “$500 million annual subsidy for the rehabilitation of historic structures and a $4 billion annual subsidy of employer-paid transportation benefits.”

While supporters of many of these programs portray them as not costing the government anything, Feldstein writes that they do: “These tax rules — because they result in the loss of revenue that would otherwise be collected by the government — are equivalent to direct government expenditures.”

I argued this in testimony I presented to a committee in the Kansas Legislature last year, when it was considering restoring and expanding the Kansas historic preservation tax credit program. I told committee members: “We must recognize that a tax credit is an appropriation of Kansans’ money made through the tax system. If the legislature is not comfortable with writing a real estate developer a check for over $1,000,000 — as in the case with one Wichita developer — it should not make a roundabout contribution through the tax system that has the same economic impact on the state’s finances.”

In that committee, not one member voted against this program, even though the committee has some members who consider themselves very fiscally conservative and hawks on spending.

In Wichita, the city council regularly steers spending to certain companies through the tax system by granting property tax exemptions and tax increment financing.

Feldstein describes problems with spending implemented through the tax system:

  • Politicians use tax expenditures to grow the welfare state. While proposing a freeze on discretionary spending, President Obama at the same time proposed an expansion of a tax credit program for child or elderly care.
  • Once enshrined in the tax law, these appropriations don’t have to be reauthorized each year. They’re on auto-pilot, so to speak.
  • Eliminating tax expenditures is looked on by Republicans as a tax increase, so they are reluctant to support their elimination. Felstein counters: “But eliminating tax expenditures does not increase marginal tax rates or reduce the reward for saving, investment or risk-taking.”
  • Tax expenditures distort the economy in harmful ways: “[Eliminating tax expenditures] would also increase overall economic efficiency by removing incentives that distort private spending decisions.”

Feldstein concludes: “Cutting tax expenditures is really the best way to reduce government spending. And to be politically acceptable, the cuts in tax expenditures must be widespread, requiring most taxpayers to give up something so that the fiscal deficits can decline.”

The ‘Tax Expenditure’ Solution for Our National Debt

The credits and subsidies that make the tax code so complicated cost big bucks. Reduce them by third and the debt will be 72% of GDP in 2020 instead of 90%.

By Martin Feldstein

When it comes to spending cuts, Congress is looking in the wrong place. Most federal nondefense spending, other than Social Security and Medicare, is now done through special tax rules rather than by direct cash outlays. The rules are used to subsidize a wide range of spending including education, child care, health insurance, and a myriad of other congressional favorites.

These tax rules — because they result in the loss of revenue that would otherwise be collected by the government — are equivalent to direct government expenditures. That’s why tax and budget experts refer to them as “tax expenditures.” This year tax expenditures will raise the federal deficit by about $1 trillion, according to estimates by the congressional Joint Committee on Taxation. If Congress is serious about cutting government spending, it has to go after many of them.

Continue reading at the Wall Street Journal (subscription required)

Obama’s tax hikes must be resisted

As our nation’s leaders consider the possibility of raising income tax rates, we need to be aware of the negative impact of higher marginal tax rates on the economy and make sure we resist the lure of higher taxes. This is especially important even if the new higher tax rates are confined to to the rich.

The concept of marginal tax rates is important to understand, as it holds the key to understanding how we can drive economic growth, and how we can kill it, too. President Barack Obama believes he has already cut taxes in the name of economic growth. These tax “cuts” — I use quotes deliberately — are part of the stimulus bill passed in February 2009.

So what are the Obama tax cuts? There was one program that qualified — sort of — as a “cut,” and several tax credit programs. The largest item that benefited most people is the Making Work Pay Tax Credit, a two-year program that rebates $400 per year to individual taxpayers, or $800 per year for married couples.

It’s important to note that this is not a reduction in marginal tax rates, which is the tax rate that people pay on the next dollar they earn. That’s what people focus on. The program will, however, reduce the average tax rate that people pay.

This bears repeating: People can’t control the tax on income they’ve already earned. But they can decide whether to submit themselves to the marginal tax rate: The tax rate the government charges on the next dollar they may — or may not — earn.

So why isn’t Obama’s Making Work Pay Tax Credit a stimulus boon to the economy? It’s not associated with any positive effort or activity by the recipients other than doing what they already do. (This applies to the Bush tax rebate in 2008, too.)

For tax cuts to be productive in growing the economy, they have to be associated with something positive, namely with work, saving, or investment. What many people positively respond to is a reduction in marginal tax rates, that is, the tax that must be paid on the next dollar earned.

Programs that reduce the average tax rate like Obama’s Making Work Pay Tax Credit and the Bush tax rebates of 2008 aren’t effective because they don’t affect the marginal rate — the rate paid on the next dollar earned. This is not to say that I am not in favor of these programs. Anything that reduces the burden of taxes is welcome. But they are not the type of tax cuts that spur economic growth.

Why are low marginal tax rates important to economic growth? First, high marginal tax rates discourage people from producing. As people get to keep less and less of what they produce after they pay higher tax rates, many decide to produce less. Some stop producing anything.

Second, high marginal tax rates encourage people to invest in economically unproductive investments like tax shelters simply to avoid tax, without regard to the underlying wisdom of the investment. Or, people decide that since government takes so much of the money they earn, they might as well spend it on tax-deductible expenses that they might not buy otherwise. A company might hold an engineering conference at an expensive luxury resort instead of a modestly-priced facility — or instead of holding it electronically.

Who responds most positively to reductions in marginal tax rates? First, with about half of American households paying no federal income tax at all — although they do pay payroll taxes — the idea of marginal tax rates doesn’t apply to them. That leaves high-income workers, or as Jeffrey A. Miron explains, the most economically productive members of society that are positively affected by marginal income tax rates:

The Bush cuts provided lower taxes on ordinary income, especially for taxpayers at the high end of the income distribution. These are some of the most energetic and productive people in society; raising tax rates would discourage their effort and entrepreneurship. High-income taxpayers also have multiple ways of avoiding high tax rates, so any revenue gain from raising rates would be modest. The Bush cuts also lowered taxes on dividend and capital gains income; maintaining these lower rates is even more important for economic performance. Capital is mobile: when it is taxed heavily here, it flees somewhere else, meaning lower investment and employment in the United States. And because capital income taxes discourage investment or drive it overseas, they generate little if any tax revenue. (Jeffrey A. Miron, “Why the Bush Tax Cuts Worked”)

It is these “energetic and productive” people that are responsible for a great deal of economic activity and job creation. When these people take steps to avoid taxes it means less productive economic activity and more unproductive tax shelters.

In Slaying Leviathan: The Moral Case for Tax Reform, author Leslie Carbone explains the harm of high marginal taxes, especially progressive taxes, where rates become higher as more income is earned:

The discouragement of earning money by working, saving, or investing inherent in any income tax is exacerbated by progressivity. While any high tax rates are economically destructive, high marginal rates are even worse, because high marginal rates particularly discourage productivity and inhibit economic growth. … By lowering potential pay off, high investment taxes especially discourage risky investment. Discouragement of risky investment squelches technological advancement, because new technologies are the most risky. This means our progressive tax system actually reduces progress and inhibits improve quality of life.”

If the goal of the Obama Administration is to create private sector economic growth instead of growth in government, it needs to keep the Bush tax cuts in place and avoid increases in marginal tax rates for everyone, especially the most productive members of society. A better strategy would be to reduce these tax rates farther to create even more economic growth.

Huffington Post says ‘tax it all.’ Seriously.

Yesterday the Huffington Post’s Jeffrey Sachs criticized a recent Wall Street Journal editorial, claiming that the Journal “distorts the truth about taxes.”

In the Journal piece, the claim is made that even if we taxed all the income of the top one percent of taxpayers, that would not raise enough funds to close the deficit. Sachs takes issue with the numbers, he claiming that taxing “total income of the top 1% would close the budget deficit entirely.” He sees an error in the numbers the Journal uses, and I think he might be right. I can’t figure out the arithmetic the Journal uses.

But while Sachs takes great relish in showing — at least in his mind — that the Journal is wrong in its numbers, Sachs himself can’t be taken seriously. After all, he is proposing to tax 100 percent of the adjusted gross income income of the top one percent of earners.

While liberals might want to take all the income of our country’s high-earning people, this is a plan that can’t be taken seriously, especially by a purportedly serious person as Sachs. It could possibly work for one year — if you could pull off a surprise and make the 100 percent tax rate retroactive, after everyone has already earned the money for the taxable year. Any other plan will fail. That’s because we know that when marginal tax rates rise, people takes steps to have less income. Some decide to work and risk less, so they have less income. Others seek to shelter income from taxes, and since almost all such tax shelters are an economically unproductive use of funds, we are all poorer as a result. And some people lie and cheat in order to avoid taxes. But we can be sure that people will takes steps to have less taxable income as tax rates rise.

Try as we might, raising tax rates won’t generate higher revenues (as a percentage of gross domestic product), due to Hauser’s law. W. Kurt Hauser explains in The Wall Street Journal: “Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues. Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this ‘Hauser’s Law.’”

People react to changes in tax law. As tax rates rise, people seek to reduce their taxable income and make investments in unproductive tax shelters. There is less incentive to work and invest. These are some of the reasons why tax hikes usually don’t generate the promised revenue.

Any plan to reduce the deficit by raising tax rates will have to overcome this tax-avoiding behavior. Hauser’s law says this is not likely to happen.

The subtitle to Hauser’s article is “Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie.”

Hauser's LawHauser’s Law illustrated. No matter what the top marginal tax rate, taxes collected remain an almost constant percentage of GDP.

Flentje: Align taxation with spending

In a recent newspaper column and an appearance on the KAKE Television public affairs program This Week in Kansas, H. Edward Flentje of Wichita State University said that we should seek to align government spending with taxation.

Presently we have systems where one level of government — say the federal government — collects taxes, and then sends the money back to local governments. Often this is in the form of grants, which local governments must apply for. If successful, the local units must then spend the money in certain ways. Flentje says that this system of money government moving from one level of government to another is the root of “cynicism, distrust, and outright anger at government.”

Citing Alice Rivlin, Flentje listed a number of programs that the federal government should stop funding. Local government, instead, should take over these programs.

Flentze mentioned Sedgwick County Commissioner Richard Ranzau, who is not voting for federal grants, one of the ways in which tax money is sent from one level of government to another. Ranzau says he votes against these grants for several reasons. The money is borrowed, he says, and we shouldn’t pass on the cost of current government operations to future generations. Second, accepting grants makes us dependent on federal spending, which, since grants come with strings attached, gives the federal government more control over local governmental bodies. And third, Ranzau sees no constitutional basis or justification for many of these programs.

While taxing and spending locally is preferred to remote taxation and spending, I would add that many of the programs suggested to be left to local government, particularly education, economic development, and job training, are best left to non-governmental, that is, market solutions.

Align spending with taxing

By H. Edward Flentje, Professor at the Hugo Wall School of Urban and Public Affairs at Wichita State University

“Spending is more responsible when the government that spends is the government that must finance that spending.” As an advisor to the late Robert F. Bennett, during his term as Kansas governor, 1975-79, I heard those words spoken often by him.

At the time Governor Bennett was being besieged from two sides. On the one hand he faced a barrage from low-level federal bureaucrats dangling dollars with strings designed to tell him what state government should do and how to do it.

On the other hand, Kansas local officials were demanding that the governor and state lawmakers send a larger portion of state taxes to local coffers.

More recently, the political philosophy underlying Bennett’s words has led to the demise of much revenue sharing and hundreds of categorical grants across the country. Kansas lawmakers eliminated two sizeable revenue sharing programs aiding cities and counties in the aftermath of 9/11, as other states are doing in the current downturn.

Still, in the current year, roughly $1 trillion in taxpayer funds will move from one level of government to another, and often from a second to a third level of government, through countless state and national programs. Huge administrative structures and arcane formulas remain in place to carry out these transfers between governments. Most deficit spending and budget battles today at all levels of government are tied to these transfers.

This behemoth has become incomprehensible to the public breeding cynicism, distrust, and outright anger at government — national, state, and local government.

One of the clearest and most consistent voices on how to tame this beast is Alice Rivlin, founding director of the Congressional Budget Office, co-author of a recent bi-partisan deficit reduction plan, and long-time advisor to Democrats and Republicans, most recently Paul Ryan, who last week released House Republicans’ budget plan.

As lawmakers struggle with unsustainable finances, they would be wise to revisit Rivlin’s radical suggestions of nearly twenty years ago on dividing more clearly the jobs of national and state governments, in her words:

Devolution. The federal government should eliminate most of its programs in education, housing, highways, social services, economic development, and job training.

The productivity agenda. The states should take charge of the primary public investment needed to increase productivity and raise incomes, especially to improve education and skill training and modernize infrastructure.”

Rivlin’s proposed reordering of state and national spending is reminiscent of Bennett’s prescription that spending should be aligned with taxing. Her “productivity agenda” also parallels rhetorically at least Governor Brownback’s “growth agenda” for Kansas. To carry out her plan would call for state and local officials to address their broadened obligations and the revenue requirements associated with removal of federal funding in education, skill training, and infrastructure.

Public disenchantment is challenging as never before the century-long practice of taxing (or borrowing) at one level of government and sending those revenues for another level of government to spend. Aligning spending with taxing offers a guide as national, state, and local lawmakers work to place their respective jurisdictions on a sustainable financial course. This realignment will not happen overnight, but one can hope it will not take another century to complete.

Cost of tax compliance is high

Each year Americans spend enormous effort and cost on tax recordkeeping and compliance. A study by the Tax Foundation estimated the time and cost of complying with the federal tax laws, and found: “In 2005 individuals, businesses and nonprofits will spend an estimated 6 billion hours complying with the federal income tax code, with an estimated compliance cost of over $265.1 billion. This amounts to imposing a 22-cent tax compliance surcharge for every dollar the income tax system collects. Projections show that by 2015 the compliance cost will grow to $482.7 billion.”

In Kansas for 2005, compliance costs for the income tax were estimated at 27.1% of the tax collected. That’s almost $2.5 billion in total costs, or $877 per person. To place this number in context, Kansas spends about $2.9 billion on public schools each year.

Furthermore, the cost of complying with the federal tax code is highly regressive. Those earning less than $20,000 spent nearly 6 percent of their income on compliance. Those with incomes of over $200,000 spent just 0.45 percent of their income on compliance. Curiously, those earning less than $20,000 will generally pay no income tax, yet they still pay to comply. (Many of these low earners will qualify for various spending programs that are implemented through the income tax system.)

By simplifying our tax code, we could eliminate much of this cost, and return that effort to productive use. As Paul Jacob wrote in a commentary: “This complexity has costs. And not just to my sanity. A whole industry has risen to ease the burden of figuring out our taxes. One hates to begrudge anyone an honest living, but really, most of today’s tax accountants would better serve humanity in some other job.”

It is estimated that nearly half of all households will pay no federal income tax this year. Some will point out that all workers pay social security taxes, but as we’re told, that’s not really a tax, it’s the government saving for our future retirement. (Only the truly deluded believe this.)

For those who do pay taxes, they often aren’t aware, on a continual basis, of just how much tax they pay. That’s because for wage earners, federal and state taxes are conveniently withheld from their paychecks. Many people, I suspect, look at the bottom line — the amount they receive as a check or automatic bank deposit — and don’t really take notice of the taxes that were withheld. This makes paying taxes almost painless.

For property taxes, anyone who has a mortgage probably has these taxes incorporated into their monthly mortgage payment, so they’re not aware of the taxes on a monthly basis. Renters pay them as part of their rent. Everyone who trades with a business pays them, as taxes such as the sales tax are part of what people have to pay to buy something.

To increase tax awareness, we should eliminate the withholding of taxes from paychecks and from monthly mortgage payments. Instead, each month or year the various taxing governments should send a bill to each taxpayer, and they would pay it just like the rest of their periodic bills. In this way, we would all be acutely aware of just how much tax we pay.

Since tax withholding from paychecks and mortgage payments reduces our awareness of just how much tax we pay, it’s unlikely that governments will stop the withholding of taxes and submit a bill to taxpayers. Instead, it’s left to ourselves to remain aware of how much we are paying.

A curiosity of tax season is that many people are happy because they get a refund. And they’re delighted to get that refund, so much so that many will pay high interest rates on a refund anticipation loan just to get the money a little earlier. The irony is that by adjusting their withholding, they could take possession of much of that money during the year as they earn it.

The ‘tax expenditure’ solution for our national debt

While most critics of government spending focus on entitlements, regular appropriations, and earmarks, there is a category of spending that not many pay much attention to. The spending is called “tax expenditures.”

It’s a big issue. As economist Martin Feldstein writes in the Wall Street Journal, tax expenditures will increase the federal budget deficit by $1 trillion this year.

Tax expenditures are implemented through the tax system. It’s usually the income tax system, especially at the federal level. Taxpayers may receive tax credits, which reduce the tax that must be paid dollar for dollar. Many credits are refundable, meaning that if the taxpayer has no tax liability, the government will send the recipient a check. Examples cited by Feldstein include “$500 million annual subsidy for the rehabilitation of historic structures and a $4 billion annual subsidy of employer-paid transportation benefits.”

While supporters of many of these programs portray them as not costing the government anything, Feldstein writes that they do: “These tax rules — because they result in the loss of revenue that would otherwise be collected by the government — are equivalent to direct government expenditures.”

I argued this in testimony I presented to a committee in the Kansas Legislature this year, when it was considering restoring and expanding the Kansas historic preservation tax credit program. I told committee members: “We must recognize that a tax credit is an appropriation of Kansans’ money made through the tax system. If the legislature is not comfortable with writing a developer a check for over $1,000,000 — as in the case with one Wichita developer — it should not make a roundabout contribution through the tax system that has the same economic impact on the state’s finances.”

In that committee, not one member voted against this program, even though the committee has some members who consider themselves very fiscally conservative and hawks on spending.

Here in Wichita, the city council regularly steers spending to certain companies through the tax system by granting property tax exemptions and tax increment financing.

Feldstein describes problems with spending implemented through the tax system:

  • Politicians use tax expenditures to grow the welfare state. While proposing a freeze on discretionary spending, President Obama at the same time proposed an expansion of a tax credit program for child or elderly care.
  • Once enshrined in the tax law, these appropriations don’t have to be reauthorized each year. They’re on auto-pilot, so to speak.
  • Eliminating tax expenditures is looked on by Republicans as a tax increase, so they are reluctant to support their elimination. Felstein counters: “But eliminating tax expenditures does not increase marginal tax rates or reduce the reward for saving, investment or risk-taking.”
  • Tax expenditures distort the economy in harmful ways: “[Eliminating tax expenditures] would also increase overall economic efficiency by removing incentives that distort private spending decisions.”

Feldstein concludes: “Cutting tax expenditures is really the best way to reduce government spending. And to be politically acceptable, the cuts in tax expenditures must be widespread, requiring most taxpayers to give up something so that the fiscal deficits can decline.”

The ‘Tax Expenditure’ Solution for Our National Debt

The credits and subsidies that make the tax code so complicated cost big bucks. Reduce them by third and the debt will be 72% of GDP in 2020 instead of 90%.

By Martin Feldstein

When it comes to spending cuts, Congress is looking in the wrong place. Most federal nondefense spending, other than Social Security and Medicare, is now done through special tax rules rather than by direct cash outlays. The rules are used to subsidize a wide range of spending including education, child care, health insurance, and a myriad of other congressional favorites.

These tax rules — because they result in the loss of revenue that would otherwise be collected by the government — are equivalent to direct government expenditures. That’s why tax and budget experts refer to them as “tax expenditures.” This year tax expenditures will raise the federal deficit by about $1 trillion, according to estimates by the congressional Joint Committee on Taxation. If Congress is serious about cutting government spending, it has to go after many of them.

Continue reading at the Wall Street Journal (subscription required)

Topeka tax increment financing project struggles

In Topeka, a residential and retail project funded with $5 million of tax increment financing (TIF) is in trouble, as the following story from the Topeka Capital-Journal describes.

The project is titled the “College Hill Redevelopment District.” Wichita has its own College Hill neighborhood, and a residential project funded by tax increment financing there has not done well, either.

Both of these projects are residential, and recent times have not been kind to residential real estate. Taxpayers are at risk when TIF districts do not meet their projections. Developers have the opportunity to earn profits to offset the losses they may incur from time to time. Taxpayers, like government, have no ability to profit from successful projects to make up for losses.

College Hill project pushes on
All 25 townhomes, 24,000 square feet of retail space remain unoccupied

All 25 relatively new townhomes in Topeka’s College Hill Redevelopment District stand unoccupied.

So does its 24,000 square feet of retail space.

But developers behind the $30 million project to revitalize central Topeka’s College Hill business district say they remain committed. This month, they entered into a contract with a large retail brokerage firm that will work to bring in retail businesses.

Read the rest of the story at the Topeka Capital-Journal.

Tax day should bring tax awareness

On tax day, here are a few thoughts:

It is estimated that nearly half of all households will pay no federal income tax this year. Some will point out that all workers pay social security taxes, but as we’re told, that’s not really a tax, it’s the government saving for our future retirement. (Only the truly deluded believe this.)

For those who do pay taxes, they often aren’t aware, on a continual basis, of just how much tax they pay. That’s because for wage earners, federal and state taxes are conveniently withheld from their paychecks. Many people, I suspect, look at the bottom line — the amount they receive as a check or automatic bank deposit — and don’t really take notice of the taxes that were withheld. This makes paying taxes almost painless.

For property taxes, anyone who has a mortgage probably has these taxes incorporated into their monthly mortgage payment, so they’re not aware of the taxes on a monthly basis. Renters pay them as part of their rent. Everyone who trades with a business pays them, as taxes such as the sales tax are part of what people have to pay to buy something.

To increase tax awareness, we should eliminate the withholding of taxes from paychecks and from monthly mortgage payments. Instead, each month or year the various taxing governments would send a bill to each taxpayer, and they would pay it just like the rest of their periodic bills. In this way, we would all be acutely aware of just how much tax we pay.

A curiosity of tax season is that many people are happy because they get a refund. And they’re delighted to get that refund, so much so that many will pay high interest rates on a refund anticipation loan just to get the money a little earlier. The irony is that by adjusting their withholding, they could take possession of much of that money during the year as they earn it.

As a country we spend an enormous effort on tax recordkeeping and compliance. A study by the Tax Foundation estimated the time and cost of complying with the federal tax laws, and found: “In 2005 individuals, businesses and nonprofits will spend an estimated 6 billion hours complying with the federal income tax code, with an estimated compliance cost of over $265.1 billion. This amounts to imposing a 22-cent tax compliance surcharge for every dollar the income tax system collects. Projections show that by 2015 the compliance cost will grow to $482.7 billion.”

By simplifying our tax code, we could eliminate much of this cost, and return that effort to productive use. As Paul Jacob writes in his column for today: “This complexity has costs. And not just to my sanity. A whole industry has risen to ease the burden of figuring out our taxes. One hates to begrudge anyone an honest living, but really, most of today’s tax accountants would better serve humanity in some other job.”

Since tax withholding from paychecks and mortgage payments reduces our awareness of just how much tax we pay, it’s unlikely that governments will stop the withholding of taxes and submit a bill to taxpayers. Instead, it’s left to ourselves to remain aware of how much we are paying.

State taxes and unemployment rates

A few days ago someone left a comment to a post in this blog that argued — I think so, anyway — that low-tax states are not doing well in this economy, with the measure of “wellness” being the state’s unemployment rate. The author provided a link to an article titled Do taxes kill jobs?. That article contained a table of the states with columns for taxes paid per person and the state’s unemployment rate.

The author of the comment made this claim: “How are states with lower taxes doing in this economy? Not very well.”

Here’s a plot of the taxes paid per person and unemployment rate of a states. I didn’t include Alaska, as it is an extreme outlier value because of special circumstances in that state.

Is there a trend visible? If there is, it’s not pronounced.

State taxes and unemployment rates

Taxation: it’s more pervasive than you know

Here’s John D’Aloia’s “Trackside” column for December 20, 2009. In this article, John traces through the pervasiveness of taxation in many common products, and how long we must work each year to pay these taxes. Besides taxation, regulation is growing, too.

John D’Aloia lives in St. Marys, Kansas, where he serves on the city council.

Have you ever thought about how many taxes you are paying when you buy a product or a service? An amount is obvious when a sales tax is tacked on, but is that the only tax included in the price you pay? You know the answer — of course it is not, but the remaining taxes are out of sight, out of mind.

The Center For Fiscal Responsibility (www.fiscalaccountability.org), is a project of Americans for Tax Reform. As stated on its website, the mission of the Center is: “… to shed a light on government expenditures, and to promote transparency, accountability, and restraint in government finance.” It has taken on this mission in acknowledgment “… that the American people and its economy can best thrive and prosper when the role of government is limited and subject to the scrutiny of taxpayers.”

The Center has calculated the percentage that represents the hidden taxes paid for by each dollar spent for 13 commonly purchased goods and services. The Center’s analysis included: excise taxes, “Sin” taxes, telecommunications taxes, taxes on tourists, common purchases sales taxes, corporate income taxes, payroll taxes, property taxes, capital gains taxes, unemployment insurance taxes, workmen’s compensation taxes, and other payments businesses must make to federal, state and local governments. The results of the Center’s analysis shows that taxes represent the following percentages of the price:

Soda: 37.6%
Cell Phones: 46.4%
Gasoline: 51.2%
Meals Out: 44.8%
Hotel Stays: 50%
Landline Phones: 51.8%
Firearms: 45.6%
Domestic Airfare: 55%
Car Rentals: 60.6%
Cable: 46.3%
Beer: 56.2%
Distilled Spirits: 79.6%

And a drum-roll please for the taxes in the price of the 13th product: Cigarettes: 81.3%.

Another Center project is to calculate the “Cost of Government Day” for the federal government and for each state. The Cost of Government Day is defined as “the date of the calendar year on which the average American worker has earned enough gross income to pay off his or her share of the spending and regulatory burden imposed by government at the federal, state and local levels.” The 47-page long 2009 Cost of Government Day Report is available for reading via a link on the Center’s website.

The national average date to pay off governments is August 12th. Kansans have it a bit better. For Kansans, the date is August 4th. In comparison, the shortest period of indentured service is served by Alaskans who are free of working for government on July 11th. The longest period falls to citizens of the Nutmeg State — Connecticut residents work until September 7th to settle with all the government demands to which they are subjected.

The Report shows the impact of the explosion of federal government spending in 2009. For the period 1999 through 2008, the number of days the average citizen had to work to cover federal spending increased from 79.62 days to 89.94 days; in 2009, the number of days jumped to 110.88.

An interesting graph in the Center’s Report displayed the number of pages in the Federal Register each year from 1977 to the present. The Federal Register is published daily telling you what the Federal government is doing for you and to you. The more pages, the more regulations are being written to tell you how to live; the more pages, the larger is Leviathan’s appetite for power and your wallet. During the Reagan years, the average number of pages per year was 53,000. For the last seven years, the average number of pages has been 78,000. As of December 18th, this year’s Federal Register has 67,800 pages and counting, including 64 pages devoted to a proposed rule titled: “Nutrition Labeling of Single Ingredient Products and Ground or Chopped Meat and Poultry Products” and a 425-page notice “Medicare and Medicaid Programs; Quarterly Listing of Program Issuances — July Through September 2009.” I wonder how much these 425 pages enhanced medical care. More than likely, the principal effect was an added paperwork and compliance burden on doctors and hospitals.

Thomas Jefferson did not foresee the Federal Register, but he foresaw its ultimate impact when he wrote in his autobiography: “Were we directed from Washington when to sow, and when to reap, we should soon want bread.”

Get out and work hard — The Clerks are depending upon you.

See you Trackside.

Obama’s tax increase on tires

There’s a reason why some news is released on Friday night. Those making the news hope it won’t be noticed.

That’s probably why the Obama Administration waited until then to inform the country that it was imposing a tariff on tires imported from China. This tariff will probably protect some American jobs, but it will increase the cost of tires.

Lew Rockwell, in a post on his blog on the Obama tire tariff, is as plain as can be:

“To stem the alarming availability of inexpensive tires to American consumers in a depression, and to reward overpaid, underworked unions and inefficient US producers, Obama has imposed — unilaterally, as a dictator — a 35% tariff tax on Chinese tires. The Chinese correctly point out that this is an act of the rankest protectionism, and harmful to the cause of world trade.”

President Bush did things like this too: President Bush’s tax hike.