Forecast and Commentary from April 2006

I've been bad about bragging without documenting the correct calls of the past. This is from my stint at the Northwest Progressive Institute. I'm dragging those posts to this site and came across it today.

One of the dreadful experiences of understanding a little economics is to watch those approaching retirement vote against schools. They have dollars in the bank, their kids are grown, Why should they worry?

Another is looking at the enormous investment in housing. Homeownership is a beautiful thing, look at the employment and tax revenue coming in, How can we lose?

The May 2006 issue of Harper's has on its cover a man carrying a house on his back. The article is entitled "The New Road to Serfdom." In it there is a graphic I pray is not correct. It identifies 90% of debt since 2000 as being mortgage debt. That would mean only 10% of debt has gone to credit cards, college loans, and oh yeah, plant and equipment.

The current debt-driven economic activity is founded on housing investment. Investment creates jobs up front. Every kind of investment. But investment in essentially passive assets, like housing, does not generate economic well being down the road like productive assets do – education and equipment and so on. It generates interest payments.

The Harper's article is instructive, if a bit pat. It's great if you like charts, because that's what it is - a dozen charts with explanatory captions. It advises of a possibility that low interest rates lure people into enormous debt loads, possibly shackling the owner to his house for decades, making payments as equity shrinks, giving lie to his hope for a valuable asset at the end of his working years.

The situation is similar to the pension crisis. (See the Seattle Times 04.04.06 article.) For dozens of years people worked, in part, for the promise of an affluent retirement funded by the company's pension. Now, one after the other, the corporation's promise has been turned over to the government for fulfilment. The "self-made" men and women wait in line to see what can be salvaged of their expectations.

Bethlehem Steel, US Airways, Kaiser Aluminum, Pan Am, and locally Consolidated Freightways, Lamonts, and Longview Aluminum, have given up their pension obligations to the federal Pension Benefit Guaranty Corporation, which now has $56 billion in assets v. $79 billion in future liabilities.

The point I want to make is that today's sure bet is tomorrow's last place finisher. Do not look at dollars. Dollars are a great medium of exchange, but a lousy store of value. They're a good way to compare goods, as in eggs are expensive, cars are cheap, but it is wrong to assume that both are being measured by a standard unit which has value in itself. They are expensive and cheap relative to each other. The dollar is simply a medium to make the comparison.

If you want your house to be worth something, or your pension to be there, or your stocks to pay off, you need to build an economy that works, with workers who will be able and willing to pay the price you want. It is their demand, not some numbers on a bank statement, that ensures value. You can lock up your greenbacks and bury them in the ground, but without that growing economy, they'll turn to dust no matter how well you wrapped them. There is no "I've got mine, now you guys fend for yourselves." You can be robbed by inflation, crashing stocks, ballooning health care, etc., etc., etc., but at its root it will always be a weakening economy that could have been floated by sound investments and reasonable trade structures.

Taxes for schools will generate economically viable citizens and reduce unnecessary drains on public coffers in the future. These are the people who will buy your house, fund your pension (including Social Security) and make your stocks worth something.

Mortgage borrowing, federal debt, everyone a millionaire... It's a hoax that is often too disturbing to contemplate, so we don't. But someday we'll have to. Our hind ends will get blasted if we keep our heads buried in the sand.

P.S. - In my last post I forgot to mention that Paul O'Neill, the former Treasury Secretary under Bush, also termed "not acceptable" W's 1990 scam with Harken Energy that we covered earlier this year. "Did I ever do an untimely filing of Form F?" O'Neill said. "No. Any other questions?"

It's timely now because W's fellow travelers at Enron are in the dock this week.

I love to hate the B&O, but ...

The State's Business & Occupation tax (B&O) remains one of the worst taxes ever anywhere. Its base of gross receipts penalizes small business, growing business, in-state business, investing business. But worse is the myriad of baby B&Os that dot the Puget Sound region in the revenue architecture of three dozen cities. These baby B&Os are taxes separate in form and application from the State's version and until recently from each other. Their main purpose seems to be to create complexity, inefficiency and resentment.

So personal consistency was abandoned this week when I dropped a memo on Tacoma's Revenue Task Force proposing an expansion of the city's B&O as an alternative to city manager Eric Anderson's property tax based initiative. The memo is in two parts, a critique of Anderson's proposal and an outline of the alternative.

The alternative uses a reformed city B&O to target bigness and nonprofits, both of which are underrepresented at tax time. It drops well more than half of the smaller businesses from the rolls and thereby reduces compliance problems and further mitigates some of the bias of the State's B&O. Plus, it dispenses with a statutory dance with the legislature needed to squeeze the holdings of nonprofits into the city manager's proposed property tax base.

Of course, it is all still in the conceptual stage. The reception was pretty good at the Task Force meeting. But questions were many, and there was the requisite challenge from the Chamber of Commerce representative. At least it opens up the range of options. And it certainly enlivened the debate.

Get in the shoes of the taxpayer

We progressives make a big mistake when we insist that the only fair reform to state taxes is a personal income tax.

Bill Gates, Sr., busted the effort of the 2002 Tax Structure Study when he obsessed during legislative hearings about the virtues of the personal income tax. For one brief moment, he had the public's attention on this difficult subject. He ignored the Commission's first and best recommendation – to scrap the albatross of a B&O tax in favor of a subtraction method value added tax, and talked at length about income taxes. The public just shrugged it off as more of the same, and a great opportunity was lost. (Our "Basic Reform to the B&O Tax" accomplishes the intent of that recommendation, by the way, without all the folderol of scrapping one form and starting up a new one.)

Yes, a personal income tax is a fairer tax, and would be preferred absent the obvious political realities – and absent the tax structure realities facing the average taxpayer. The taxpayer is already faced with a personal income tax from the feds, and a payroll tax that is being operated as an adjunct to the income tax. She may be forgiven for not wanting another deduction on the pay stub.

I remember sitting in a House Finance Committee in Olympia and listening to Rev. John Boonstra of the Association of Washington Churches and the Tax Fairness Coalition. He gave impassioned testimony about how voters would respond responsibly if only they were given the straight scoop about the progressive advantages of an income tax. I thought it was a noble naivety, a feeling similar to the one from listening to Bill Gates.

Then the same feeling came over me the other night as I listened to the firefighters' local president Pat McElligott insist that voters would support new property taxes once they understood what they were getting for their money. Pat probably had the best case, but none of the three appreciated the difficulty of talking about taxes to the average citizen.

First, the word "tax" has been given the connotation of leprosy or incest in a targeted effort by the Radical Right to reduce the size and scope of government. Realizing that public programs like Social Security and schools have wide public support, the Right has chosen to focus on the financing mechanism – taxes. And they have largely been successful. People who would laugh if you told them they could have a house without a mortgage now sincerely think they should have public services without paying taxes.

Second, there is a cacophony of talk the average citizen has to sort through in dealing with taxes, and very little of it is economically informed. I watched a video produced by a city government with real citizens talking about where their tax money goes, how they didn't realize where it goes, and how they were happier when they realized it goes for this or that. Taxes don't "go" anywhere. They stay right in the community. More than eighty percent of your tax money goes to pay the salary of a fellow citizen. Match that with where your money goes at the gas station or the mall. This is an important thing to understand. If small business were not enthralled with fairy tale capitalism, they would understand that government not only provides services they need, but keeps market demand in the neighborhood.

Lastly, though, we need to see the tax structure from the taxpayer's point of view, not from the government's point of view. Instead of talking down to them, we need to get behind them and see things as they see them. State tax reform, as I said, often gets stuck on an income tax as if it were balanced. It is balanced from the perspective of state government, but not from the standpoint of the one who writes the checks. Voters distrust anything new in the realm of taxation, so when they don't see balance where it is advertised, they don't stop to listen to the rest of the pitch. Real balance would come with a turn to business taxes, broad-based, equitable business taxes founded on ability to pay.

Reforming the B&O in a way that generates revenue and ends the free ride of the big corporations will look good taxpayers (he said, with charming naivety).

Tacoma Taxk Force Underway

Tacoma's Revenue Task Force is accelerating rapidly. We may not be going very fast yet, but considering we started at zero mph, the acceleration is great.

The City Services Tax Task Force was nominally created by the city council, but more by the effort of new city manager Eric Anderson. He wasn't on the job six months before he recognized the long-term squeeze Tim Eyman and the rest of the deadbeat dads have put on the city's revenue.

At our first meeting we introduced ourselves and listened to the Finance Director and pretended we knew what we were supposed to be doing. At the second we heard from Anderson and got some of our own ideas on the table.

Anderson carried in from Iowa and Illinois an idea of spreading the cost of basic city services – police and fire – to all those who benefit. Seemingly an admirable sentiment, except when those free riders are powerful nonprofits like hospitals and private universities. In an earlier life, it had been Northwestern University. Anderson tried to enact a tuition tax, and "it took four days for the legislature to pass a bill outlawing the idea."

In Tacoma, it's the University of Puget Sound and the hospitals surrounding Wright Park. Two people from UPS are on the task force, David Droge, a professor in small group dynamics and task force chair, and John Hickey, from the business office. Nonprofits have two representatives as well, Liz Heath and Mike Renner.

Anyway, Anderson's idea of extending taxation to nonprofits is going to get a severe review. (Prior to our meeting with Anderson last week we were set to see a video on property tax. The television showed a few seconds of the news as the video was being cued. The image was of the effigy of somebody, maybe George Bush, in flames. "That's part of our video," Anderson said. "Right after my last meeting with the nonprofits.")

To me, anyway, the key is not the nonprofits, although the idea of taxing them is certainly the issue arousing the most heated debate. The big ones can afford to help the city out. The little ones we can let go. There's not enough revenue there to make it worth trying to collect anyway.

The key is Anderson's idea of using the property tax as the vehicle. At the outset, we need the okay of the legislature to tax the property of nonprofits. It's allowed, but only to fire districts. Then he proposes abandoning the city's B&O, abandoning the city's 1% of the sales tax, and expanding the property base by the holdings of the nonprofits. This new base would be responsible for perhaps 75% of the city's general fund expenditures. Since right now the property tax is only about one-fifth of revenues, even if nonprofits expand the base 30 percent as Anderson estimates, the shift of the load means a bump up in the rate of 2.3x.

Billing monthly is part of the plan, and that would take away some of the sting, but not enough to get by the voters, I'm afraid. And it will need to go past the voters, not only at the beginning, but periodically. That's the last part of the scheme, to submit increases to a "city services referendum" periodically to the voters, allowing them to choose whether they want the services or the few dollars a month they'd save.

There are two other major troubles connected to a big shift to a property tax base. First, the size of the increase would mean a renegotiation of tens of thousands of private contracts between landlords and tenants. Not a happy event for either party. Second, the property tax is not exportable. Tacoma residents traveling to Seattle to shop leave a little in the kitty in the form of the sales tax. Seattle residents in Tacoma should return the favor. Likewise, the B&O tax is collected from businesses operating in the city, whether or not they have property here. The property tax, by contrast, is paid almost exclusively by Tacoma.

I have an alternative based on using both the B&O and property taxes which retains the advantages of transparency and accountability from the Anderson proposal. I'll post it or a link to it after I submit it to the group next week.

One good thing, we changed the name from the City Services Tax Task Force to the Revenue Task Force. Try saying City Services Tax Task Force.

It may be Triple A, but it's the only game in town

Yes! I was accepted for the city services tax tacks ... er... task force! (We're still going to change the name.) This is like the only thing happening in the state in the realm of tax reform. I got a call informing me of my appointment along with an invitation to attend the Council meeting where they would be passing the resolution. It was quite the event.

The eleven of us arrived to a lukewarm greeting outside the Tacoma Municipal Building. Thirty or more picketers were crowded around the front door, union members not happy with a zero COLA and other elements of a contract proposal.

Inside, however, it was much warmer. There were nice seats reserved for us right up front in the Council chambers. We got to chat and exchange cards with each other and some of the Councilmembers came down to say hi. It was also tactful of them to put us first on the agenda and they had the grace to say some nice things from the dais into their microphones about our willingness to confront the daunting problems ahead and the seriousness of the mission and so on. Some of it sounded like encouragement for a suicide squad. Then we stood and introduced ourselves, and as a group turned to nod to whatever people might be seated behind us.

On a normal Tuesday at the Council meeting there are fourteen people in the seats, eleven staffers there for questions on ordinances and three citizens to take advantage of the open mike and free television exposure.

Imagine our surprise when we discovered that instead of fourteen, the place was packed. All those picketers and their families were now inside, holding their signs and looking at us. And they were happy to see us, too! I won't say they cheered or carried us from the room on their shoulders, but I do think it was more than polite applause.

Only later did I reflect that all those nice words from the Council may have been directed as much to them as us. Stressing the dire situation of the city's finances might have been a good way of softening up the opposition.

In any event, somebody indicated that we could leave if we wanted to, and we did. We congregated in the hallway outside, but pretty soon raised enough ruckus that the sergeant-at-arms came out and asked us to move along. We could show those union folks a thing or two.

This effort in Tacoma is just the first of many across the state, as cities get desperate enough to mention the "T" word (and I don't mean "task"). Eighty percent of Washington's municipalities face as grim a prospect as Tacoma, or worse. Many have had to make severe cutbacks already. And this is supposed to be a strong economy.

People do not realize the seriousness of the problem, but just as with the state's revenue picture, the light at the end of the tunnel is an oncoming train. Neither do people appreciate the importance of the services of state and local governments. These are not the accessories to our economy, but the frame, wheels and lubrication. You can't buy these out of the tip jar. Nor are they expendable. And they are good for the economy. Schools, roads, health care, police, fire protection, courts and the rest are "made in Washington."

We are lucky to have trade-related megamanufacturers like Microsoft and Boeing and Agriculture in our state, but even so, it has taken historic low interest rates and record borrowing to generate any job growth at all. Record personal borrowing. Record federal borrowing. It is not going to last.

We've got to come to some resolution of the problem of funding these most basic needs before the situation gets out of hand. Our new city manager in Tacoma has bailed us out with some skillful reorganization. At the state, the new governor is holding on with admirable determination to what little surplus she can find. We have about one more year. It's time to get to work.

Real Tax Reform

Washington's B&O tax is so bad that lawmakers won't touch it for fear it will fall apart completely.

The Business & Occupation Tax is a gross sales tax, meaning it is charged on the full value of every transaction, regardless of anything. Regardless of cost, so the effective tax on income is different for every business. Regardless of how many times the product has already been taxed, so this pyramiding overtaxes in-state companies and undertaxes out-of-state and large, vertically integrated companies. Regardless of investment or market position, so new and developing and investing companies are penalized, as well as small, homegrown companies. Just the thing for economic development, don't you think?

The first recommendation in the 2002 Washington State Tax Structure Study (Gates Commission) was to scrap the B&O entirely and replace it with a subtraction method value added tax. This recommendation preceded the much-ballyhooed call for a personal income tax. The Washington State League of Women Voters' State Tax Reform Update calls for a switch from gross sales to net sales. Both are designed to eliminate the pain and economic problems of taxing gross sales.

This can be done. It can be done in the context of reforming the B&O. It can be done and result in a relatively painless net increase in revenue of perhaps $1 billion per year. It can be done without major new bureaucracy. It can be done in a way that could eliminate the current special tax exemptions, or at least the rationale for them.

A full and detailed outline of just such a plan, developed by yours truly and Don Hopps, of the Institute for Washington's Future, is available online at the Effective Fiscal Policy Project. I wish I could tell you it was a work of genius, but it is really just the shortest distance between two points. The reason it hasn't been picked up in Olympia has more to do, I think, as much with the radioactive nature of the word "tax" as anything.

The B&O is a business tax. This reform makes it a rational business tax. As a business tax, it ought not to be as vulnerable to attack from the Eyman vigilantes. This would make the weakest link in Washington's tax structure into the strongest. It would be pro-competitive for Washington-based businesses. It would raise revenue largely by closing down the advantages now enjoyed by out-of-state suppliers and vertically integrated megaretailers like WalMart. And believe it or not, it is simple, as simple as significant tax reform can be. We simply subtract purchases from other tax-paying businesses from the current gross sales base. The six different rates of the current tax become one. The tax becomes rational. We don't even have to change the name.

Progressive Candidate Alert! This plan is good for small business. The current form includes a $100,000 standard deduction that would drop most small businesses from the tax rolls. Being independent would no longer mean having a higher effective tax rate.

Currently small business groups seem to be captive to the anti-tax conservative right that really serve larger businesses. Under this proposal tax incentives would be available for beneficial activities, not to the actors who are able to marshal political backing in Olympia.

More wartime tax cuts from Bush

If Tim Eyman is the poster boy for deadbeat dads, George Bush surely must be their king. The latest arrogance of another tax cut for the rich in a time of war while cutting social programs is nothing less than George playing poker with the mortgage payment, the kids college fund, and the grocery money.

See the breakout of the new tax cuts, at EPI's snapshot. More than $16 billion in new business tax cuts, $20 billion in capital gains tax cuts, and over $30 billion in tax cuts on dividends.

It doesn't bother him. I wonder where he'll be when the bills come due? For Medicare, for education, and for our social security. The social safety net may still be there, but it's now only a few inches off the ground. If you hit it, it's not going to save you any broken bones.

Up until George, I objected when people dismissed our social security system. It was phenomenally successful in its time. It raised millions of seniors from poverty and humiliation almost immediately when it was enacted. Later revisions lifted even more. Its financing is impeccable in terms of internal sufficiency. But social security is now the house, and the mortgage payment is going to the rich in the form of tax breaks.

I can think of two possibilities: (1) Bush doesn't know what he's doing and imagines like the Queen of Hearts that reality is determined by decree, or (2) He knows exactly what he is doing, and he is purposely dismantling the social programs that make us a civilized society. Maybe it's a combination, Bush is #1 and the people who maintain him in power are #2.

But there is a third. The enabler. The compliant, supine press, who faithfully report his lies as matters of opinion and the facts as contrary opinions. To the press he is not the deadbeat dad, but a man of strong principles, and if not principles, at least appetites. They are his poker buddies, his "friends on the force."

In the end, all will suffer. Even the deadbeat dad. If things aren't righted, it will be a tragedy. If things are righted, it will leave a scar. Better we should have done the right thing to begin with.

Tax Reform in Tacoma?

The city services assessment scheme proposed by Tacoma's first-year city manager will go to a citizens advisory panel in the next few weeks. Is it reform? Does it offer any hope for other Washington cities squeezed by the anti-tax dynamics of the past decade?

Outline of the Plan: The proposal put forward by city manager Eric Anderson would cut regular property taxes for all by eliminating the city's portion of the regular levy. It would eliminate utility taxes for all, as well as taxes on businesses, the city's B&O and gross revenue tax. In their place would be a probably bimonthly assessment, a tax based on property values, dedicated to the core city services of police, fire and libraries. Under Anderson's preferred option, the assessment would apply to all property owners other than houses of worship. A biannual referendum would set the level of the assessment. The remaining non-utility city operations would be financed by the existing local option sales tax, which would be retained.

Advantages: To many, the chief advantage would be the initial cut in effective taxes if the shift of some of the burden to nonprofits goes through. Utility bills would be smaller. Regular semi-annual tax bills would be 25% smaller, reflecting the shift of the city's portion. The new assessment would likely come every other month, staggered with the combined utilities bill.

If the nonprofits were left out of the tax base, average tax burdens would stay the same, but it might still be preferred by Tacomans. The new assessment would make a structure that is slightly less "lumpy," since it would reduce the regular property tax bill. Voters tend to prefer taxes that are not "lumpy." They prefer sales taxes to income taxes partly on this count. The bill is small and frequent, rather than large and infrequent.

To Anderson, the chief advantage is clarity. Citizens can support the city's services or not, in a simple vote. He doesn't have to be the bad guy. His reduction of 41 positions in the current budget was not as painless as it has been portrayed.

One advantage to getting the hidden taxes off the books is administrative simplicity, both for businesses and government. Another benefit may be in avoiding difficulties should some telecommunications sources be legislated away in the US Congress, as has been threatened recently.

Improvements in clarity and simplification may be modest reforms. There may also be some improvements in progressiveness, since property values relate generally to income and wealth.

The greater reform could be to adequacy. When people see directly the public good they are financing, they tend to step up to the plate. Andrew of NPI did research some time ago showing that, statewide, 75% of local levies passed, for parks, schools, libraries, fire and so on. Anti-tax deadbeats have a more difficult time distorting the situation in local elections. Their bureaucratic bogeymen and voodoo black holes play better in statewide elections where the direct public good is not explicit.

If that pattern of success for local levies continued, it would be good news. It has to be the calculus Anderson is contemplating. The city's revenue architecture has been crippled by anti-tax initiatives, and it cannot support projected demand for services past the next biennium. Over ten years the shortfall grows to $100 million. Police, fire and libraries comprise two-thirds to three-quarters of all tax supported services.
But it is a vote. And the prospect for failure could well increase should economic times get harder. Note, the referendum would be on increases from a base level carried forward from the previous vote.

Is the city council be abdicating its function as a representative body by putting basic city budgeting to a vote? Anderson believes it is "too late" for government representatives to get control of revenues. The sequence of anti-tax initiatives which occasioned the current contortions, he thinks, also removed effective control.

It is true that Tim Eyman and his anti-government fellow travellers in the Republican party have intentionally eroded confidence in representative government as a campaign tactic. This is very unfortunate. The complex issues facing our society need to be decided by careful study and deliberation at each level, not by knee-jerk reactions to hot button campaigns.

Making the citizens face a vote which is explicit can only help in getting the public's concept of government back closer to reality. Government is schools, police, libraries, parks, fire protection, roads, courts, and so on. It is not the caricature of bureaucrats and lazy clerks painted by the wingnuts.

Most councilmembers have been cautions in their support. One, Mike Lonergan, was adamant in his opposition. In his comments he made the case for representative government, but only in passing. He is much more alarmed by the prospect of taxing nonprofits. He is past head of the Tacoma Rescue Mission and current executive director of a private school.

Is taxing nonprofits regressive? This is not clear. One can envision opponents of the assessment wheeling nursing home residents into the council chambers. But prosperous hospitals and schools would reap a windfall should they not be included in the tax base, since their utility and business taxes would disappear. Nonprofits are receiving city services without paying full price now, a de facto subsidy by taxpayers.
The question may turn on the magnitude of net effect, the difference between current business and utility taxes and the contemplated property assessment. And remember, the entire scheme needs to be authorized by the state legislature. The precedent for taxing nonprofits currently lies only in special fire districts.

Personally, I am in favor of broadening the tax base as much as possible. While there are many nonprofits who might feel a pinch, there are plenty of others who are hiding from taxes in their nonprofit status. In any event, there ought to be ways to tweak the categories or assessment criteria to meet the worst situations.

For those who may worry that the loss of business taxes means the contribution of non-city residents will be diluted -- Don't. Commercial property values directly reflect their access to customers outside the city limits.

The specific effects will need to be sorted by the task force.

No other action on the fiscal plight of Washington's cities is in sight. Virtually all face the same grim future as Tacoma. Any public debate is better than none. This alone is a compelling argument for going forward with the process.

The last word needs to be, This is not about taxes. It is about responsibility. Funding city services cannot be a matter of good luck and accounting gimmicks. Tacoma is one place where they are doing more than sitting and wringing their hands. They are looking for answers. The rest of the state is watching.

Economic development vs. tax giveaways

While I have great respect for Chris Gregoire, and was enormously impressed with the outcome of the last legislative session, I worry that her economic development plan is not very sophisticated. I saw the coordinator of her GMAP process on TVW talking about economic prosperity (is there another kind?), and she seemed to indicate it the Governor’s efforts are the usual parade of officials showing corporate potentates around the local industrial sites and promising to "work with them."

There is a certain intuitive attraction to the notion that economic development means luring new companies to your shores, but the idea fails the direct look test. Every other state is doing the same thing, the tax breaks and siting bonuses tend to compete away any net positive economic impact. Most problemmatic may be that in order to get the concessions, you need to move your company (or threaten to move, as with Boeing).

State incentives ought not to be targeted to individual companies, or even industries, but to activities that are beneficial. Let the state reward investment in human or physical capital – the activity itself. Let the market invest where the entrepreneurs see the advantages coming.

If we could ever get the small-minded, me-first anti-tax vigilantes out of the way, the state itself could invest to great effect. Transportation infrastructure, for example, is a public good that yields many times its purchase price in real money to real businesses and real individuals from reduced costs and increased opportunity. (The opposition to the gas tax in the recent election was numbing in its stupidity.) A major advantage of infrastructure is that it is not portable, as for example, are the proceeds of a tax break. Infrastructure is here for anyone who wants to be in Washington.

Education is great. Excuse me. Good education is good, great education is great, economically. Employment is high. It improves individuals’ lives. Reduces burdens on other state services. Provides spin-off possibilities. Draws revenue from other states. Focuses communities. Supports local trades and industries. (I get teary-eyed.)

Aside from direct investment, there are three other mechanisms for the state to increase the number and quality of jobs and thus the climate for business: (1) direct hiring, (2) reducing the cost of Washington-made goods, and (3) progressive tax reform.

Direct hiring may seem too obvious, but there is a debate. The Heritage Foundation will tell you that the taxes necessary to fund government programs are themselves obstacles to economic development. The facts are arithemetically and logically conclusive, but lie in the opposite direction.

A dollar spent in taxes hires a worker in the taxing jurisdiction. A dollar spent by a private individual buys a product or service that may be, but often is not, in the taxing jurisdiction. This dilution of the first dollar spent echoes through the economy. (Notice that the person of part one then becomes the person of part two, so nothing is lost, only the government job is gained. This is the root of the concept of the economic multiplier.) The Governor’s insistence in fulfilling the class size and COLA mandates for teachers will do more for Washington’s economy than any number of fenced assembly plants.

[I’m getting off the point here, but one thing that really bugs me is when construction projects are treated as "job producers" and cutting teachers salaries or laying off people in government is called "management efficiency." Maybe this is purposeful spin, maybe it is sincerely believed, but it is wrong.]

Quickly! (Economist rants are so dull)

Reducing the cost of Washington products means more will be bought and production will go up. State government can do this by favorable taxation and by efficient regulation, as well as by infrastructure. The state’s B&O tax is really, really bad at this, since its pyramiding burdens in-state firms while letting out-of-state firms and big, vertically integrated corporations (Wal-Mart) skate.

Progressive taxation. Poor people spend all their income. If they get more income, they will spend more. It’s the multiplier again. The three most fundamental problems (it’s always three, isn’t it) with the our state's notoriously regresssive tax system are: it’s morally offensive, the poor can't produce enough revenue anyway, and it reduces spending in the local economy. Better we should tax people who have the money and let low-income people help local businesses by buying what they need to survive.

Economic development cannot be accomplished by competing with other states. It's a race to the bottom. Promote investment in human and physical capital, emphasize our natural advantages, and do what we can internally to create good jobs and an attractive base of demand.

Sunday, December 04, 2005

Tacoma to study maverick revenue scheme

In a special budget meeting Wednesday night, the Tacoma city council agreed to explore a singular remedy for its projected revenue shortfalls. The idea, which was put up by first-year city manager Eric Anderson, would connect key city services to a new tax at levels explicitly determined by the voters. The council agreed to convene a citizens advisory group to examine the plan.

The scheme is basically a monthly city property tax dedicated to police, fire and library services -- the core of city government. Current B&O, utility and other taxes would be eliminated -- including the city's portion of the existing property tax. In Anderson's initial outline, the tax would extend to all property holders other than houses of worship, which would include private schools and universities, nonprofit hospitals, charities, and others. A base level would be set by a city-wide vote, and any subsequent increase would go to a referendum.

While it is not exactly an act of desperation, Anderson's idea is definitely, as Mayor Bill Baarsma said, "a long shot."

The referendum element means that citizens will have the means to decide if they want the tax or not, and if they don't, they will see the effect in services. It thus makes voters responsible for balancing the budget. When Anderson was asked if this wasn't giving up on representative government, he said, "it's too late," meaning that the state initiative process has already degraded the role of city councils and legislatures in this area.

In Tacoma, councilmembers were careful to limit their support to the process of exploration, not the plan itself. A task force of as-yet-to-be-named stakeholders and citizens will be convened early in 2006. Should the idea pass muster there, an advisory referendum is targeted for June.

Should that pass, the result would then have to go through Olympia. Cities are creatures of the state and they cannot unilaterally institute taxes, and Tacoma would need enabling state legislation.

Virtually all cities have been squeezed since the passage of I-695 and I-747, the anti-tax, anti-government initiatives of the late 1990s. This effort will be watched with interest from both sides of the mountains.

COMMENT:

The state had better be free with its authorization, should it ever get to that point. They have no business obstructing any effort of a city to address its fiscal problems. It was the state through initiatives and by legislative action that opened these wounds.

Something has to be done. Cities are in an impossible position long-term. And we've gotten to the long term. It's a shame Tim Eyman doesn't have to figure this out.

I'll have a more complete take on it for you next week, including a note on the issue of abdicating representative government.

True tax reform

"Reforming" taxes under Dubya has been like reforming the number of limbs on your body or reforming the number of apertures in your head. The budget, the economy, and the truth have been bludgeoned all out of shape by tax "reform" from the Republicans. Dubya and his compliant Congress have rammed through giveaways that have, to put it mildly, exacerbated the disparity between the rich and the rest of us.

With tax cuts, as with the War in Iraq, the rationale changes to fit the changing PR requirements. Originally it was "because it's your money" (and the government shouldn't be running surpluses with your money). Then the economic downturn of 2001 offered the chance to say, "to stimulate the economy." The design of the tax cuts did not follow that stated goal, since they were targeted to the rich and not to the middle or lower classes. And the effect certainly has not been a stimulated economy. See the Economic Policy Institute's "The Boom that Wasn't" at epi.org.

A real reform comes from the Progressive Policy Institute's tax man Paul Weinstein, Jr. See "Family Friendly Tax Reform" at ppionline.org. (I have some difficulties with PPI, the "Third Way" descendent of Clinton's Democratic Leadership Council, but they're right on track here.)

Progressive candidate alert: Weinstein's scheme is politically do-able. When the pendulum swings back this way, people will want to see real change. This is not extreme. It's a first step. And it's an object lesson on the differences between the political sides. It's simple. It's economically sound.

The PPI proposal would eliminate 68 tax breaks and replace them with four new tax incentives that would come in "above the line" and thus be available to substantially more taxpayers. The $436 billion in net new tax relief to American families would come from consolidating current breaks and cleaning up some of the bias in the code toward wealth and privilege. There's plenty more to be done to make taxes adequate, but this goes a long way to making it more fair.

The four basic elements are easy to understand: college, homes, families and pensions.

1. A refundable college tax credit would provide up to $3,000 per year to students. This is more generous and simpler than the current system.
2. The home mortgage deduction would move to the front page of the tax form. Currently only one-half of the 72 million homeowners itemize, and thus are able to take the credit.
3. A family tax credit would replace three existing incentives and provide greater benefits to more families. Right now a taxpayer has to sift through more than 200 pages of instructions and other material to apply for the several different breaks.
4. A universal pension would replace IRAs and the other 15 existing accounts with one simple, portable retirement account for all. It would even provide a $500 stake to get people into the UPs.

The tax code has been abused, not reformed by Republicans. Tax breaks during wartime, in itself, is a concept which demonstrates Dubya's Queen of Hearts mentality.We are on the cusp of going from a bell curve economy, with a strong middle class, to a barbell economy, with wealth at the top and poverty at the bottom and a middle class that is stressed, thin and unable to support the kind of society we have long taken for granted as our right. Weinstein has rooted out some of the most egregious giveaways to the rich and used them to pay for the net cost of real "reform" and "relief."