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Out of Control Policy Blog Archives: 1.27.13–2.2.13

New Reason Study Calls for California Tax Reform

In his State of the State Address last week, California Governor Jerry Brown asserted, "California is back, its budget is balanced, and we are on the move." Sadly, economic reality belies the governor's optimism. California still has the third-highest unemployment rate in the nation at 9.8%, a rate 26% higher than the national average of 7.8%. It has the highest income tax rate in the nation, the highest state sales tax, the highest gas tax (tied with New York), and the eighth-highest corporate tax rate (and the highest rate west of the Mississippi River, making it even less competitive with its neighboring states). Add to this the fact that California has the worst credit rating in the nation (now tied with Illinois), mainly due to its significant debt and hundreds of billions of dollars in unfunded pension and retiree health care liabilities, and one of the worst—if not the worst—business climates in the country. The passage of Proposition 30, with its roughly $50 billion in new tax increases over the next seven years, last November certainly won't help matters. This is certainly not the track record of an economic powerhouse, or even a state on the upswing.

There are many ways to turn around the California's fiscal and economic fortunes—cutting spending, eliminating burdensome regulations, privatizing government services, ditching boondoggles like the California high-speed rail plan, implementing real pension reform, etc.—but today I would like to focus on how tax reform could help to revitalize the state. In addition to its high general personal income, corporate, and sales tax rates, California's tax code is plagued by numerous special carve-outs for politically-favored businesses and industries. In a new study by Reason Foundation and the Howard Jarvis Taxpayers Foundation, I highlight some of the more egregious corporate and sales and use tax credits, exemptions, and deductions offered by the state and argue that eliminating such tax breaks and using the "savings" to lower the overall corporate tax rate would promote a better business climate, and thus help improve the state's economy.

The results of such tax reforms could be significant. The Franchise Tax Board estimates (see page 10 of this California Senate Office of Oversight and Outcomes report) that if the Research and Development Credit alone were eliminated, the overall corporate tax rate could be reduced by about 14 percent, thus improving the business climate for all industries. If some of the other tax breaks discussed in this report were also eliminated—including the Accelerated Depreciation of Research and Experimental Costs, Double-Weighted Sales Factor, Film Credit, Low-Income Housing Credit, Hiring Credit, Percentage Depletion of Mineral and Other Natural Resources, and Expensing of Timber Growing Costs breaks (see Table 1 on page 14 of the study)—the Reason-Howard Jarvis report finds that California could likely reduce its overall corporate tax rate by more than 20 percent.

The infamous Solyndra case is a perfect example of why tax breaks are a bad idea. In addition to the $528 million in federal loan guarantees that taxpayers lost when the company went belly-up, the company also wasted $25 million in California state tax exemptions from a "green energy" tax credit program. Rather than trying to play favorites or cater to special interests through preferential treatment in the state's tax code, politicians should ensure that the playing field is level, and that tax rates are as low as possible, and otherwise let the free market and the choices of consumers and entrepreneurs—through the forces of supply and demand—determine which businesses and services are most desirable and best meet their needs.

When the state encourages economic activity in one segment of the economy—be it through tax breaks or direct subsidies—it necessarily discourages economic activity in all other segments of the economy by making them relatively less competitive. These opportunity costs are often ignored by policymakers. The error is compounded when you consider that much of the tax breaks end up being used for business activity that would have occurred with or without the tax breaks.

If this were not enough, another negative consequence of such tax breaks is that they breed even more special-interest lobbying. The more industry groups, environmental lobbys, or other special interests see that lobbying "investments" pay off, the more money is directed to lobbying Sacramento and the less is put to productive use in the economy.

If California wants to jump-start its economy and become a place that Gov. Jerry Brown and taxpayers across the state can be optimistic about, a good start would be to simplify and reduce its onerous taxes. The new Reason-Howard Jarvis study offers some recommendations about how to go about this:

 

  • Eliminate special tax treatment wherever possible, particularly in cases where:

 

a)     The tax break’s purpose is not clearly defined,

b)     The tax break is not serving its intended purpose or has outlived its intended purpose,

c)     The tax break is narrowly tailored to benefit a specific industry or type of business, or

d)     The tax break is clearly an example of the government picking winners or losers for ideological or special-interest reasons.

  • Wherever possible, lower broad tax rates down to tax break levels, rather than raise tax break levels up to broad tax rates.

 

  • Require a clear statement of purpose and performance measures for each tax break—including existing tax breaks without a clear statement of purpose or relevant performance measures—in order to facilitate evaluations of the impact of tax breaks on taxpayers and the state budget.
  • Eschew static analysis of state tax breaks and return to dynamic analysis of their effects on taxpayers and the state budget.
  • Establish a sunset commission to periodically evaluate tax breaks and other state regulations. A citizen’s commission would aid the legislative sunset commission similar to the state of Washington model. Adopt legislation requiring that both existing and future tax breaks must be evaluated every 5 or 10 years. Tax breaks not acted upon within this period would automatically be repealed.
  • Adopt a BRAC-style commission (similar to that used to close unneeded federal military bases) to evaluate existing tax breaks and regulations. The two-thirds supermajority makes it difficult enough to repeal existing tax breaks. Under such a process, an independent panel of taxpayers, perhaps with additional representatives from the Franchise Tax Board, State Board of Equalization, and Legislative Analyst’s Office, would be appointed to evaluate and recommend tax breaks for elimination. The recommendations, once approved by the governor, would be submitted to the legislature, which would not be allowed to make any amendments and could only vote up or down on the entire package. A simple majority of both houses would be required to approve the recommendations.

 

See the California tax credits study here.

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Reason-Rupe Poll: 52 Percent of Americans Say Sandy Hook Is Being Exploited for Political Gain

 

As gun rights and gun control are debated in the wake of the Sandy Hook school shooting, a majority of Americans say elected officials are “exploiting” the tragedy.  The new Reason-Rupe poll finds 52 percent of Americans believe that elected officials are exploiting the tragedy for political gain, while 41 percent feel elected officials are acting responsibly. 

Democrats differ sharply from independents and Republicans on the issue. Seventy-one percent of Republicans and 60 percent of independents think the tragedy is being politicized, while just 32 percent of Democrats believe so.

Reason-Rupe finds that over half, 51 percent, of Americans say people “should be allowed to own assault weapons,” while 44 percent say people “should be prohibited from owning assault weapons.” Once again there is a substantial political divide: 68 percent of Republicans and 57 percent of independents say assault weapons should be allowed. However, just 33 percent of Democrats agree.

Democrats, who normally count on the youth vote, may be surprised to find that 70 percent of 18-24 year-olds and 58 percent of 25-34 year-olds say “assault weapons should be allowed.” Similarly, Republicans, who usually rely upon the senior vote, will find that 57 percent of 55-64 year-olds and 61 percent of people over the age of 65 say assault weapons should be prohibited.

As Congress gets ready to debate new gun restrictions, just 27 percent of Americans say the federal assault weapons ban that expired in 2004 would’ve helped avoid the tragedy if it were still in place. Over two-thirds, 67 percent, say the ban would not have helped avoid the shooting.

The public is split on what might have helped prevent the Newtown tragedy. When asked what might have helped prevent the shooting, 24 percent proposed better mental health treatment, 19 percent said stricter gun laws, 18 percent stressed better parenting and 17 percent suggested armed guards.

The poll also found little consensus when respondents were asked, open-ended, to actually define an assault weapon. Assault weapons were described as fully automatic machine guns in 29 percent of the responses. Twenty-seven percent of the answers defined assault weapons as any gun that fires rapidly, 23 percent focused on the size of the magazine or clip and 17 percent described them as any gun having the ability to fire multiple rounds.  

The Reason-Rupe poll conducted live interviews with 1,000 adults on mobile (500) and landline (500) phones from January 17-21, 2013. The poll’s margin of error is plus or minus 3.8 percent. Princeton Survey Research Associates International executed the nationwide survey.

Of those surveyed, 52 percent approve of the job President Barack Obama is doing and 42 percent disapprove. The public is split over how the president is handling the economy, with 48 percent approving and 47 percent disapproving. Just 17 percent of Americans approve of the job Congress is doing and 74 percent disapprove.

The full poll is online here (.pdf) and additional Reason-Rupe poll resources are available here. This is the latest in a series of Reason-Rupe public opinion surveys dedicated to exploring what Americans really think about government and major issues.  This Reason Foundation project is made possible thanks to the generous support of the Arthur N. Rupe Foundation.

 

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Poll: 79 Percent of Americans Say Federal Spending Hasnít Improved Americaís Quality of Life, 49 Percent Support Going Back to Clinton-Era Spending Levels

Adjusted for inflation, federal spending per capita has increased approximately 39 percent since 1992, yet a new Reason-Rupe poll finds 79 percent of Americans believe the government’s spending increases have reduced the quality of life or made no impact on the quality of life in the country during that time.  Forty percent say the increases in federal spending over the last 20 years reduced the quality of life in the country and 39 percent say the increases had no impact on the quality of life. Just 17 percent feel federal spending increases improved the quality of life in America.

Nearly half the country, 49 percent, says it would help the economy if the federal government returned to Clinton-era spending levels, while 30 percent believe it would make no difference and 12 percent think returning to those spending levels would hurt the economy.

An even larger number, 61 percent, support cutting military spending back to the amount that was spent before the wars in Iraq and Afghanistan began, while 25 percent oppose such a reduction.

In an open-ended question about what specific things the government spends too much money on, defense spending took the top spot, named by 21 percent. Congress itself—its pay and perks—was singled-out by 17 percent, followed by foreign aid at 13 percent and welfare and social programs, also at 13 percent.

When asked, open-ended, how much money the federal government wastes, the median response was that that the federal government squanders 50 cents out of every tax dollar.

Two entitlement reforms that were often mentioned during the fiscal cliff negotiations—raising the retirement age and means-testing Social Security and Medicare drew little support in the poll. Sixty-six percent of Americans oppose raising the retirement age from 65 to 67, while 31 percent favor doing so. Similarly, 56 percent oppose means-testing Social Security or Medicare, 40 percent favor means-testing the programs.

When asked, open-ended, what President Barack Obama’s top priority should be during his second term, 29 percent say the economy, 19 percent would like him to focus on jobs and 13 percent say balancing the budget and reducing the deficit.

The Reason-Rupe poll conducted live interviews with 1,000 adults on mobile (500) and landline (500) phones from January 17-21, 2013. The poll’s margin of error is plus or minus 3.8 percent. Princeton Survey Research Associates International executed the nationwide survey.

Although Congress recently set aside the government’s borrowing limit until May, 64 percent of Americans say Congress should not raise the debt ceiling and 29 percent say it should be raised.  If Congress does not raise the debt ceiling, 25 percent expect it would create a “major” economic crisis, 30 percent think it would cause a “minor” economic downturn and 22 percent say it would help the economy.

Three-quarters, 75 percent, of Americans consider the national debt a “major problem” that must be addressed now, 20 percent say it is a major problem that should be addressed when the economy has improved and just 3 percent of Americans say the debt is “not much of a problem.”

Looking back at the past year, 53 percent of Americans say Congress had a negative impact on the economy and just 10 percent think Congress made a positive impact on the economy. Given the opportunity to use any word to describe Congress, the public overwhelmingly chose words like inept, incompetent and selfish.  Overall, 17 percent of Americans approve of the job Congress is doing and 74 percent disapprove.

Meanwhile, 52 percent approve of the job President Obama is doing and 42 percent disapprove. The public is split over how the president is handling the economy, with 48 percent approving and 47 percent disapproving.

The full poll is online here (.pdf) and additional Reason-Rupe poll resources are available here. This is the latest in a series of Reason-Rupe public opinion surveys dedicated to exploring what Americans really think about government and major issues.  This Reason Foundation project is made possible thanks to the generous support of the Arthur N. Rupe Foundation.

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With LaHood Leaving, Who is the Next Secretary of Transportation?

Today’s news that Secretary of Transportation Ray LaHood is leaving the Obama administration led to shrieks of joy from transportation entities across the country. The next few days will be full of thank you’s for what LaHood has accomplished. And a few columnists may even reminisce about the death of bipartisanship—a Republican who could work with Democrats. But the reality is that LaHood has been one of the least effective modern transportation secretaries ever. And transportation has a history of being bipartisan that will not change with LaHood’s departure.

Most transportation research and advocacy groups view LaHood as a nice guy who is completely and utterly clueless regarding transportation. And many of these same groups have been extremely disappointed with both President Obama’s handling of transportation and the White House’s lack of involvement in MAP-21. LaHood wanted to be named Secretary of Agriculture not Secretary of Transportation. This New York Times article from 2009 details his feelings on transportation. I previously explained why LaHood was the least qualified of any U.S. DOT Secretary. But what most galled transportation types was the fact that LaHood had absolutely no interest in learning more. 

The 2011 Moving Ahead for Progress Act (MAP-21) surface transportation bill was passed primarily because Senator Barbara Boxer and Representative John Mica wanted a bill. Boxer alone did much of the heavy lifting with very little help from the White House. To be fair to the President, it is challenging to know if he does not care about transportation or, if by relying on Mr. LaHood for information, simply misunderstands how an affective transportation system works. When former T&I leader James Oberstar proposed a transportation bill in 2009, President Obama maintained that transportation was not a priority. Mr. Oberstar and Democrats lost the next election. And the passed MAP-21 bill was significantly less friendly to Democratic interests than a bill passed in 2009 would have been. To call Mr. LaHood’s departure a boon for the U.S. transportation system is an understatement. 

The focus now turns to his successor. There are at least five prominent candidates. And the White House may pick a dark horse candidate who is not on this list. 

1) Ed Rendell: Rendell has been a mayor of Philadelphia, and a governor of Pennsylvania and has worked in policy. He helped set up Building America’s Future to address infrastructure challenges and he has the existing relationships to work with members of Congress. And as a moderate Democrat from a swing state he could be politically useful to the administration. Rendell’s background and his ability to work well with others makes him the strongest candidate. 

2) Antonio Villaraigosa: Villaraigosa has shown a passion for infrastructure. And the President would like to add a Hispanic to his cabinet. But Villaraigosa has no statewide experience. He is not as much a national figure as Rendell. And he is more of a cheerleader for transportation than an analyst. The next Secretary of Transportation should be part cheerleader, but he/she also needs to understand transportation and be able to balance facts objectively. 

3) Steve LaTourette: LaTourette abandoned transportation in the House to serve on Appropriations. He announced in early 2012 he wanted to reclaim his seniority on the Transportation and Infrastructure committee and run for Chair. And, the House steering committee's decision to give the gavel to somebody actually on the T & I committee played a promiment part in LaTourette's decision to retire from the House. LaTourette may not have the best personality for a cabinet position as he has a bit of a temper.  

4) Deborah Hersman: Hersman is serving as National Transportation Safety Board (NTSB) secretary. She has been on the NTSB board since 2004 and has served as the chairman since 2009. Before her time at the NTSB she served 12 years on Capitol Hill. Hersman allows President Obama to appoint a safety expert to replace LaHood. And Hersman is the rare DC type who does not have strong partisan feelings. Hersman has the necessary transportation background and her Master’s Degree in Conflict Resolution is the perfect degree for somebody leading a cabinet department.

5) James Oberstar: Oberstar has been involved in transportation for much of his life. He was administrator on the Committee for Public Works before he served in the House. While Oberstar is dedicated to transportation, there are several reasons why he is not the best pick. He and the President got into a political battle in 2009 about the next surface transportation bill. Oberstar wanted the President to raise the gas tax to pay for transportation and the President did not want to devote any resources to transportation. In a memorable photo-op Oberstar and ranking minority leader Mica claimed that they were trying to put America back to work but the President was stopping them. Oberstar is a major supporter of using gas tax funds to pay for recreational cycling and hiking, which is a troubling idea with today’s constrained resources. He is adamantly against private sector involvement of any kind. In the past, he has preferred that a project not get built to using one dime of private sector related funding. He even argued that private sector spaceflight was dangerous. Rendell, Villaraigosa and Hersman would all be better choices.

6) Gene Conti: Conti is the darkhorse candidate. He has a detailed background in transportation. He has served in Maryland, as DOT secretary in North Carolina and as deputy assistant secretary for the USDOT under President Clinton. Conti was able to professionalize the NCDOTs finances and make it one of the most efficient DOTs in the country in his 4 years. Conti has had a few issues such as his unhappiness with his North Carolina state salary. Still Conti is an organizational genius and the only of the sixth candidates on this list with actual experience at USDOT. 

Transportation stakeholders are watching President Obama. Hopefully this time he will pick a transportation secretary with some actual transportation knowledge and not some guy from Illinois whose real job is to teach the Treasury Secretary proper Washington etiquette. (Note: Ray LaHood never succeeded with Tim Geithner.) The next DOT Secretary will have a big job that includes crafting a new surface transportation bill in less than 2 years, creating a national framework for freight, and integrating intelligent transportation systems into daily life. The stakes have never been higher for choosing a knowledgeable transportation leader who is also politically savvy. Obama’s first pick was a major disappointment. The country cannot afford for him to miss a second time.

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California Shouldn't Raise Minimum Wage

Democratic lawmakers in Sacramento, emboldened by their new supermajority status, are now tempted to use their added power to push an aggressive legislative agenda. One such effort, which they have tried, but failed, to implement during the past several years is an increase the state’s minimum wage, currently $8 an hour. Assemblyman Luis Alejo (D-Salinas), has introduced AB 10, which would increase the minimum wage to $9.25 an hour over three years and tie additional increases to inflation growth thereafter.

In a recent column for the Orange County Register, I argue that while a minimum wage might sound like a good and compassionate policy, it actually destroys job opportunities for many (not to mention the damage it does to the freedom to voluntarily agree to the price of one's labor).  The recent imposition of a living wage ordinance on large hotels in the City of Long Beach, California, is a case in point.  Consider the following excerpts from the O.C. Register article.

In the November 2012 election, voters in Long Beach overwhelmingly passed Measure N with 64 percent of the vote. The measure, pushed by labor unions such as Unite Here 11 and the Los Angeles County Federation of Labor, AFL-CIO, requires hotels with 100 or more rooms to pay their employees at least $13 an hour and guarantee annual raises.

After the passage of Measure N, Christine Petit of the Long Beach Coalition for Good Jobs and a Healthy Community, which sponsored the measure, crowed, “This ordinance means a lot to the workers, who will get the wage increases just in time for the holidays.” But this was a case of “Be careful what you wish for.”

In response to the measure's passage, some hotels were unable, or unwilling, to shoulder the extra financial burden. Instead of paying their employees more, they announced they'd lay off workers and reduce their number of available rooms so they would not have to comply with the new rules. The 174-room Best Western Golden Sails and the 143-room Hotel Current plan to dramatically reduce their number of available rooms to 99 rooms each to avoid the ordinance.

In December, just before the rules went into effect, the Best Western Golden Sails also reportedly posted a notice that "all employees will be considered terminated after their last shift of duty on or before Dec. 15." The Long Beach Press Telegram reported that "some" of the employees would be rehired but around 75 people were expected to permanently lose their jobs.

[. . .]

When a minimum wage law is imposed, or increased, business owners have a choice to make. They can reduce their costs, usually by laying off employees or cutting employees' hours, or they can try to increase their revenues by hiking prices and hoping customers will pay the higher prices.

[. . .]

Politicians in Sacramento should think long and hard about the fragile economy before pushing a minimum wage increase. For local and state businesses teetering on the edge of survival, the increased costs could be the last straw.

The good intentions of those who propose raising the minimum wage cannot outweigh its unintended consequences and economic reality. Try as they might, politicians can change the laws with regard to the minimum wage, but they cannot repeal the laws of supply and demand.

If the minimum wage was truly a wise and compassionate policy, then why stop at $9.25 an hour, as AB 10 proposes, or $13 an hour, as Long Beach mandated for large hotels? If arbitrarily raising the minimum wage to $13 an hour could magically create prosperity, why not raise it to $100 an hour? Wouldn't we all be rich if the minimum wage was raised to $100 an hour? The answer is obvious: business owners simply could not afford to pay $100 an hour, people would lose their jobs, stores would go out of business in droves, and commerce would grind to a halt. The fact that a minimum wage of $9.25 an hour or $13 an hour will not destroy quite as many jobs and businesses as a $100 an hour minimum wage is hardly reason to support it.

If simply passing laws could create wealth and eradicate poverty, politicians would be the most popular and celebrated people on the planet and people would avoid being poor without even having to work their way up the economic ladder. But take a good look around and ask yourself: Is this the way the world really works?

See the full op-ed article here.

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