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Out of Control Policy Blog Archives: 2.10.13–2.16.13

Reform California’s Tax System to Boost Economy

In my most recent policy study, co-published by Reason Foundation and the Howard Jarvis Taxpayer Foundation, I analyze what I consider to be some of the more egregious special-interest corporate and sales and use tax carve-outs in California and argue that the state could improve its woeful business climate—and, thus, the economy in general—by eliminating such tax breaks and lowering the general corporate tax rate by an amount equal to that of the "extra" tax revenues that the state might expect to get without these tax breaks.

As I note in the study, the impact of reducing California's corporate tax rate in a revenue-neutral way by eliminating these targeted and unfair tax breaks could be significant. As Howard Jarvis Taxpayers Foundation chairman Jon Coupal and I note in a recent Orange County Register column,

The Franchise Tax Board says the corporate tax rate could be reduced 14 percent across the board, without losing any net tax revenue, simply by getting rid of one tax break—the Research and Development Tax Credit.

Furthermore, the Reason-Howard Jarvis study shows that eliminating other corporate tax breaks for things like movie companies, computer software, timber growing, farm machinery, and the "Accelerated Depreciation of Research and Experimental Costs" credit would allow the state to reduce the overall corporate tax rate by 20 percent or more.

Each time state lawmakers carve out a special tax credit or implement policies that favor certain businesses or industries through the tax code or through regulation, they also harm other industries.

[. . .]

The error of such tax breaks is compounded when one considers that they are effectively subsidizing many business activities that would have taken place even without the tax breaks. It's corporate welfare that California doesn't need and can't afford.

In addition, the state is notorious for its lack of oversight of these tax policies. A Department of Finance analysis of state tax credits concluded that the legislative intent was "not specified" for 70 of the 82 tax expenditures reviewed.

California's terrible business climate—due primarily to its burdensome taxes and regulations—has played a significant role in its economic stagnation and malaise. California has the ninth-highest corporate tax rate in the nation, at 8.84%, and the highest rate in the entire western half of the continental United States (which gives one an idea why so many businesses are fleeing to states like Texas, Utah, Nevada, Idaho, and North Dakota).

According to Chief Executive magazine's Best/Worst States for Business survey, California's business climate ranked dead last for the eighth year in a row. Among the responses from the CEOs surveyed were the following:

  • “California continues to head in the wrong direction as its tax policies will drive more businesses and people to relocate in other states. State politicians feel business and commerce are ‘necessary evils’ that provide the funds to enable pursuit of their misguided agendas.”
  • “California government is difficult to work with and very bureaucratic. Taxes and regulation are high and unruly.”
  • “California is begging for businesses to leave its state.”
  • “California is going in the wrong direction if that’s even possible.”
  • “California is out of control. They have too much government who have nothing better to do than to harass businesses in the state. They need to cut the size of their regulatory bodies in half.”
  • “California is the worst! They are doing everything possible to drive a business out of their state. If the environment in CA was not so good, they would have lost half of their population.”
  • “California regulations, taxes and costs will leave only tech, life sciences and entertainment as viable. If you aren't an elitist no room here for the middle or working classes.”
  • “California’s regulation and specifically labor regulation is a job killer. We will be moving our business out of CA and the State will lose 100’s of jobs simply due to the poor regulatory environment.”
  • “California’s taxes and ongoing changes for regulations are devastating. One never knows from even day to day what new interpretation of an existing regulation or new regulation will befall you and your small business.”

It is time policymakers in California realize the more taxes and more regulations are not getting the job done. If they truly want to jump-start the state's economy and "create jobs" (which, of course, only private-sector businesses—not the government—can do), they should reverse the many years of failed policies by reducing the high taxes and voluminous red tape that are strangling the state's economy. A good place to start would be to level the playing field by getting rid of special tax breaks for politically-favored industries and cutting business taxes across the board.

» See the full op-ed article here.

» The Reason Foundation-Howard Jarvis Taxpayers Foundation California tax credits study is available here.

» See my previous blog post about the California tax credits study here.

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President Obama 's SOTU Transportation Component Similar to "Groundhog Day"

In last night’s State of the Union speech, President Obama’s displayed how transportation remains a low priority for the White House. After admitting that he did not focus on transportation in his first term, the President promised to devote more attention to it in his second term. Let’s hope this speech is not representative. It is fitting the President delivered the speech only 8 days from Groundhog Day since the President’s approach to transportation reminds many of the movie “Groundhog Day.” In the movie the main character, Bill Murray keeps reliving the same day until he changes his attitude. And similar to Groundhog Day unless the President changes his approach, he and the transportation system will keep reliving the same day again and again. 

In the State of the Union speech, a President has many issues to address. And unless we want a 3-hour speech (we don’t), a President cannot detail all plans. But in President Obama’s 6,421-word speech, he spent only 192 words or two paragraphs addressing transportation. Far more time was devoted to environmental issues (592 words) of less concern to most Americans. 

And the context of those 192 words is mostly forgettable:

America’s energy sector is just one part of an aging infrastructure badly in need of repair. Ask any CEO where they’d rather locate and hire: a country with deteriorating roads and bridges, or one with high-speed rail and internet; high-tech schools and self-healing power grids. The CEO of Siemens America – a company that brought hundreds of new jobs to North Carolina – has said that if we upgrade our infrastructure, they’ll bring even more jobs. And I know that you want these job-creating projects in your districts. I’ve seen you all at the ribbon-cuttings.

Tonight, I propose a “Fix-It-First” program to put people to work as soon as possible on our most urgent repairs, like the nearly 70,000 structurally deficient bridges across the country. And to make sure taxpayers don’t shoulder the whole burden, I’m also proposing a Partnership to Rebuild America that attracts private capital to upgrade what our businesses need most: modern ports to move our goods; modern pipelines to withstand a storm; modern schools worthy of our children. Let’s prove that there is no better place to do business than the United States of America. And let’s start right away. 

Let’s address the President’s big ideas. A Fix-It-First program is a good investment. But most departments of transportation already have such a program. Since 2000, the majority of state, county and city DOTs have moved to a state of good repair mentality where they prioritize maintenance projects. These departments already spend 60, 80, and in some cases 100% of their money on maintenance. So fix it first is a good idea. But it was innovative in 2001; in 2013 it is standard practice.

And most places would welcome private capital. In fact they already do. Some 33 states have some form of Public-Private Partnership (PPP) law. The Federal Highway Administration’s Office of Innovative already disperses TIFIA loans, private activity bonds, section 129 loans and other innovative programs. Many transit projects such as the Eagle Rail Project in Colorado use PPPs. It is good the President supports these programs. But use of private capital is neither new nor innovative.

If the President wants to increase private sector involvement, he needs to spend more time changing laws and practices and less time on grandiose statements. For example, the President wants to use PPPs to improve ports. This is a great idea. But as long as ports get free taxpayer money in the form of federal earmarks to permanently deepen their harbors, they have no incentive to partner with private entities. President Obama needs to change the law so that ports must rely at least partly on private capital to deepen their ports. 

The issue the President most needs to address and did not is the cost of infrastructure projects in the U.S. One of the biggest problems is not the amount of money we spend but how we spend it. Many projects such as the New York City Second Avenue subway are ten times more expensive to construct in the U.S. than they would be in another country. Expensive art and a multitude of contractors, both largely unneeded, lead to some of these cost increases. Provisions such as Buy America and David-Bacon that increase capital and labor costs also play a role. Environmental Rules, while streamlined under MAP-21, increase costs by delaying projects. Infrastructure projects often take 12 years to be completed because of these rules. European projects can be constructed in half the time with less environmental damage than most American projects. 

The President’s approach to viewing transportation as primarily a jobs program does not help. Transportation increases economic development by quickly and efficiently moving people and goods from point A to point B. In comparison, the effects of hiring a small number of temporary workers are very minor. Further, more construction workers employed and more unnecessary federal laws such as those that require a living wage, inflate the project’s cost and therefore fewer projects can be built. On some level, the President may have to choose between transportation and another policy objective. And transportation is likely to lose. 

And one part of the President’s speech shows he still does not understand transportation. A CEO would choose a country with well-maintained roads and bridges over a country with poorly maintained infrastructure. But why are our bridges and roads not well maintained? Our President’s main goal is to build a multi-billion dollar high-speed rail system. And the local money that states like California are using for that project is money that they are taking from road and bridge maintenance. While a high-speed rail system is a nice dream, most states with constrained budgets cannot build high-speed rail, and upgrade and improve their transportation networks. As President Obama mentioned in his failed joke--politicians love ribbon-cuttings. And given a choice between the ribbon cutting of a new largely useless train line and the maintenance of existing highway and transit systems, politicians will choose the ribbon cutting. This combined with federal pressure to accept free money leads politicians to choose high-speed rail over maintenance.

And the President once again pushed for unrealistic, unworkable solutions. As Politico’s Morning Transportation elegantly puts it:

President Barack Obama bemoans the country’s crumbling infrastructure, offers up a $50 billion package of immediate spending on transportation infrastructure and says we should pay for a long-term boost in spending with war savings.

This is another example of reliving Groundhog Day. As mentioned earlier, the reason that the country’s infrastructure is crumbling is because the President has been pursuing large-scale, sexy construction projects instead of needed maintenance. Transportation projects take a long time to build; immediate short-term spending might fit the President’s Economic Stimulus goals but does not improve the transportation network. And the war savings money is fictional. The President is using money towards transportation that he never intends to spend. 

And transportation supporters in Congress are growing increasingly frustrated. All quotes are from Politico Morning Transportation. Oregon Representative DeFazio would like:

(A) new emphasis on delivery here.

Earl Blumenauer when asked about budget specifics:

Well, let’s see what comes with the budget.

And those are the Democrats. The Republicans were more skeptical. Jeff Denham asks,

It certainly is encouraging to hear him talk about building things across the nation. The real question is at what cost and where does the money come from? With high-speed rail, again, other countries are doing it. But they’re doing it at a far less cost than we are and they’re doing it in a far greater speeds with greater ridership numbers. 

And Transportation and Infrastructure Chairman Bill Shuster was not a fan of the speech, 

He didn’t say anything. We’ve heard some of this stuff before; how’s he going to pay for it? I think he’s lying about CEOs — they want to invest in a country that has high-speed rail? Really? Tell me what CEO said that, that cares about high-speed rail. Manufacturers want to invest in a country that has roads that are built, they want the infrastructure to be right for the transportation system, but to say one of the reasons they’re going to invest in America and manufacturing plants is because of because of high-speed rail is crazy, 

While slightly better than past speeches, the President is still presenting variations on the same old transportation vision. He finally highlighted the importance of infrastructure maintenance and the use of the private sector, but some of his policies such as large grants for HSR show he still does not understand transportation. Hopefully, his next Secretary of Transportation will create a comprehensive transportation plan by considering why the U.S. does not have a better transportation system. Until then, the U.S. will remain stuck in a version of Groundhog Day. And unlike the movie all Americans, and not just Bill Murray, are reliving the same scenario again and again.

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2012 Urban Mobility Report Indicates as Economy Improves Congestion Returns

The Texas Transportation Institute released its 2012 Urban Mobility Report last week. The major finding is that after remaining static since 2005, congestion is growing thanks to an improving economy.

While the report is best known for analyzing traffic congestion, it also details the role of transit in reducing congestion. Further, it explains how congestion worsens air quality. TTI has been producing this report annually since 1982. During that time, congestion has tripled in many U.S. metro areas. 

TTI made several changes this year, but the most noteworthy is a new metric, The Planning Time Index (PTI) that explains the amount of buffer time needed to reach a location on time in 19 out of 20 instances. According to TTI:

If the PTI for a particular trip is 3.00, a traveler would allow 60 minutes for a trip that typically takes 20 minutes when few cars are on the road. Allowing for a PTI of 3.00 would ensure on-time arrival 19 out of 20 times.

PTIs on freeways vary widely across the nation, from 1.31 (about nine extra minutes for a trip that takes 30 minutes in light traffic) in Pensacola, Florida, to 5.72 (almost three hours for that same half-hour trip) in Washington, D.C. 

The best way to reduce the PTI may be managed lanes and managed arterials. Managed lanes are freeway lanes that are free to buses and large carpools. Single person vehicles may use these lanes for a small fee that varies based on congestion. This small fee helps keep managed lanes free-flowing 24 hours a day even during rush hour. Managed arterials are bridges or tunnels at major intersections that drivers can choose to pay to avoid congestion. Managed arterials are free-to-use for transit vehicles With managed lane and managed arterial networks commuters are guaranteed a congestion-free ride and can factor in less planning time. As a result, commuters will have more free time for other activities. 

The traditional metric that TTI uses to measure congestion is the Yearly Delay per Auto Commuter. The ten metro areas with the worst congestion from heaviest to lightest are Washington D.C., Los Angeles, San Francisco, New York City, Boston, Houston, Atlanta, Chicago, Philadelphia and Seattle. 

As these metro areas are the largest in the country, there are no major surprises. Although some areas with relatively smaller populations have relatively large congestion problems while some of the biggest metro areas have relatively moderate congestion issues. 

Washington D.C., the 8th largest metro area, ranks 1st in congestion. This is due to several reasons including the strong regional economy, the large number of face-to-face jobs where personal contact is important and the poor regional freeway network. Despite the presence of a strong subway network, D.C. area residents still have the worst commute in the country. Other metro areas where congestion is more severe than population include San Francisco, Boston and Seattle. 

Chicago, the 3rd largest metro area, ranks 8th in congestion. This is likely the result of a poor regional economy, better freeway and arterial network, and stronger regional cooperation. The other major metro area where congestion is less severe than population is New York City. 

As the economy improves congestion will increase. This is the time for metro areas to develop a comprehensive cost-effective, congestion-reduction strategy. This includes new managed lanes, new managed arterials and new, targeted freeway and arterial widenings. This strategy also includes enhanced use of tolling, cost efficient local bus/BRT systems, and increased use of intelligent transportation systems. 

Metro areas that are improving thier transportation system fare better than metro areas that are not upgrading thier systems. Let’s take a closer look at one of the latter--Atlanta. Atlanta’s congestion increased from 13th worst in 2011 to 7th worst in 2012. This is a large jump due in part to new methodology. However, Atlanta’s increase in population, increase in vehicle miles of travel and decrease in transit usage are the larger factors. Atlanta is on the road (bad pun intended) to returning to its early 2000’s pattern of severe congestion. 

An improving metro economy is one reason for the growing congestion. After lagging behind the rest of the country for much of the recovery, metro Atlanta foreclosures recently hit a six-year low. The unemployment rate has declined from almost 11% to 8.5%. According to William Frey of the Brookings Institute, the most important growth factor of the past 50 years has been average January temperature. And while Atlanta will likely not return to its growth rate of the 1980’s and 1990’s, it figures to continue its increase in population. 

Inadequacy of the transportation network is the other contributing factor. Atlanta has not substantially widened its freeway or arterial network over the last 20 years. It has not added redundancy or upgraded insufficient suburban arterials either. Nor has it invested in a high-quality, low-cost bus and BRT network. A metro area that is growing but not improving its transportation network is going to face major congestion problems. In a way the recession saved Atlanta from far worst congestion. But with growth continuing Atlanta remains without a comprehensive plan to solve its transportation challenges. 

Other metro areas such as Dallas, Houston, Los Angeles and Miami with major congestion problems are investing in managed lanes, managed arterials, reconstructing arterials, and implementing cost-effective transit service. Meanwhile Atlanta is doing very little. Without improvements, increased growth will lead to increased congestion. The smart money says Atlanta’s travel time index will be much worse than 7th in the future.

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