Will Puerto Rico’s governor part ways with Grover Norquist?
Last month, Puerto Rico Governor Luis Fortuño delivered a speech at the libertarian Reason Foundation on “how Puerto Rico avoided becoming “America’s Greece.” In his talk, the governor espoused the anti-government ethos of Grover Norquist, whom he cited as a friend in the first minute of his remarks. Fortuño has been a staunch advocate of “right-sizing” government: Soon after taking office, he laid off a substantial number of the commonwealth’s employees and reduced the island’s personal, corporate and property taxes.
Despite these cuts, Puerto Rico’s budget is still unbalanced. Fortuño has been relying on bond issuance through COFINA, the government’s off-balance-sheet, special-purpose vehicle, to make up for annual shortfalls to his budget.
Now, Republicans in Congress are working to blow another hole in Fortuño’s budget. As part of their effort to stave off the impending, automatic cuts to the defense budget, House Republicans passed legislation that kills a special provision of the Affordable Care Act increasing Medicaid grants to Puerto Rico. Faced with the threat of losing billions of dollars in federal payments each year, Fortuño now seems to think that lower federal spending is not that appealing. He pushed back on these cuts in an op-ed on CNN.com:
Historically, Puerto Rico’s Medicaid program has been chronically underfunded by the federal government. In 2010, Puerto Rico and the other territories secured corrective legislation to provide $6.3 billion in Medicaid funding over 10 years, which includes $5.4 billion for Puerto Rico.
[...]
Now, House Republicans have assembled a package of budget cuts to replace the automatic, across-the-board sequester. The proposal does not cut the Medicaid expansion funds for the 50 states, but Puerto Rico’s $5.4 billion Medicaid provision has been singled out for elimination.
It’s important to note that residents of Puerto Rico are already treated differently in the federal government’s eyes, at least when it comes to the tax code. Its residents do not pay federal income tax on money earned within Puerto Rico, making federal tax collections there much smaller than in any U.S. state. The most recent data available showed federal per capita collections of $888; West Virginia, the state with the second-lowest federal per capita collections, took in $3,599. According to the AARP, Puerto Rico has a higher percentage of residents receiving Social Security than the national average, and only half of those recipients are retirees.
When the food stamp program was modified in 1977 to cover Puerto Rico, 56 percent of the island’s residents signed up to receive those benefits. Although Puerto Rico represents barely more than 1 percent of the national population, Puerto Ricans accounts for about 8 percent of federal dollars spent through the food stamp program. After Congress later modified the program, the percentage of Puerto Rico’s population on food stamps fell, to about 25 percent today, but that’s still well over the national usage rate of 15 percent.
A smarter way for Congress to talk about muni tax code
Chris Mauro, head of U.S. municipal strategy at RBC Capital Markets, sent around a comment note suggesting that the media coverage of the Senate Finance Committee hearing Wednesday that included discussion of possible changes to the taxation of municipal bonds was overheated:
Yesterday, the Senate Finance Committee held a hearing entitled “Tax Reform: What It Means for State and Local Tax and Fiscal Policy”. A simple reading of the media accounts of this hearing would lead one to believe that the entire event was dedicated to a detailed discussion of the future of the tax-exempt status of municipal bond interest. So we decided to review the tape of the hearing in order to see what in fact was discussed. In reality, the vast majority of the hearing was focused on two issues – the deductibility of state and local taxes by federal taxpayers and the ability of state and local governments to collect sales taxes on internet and catalog purchases.
Both Committee Chairman Max Baucus and Ranking Member Orrin Hatch made some passing comments about tax-exempt bonds and the federally subsidized taxable Build America Bond (BABs) program, with Baucus making generally positive statements about BABs and Hatch making generally negative ones. Senator Maria Cantwell of Washington State expressed some concern about the importance of tax-exempt bond financing to public power utilities in the northwest, but beyond that, there wasn’t a whole lot of discussion about the muni tax exemption.
In our view, the biggest take-away from the hearing was just how far away we seem to be from a comprehensive tax reform package actually becoming reality. We found it informative that at several points during the hearing, Senator Baucus discussed the difficulty Congress has in identifying which tax expenditure items need to be cut in order to lower overall tax rates, asking the witnesses during one exchange to contribute some creative ideas in that regard. This confirms something that the market already knows but needs to be continually reminded of – real comprehensive tax reform is extremely difficult to pull off and will take a considerable amount of time to accomplish.
I didn’t watch the hearing but it sounds as if RBC’s Mauro read the tea leaves pretty well. I’m sure that Congress is having difficulty identifying where to amend the tax code to make it fairer and raise additional revenue or have revenues remain neutral. The deliberative congressional process gives all the issue’s players a chance to be heard, and tax matters are often the most fiercely fought. But the other thing I noticed in Mauro’s note was that Congress is looking for new ideas to address this complex issue.
One idea that I’m interested in is having Congress more narrowly define what constitutes a “municipal bond” issued for the public good. In muniland there are a lot of private activity bonds that do not provide infrastructure or services for the general public but rather for a select audience that must pay substantial amounts to gain access. The tax-exempt bonds of “non-profit” hospitals offer the most obvious example, as I wrote several weeks ago:
As the legislative and executive branches thrash out the exact standard for how much charity care a hospital must provide, the deeper issue of for-profit entities using most of the physical space in a tax-exempt, non-profit building needs more attention. The original county review that sparked Illinois to look more closely at non-profit hospitals, that of the Provena Covenant Medical Center, detailed the extent of for-profit activity in the system:
“Provena Covenant Medical Center allows outside, for-profit entities to use the facilities to generate personal and/or corporate profit. There are multiple outside physicians’ groups and service providers who use the hospital to serve patients. These physicians’ groups are for-profit entities that practice in the hospital and then bill patients for work done in what is claimed as a tax-exempt property…”
I’ve also written about Exxon Mobil and Koch Industries, which have tax-exempt bonds for refinery facilities and waste treatment plants, respectively, in Louisiana. As Congress thinks about creating greater fairness in the tax code, the tax exemption for private activity bonds is one place to look, and I’m sure there are other areas where changes could be made.
The state of state and local taxes
In addition to federal taxes, Americans are responsible for paying state and local sales, personal income and property taxes, and a variety of fees for the use of their cars, sewer systems and water systems. Although approximately 47 percent of the population pays no federal income tax, those people do contribute to public safety, education and welfare through their state and local taxes (and, it should be noted, also pay federal payroll taxes). Across the nation, sales taxes bring in about one-third of state revenues, personal income tax revenues bring in another third, and a variety of other taxes and fees make up the balance.
Rarely do you hear cries from the citizenry to have their taxes raised – usually you hear people lament that rates are too high. A recent Bloomberg slideshow listed aggregate tax rates by state but used data that did not include local tax rates. Many of the 1,256 comments on the slideshow pointed out that the information was wrong. In almost every comment that I read, people thought that their taxes were too high.
The response of state governments to their citizens’ cries for lower taxes has been ambivalent. While states decreased their sales taxes by $5.2 billion for 2012, they also increased personal income taxes by $3 billion, according to a National Conference of State Legislatures poll. There is a lot of variance among states in sales tax rates, though: Five states collect no state sales tax, and 13 states have an average local sales tax rate of zero. State and local governments are looking for additional revenue from every available source, but I predict that we will mainly see increases in income taxes for higher earners rather than increases to sales tax rates.
With the statement of not paying any income tax, if you look at the chart on the link, one of the pie charts kind of clarifies it. It will show no income tax, but payroll taxes. I can’t speak for all states, but I do know in most states if you make under a certain amount every pay period, no matter what you claim there just isn’t enough there to tag with taxes. They will take SS taxes and others, but there isn’t enough to take income tax. So I believe that is what the author is referring to. He isn’t saying people are skipping out on paying or anything else.
My wife is lucky enough to be able to work part time, but even at 20-25 hours a week, it isn’t enough to get taxes taken out.
And with states and sales tax, here in Colorado you have a base sales tax, but then each city can have their own city tax. So depending on where you shop you will find that you end up paying a different rate. It’s hard to say what you pay. But the bottom line, is I don’t like paying taxes anymore than the next person, but the items we require aren’t going to be paid for by anyone else. I do get tired of hearing people say that they want the federal government out of their lives, but are happy as hell when they want the money they hand out to the states. I don’t know of very many states that refuse money for roads or anything else. But then you’ll hear them scream to leave them alone. Funny how people want it both ways.
So taxes are going to be around. We are going to have to raise them one way or another. It doesn’t matter what we cut out of the budget or reduce spending on, that will only last so long. Even the government has to pay going rates. So if money coming in doesn’t keep up, we’ll be back into trouble. There isn’t a republican, democrat or independent that doesn’t know that. They just won’t say it in an election year, and when they do say it, it will always be the other guys idea no matter who has the idea
Pennsylvania to forgo $24 billion in fracking royalties
There are shale gas fields covering more than half of the United States, but Pennsylvania has emerged as the rising star of domestic energy production with its “Mighty Marcellus” fields. This is a great resource for Pennsylvania, but I’ve been confused about legislation that would impose an “impact fee” on shale gas producers instead of the traditional volume-based royalty structure used by other states. The loss of revenues to the state over the next 20 years using the “impact fee” could be approximately $24 billion using current gas prices. If gas prices doubled (they are currently at 10-year lows), losses to the state could exceed $48 billion or more.
The energy states of North Dakota, Wyoming, Texas and Oklahoma historically have earned substantial revenues from energy royalties. It seemed odd that Tom Corbett, the Pennsylvania governor who received substantial campaign contributions from gas producers, barred his shale gas commission from even considering a royalty or gas tax.
When energy producers do cost-benefit analyses, they use very sophisticated modeling in which the primary input is the quantity of “recoverable” oil or gas in an area. The second input is the projected demand and supply for energy, which in turn determines its price. Finally, the modelers factor in business expenses, primarily the depth of well drilling required and the cost to haul the energy to a pipeline terminus or railroad depot. In the case of natural gas they might include the cost to liquefy the gas for easier transport. Generally at the end of all the calculations they look at the cost of paying mineral rights fees to landholders and royalty fees to the state. All these inputs move around constantly, and projecting them years or decades ahead requires quantitative wizardry.
The fees for mineral rights paid to landowners are negotiated costs. Mineral rights vary because landowners don’t have a central platform to see what other landowners are being paid and generally accept what the energy company offers. State royalty fees, though, are foreseeable: They’re set by the legislature and are generally clustered around similar levels across the nation. Oklahoma has a scale that starts at 7 percent when gas prices exceed $2.10 and slides downward if gas prices go lower. West Virginia, also a Marcellus shale state, imposes a 6.1 percent effective royalty rate, while Texas charges 5.4 percent of well revenue.
Pennsylvania is different in that the governor and legislature want to impose a fixed annual fee on drillers that changes over time, going from $50,000 in the first year to $20,000 a year from the fourth to 10th years and $10,000 annually for years 11 to 20. The impact fee will earn Pennsylvania $360,000 over the life of the gas well.
The Marcellus Coalition, the energy producers’ trade group, commissioned a study that found there were 2,300 Marcellus wells in Pennsylvania in 2012 that could produce almost 3.5 billion cubic feet of natural gas per day. At $3.62 per 1,000 cubic feet (the October 2011 EIA wellhead price) each well would earn about $5,500 per day, or $2,010,000 per year. Using the West Virginia royalty rate of 6.1 percent, a shale gas well could earn Pennsylvania $122,000 per year, or $2,440,000 over a 20-year production period. Instead, the proposed Pennsylvania impact fee will earn the state about $360,000 per well over a 20-year period. The Marcellus Coalition has estimated that Pennsylvania will have 11,500 wells operating by 2020, meaning the state is shortchanging itself by a minimum of about $24 billion in gas revenues over 20 years. If inflation or demand push up natural gas prices, the revenue losses to Pennsylvania will increase geometrically.
Tom Corporate: Owned and Operated by the Gas Drillers for $750,000. Good deal for them. They get 24 billion.
When home prices and property taxes diverge
The latest S&P/Case-Shiller Home Price Index, released yesterday, wasn’t pretty. Housing values continued to fall, their 5th consecutive year-on-year decline. (You can download the data here). The Federal Reserve Bank of Cleveland had this to say about the release:
According to today’s [Case-Shiller] report, the fourth quarter started with broad-based declines in home prices… On an annual basis, the 10-city composite is down 3 percent and the 20-city composite is down 3.4 percent, and eighteen of the 20 MSAs are also in negative territory.
Basically, there’s blood on the streets everywhere.
The Federal Reserve Board reports in its Flow of Funds data (line 4) that the value of household real-estate assets has declined from $22.7 trillion in 2006 to $16.1 trillion in the third quarter of 2011. That’s a loss of 30 percents. Have revenues from property taxes, which are supposed to reflect the property valuations, mirrored the same decline?
Thankfully not (yet). As we can see in the U.S. Census data graphed below, property taxes have mostly marched steadily northward. We see a slight flattening in 2009, but nothing to match the 30 percent decline in property values. Local governments should see this as a gift from increasingly stretched taxpayers. There may be room to raise tax rates in some places but there will also have to be local belt-tightening as declines in property values feed into declines in tax collections.
what do you mean “thankfully not yet”? Do you see it as a positive thing that homeowners, having lost up to or over 30% of their home’s value are getting shafted by overpaying property taxes, which in many places were high to the point of thievery before home values dropped? I’m sure struggling homeowners are very “thankful” when they get the tax bill for property value that doesn’t even exist anymore.
Who carries the heavier tax burden: corporations or people?
Ever wonder whether people or corporations carry a heavier tax burden? Well, it’s not even close: people pay more in taxes by a long shot.
First, let’s look at federal tax statistics. In 2008, corporations paid 12.0 percent of federal revenues; the figure for individuals was 45.3 percent. Similarly, total corporate income tax after credits came in at $200 billion in 2008, while total individual federal income tax over the same period was $1.145 billion.
Now let’s look at state tax stats. In 2008 corporations paid 4.27 percent of state and local revenues; over the same period individuals paid 27.9 percent of state revenues. Similarly, state corporate income taxes came in at $52 billion while state personal income taxes came in at $301 billion and state sales taxes came in at $ 278 billion.
Please, this is preposterous. A well-established elementary result of tax theory, usually taught on day 1 of tax economics classes, is that ALL tax, including that levied on firms, is ultimately born by people – the firm’s owners, employees or customers. Furthermore, another well-established fact is that both economic models and real-world experience show that the optimal corporate income tax rate for a small open economy is ZERO, because it causes more distortions to the economy than other taxation means.
Why large countries keep a corporate income tax is because
1) otherwise, everyone wealthy enough would incorporate and evade tax and
2) basically being large, they can, even though they fudge it a lot for internationally active firms, with very wide differences between nominal and effective tax rates for political reasons.
Only the ignorant – of which there are many – call for higher corporate income tax rates out of principle.
See for instance this : http://ec.europa.eu/taxation_customs/res ources/documents/taxation/gen_info/econo mic_analysis/tax_papers/taxation_paper_1 5_en.pdf
Are teachers a protected class?
State and local employees have not been as hard hit as the general economy. At 19 million strong, this workforce comprises about 14.6 percent of total U.S. non-farm employment. It looks as if education workers are particularly being shielded from job cuts.
Chris Mauro, Head of U.S. Municipals Strategy at RBC Capital Markets wrote today in a privately circulated research note (emphasis mine):
[O]n a percentage basis, the state general government (non-education) sector has seen the largest decline in employment since December 2007. As of October 2011, it is down almost 6% from its recent peak.
Similarly, local education employment is currently down about 3% from the peak and has now also declined by a greater percentage than in any of the prior three recessions.
State education employment, which has historically been very recession resistant, has been growing at a moderate rate since December 2007 but, here again, the growth rate has been slower than in any of the previous three recessions.
I’m fine with this as long as student performance increases and America turns out high school and college graduates who are ready to meet the 21st century with good reading and comprehension skills. It would be a sad thing, though, to devote increasing amounts of precious tax revenues to school systems and universities that are graduating barely literate students. If America is making a bet on education, it really needs to pay off.
The tax collections that support education workers have bifurcated recently. State revenues have returned to pre-recession levels thanks to strong sales and income tax collections, while local revenues have been lagging due to lackluster property tax collections. Though teacher salaries are mainly funded by local taxes, states do pass through significant revenues to local school districts, and higher education receives big cash flows via state funding and loans that students take out to attend college.
Outside of teachers, local governments employ a lot of firefighters, police officers and health and hospital workers. If education workers remain a protected class, then the layoffs will have to come from these areas. RBC’s Mauro comments on non-education local employment:
Teachers should not avoid the layoffs, especially if they do not achieve better results.
@Acetracy, I also have many relatives in education, my husband is in tech (at a university). He does work very long hours, both at work, and at home, for his job (salaried). He also is required to do his job with a much more then 50% success rate. In fact, in most other jobs, the employee would be gone with the failure rate of schools
State taxes on fire
State tax collections are hot, hot, hot. The taxman rustled up 16 percent more in state income taxes for the second quarter of 2011 compared to the same period in 2010. Where is this phenomenal growth coming from?
Based on the most recent data collected by the Rockefeller Institute, states are raking in about $900 billion a year from their three major tax categories: the sales tax, personal income tax and corporate income taxes. Revenues from these three taxes total about 6.25% of U.S. GDP.
But it’s the personal income tax (PIT) that’s really driving the show. In the state of New York the PIT makes up about 60 percent of total tax revenues. In Oregon the PIT is an astonishing 72 percent of the state’s tax haul. Although the national employment level improved slowly the PIT was up on average 11.4 percent across the country year over year, according to Rockefeller. This contrasts sharply with the 4.6 percent national increase in state sales tax collections, especially given that 21 states cut their PIT tax rate while only 12 states cut their sales tax rates.
Robert Ward of the Rockefeller Institute tried to explain this counterintuitive phenomenon in a presentation earlier this month. He pointed out that some states have significant PIT revenues from capital gains. Unlike the federal tax code, twenty-one states treat capital gains as regular income. All the states in the chart above treat income earned from labor in the same way as income earned from capital. And in some states the amounts can be significant: In 2007, 13 percent of New York taxpayers’ annual gross income and 8 percent of New Jersey’s came from capital gains. That is a lot of bond and derivative trading on Wall Street.
Ward also pointed out that states are increasingly relying on personal income taxes. In 1978 PIT was about 25 percent of state tax revenues nationally versus 35 percent in 2008.
As financial markets gyrate, though, state revenues that depend on the PIT will gyrate too. Financial markets have been highly volatile over the last decade. It would be interesting to find any work that ties state PIT revenues and market performance together, and it would be especially interesting to see any work which explains this recent big jump in personal income tax collections.
11% PIT in Oregon (state tax)! Please turn out your lights when you leave!
An army of corporate lobbyists in the halls of Congress
Now that the Senate failed to pass President Obama’s jobs legislation last night, various pieces of his plan and other pet projects are likely to be introduced separately. It’s unclear whether an extension of the payroll tax reduction or additional unemployment benefits — two key planks of the President’s plan — will get floor time. But corporate interests are getting plenty of attention from members of the Senate. In particular, an army of corporate lobbyists has been vigorously promoting a tax holiday for U.S. multinationals.
Politico says the senior New York US Senator, Democrat Chuck Schumer:
has been quietly courting some Senate Republicans and Democrats to see whether there is any appetite for merging a GOP-backed idea — a tax holiday for corporations to bring home their overseas profits — with a Democratic-supported plan of creating a national infrastructure bank.
There is no evidence that giving multinational corporations a big tax break on profits earned overseas will create jobs or stimulate the economy. But some, like former director of the Congressional Budget Office Douglas Holtz-Eakin, believe that a tax holiday will actually create economic growth. Holtz-Eakin writes in Bloomberg:
Repatriation can be thought of as a private-sector approach to stimulus.
Both the left and the right have poured cold water on this idea. The Heritage Foundation, the conservative think tank, says the proposed holiday would not spur additional U.S. capital investment or jobs because corporations have plenty of profits onshore and there is easy access to financing. J.D. Foster and Curtis Dubay of the Heritage Foundation write (emphasis mine):
Absolutley NOT…this bill is not good enough. Giving the 1% any type of a tax holiday is a reward for destroying our jobs.
If the 1% wants to bring their blood money back into this country after exploiting workers overseas, why reduce their tax from 35% down to only 8%….how about down to 15 to 20%??????? Instead of getting a trillion dollars in taxes out of them at 8%, why not 2 trillion at 15%?
When national and state data diverge
In our turbulent times, middle-income households are falling behind and national data depicts an economy that’s stagnating. But tax revenue data for many states hints that some earners have had substantial increases in their incomes.
Let’s start with the national numbers. There has been a lot of reporting this week about median personal income dropping since the official end of the recession in June 2009. Robert Pear wrote in the New York Times:
Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent.
If we isolate the period between June 2009 and June 2011, household income fell 3.5 percent nationally, or approximately 1.75 percent per year, according to the Sentier Reseach study quoted by Pear. This income reduction syncs up pretty closely with consumer expenditure data from the Bureau of Labor Statistics that was reported in September. From the BLS:
Average annual expenditures per consumer unit fell 2.0 percent in 2010 following a decrease of 2.8 percent in 2009, the U.S. Bureau of Labor Statistics reported today. While spending fell in 2010, prices for goods and services increased 1.6 percent from 2009 to 2010, as measured by the CPI.
So household incomes are down, spending is down and inflation is up marginally — it is an economy in stall speed for most Americans. What I’ve been watching and wondering about, though, is why state tax collections are making such massive gains. By focusing on the aggregated national numbers, a lot of observers have failed to notice how robustly state tax revenues are recovering.
-
Resident Muniland expert
-
I believe First of All things should be put in perspective before making statements such as “Puerto Rico is a very poor place and needs support from the mainland.” & “Given the fragility of the island’s economy”…
Perhaps the actual Times Magazine’s Cover story said it best…”Are You Mom Enough?”
Now, doesn’t the analogy makes you want to take the breast out of the 114th year old child’s mouth. (the boy pants was very clever btw)
We must ask ourselves what are we missing here?…because what I just read sounds almost verbatim from Murat Halstead late 19 century books. -The infamous definition of the word Insanity comes to mind.
Now going back to the ‘Breast Feeding Time’ analogy I was asking myself this question earlier today…
Could a Mom still have milk in her breast to feed a child so late into their lives?
Well, here is a video that might help put things in perspective by a layman in Economics…Sir Tony Robbins. So you don’t just settle for my breast feeding analogy and question.
Enjoy It
http://www.youtube.com/watch?v=jboTeS9Ok ak&feature=youtube_gdata_player