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Kentucky's Regressive Tax Reform

I was pleased to be asked to comment for today's story by Jack Brammer and Janet Patton for the Herald-Leader on the Governor's tax proposals. They did a great job accurately representing my views. This post helps elaborate on my perspective.

Dubbed "Kentucky Competes", Governor Steve Beshear's tax proposal consists of more than 20 changes to our state's tax code. The proposal contains a number of troubling components which place a disproportionate burden on Kentucky's poor, while providing large annual tax breaks which are skewed toward businesses and the wealthy.

I have three major objections to Governor Beshear's tax reform plan:

  1. It is a taxpayer-financed corporate tax giveaway.
  2. By relying on sales taxes, the plan hits the poor and middle class harder than wealthier citizens and businesses.
  3. By choosing which kinds of labor to include (and exempt) from the sales tax, the plan hits the poor and middle class even harder.

Let me step through each one in turn.

1) Corporate Tax Giveaway

Overview
Click to enlarge

Governor Beshear's proposals would generate an additional $210 million for the state. But like many tax reform initiatives, Beshear's plan contains a mixture of new taxes and new tax breaks.

The Governor's plan contains approximately $487 million in new annual tax breaks, more than offset with about $697 million per year in new taxes.

That's nothing especially disturbing, given that the reform plan is supposed to put the state on sounder financial footing, and raising taxes is one way to do that.

What is disturbing is how the mix of breaks and taxes are allocated. Nearly half of the Governor's tax breaks go to businesses (amounting to $234 million per year). So what's their share of the new taxes that Beshear proposes? Nearly zero:

 

Who benefits and who pays?
Click to enlarge

 

Businesses pay a lot less...

I say 'nearly' zero because there will be some businesses which pay the new sales taxes for covered categories like auto service or computer repair. But given the exemptions and restrictions on these new sales taxes, the business share of the almost $700 million in new annual taxes will likely be very, very small. 

So businesses (some of them, at least) will get a collective windfall of more than $234 million per year under Beshear's plan, while simultaneously contributing no new taxes to the state.

Throughout the documents Beshear's office released yesterday, there is the notion that this corporate giveaway will help Kentucky "compete for quality jobs." The underlying assumption is that if "job creators" are given enough tax cuts, that they'll hire our way to prosperity. This notion is, at best, misguided; at worst, it is an outright lie.

As I have written before (more than once, in fact), business owners do not hire because they have extra tax-cut money lying around. We hire because we have work to do, and we need someone to get it done. We hire when there's more demand.

...while Kentucky families pay a lot more.

Meanwhile, because businesses wouldn't pay these new taxes, the burden is placed squarely on Kentucky's families. When paired with the tax breaks for individuals, Kentucky households would pay about $444 million more in new taxes each year (or approximately $260 per household.)

While the Governor trumpeted the 'relief to every working Kentuckian' yesterday, the hard truth is that his scheme raises taxes on nearly every working Kentuckian in order to fund an enormous tax giveaway to select (usually large) businesses. This plan is a stunning, brazen, and inexcusable attempt to redistribute wealth from those who can least afford it to the already-wealthy.

2) Sales Taxes

Sales taxes are an incredibly regressive tool for raising money for Kentucky. They are regressive in the sense that sales taxes hit poorer people harder than wealthier ones.

Why are sales taxes especially burdensome for the poor? Because the extra tax takes up a greater portion of their income for the same product or service. The extra tax just hurts more.

Even though the Governor's proposal includes some $72 million in Earned Income Tax Credits (credits for the working poor - generally a good contributor to the economy and job production), he bleeds those benefits away with new sales taxes.

And the proposed sales taxes are almost exclusively in consumer services, while sales taxes for business services are largely exempt.

Ordinary Kentuckians would not benefit under Beshear's regressive plan.

3) Different Kinds of Labor

The Governor's plan also targets only certain kinds of labor for sales tax expansion. In particular, it chooses to apply sales taxes to labor involved in the "installation, maintenance and repair of taxable personal property." In other words, the repair and service of personal items (like cars or computers) would be taxed under Beshear's plan.

But not all service labor is equal, under the Governor's scheme. Other kinds of labor - say, accounting or legal services - would be exempt from the new taxes. And who disproportionately uses a lot of those exempted services? Businesses and the wealthy, of course.

Even within the "installation, repair, and maintenance category", there are exclusions. Because these new taxes apply to 'personal property', they exclude repair and maintenance services for machinery, farms, and real estate properties -- the kinds of services consumed in greater amounts, once again, by businesses and the wealthy.

By steering the new taxes away from services which impact the wealthy, Beshear hits ordinary Kentuckians especially hard.

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Governor Beshear's new tax proposal is an audacious attempt to take wealth from Kentuckians who are hardest hurt by our economy, and attempts to transfer that wealth to the already-well-off.

It is a colossally bad idea which will leave millions of Kentuckians worse off. And we shouldn't let him get away with it. 

After the jump: Backstory

Continue reading "Kentucky's Regressive Tax Reform" »


The Austerity Drag

The U.S. economy added 243,000 jobs in January, far surpassing analysts' expectations of around 155,000 jobs for the month.  As a result, the unemployment rate also unexpectedly ticked down to 8.3 percent for January.  

The private sector added 257,000 jobs in January, while public-sector employment dipped another 14,000.  

And that last part is important, because it begins to reveal the truly destructive nature of austerity.

Amid the wrong-headed drive to shrink the size of federal, state, and local governments (government employees make up one-sixth of the workforce), private sector job gains have been partially thwarted by the losses of government jobs.  

With the release of the jobs data each month, the ever-insightful Steve Benen - who joined The Maddow Blog this week - republishes his two charts showing job losses and gains for each month since the beginning of the Great Recession.  

The first chart shows the overall jobs picture, while the second shows the jobs picture for the private sector alone.  My shameless rip-off adaptation of these charts is below. As with Steve's charts, the red columns show monthly job losses under George W. Bush, while the blue columns show monthly job totals under Barack Obama:  

 JobsJanuary2012Total

The second chart shows that the private sector has been adding jobs for each of the past 23 months.

JobsJanuary2012Private

Also worth noting: there are more total private-sector jobs today (110.4 million) than in February 2009 (110.3 million), just days after Barack Obama took office.  

But I always wanted to see a chart which showed us what was happening in the public sector.

So I took matters into my own hands.  Here's my own homemade chart showing jobs totals in the public sector since the beginning of the Great Recession:

JobsJanuary2012GovtCensus

As I plotted the data, I began to understand why Steve might not show the public-sector data each month: The one-time massive hiring bump (and susequent wind-down) surrounding the 2010 Census dwarfed all of the other changes in the chart, obscuring the other month-to-month changes.

As a result, the chart provided little insight into the fundamentals of public-sector jobs.

Fortunately, the Bureau of Labor Statistics published a press package which isolated hiring for the 2010 Census.  This allowed me to disentangle the one-time effects of the Census from the underlying fundamentals of public sector jobs.  

The result is this chart showing monthly job totals in the public sector, excluding the volatile Census hiring data:

JobsJanuary2012GovtNoCensus

In many ways, this public sector chart is the inverse of the private sector one.  

At the very moment when the private sector began to recover, at the very moment the economy needed to be firing on all cylinders, at the very moment the government should have leveraged negative real interest rates* to invest in jobs and infrastructure, one-sixth of the economy was (and continues to be) stuck in reverse.  

And as austerity economics kicked in, the losses in the public-sector have only deepened, creating significant drag on the economic recovery.   

Since Barack Obama took office three years ago, the public sector has shed some 603,000 jobs - averaging roughly 17,000 job losses per month.  (Compare that to the 840,000 public-sector jobs added during George W. Bush's second term - an 18,000 per month clip.)

Without these public-sector job losses over the past three years, the unemployment rate would stand at 7.9% today instead of 8.3%.

While some might celebrate the wholesale destruction of government jobs, I don't.  

Public sector employees are vital to our economy and to my business.  Many of my customers are teachers, first responders, court personnel, and a wide array of other local and federal government employees. Public employees create better roads and safer neighborhoods and smarter students, all of which benefits my business.

The destruction of public sector jobs negatively affects my business and our economy.  As public sector employees lose their jobs, I lose business.  And the wider economy suffers, as well.

Austerity just doesn't work.  

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* A bit of explanation here on "negative real interest rates": instead of expecting a positive return on government bond investm0ents, investors are now willingly paying to have the federal government hold their money for 5, 7, and 10 years. In essence, investors from around the world will pay us to invest in our jobs and infrastructure - which would, in turn, pay even greater dividends to our economy as we emerge from recession.


2012 and the Local Economy

I was privileged to be surveyed late last week by the Herald-Leader's Tom Eblen for today's column on the state of Lexington's economy for 2012.

I don't envy Tom: distilling the often-disparate views of eight different business owners into 800 words or less must be tough.  (As regular readers might imagine, my views didn't exactly align with many of my peers.)

My response alone was over 1000 words, so the understandable - and necessary - result was that some context was stripped from my comments.  

Still, Tom asked very thoughtful questions, and I liked some of my answers.  So I thought it might be worthwhile to share them here on CivilMechanics.

And if you haven't read Tom's column, go check it out here.

(Note: I wrote these answers early Friday morning.  Some local events have already outdated at least one answer...)

1. Are you optimistic or pessimistic about the economy this year. Why?

I'm kind of bipolar on the economy.  For the first time in 4 years, I'm seeing signs of strength in our business, in our customers and their ability to buy our services, and in the national economy.  

At the same time, I see two major "storms" on the horizon: the apparent willingness of Republicans in Congress to scuttle the economy for political advantage (and I don't think this is a "both sides" thing - see this, for example), and the apparent unwillingness (or inability) of Europe to deal effectively with their debt crisis.

In my view, both storms are fueled by wrong-headed drives for austerity - forcing governments to spend less when no one else is spending, and further drying up demand.

2. How is your business doing?  How are business conditions better or worse for you than they were a year ago?

Our business is still weaker than I'd like in the wake of the recession, but it is growing.  Sales are up about 3% over last year, but some of the underlying fundamentals still aren't where they need to be. While we've seen some improvement, many of our customers are still delaying basic maintenance on their cars because they can't afford it.

3. What’s your biggest business concern for the coming year?

I've hired two new technicians in the last 9 months, including one last week, bringing us to six mechanics in total.  Having more technicians will help us enormously in the busy spring and summer months.  But the winter is typically our slowest time of the year, so bringing on an additional employee now is a bit of a risk: Will there be enough work to keep everyone busy and happy? Will there be enough business for me to make a profit while paying them?  

Getting through the next few months with a bigger staff is my biggest current concern.  Keeping them busy throughout the year by bringing customers through the door is my biggest concern for 2012.

4. What do you see as your biggest opportunity for the year?

Having a larger staff will allow us to serve more customers more quickly.  Toward the end of 2011, we were frequently scheduling appointments up to a week in advance because we were too busy to get customers into the shop sooner, and we lost some business because we couldn't get them in right away.  We want to improve our service and accommodate our customers more quickly in 2012, and the additional employees will help us with that.

5. What would you like to see the president and/or Congress do to improve the economy?

I'd like to see another massive stimulus package.  

120106_privatejobs

While it may not be popular with your readers, there is no doubt that the early 2009 stimulus worked.  (See chart of private-sector job losses and gains at right, stolen from the estimable Steve Benen.)  We were losing hundreds of thousands of jobs every month and the economy was imploding.  Immediately after the stimulus, the economy stabilized and the jobs losses dropped dramatically, and jobs have been growing slowly and steadily since early 2010.  But a stable and slow-growing economy isn't enough.  I'd like to see another stimulus to help jump-start a more dynamic, fast-growing economy.

A lot of folks will say that we need to cut taxes and regulation in order to get the economy growing again.  That's a head-scratcher for me.  Lowering my taxes and putting a little extra money in my pocket won't help me create a job.  Neither would letting me pollute more.  

I've hired two new employees in the last year (growing 25% from 8 employees to 10), and the decision to hire them was driven by customer demand for faster and better service - which had nothing to do with my taxes or regulations.  Customer demand drives hiring; giving business owners extra money or convenience really doesn't.

I like President Obama's American Jobs Act as a starting point for a stimulus - investment in infrastructure, schools, and public safety is a sound way to grow economic demand.  But I'd like to see even more investment in other areas, such as energy research and American manufacturing, and I'd like to see a stimulus closer to $1 trillion to really get the economy growing again.  

That's what I'd like to see.  I see zero chance of this actually happening with this Congress.

6. Will this year’s presidential election make the economy better or worse? Why?

I fear that it will make things worse, at least for the short term.  It is hard to imagine how our political system could be more gridlocked than it was in 2011.  Still, as congressional Republicans obstruct any initiative which might make the President look good, I worry that they'll sacrifice the economy on the altar of politics.

As for the race itself, I see a worrying thread of extremism from the GOP candidates.  Even the supposedly-moderate Mitt Romney is proposing extreme policies which benefit the wealthy even more and skewer the middle class and poor even more (thereby skewering most of my customers).  I worry that the austere policies a Republican President might attempt to implement would decimate my customer base and my business.  

7. What is Lexington’s biggest asset during these economic times? It’s biggest problem?

I think our schools - particularly UK - are our biggest asset.  They provide our city with well-educated people, great research to improve our lives and build businesses upon, and a vibrant "student economy" which spills over into the rest of our city. 

I see two big problems for Lexington.  First, if the proposed redistricting is approved by Governor Beshear, a huge chunk of our city will not be represented in the Kentucky State Senate for two years.  Proper representation in Frankfort is vital to protecting Lexington's interests and to protecting UK, and these undemocratic redistricting plans would deprive one-third of our city of its vote.  I worry about the impacts of Lexington not being represented in Frankfort.

Second, I think our city, our state, and our schools are under-funded.  I appreciate all of the efforts Mayor Gray has made to trim Lexington's budget, but at some point, we citizens need to fund all of the services and infrastructure and improvements we've come to expect.  

I want nice roads for me, my customers, and my employees.  I want them to be plowed and salted when nasty weather strikes this winter.  I want the best schools for my son and for my employees' families.  I want the best fire and police protection.  I want a beautiful and safe city to live and work in.  But those benefits come at a price.  And we're responsible for funding all of those "nice things".

It won't be popular, but I think we need to start a frank conversation about raising taxes to fund our city's (and state's and schools') obligations.  We need to pay for the great things we want to do together.

8. What else should readers know that I haven’t asked about?

I hope they'll go out of their way to buy local goods and services when possible.  That will keep more of Lexington's money in Lexington, which helps foster a more vibrant local economy.


The 1345

McConnell
Mitch McConnell
Yesterday, despite having support from a majority of the Senate, the $60 billion Rebuild America Jobs Act was blocked from even being debated on the floor of the Senate by Kentucky's own Mitch McConnell and Rand Paul - along with every other Republican senator.

The Act included $50 billion in direct spending for roads, bridges, and other infrastructure, as well as $10 billion towards starting the National Infrastructure Bank.  Both ideas have traditionally enjoyed bipartisan support.

The bill would be paid for by a 0.7% surtax on incomes over $1 million.

The Department of Transportation estimated that the Act would create about 800,000 new jobs.

McConnell was unapologetic for blocking debate on the bill:

"The truth is, Democrats are more interested in building a campaign message than in rebuilding roads and bridges," said Senate GOP Leader Mitch McConnell of Kentucky. "And frankly, the American people deserve a lot better than that."

800,000 jobs seems like more than a campaign message.

But these national numbers are a bit hard to get our arms around.  

It's worth evaluating the impacts of this bill on a more local level.  What would the Act do here in Kentucky?

Over 200,000 Kentuckians are out of work.  That's nearly 10% of the labor force.

And since September, one of two major bridges crossing the Ohio River in McConnell's hometown of Louisville has been shut down after inspectors found cracks. Another bridge between Kentucky and Cincinnati has been deemed "structurally deficient".

Paul
Rand Paul
The bill McConnell and Paul voted against would have spent over $450 million on roads and bridges in Kentucky, and would have created 5,900 jobs.

Why would Mitch McConnell and Rand Paul reject 5,900 jobs for Kentucky? Why would they oppose fixing Kentucky's infrastructure?

Maybe they're concerned with raising taxes.  As McConnell said on Meet the Press, "We don't want to stagnate this economy by raising taxes" on those who make over $1,000,000, who Republicans are fond of calling "job creators" and "small business owners".

So let's take a look at who makes over $1,000,000 in Kentucky.  According to Citizens for Tax Justice [PDF Link via Greg Sargent] out of Kentucky's 4.3 million citizens, there are 1345 Kentuckians who would be affected by such a tax, and they make an average of nearly $3.5 million.

And it's worth noting that The 1345 are folks who don't just have $3.5 million - enough to qualify them as multi-millionaires.  These are people who clear $3.5 million per year.

The 1345 are the ultra-wealthy.  And businesses which help their owners reap $3.5 million per year are not ordinarily considered "small".

And what is the onerous burden the "millionaire's tax" would place on The 1345?  

Out of their $3.5 million in income, The 1345 would pay $17,409 more to fix Kentucky's roads and bridges which they undoubtedly benefit from more than Kentucky's other 4,338,000 citizens.

So: McConnell and Paul blocked the creation of 5,900 jobs and the improvment of roads and bridges for all Kentuckians in order to protect The 1345, a tiny group of ultra-wealthy Kentuckians who would pay only $17,409 to rebuild the infrastructure they use more than anyone else.

McConnell claims he doesn't want to "stagnate the economy" by taxing The 1345, which raises the question: What have these ultra-wealthy "job creators" been doing with this money while they've kept it?

Because they certainly haven't been creating jobs.

Mitch McConnell and Rand Paul chose to protect The 1345 at the expense putting 5,900 Kentuckians back to work.  At the expense of our crumbling roads and bridges.  At the expense of the other 4,338,000 Kentuckians.

And frankly, the American people - and Kentuckians - deserve a lot better than that.