Topic: Tax and Budget Policy

Florida Enjoys No-Income Tax Status

While New Hampshire residents are famous for their aversion to the income tax, Florida taxpayers also are spared from this odious levy and state politicians wisely avoid any mention of the income tax. As the Gainesville, Florida, newspaper reports, even Democrats are reluctant to broach the subject. Not surprisingly, tax competition plays a role. The original amendment banning the income tax was motivated by a desire to attract productive people, an approach which simultaneously - and deservedly - punished high tax states:

…one potential new revenue source, common in most states, remains unthinkable and unmentionable in Florida: a personal income tax. “It’s a terrible way to tax,” said House Policy and Budget Committee Chairman Ray Sansom “We would never consider something like that. That would be the last thing. It’s sort of over our dead bodies.” Sansom, R-Destin, said House Republicans never gave income tax the slightest thought when they came up with their tax-swap proposal. …Senate Democrats also never considered an income tax when they drew up their proposal… Florida’s income tax aversion dates to 1924, when voters banned it through an amendment to the state constitution. The state remains a tax haven more than 70 years later… Politicians saw the ban as a way to attract wealthy people and encourage them to invest in Florida at a time when other states just were beginning to tax incomes.

Over-taxed

From the Agoraphilia blog, Glen Whitman ridicules those who ridicule Americans who feel over-taxed:

Sub-headline from an article about a survey on taxes: “An MSN-Zogby poll says that many Americans think they’re paying too much in taxes even though research shows the average tax burden is light compared with other developed countries.”

Interesting. I’ve also heard that for some reason, paraplegics would like to get the use of their limbs back, even though other people are totally paralyzed from the neck down. Oh, and people who have lost an eye would like to get their 3D vision back, despite the existence of blind people. What is wrong with these people?

The Nation’s Worst-Managed Transit Agency

For years, Washington, D.C. has been considered by many students of government to have the nation’s worst city government. Similarly, the Washington area transit system, Metro, is in contention as the nation’s worst-managed transit agency.

The Metro Rail system was built with federal dollars, with the understanding that local governments would pay for its operation. But no one was prepared to pay for rail reconstruction, which is needed every 30 years or so and which costs a substantial fraction of the original construction cost. Now, some of the system is approaching 30 years of age and is breaking down with increasing frequency.

But Washington’s Metro is not the nation’s worst-managed transit agency — not by a long shot. That dishonor goes to San Jose’s Santa Clara Valley Transportation Authority (VTA).

VTA persuaded local taxpayers to raise sales taxes to construct billions of dollars worth of rail transit lines. But it failed to budget enough money to operate those lines. Even as it opened new light-rail lines in the early 2000s, VTA was forced to severely cut bus and rail service on its existing lines. The result was a 34 percent decline in transit riders.

A few weeks ago, a consultant hired by VTA released an audit blaming the system’s board of directors for its failures. “The Board has approved capital projects that were political solutions to address the needs of certain local neighborhoods at the expense of regional congestion management,” states the audit. “As a result, VTA has built transportation systems that have low ridership and are also expensive to operate and maintain.”

After the audit was published, VTA’s chief financial officer resigned. Unfortunately, none of the board members followed. Instead, they hired a temporary chief financial officer for the munificent sum of $13,600 per week for 39 weeks. That’s a total of $530,400 and more than three times the weekly pay of the previous CFO.

It gets weirder: The new CFO has no history in the transit industry. Instead, he is a former mining company executive who oversaw a shell game of companies taking over other companies. “He has a lot of experience with projects and a lot of our money is tied up in projects,” says VTA’s general manager. There are so many similarities between digging gold and sapphire mines and building transit lines — like none.

One wonders what the new CFO might do. Merge VTA with Washington Metro? Bull the stock with rumors of an untapped source of transit riders? Corner the market in light rail?

Meanwhile, everyone is trying to ignore the gorilla in the corner, which is that VTA’s board wants to spend $4.7 billion to connect the San Francisco BART system to San Jose. The agency only has enough money to build to the edge of San Jose, but even if it had all the money for construction, its general manager admits “we clearly do not have the money to operate the system.” Nevertheless, the board recently voted to spend $185 million — more than half of VTA’s annual operating budget — on preliminary engineering.

Meanwhile, VTA is still short on operating funds, so it is contemplating “eliminating or consolidating” service on more than a quarter of its remaining bus lines.

Almost every Bay Area transit group opposes the BART line. But the audit (which itself cost $500,000 — I would have done it for $5,000) barely mentions the BART line, and the Silicon Valley Leadership Group (formerly the Silicon Valley Manufacturers Group) strongly supports it.

Last June, San Jose voters angrily rejected VTA’s request for a further sales tax increase to build the BART line. VTA’s board members are hoping they can convince taxpayers that they are fiscally responsible enough to deserve a tax increase anyway. But spending $530,400 for less than one year’s work by a temporary CFO hardly seems conducive to gaining the taxpayers’ trust.

Abracadabra! County Pulls a Subsidy Out of a Hat

Jacob Grier, the blogger-barista-magician with a highly coveted Vanderbilt degree, has been writing about Montgomery County’s plans to evict Barry’s Magic Shop from the site in Wheaton, Md., where it has survived for 31 years. As he wrote last June:

The real story is that simply because a few county planners have decided that the land could be better used to attract developers than as a magic store, the man who owns the building has had his property forcibly taken from him and a small business that has thrived for decades is being evicted years before its lease is up.

The county used eminent domain to take the building in order to build a walkway as part of a grand plan for Wheaton. The plan has been in the works for years, and there are no immediate plans for actually building the walkway, but the building has been seized.

But today there’s good news! For Barry’s and its customers, anyway, if not for Maryland taxpayers and property owners. In addition to spending over $2 million to take the building and build the walkway, taxpayers – in the person of Montgomery County Executive Isiah Leggett – are also going to spend $260,000 to relocate the magic shop.

So first the county spends taxpayers’ money to seize private property in the name of its own vision of what that corner of Wheaton should look like. Then it spends more taxpayers’ money to subsidize a small business.

Here’s an idea: Why not let the market decide where businesses locate, without subsidizing the businesses and without seizing their property? As Jacob says,

This is a story that should make people angry. Angry that George Chaconas had his land taken from him. Angry that Barry Taylor and Suzie Kang are being evicted years before their lease is up. Angry that this is all being done with taxpayers’ money to subsidize the developers who will eventually move into the area, just because some guy named Joseph Davis thinks that’s the way things ought to be.

Montgomery County, Maryland: Where everything goes according to plan. Or else.

A Good Tax Increase?

Fannie Mae and Freddie Mac are quasi-private mortgage companies that receive huge implicit subsidies from taxpayers. So it is difficult to know how to react to a deal between the Bush Administration and Congressman Barney Frank (D-MA) that would skim some money from Fannie and Freddie and use the money for so-called affordable housing. The bill would curtail the ability of Fannie and Freddie to use their subsidized status to expand into new markets, which is good. The bill also would make Fannie and Freddie shareholders unhappy, which is good (or at least amusing) since they have been implicitly profiting from government rather than market forces. But the deal also means more money for politicians to redistribute, which is akin to giving an alcholic keys to a liquor store. The Wall Street Journal reviews the good and bad of the deal:

[Rep Frank’s] bill would tax Fannie and Freddie to the tune of 1.2 basis points of their total book of business – or just over 1/100th of 1% of all the mortgages Fannie and Freddie have bought and packaged to sell to investors. That’s more than $500 million a year, with potential to grow. The Bush Administration has insisted that the fund be disbursed based on non-political criteria, but, c’mon, this is Washington. While the first year’s payout is supposed to go for housing on the Gulf Coast, a honey pot this sweet will soon be passed out based on the interests of the most powerful Members. The larger political danger is that such a fund gives Congress an even greater stake in seeing Fan and Fred grow. The fund amounts to an annual dividend payout to Congress. The Fannie Tax would thus make it even less likely that these “government-sponsored enterprises” (GSEs) will ever be weaned off their implicit taxpayer subsidy and act like normal private companies. Congress could also look at this earmarked tax precedent and try to apply it elsewhere – say, on the profits of energy companies for a “global warming fund.” …the current meltdown in the subprime and Alt-A mortgage markets has led to calls – by the same people now dunning Fan and Fred – for all kinds of new lending oversight, rules and restrictions. Mr. Frank’s latest brainstorm is to stick investors in mortgage-backed securities with the losses when subprime borrowers default. It’s hard to imagine a measure better designed to cut off credit to those Mr. Frank claims to want to help. If investors don’t have legal certainty about the debt they are buying, they won’t lend the money.

England Contemplating Territorial Tax Regime

The core principles of good tax policy are low tax rates, taxing income only one time (no more double-taxation of saving and investment), no special loopholes (which also means simplicity), and territoriality (only tax income inside national borders). The Anglo-Saxon world is often guilty of violating the last principle, generally imposing worldwide taxation. Fortunately, tax competition is eroding the ability of nations to impose bad tax policy. The United States, for instance, approved the Homeland Investment Act a couple of years ago, which temporarily allowed companies to repatriate foreign-source income at a much lower rate of tax. The United Kingdom is now considering a a much better solution – a permanent change that would move much closer to a territorial tax regime. As is so often the case, tax competition is the impetus for the reform. British policy makers are afraid that companies are moving abroad to escape the anti-competitive burden of having foreign-source income subject to tax by both the nation where it was earned (which is appropriate) and the British Exchequer. Tax-news.com reports on this potentially important development:

The United Kingdom government is reportedly working on proposals that would allow British-based multinationals to repatriate billions of pounds in profits earned overseas free of tax. According to a report by the Financial Times, the Treasury is preparing to launch a consultation document this Spring which will discuss a number of options, including an European-style “participation exemption” for foreign dividends, as well as a different approach to the anti-avoidance rules that impose tax on profits generated in low-tax jurisdictions. The move by the British government is being viewed as part of its effort to improve the corporate tax regime, after several warnings from business groups that recent additions to UK tax legislation are making the country increasingly uncompetitive compared with its economic rivals. Seemingly heeding these calls, Chancellor of the Exchequer Gordon Brown announced in his budget statement last month a 2% cut in corporate tax to 28%, bringing the UK below the OECD corporate tax average. …it is anticipated that the change would be welcomed by companies, as they would no longer have to apply complex tax strategies to minimise taxes on repatriated profits.

European Bureaucrats Want Massive Expansion of Savings Tax Cartel

Appeasement generally is not a good strategy since it encourages an aggressor to make additional demands. This certainly is the case in Brussels. The European Commission is gearing up for a campaign to expand the size and scope of the so-called savings tax directive. This cartel seeks to prop up bad tax policy by making it easier for high tax nations to double-tax income that is saved and invested. The bureaucrats in Brussels are upset that the current version of the directive, which was implemented in 2005, is riddled with loopholes, enabling most taxpayers to protect their assets from an additional layer of tax. So now they want to expand the directive, both in terms of the types of savings and investment that would be subject to double-taxation and the number of countries asked to be in the cartel. Hong Kong and Singapore already have told the Europeans that they have no desire to sabotage their economic interests by helping Europe’s welfare states track - and tax - flight capital. This resistance is good news, but the bureaucrats learned from the first round of this battle that it is possible to badger low-tax jurisdictions into making foolish decisions. The Financial Times reports on the European Commission’s radical agenda:

has launched a drive to close the gaping loopholes in a two-year-old European savings law… early evidence is that the directive is failing to bite. Switzerland, the world’s biggest offshore financial centre, only raised €100m in the first six months of the law’s operation. Meanwhile Mr Kovacs is worried that some savers have moved to Hong Kong and Singapore – not covered by the directive – and he is trying to arrange reciprocal deals with them. …Whether he can persuade EU member states and third countries to give their unanimous agreement is questionable: diplomats say big offshore financial centres like Switzerland, Luxembourg and Austria only agreed to the directive precisely because it contained so many loopholes. …A Commission working document…proposes…extending the directive’s reach to include companies and trusts. It also floats the idea of blocking the deliberate routing of interest payments through branches of banks located in jurisdictions not covered by the directive, whose reach also includes several Caribbean islands, the Channel Islands and the Isle of Man. The working paper suggests that the tougher definition of “beneficial ownership” used for anti-money laundering obligations should be adopted for the savings directive. This would bring discretionary trusts and companies into its scope. It suggests imposing a new obligation on EU banks to report – or withhold – interest payments made through non-EU branches. …It suggests reconsidering whether interest-generating securities “wrapped” within life insurance, pension or annuity contracts should be exempt from the directive.