Category: taxes

Economic Recovery Prevention Commission

I must not have been paying attention, but apparently on June 24 Governor Quinn’s Economic Recovery Commission issued its report. If we’re lucky, this will be one of those that just sits on the shelf.

The whole report is at the link above, or get the pdf from the direct link here, provided by the Executive Service Corps. It seems that a summary would be: “Raise taxes and make them more complicated, then give more subsidies to favored interests.” Among the tax increases are higher individual and corporate income taxes, and a broadening of the sales tax to include more services.

Those of us with a sound understanding of economics will be shocked discouraged to find that there is no mention of increasing the taxes on land value as a way of encouraging development and easing taxes on productive activity.

I’m not likely to review the whole report in detail, and doubtless it contains a few sound recommendations. I’ll just mention two other things that struck me.

First, we all know about TIF’s which divert real estate taxes to private pockets, and there are quite a few TIF’s that divert sales taxes, but this is the first I’ve heard of a TIF that diverts state income tax:

The CenterPoint Intermodal Center in Joliet, a 3,900-acre state-of-the-art, integrated intermodal center,  represents a $2 billion private investment. The center also will receive State investment under theIntermodal Facilities Promotion Act, signed last year. Designed to encourage business development along the freight rail systems of Illinois, the Act authorizes income taxes from jobs created at the facility to be placed in an Intermodal Facilities Promotion Fund. DCEO will administer the fund to reimburse CenterPoint for infrastructure improvements. DCEO will award an annual grant of up to $3 million in fiscal years 2010 to 2016.

Second, among the recommendations is an increase in the public employee retirement age to 72. I am no expert in retirement ages, and probably it’s appropriate to push the age up from 60 (which I believe it is now, and younger in many cases), but 72? No basis is given for choosing this age (other than the obvious fiscal benefits of more workers and fewer retirees. My guess is that nobody takes this recommendation seriously; had they recommended 65 or 67, there’d be a danger that the change might actually happen, but there are probably enough stories of senile 72-year-olds to prevent anything from being done.

Lawyer tax

Many years ago, I encountered a prosperous attorney who was (and probably still is) pushing for a national sales tax covering all goods and services.  This was before Bush’s tax panel outlined in some detail the exhorbitant rates that would need to be applied if such a tax was intended to replace the federal income tax, but I had a general sense that it wasn’t a workable replacement.  So I asked this lawyer whether he intended that such a tax would cover legal services.  He said that he really hadn’t made up his mind about that.

There are good arguments why legal services oughta be exempt, but the same can be said about all other services and all goods, too.  So I was kind of pleased to note that the Province of Ontario will now apply the 13% “harmonized sales tax” to legal services, while continuing to exempt newspapers and shoe repairs.  (British Columbia will do the opposite.)

America Speaks “National Town Meeting”

Anyone who’s been paying attention is aware that the Federal budget is out of control, unsustainable, and politicians dare not display any consensus on what to do about it.  So several wealthy foundations are funding the “America Speaks” project, which seems to have focused on a fleet of 19 “town meetings” (plus a few dozen less-connected gatherings) held today.  I attended Chicago’s, at Navy Pier.

The concept is at least a little bit promising.  I guess we had about 600 people, assigned to tables of a dozen or so each, and we talked about how the Federal financial situation might be improved.  But first we had a very loud presentation from Philadelphia. (Philadelphia is apparently standing in for Washington and New York, so we won’t suspect that political professionals and Wall Street are involved in the effort.) We were told that, yes, the deficit is a big deal(as described in this pdf). And before talking about the options for reform, we were directed to determine our values.  The “values” are listed below (and on worksheet #3 of this document), along with the reasons that they make no sense at all. Continue reading America Speaks “National Town Meeting”

California retrieves TIF funds for “education”

Faced with fiscal strains similar to ours, California legislators observed that TIF funds weren’t particularly well-used, and are taking them to fund government schools.  Since Illinois TIFs are authorized by the State it seems that the State could control or limit them, and divert the funds to some more effective use (not necessarily the schools).

Of course, if this reform got serious support, I suppose the TIF authorities would promptly find it necessary to sign long-term contracts with connected developers or consultants, to be paid out of anticipated cash flows, so it might take quite a while to have any effect.  And anything beyond the next election is too far away to see.

Taxing billboards– a win-win?

Since billboard value is a function of location in the community, it’s only fair that the community should collect most of the rental value.  Accordingly, the City of Toronto expects to collect C$10.4 million/year with a tax of $850/$24,000 per billboard, “depending on size and type.” Naturally, the billboarders object, saying that they’ll pass the tax on to landowners and advertisers (which somehow makes it illegal– but I do not understand U. S. law, let alone Canadian).  But of course, all taxes are ultimately paid by landowners. Perhaps the tax will reduce the number of billboards, but most citizens are likely to survive this loss.

Mayor Daley, being in a taxing mood, might want to consider this, if his obligations to the billboarders aren’t excessive. Chicago Reporter has found many illegal billboards in the city, and that politicians receive, not only free space, but cash contributions, from the billboarders.

ht Frank Dejong

ICMA on LVT

ICMA (International City/County Managers Association) has published Walt Rybeck’s article about some of the advantages of taxing land value.  A good introduction for those generally familiar with local government issues but not with land value tax. Includes link to a video which summarizes the case.  Inconveniently, Harrisburg, PA is highlighted as a success for LVT.  It is, but other problems have overwhelmed it in recent months.

(And in the process of locating the video link, I found a couple about Walt’s late brother and fellow geoist, “Dental Farmer” Art Rybeck.)

Vague ideas about the income tax

Many of us have a vague idea that the income tax is more or less “progressive,” meaning that those with higher incomes pay a larger share of income than those with smaller incomes.  Of course there are some unfair loopholes, but on the whole these people would like to see the income tax cover a greater share of government revenues. Of course, those of us who actually look at how taxes work know that the income tax makes no sense at all, and is only very vaguely related to income.

In fact, a new-to-me report shows that among the richest (top quintile of income), effective average tax rates range from less than 3.8% (for the cleverest 10% of these affluent taxpayers) to 18.6% (for the most tax-burdened tenth of this group).  For the “middle class” (third quintile), the range is from -4.5% (meaning that refundable tax credits exceed otherwise-taxable income) to 9%.  (Exactly what definition of income applies here is not clear; it’s based on the “Urban-Brookings Tax Policy Center Microsimulation Model (version 0509-4),” which I haven’t examined.)

Of course this weirdness is the result of many “loopholes” and special provisions.  In theory it would be possible to eliminate them and come up with a simpler tax, but in front of each loophole stands a lobbyist (and/or a legislator favored by a lobbyist).  U S Senators Ron Wyden (D-Oregon) and Judd Gregg (R-New Hampshire) have introduced S-3018, which will do away with many(pdf) (but not all(pdf)) of these provisions.

The mortgage interest deduction stays, which maintains a subsidy for real estate speculation. The deduction for corporate-paid interest would be limited to the amount in excess of inflation, which appears to mean that a corporation, upon issuing fixed-rate bonds, would have no way to know in advance how much interest they’ll be able to deduct.  Perhaps this will encourage inflation-indexed bonds?  Also, it is not clear what the effect  would be if we enter an (unlikely) deflationary period.

I see this as simply one more illustration that the tax on earned income (including revenue from investments in real capital) is a hopeless mess.  A tax on privilege (or, what is effectively similar, on the income from privilege) would be much more straightforward and encourage balanced economic growth.  Unfortunately, those who hold privilege have great resources to fund lobbyists and other professionals to block to adoption of such a tax.

ht Forbes via Yglesias (indirectly from Felix Salmon)

Illinois Fiscal Rehab

Our friends over at the Civic Federation on Monday issued a “Fiscal Rehabilitation Plan for the State of Illinois.”  It has a pretty decent summary of where we stand financially, and by what route we got here.  The short version of this is, we are in deep doo doo.  And in recent years, the doo doo has been spread around in confusing ways, making it harder to trace the problem.  But now, no question about it, we have retiree benefit liabilities far beyond the funds available to pay them, debt has been increasing, and programs for the poor are facing increasing burdens with decreasing resources, while tax revenues have been slipping. (The report doesn’t discuss infrastructure needs.)

The report, funded by some of Chicago’s wealthiest foundations, recommends freezing or cutting funds for  State programs, reducing pension obligations to the extent possible, raising the personal income tax 67% and corporate tax 33%, and removing a few relatively minor tax breaks.  It also suggests that pension income be taxed and that the State move toward taxing consumer services.  Despite these tax increases and ongoing national economic difficulty, it pretends that the income and sales tax bases will not decrease.

Of course this is a dumb plan.  Frozen or reduced expenditures will be inadequate to meet the State’s needs. Increased rates of tax on productive activity will cause some of that activity to leave Illinois, or simply not to occur.   When they see their income become subject to tax, some pensioners will choose to move out of state– and the ones best able to leave are the affluent ones, who pay sales and property tax and don’t so much burden public services.

But the State is in a fiscal hole, so if I don’t like the Civic Federation’s plan shouldn’t I suggest one of my own?  Despite the lack of foundation funding, that is what I shall do.

I won’t comment much on the expenditure side. Probably some pension cutbacks are appropriate, and there is surely plenty of fraud and waste in many programs (tho catching it is difficult).   Some programs certainly could be eliminated, but the big ones– education, transportation, aid to those unable to work– are necessary in some form.  Also, there is an existing debt of about  $25 billion, plus $66 billion in unfunded retiree liabilities (for past years). So we need a lot of revenue.  How to get it?

What about a land value tax? Now, nobody knows what the land of our State is worth, but we know for sure that it isn’t moving away.  It might be $2 trillion.  Suppose we were to tax that at, say 1% of value.  That’s $20 billion/year, more than the total raised by the State sales, corporate and personal income taxes. That bails us out of the debt in a few years, allowing eventual elimination of these other taxes.

Is it fair? It’s more fair than asking hardworking people to share their salaries with the State, then pay again when they purchase things.  (The Illinois sales tax originated, in 1933, as a way to eliminate the real estate tax.) It’s not just fairer, but also smarter, than telling employers and retirees that if they stay in Illinois, the State will take a share, an increasing share, of their income..

I have a special affinity for taxing farmland, because I look at listings like this 210-acre farm where real estate tax is only 1/10th of 1% of value.  Others pay even less.  It’s quite legal, tax preferences for “farmland” even tho the owners in most cases are investors, not farmers.  There are plenty of urban examples, too, some illustrated here.

Although Civic Federation’s recommendations are foolish, I think descriptive portions of the report are pretty good.  Two things I learned are, first, that the number of State employees has dropped about 20% in the past decade, and second, that expenditures on “Corrections” are only about $1.1 billion/year. It still would be a good idea to let all the innocent people out of prison, but that’s not going to solve our budget problem. However, if we raise taxes as the Civic Federation suggests, those released, as well as the rest of us, are unlikely to be able to find jobs.

70 Senators agreed with Joe Stack

The main issue Joe Stack seemed to have with IRS when he crashed his plane into their offices yesterday was the “Section 1706” provision which made it difficult for “information technology professionals” to work as independent contractors. NY Times’ David Cay Johnston reports that 70 U S Senators, including original sponsor Moynihan, had agreed it raised little or no revenue and should be repealed, but somehow it survived.  Johnston also says it originated as a favor to IBM.

Is it inevitable that anything like a tax on earned income must become so complex that it virtually can’t be fixed, even when “everybody” agrees how it should be done?