Rhode Island Policy Reporter

Carbon for thought

An article here points out that a properly done cap-and-trade carbon policy would have a progressive (in the technical sense of tax policy) effect. It also points out that doing things John McCain's way might be as effective in the environmental sense, but have a regressive effect, and provide a windfall to electric producers and oil companies. More later.

Business subsidies

I was reviewing some statistics about state tax revenues last week, and looked at business taxes. Along with the income tax and sales tax, business taxes were once the third important leg of funding state operations, but no longer. Between 1996 and 2006, income tax collections rose by 76%, sales tax collections by 97% and business taxes by -- wait for it -- 14%, far less than inflation over that decade.

Why have business tax revenue declined so much? The economy has suffered recently, but not for all of that decade. The biggest reason for the decline is a nearly endless stream of special tax breaks. We offer businesses several different investment tax credits, an R&D credit, a credit for wages paid in an Enterprise Zone, a jobs development credit, a job training credit, a biotechnology tax credit, an "innovation and growth" tax credit, and much more. Some of these are worth millions of dollars. For others, we simply don't know what the effect is on the state budget. But the result is that 94% of the businesses in our state pay the minimum corporate tax of $500.

Highlights from the Supplemental Budget Follies

As expected, the supplemental budget passed the Senate last week, though it nearly ran off the rails in the Senate Finance Committee where a majority of the committee voted against it.

What's that? It lost in committee? Then how did it pass? Let's call it some extraordinary parliamentary maneuvering.

In an official sense, the Senate President and the Majority and Minority leaders sit on all the committees of the Senate, though they almost never attend or vote on committee matters. But last week, six of the ten Finance Committee members decided to vote against the budget, which forced all three of the ex officio members to interrupt whatever else they were doing, and show up at the Finance committee to cast their votes for the budget, in order to get the bill out of committee, 7-6.

The joke hiding here is not just that it took this much work to provide for a budget that slashes RIte Care, including for some legal immigrants, accelerates a few thousand retirement decisions among state employees, cuts money from all the cities and towns in the state for the current fiscal year, imposes a tax on bottled water, and cuts income taxes for the wealthiest taxpayers. The joke is also that it took two extra Democrats and one extra Republican to do it. The Republican was voting for his Governor's budget. What were the Democrats doing?

Why do they put up with it?

The House of Representatives last week approved the Governor's supplemental budget for this current year. They approved of the plan to take back $12.5 million from all the cities and towns before the end of June, throwing 39 municipal budgets into chaos. This plan also cuts 2700 immigrant children from RIte Care -- including more than a thousand who are here legally -- and forces state employees to take six furlough days. There are some minor deviations from the Governor's original proposal, but they are nothing compared to the agreement.

My favorite: cutting $26 million from Rhode Island Housing. This agency gets its money from federal housing grants and from borrowing. Using their money to balance the budget means we are using either borrowed money or federal housing grants. I report, you decide which is worse.

The sad truth is that the Governor and the leadership of both houses of the Assembly are reading from the same script. The Assembly leadership team call themselves Democrats, but so what? They are for slashing pensions and health care for state and municipal workers and ending important (and cost-saving) social programs. All the while, they are cutting taxes for rich people, while the upward pressure on local property taxes remains as bad as ever. In what meaningful way is this a Democratic agenda? Maybe they mean that the program cuts cause them more pain than they cause Republicans.

Immigrants

Lenny Bruce used to say he didn't believe the stories about dolphins pushing drowning sailors to shore. He said dolphins just like to push people around -- and you never hear from the people who get pushed away from land.

As a nation of immigrants, we hear a familiar line whenever immigration comes up: "My grandparents came here and they worked hard and they did fine." And whenever I hear it, I think of a Greek uncle of mine, Niko, who I knew when I was little. He wasn't strictly related, but he was married to Georgia, my aunt's best friend, and frequently showed up at family holidays where I played with his daughter Photini. Niko never really mastered English, and I remember him sitting quietly by himself somewhere to the side of the action during those holiday gatherings. Sometime around when I was 16, Georgia died and he decided that America just wasn't for him, and moved back to Athens.

The capture of Keynes

Every time you see a TV ad with shaky camera work, think that you're seeing the commercial use of what was once a hallmark of the non-commercial, and marvel at the free market's ability to co-opt pretty much everything — including economic policies originally meant as a critique of business-as-usual market capitalism.

Communist revolutionary Che Guevara rapidly became an inspirational figure for revolutionary socialist change after his execution in Bolivia in 1967. Forty years later, Che lives on but his image now adorns t-shirts that have become popular fashion statements. This transformation reflects the extraordinary power of markets to capture and transform, turning an avowed enemy of the market system into a profit opportunity.
The process of capture also holds for economic policy, which has witnessed the conservative capture of Keynesianism. This capture is now on display as U.S. policymakers struggle to contain the effects of a collapsing house price bubble that was recklessly funded by Wall Street. The sting is that the full powers of Keynesian policies are being invoked to save an economy that no longer generates Keynesian outcomes of full employment and shared prosperity.

Data about immigration

What? There's actual data to inform the discussion of illegal immigration and its effect on the state budget? Huh.

Here's the Congressional Budget Office's review of 29 reports about the fiscal impact on state and local budgets.

What does it say? It says that illegal immigrants pay more in taxes than the services they receive, but that they pay most of it in federal taxes, and the services they use are state and local services. Federal services typically deny assistance to illegal immigrants, but federal laws and court rulings deny that possibility to states and towns.

Immigration is, of course, largely a federal problem. It's the federal government that turned a blind eye to employers who came to depend on cheap labor from the south. So immigration is, again, a case of the powerful shifting the cost for their bad decisions onto someone else, simply because they can. The real mystery is why everyone gets mad at the immigrants and not at Congress or the President.

Here is a page of research from Federation for American Immigration Reform (FAIR). They would seem to be the source of a lot of the data used in debates about illegal immigration here. I couldn't help but notice that they are on the high side of all the relevant estimates, though perhaps within the margins of error.

Issue 31

Is at the printer.

Eric Hirsch on homelessness and the housing market. How income polarization has affected homelessness in more ways than you think.
What car imports in the 1980's and the housing market of the past few years have in common. See here.
Review of Dan Ariely's book "Predictably Irrational", a behavioral economic account of irrational behavior.

Didn't you mean to subscribe today?

A moment passed

It's now quite clear that nothing is going to happen to the President who has openly admitted that he authorized torture, and that, far from being the acts of a few bad apples, our appalling descent from at least a pretense to the moral high ground was engineered by decisions made at the very top.

It's hard to find words to express the astonishment at how quickly our country could descend to barbarism. Not to mention the sadness.

Here's someone who tried.

Background summarized well here.

A historic blunder on tax credits

We got a taste last week of how House Finance intends to deal with the fiscal crisislast week. What did we learn? We learned that the distance between the House leadership and the Governor can be measured in small fractions of a millimeter. Challenged to do something about the burgeoning cost of the Historic Structure tax credit, they decided not to limit it to affordable housing developments, or to cap it, but to deep-six it altogether.

To understand this story, you need to understand how tax credits like this work. It's not that hard. Suppose you want to rehabilitate some historic building. If it meets the criteria, you are eligible for a 30% credit against your taxes. But suppose you don't ever owe that much, or suppose you're a non-profit who doesn't pay taxes? In that case you can sell your credit to someone who wants a break. If you have a credit for $100,000, and you sell it to your friend for $80,000, then you're $80,000 ahead, and your buddy gets to use your credit to pay his taxes, so he's ahead $20,000. Sweet, no?

Hurray for the free market

Another corner turned in the war on drugs. Apparently poppy production in Afghanistan is down. Why? It's more profitable to grow wheat this year.

Isn't that great? And it comes in bags of white powder, too.

Handy/Moura hearing: special tax breaks and the general good

Last week, there was a State House hearing about the "Economic Growth and Fairness Act," a complex tax reform bill sponsored by Representative Art Handy (D-Cranston) and Senator Paul Moura (D-East Providence). (First, the full disclosure: I did research to support this bill, and testified for it. I've never claimed to be an objective journalist, only an honest one.)

Before the hearing, there was a rally in the rotunda protesting cuts to Head Start, the early-childhood education program. "Great," you say, "yet another interest group, trying to protect its special program that's costing us money." I watched the rally, then went downstairs to the hearing.

And do you know what I saw there? Lots of other interest groups trying to protect their special programs, mostly tax breaks. The difference? These people were wearing nice suits. (So was I. As I said: full disclosure.)

What do you think about the Electoral College?

What was the most outrageous thing about the election of 2000? You might think it was the conduct of Florida's election, or the way the Supreme Court ruled that counting votes wasn't as important as preserving George Bush's presumption of victory. I think it was the fact that the loser got half a million more votes than the winner. Is this how we want to run a democracy?

As most of us realized in 2000, we don't have a national election for president. We have 50 elections to choose "electors" who go off and meet as the Electoral College and choose the president. The College is one of those undemocratic vestiges of a time when the founding fathers were willing to endorse democracy in principle, but not so much in practice. This year, there's a bill in 44 state legislatures, including ours, that could spell the end of the Electoral College. It has an uphill battle here, though, and needs your support to get through the Assembly.

Evading the rules and learning from experience

Last week, the news was about the RI Resource Recovery Corporation, and it was enough to give anyone pause. A state audit uncovered land deals that seem pointless to the agency's charge, charitable contributions that seem to have been made at the pleasure of various RRC board members, and legal work awarded to friends and relatives.

There was some related news, too, though maybe it didn't seem that way to you. The House is considering a move by Governor Carcieri to merge the state's three environmental agencies, CRMC, DEM and the Water Resources Board. CRMC fired a salvo in that battle by pointing out that DEM workers had violated some wetlands rules by clearing land at Fishermen's park. (This was apparently not news at DEM and seemed mostly an attempt by CRMC to embarrass people into dropping the idea of the merger.)

What's related about these? Just this: both agencies were created to get around what were perceived as overly restrictive state rules, and both have lived up to their founders' intentions by becoming havens for, well, let's call it something less than the professionalism I expect from my government.

But what will they invest in?

It sometimes seems I spend too much of my time writing about taxes on the rich and the poor. It's uncomfortable territory on which to stake one's tent. People accuse you of socialism, and make sneering remarks about not getting the memo about the fall of the Soviet Union. This gets dull, to be honest, but the truth is I occupy this uncomfortable (and fairly lonely) little outpost not for ideology, but because the arithmetic drove me there. A transfer of taxes from rich people and corporations to the poor and middle is what we've experienced at both the state and national level over the past 25 years. There's simply no way to get around it, because that's what happened.

A Funny Kind of Antagonists

One of the persistent myths about the conduct of our state government is that the Governor and Assembly are two poles of a struggle. The idea is somehow that the Governor is engaged in a titanic battle for control over our government, pushing to cut expenses and hold the line on taxes, and Democrats in the Assembly are thwarting him at every turn.

This is, however, absurd in almost every particular, a fairy tale that bears almost no relation to what really goes on under that big white dome.

This isn't good

Via here, I read that US corporations are apparently flush with cash. From the New York Times:

The increase over the last decade in the amount of cash, as a percent of total assets, for the companies in the Standard & Poor's 500-stock index has been steep....According to S.& P., the total cash held by companies in its industrial index exceeded $600 billion in February, up from about $203 billion in 1998.

This is not at all surprising. As was noted last year in RIPR 25, declining investment opportunities may have already become the most significant untold economic story of the 21st century. During the Depression, economists clearly saw that this was a problem to be addressed, and academic disputes raged about why opportunities were in decline. (Joseph Schumpeter and Alvin Hansen representing two of the important antagonists.) But after WWII, there was plenty to invest in, and the topic faded from importance.

But just because a topic isn't trendy doesn't mean that it isn't relevant, and that appears to be what's happening here. Ask yourself: if $40,000 dropped in your lap tomorrow, what productive investment would you make with it? Can't think of anything? You're not alone, and that's a problem.