The Tax Policy Blog

This morning, we published a report on some of the taxes being proposed during Maryland's special session. The special session was called to avoid "doomsday" budget cuts that were triggered when the assembly failed to reach a revenue deal at the end of the regular session. Of course, the budget cuts were actually cuts to planned spending increases, so even if they had been allowed to take place, the budget would have grown 2 percent over last year. This is hardly a doomsday scenario.

Today, we've just received word from the Maryland statehouse that the Senate has passed the income tax increases, and also snuck in a tobacco excise tax increase. The income tax increase will mean that a family of four earning $250,000 in Montgomery county will pay almost $1,000 more in taxes each year. You can find the rate breakdown here.

Increasing taxes on high-income earners is often politically expedient, but that does not make it sound tax policy. While voters sometimes see hiking taxes on the rich as a free lunch, doing so in the long term has dynamic effects. Namely, people are not willing to work as much if they have less take-home pay. This hurts long-term growth for the entire economy, and all citizens bear that cost.

The tobacco tax hike is troubling as well. It raises taxes on "little cigars" from 15 percent to 70 percent of wholesale, and raises taxes on smokeless tobacco from 15 to 30 percent. More and more I find myself being persuaded by the moral argument against taxing tobacco at increased rates. Patrick Fleenor put it best back in 2009:

The fact that something is risky doesn't make it bad. Some people ride motorcycles and sunbathe; like smoking, these are risky activities. Are they therefore bad? No. As long as people understand the risks of what they are doing and bear all of the costs, there is no reason for the government to threaten to impoverish them if they don't live their lives in the way some bureaucrat demands.

Life in a free society requires tolerance of activities that have little or no effect on others, even those we don't personally approve of. If government or interest groups have information about risks that are not widely known, they should disseminate it. Otherwise, adults should be left alone to live their lives in accordance with their own dreams and values.

More on Maryland here.

A key element of President Obama's corporate tax reform plan has been introduced in the U.S. House of Representatives by Rep. Bill Pascrell (D-NJ) and in the Senate by Sen. Debbie Stabenow (D-MI). Called the "Bring Jobs Home Act" (H.R. 5542), the bill would give eligible firms a tax credit equal to 20 percent of the cost of relocating overseas jobs back to the U.S.

Of course, the premise behind this legislation is that U.S. companies are "shipping jobs overseas" because of various perceived loopholes in the tax code and that a new tax break will encourage them to bring those jobs home.

But the facts show that the outsourcing issue may be one of the most over-hyped issues in American politics.

Hard data from the Bureau of Labor Statistics (BLS) shows that only a small fraction of the mass layoffs in any given year are moved offshore. The vast majority of layoffs that result from the movement of jobs from one location to another are domestic - meaning that U.S. workers have more to fear from their job being moved from one state to another rather than to another country.

The table below shows the total number of job losses resulting from mass layoffs (layoffs of 50 workers or more) from 2008 to 2010. In 2010, just 3.1 percent of the nearly 1.3 million total layoffs were the result of relocating jobs from one location to another. Of those three years, 2008 had the largest percentage of relocation-driven layoffs at 4.0 percent.

BLS and the employers cannot always document where those jobs are move to, but the data clearly indicates that the vast majority of those jobs are domestic relocations and within the parent company. For example, in 2010 BLS was able to identify the destination of 18,622 job losses resulting from the movement of work (just 1.2 percent of the total layoffs that year). Of those identified, 71 percent were domestic relocations. By contrast, 5,336 of those job losses (29 percent) were relocated abroad and the majority of them were within the parent company.    

The bottom line is that the outsourcing of U.S. jobs abroad has become a political urban legend that has little basis in fact. As such, policies such as the Bring Jobs Home Act are likely to play well politically but have little impact on creating jobs here in the U.S.

Today's Monday Map is a repeat of our cigarette tax map from a few weeks ago, with one change: it shows how the state rankings would change if California voters pass California Proposition 29, the Tobacco Tax for Cancer Research Act - a $1.00/20-pack increase in the cigarette excise tax. 

Currently, California's cigarette excise tax stands at $0.87/20-pack, giving the state the 32nd highest cigarette tax in the country. Should California pass Proposition 29, the tax would increase to $1.87, and would rank 15th highest.

Click on the map to enlarge it.

The original map is located here.

View previous Monday maps here.

TaxProf points us to a very interesting article which makes the case that the origins of our current debate over "Obamacare" and particularly the health care individual mandate stem from 1960s era IRS rulings on the charitable nature of hospitals:

"In fact, under ruling 69-545 a tax-exempt hospital did not have to provide any free care to the poor so long as it maintained an emergency room open to all regardless of ability to pay, accepted Medicare and Medicaid patients, and had an independent governing body comprised of community leaders. The IRS had decided that the "promotion of health" was an inherently charitable purpose even if the cost is borne by patients and third party payors. It is important to note, that the change from a relief of poverty standard to a promotion of health/community benefit standard was not the result of a change in the law-rather it resulted solely from a change by the IRS in the regulations interpreting the law. The validity of this change has, however, withstood repeated court challenges. It appears that part of the reason for the approach taken by Revenue Ruling 69-545 was the passage of Medicare and Medicaid four years before in 1965. The IRS evidently believed that this new legislation would provide adequate access to medical care for the poor and indigent."

Accordingly, most hospitals now operate as tax-exempt entities and in return provide free or low cost care.  The removal of market pricing from health care has led to the same sort of problems we might expect if shoes were provided free of charge: over-consumption, out of control costs, poor quality service, and rationing.  The health care individual mandate is meant to address this market distortion by penalizing those who do not buy health insurance.  In this sense the circle is complete: both providers and consumers are subject to government pricing and terms.

See this for more on tax law and the individual mandate.

See this, this, and this for more on tax-exempt organizations.

Follow William McBride on Twitter @EconoWill

This week the editors of Time magazine stirred up an Internet-wide controversy with a cover photo of mother/blogger Jamie Lynne Grumet breastfeeing her 4 year old son. The accompanying article, which discusses the virtues of "attachment parenting," created an avalanche of reaction, commentary, and satire, everywhere from Fox News to the the Huffington Post.

It was in the latter outlet that columnist Lisa Belkin characterized the debate over breastfeeding as one that was about "nutrition, and workplace policy, and government responsibility, and gender relationships." At first it seemed odd that a personal parenting decision like what to feed young children should be about "government responsibility," but it turns out that both state and federal governmental agencies are no strangers to the issue. 

It was only last year, for example, that the Internal Revenue Service, bowing to lobbying from groups such as the U.S. Lactation Consultant Association, issued new rules that reclassified breast pumping supplies as "medical devices" rather than merely "feeding devices."

The Internal Revenue Service announced today that you can use pre-tax flexible spending account money to buy a breast pump and related lactation supplies, reversing a stingy position. After all, other kinds of medical equipment, like crutches and hearing aid batteries qualify for the tax break.

It’s good news for working moms. According to the American Academy of Pediatrics, which advocated for the change in a letter to Internal Revenue Service Commissioner Douglas Shulman last year, the old policy left “millions of working mothers without the financial assistance to obtain a breast pump and continue nursing their children.” That was a problem because nursing provides numerous health benefits to mother and child, the letter said.

Decisions like this, of course, are a natural outgrowth of a tax code that attemps to micromanage behaviors and purchasing decisions in every aspect of life. As long as the government continues deciding which parenting decisions qualify for special tax treatment, the public policy process will be pulled into debates that in most times and places are considered private family matters.

Although Brown University is a non-profit institution and is exempt from paying property taxes to the city of Providence, Rhode Island, it still makes payments of $4 million per year to the city. This week the city convinced Brown University to pay $31 million more over the next 11 years. To put this in perspective, if Brown had to pay the commercial property real estate tax, it would owe about $38 million per year. The city will raise a total of nearly $100 million by collecting these payments in lieu of taxes (PILOTs) from nine of the city's tax exempt organizations.

Generally, municipal governments exempt universities, hospitals and other nonprofits from paying property taxes. But the government is often partially compensated for lost tax revenue by collecting PILOTs either from the exempt organizations or from the state government. As for colleges and universities, a 'significant minority' pay PILOTs, according to the Lincoln Institute. In Brown's case, the state government used subtle coercion to increase these payments by considering legislation to require PILOTs from tax exempt organizations. In another example of coercion, Baltimore threatened to tax hospital and dorm beds at Johns Hopkins University if it didn't agree to a PILOT arrangement. Cities have increasingly considered turning to non-profits after the recession put a dent in their other revenue sources. 

Proponents of PILOTs argue that these agreements correct two imbalances in the tax system. If nonprofits paid taxes, nonprofits with valuable land holdings pay an arbitrarily higher tax than other nonprofits. The other imbalance is that while local governments foot the bill to provide services such as policing or fire protection to universities, the benefits of those services go to university students from all over the country. The payments also satisfy governments' desire to raise revenue. One official in Syracuse worried that hospitals "gobbled up property that used to be taxable."

Although these imbalances may exist, governments should also consider the hazards of PILOT agreements. A study by the Lincoln Institute concluded that they are often secretive, haphazard, arbitrarily calculated, and an unreliable source of funds in the long-term.

PILOT payments are less than what a nonprofit would pay if it was not tax exempt, but more than what it is obligated to pay as tax exempt organizations (i.e. zero). Because of this, PILOTs might be viewed either as a subsidy or as a tax.  An example where many would view the PILOT as a subsidy is New York City, where the City financed construction of Yankee Stadium with tax exempt bonds and then paid the IRS a small fraction of the taxes it would have paid if they had issued taxable bonds. With Brown, on the other hand, if you believe that universities should be tax exempt, you might view the PILOT as a tax.  Viewed either way, the payment is in an arbitrary amount.

 The debate over PILOTs resembles the debate over whether to give nonprofits tax-exempt status as charitable organizations. The argument against the exemption is that it violates the benefit principle: nonprofits should pay the government for the services they use. And we have previously made the argument that giving some organizations tax-exempt status gives them a competitive advantage over similar organizations that are not tax-exempt. An example is that the tax code treats Harper's, Mother Jones, and some other magazines as 'charitable providers of educational materials.'  If the rationale for tax exempt status is that the public has an interest in promoting education and certain other activities, one can argue that competitors of Harper's already promote these activities without the help of tax exempt status. As with PILOTs, governments' treatment of nonprofits is arbitrary.

There are a number of reforms that might mitigate concerns with whether and how to raise revenue from nonprofits. First, removing the tax exemption for charities would remove the differential treatment of similar organizations. We recommended a somewhat less dramatic change in our 2005 paper on the federal charitable deduction:

Most 501(c)(3) charities [...] are neither charitable, in the sense of relying mostly on altruistic gifts, nor providers of public goods. This analysis suggests lawmakers should explore ways to curtail the definition of tax exempt charity, and exclude groups that are now benefiting unfairly [...].

Third, if the system of tax exemptions and PILOTs remains, PILOTs could be made to conform to a uniform and transparent standard.