Thomas Hungerford, now at Economic Policy Institute, has a new paper in which he claims:
Lowering the corporate income-tax rate would not spur economic growth. The analysis finds no evidence that high corporate tax rates have a negative impact on economic growth (i.e., it finds no evidence that changes in either the statutory corporate tax rate or the effective marginal tax rate on capital income are correlated with economic growth).
The problem with this analysis is that it is completely out of line with the economic literature, reviewed here. Every major study published in peer-reviewed journals finds the corporate tax harms economic growth. Has Hungerford discovered a new way to analyze the effects of corporate taxes, unknown to the economics profession? No, as Matt Yglesias points out, he merely did not account for the long run effects of the corporate tax. These effects are huge, since the corporate tax is mainly a tax on investment, which takes years to come about.
Follow William McBride on Twitter @EconoWill
Last week the Trustees of Social Security released their annual report to Congress. It didn’t get much attention in the media and it is no wonder why: not much has changed since last year. Despite the little attention, the program is still in pretty deep trouble.
The Social Security Trust Fund continues to take in less money from payroll taxes than it is paying out. In 2012, the annual deficit was $169 billion. This year it is projected to shrink to $79 billion due to the expiration of the payroll tax holiday.
However, as time goes on, the deficit will worsen. According to the report, the Disability Insurance (DI) Trust Fund will deplete in 2016 and the Old Age and Survivors Insurance (OASI) Trust Fund will be depleted by 2033. At this point of depletion, the report estimates, that DI will only be able to sustain 85 percent of the promised benefits and OASI—what we think of when we think of Social Security—will only be able to afford 77 percent of the legally promised benefits. So after these date, people will begin seeing massively reduced benefits if nothing is changed.
Projected over 75 years, the cumulative current-law present value of the unfunded liabilities is $9.6 trillion. These are benefits that are promised today, but have no funding tomorrow and represent real debt for the United States. Extend this to the infinite horizon, the unfunded liabilities soar to $23.1 trillion in promised benefits with no funding.
Remember these are based on some pretty basic assumptions about the economy. If these assumptions don’t hold and people start living longer, having even fewer children, or if they find a cure for cancer down the road, Social Security’s financial problems will only get worse. Reform is definitely needed and one hopes it won’t be long before politicians finally start paying attention again.
In the wake of the Apple hearings, there has been a lot of discussion about who pays what tax and to whom. To clear up any confusion, a commentary from the New York Times Dealbook section makes a suggestion: require every large American company to disclose publicly what the author would inaccurately call the “true U.S. tax rate,” so voters and politicians can easily understand the function of the system.
The author is right, we do need a “true U.S. tax rate,” but we need to get that rate by simplifying and clarifying the corporate code, not finding new ways to measure the effectiveness of the current broken code.
The tax measure the author proposes would take the amount of U.S. taxes paid and divide it by the total worldwide pretax book income. The example the author uses is Apple:
According to the Senate report, Apple paid $5.3 billion to the Treasury Department in the fiscal years 2009 to 2011. Its worldwide pretax book income over that period was about $65 billion. Thus, Apple’s “true U.S. tax rate,” according to my own calculation, was 8.2 percent.
On a theoretical basis, the suggested measurement of taxation is entirely void of the benefits principle. The benefits principle of taxation submits that because governments collect taxes in order to pay for government services, the people (or companies) who benefit from those services should be required to pay the tax.
By counting total worldwide income earned, the measure falsely suggests that the U.S. government provided services on all income earned. The proposed measure creates the perception that the U.S. government played a part in the entirety of Apple’s income and is being compensated for those services at a rate of 8.2 percent, which is significantly lower than the statutory rate of 35 percent.
On a practical basis, this measurement tool significantly understates the tax burden paid by corporations. Over 95 percent of the world’s population lives outside the U.S. borders. This means that U.S. corporations earn much of their income outside of the United States. Secondly, the income for the equation is “book” income, which is income before any tax treatment at all (i.e. depreciation treatment). This is a problem because the current code inaccurately defines the income tax base, counting business expenditures as income.
Furthermore, this measure fails to account for the taxes paid by corporations to foreign governments. A recent Tax Foundation study shows that U.S. corporations pay over $100 billion in taxes to foreign countries a year.
So, instead of being an accurate indicator of the health of the tax code on the burdens paid by U.S. companies, the proposed measurement plays into the false narrative that corporations are undertaxed.
In reality, U.S. corporations pay a high effective tax rate by international standards. Previous Tax Foundation analysis found that the U.S. effective corporate tax rate is one of the highest in the world at about 27 percent, and a recent PwC study found the rate to be even higher, at over 28 percent.
In February, we gave a lukewarm appraisal of a lukewarm tax plan that Governor Kasich was pushing in his budget for Ohio. Some elements of the plan were good. The plan would broaden the sales tax to include services, and cut the rate from 5.5 percent to 5 percent. This move would leave a lot of revenue though, and the plan would apply that revenue to cutting income tax rates across the entire nine bracket structure by 20 percent. While those are good reforms, we were critical of the generous exclusion for passthrough entities that would allow them to deduct half their income below a $750,000 threshold. This gimmick was mainly a political ploy that claims to help a sympathetic constituency (small business), but in reality just creates an incentive to organize your personal income as small business income to get a large tax cut.
After the Ohio House got hold of the plan in April, the sales tax base expansion and the small business carve out were removed and the income tax cut was reduced to just 7 percent across-the-board. Now that the Senate has hold of budget, the House’s 7 percent income tax reduction is gone and the small business carve out is back in.
This is bad policy, and many supporters are errantly pushing it under the guise of putting more money in the hands of “job-creators.” But this is based on a flawed understanding of what creates jobs. The businesses that actually create jobs are not small businesses or big businesses; they are businesses that are growing. And that type of business is virtually impossible to target with a tax incentive.
So while I’m the first to recognize that politicians would probably rather say “I cut taxes on businesses in half!” than “I cut taxes for everyone by 7 percent,” the latter claim is a far less distortive approach; one that doesn’t pick winners and losers in the economy. Ohio deserves real reform, not gimmicks.
PS-The best plan in Ohio right now is not this one snapping up AP headlines, it’s the administrative reform that would start to fix Ohio’s highly unusual municipal income tax system.
Follow Scott Drenkard on Twitter.
A lot of attention is given to the lop-sided individual income tax revenue shares by income (page 3). Overlooked though, is the corporate income taxes paid by corporation size. It happens to be quite skewed as well.
According to IRS data, 81.80 percent of taxes paid (after credits) are paid by the .32 percent largest corporations with assets larger than $250,000,000 (restricted to returns with net income). At the same time, the remaining 99.68 percent of corporations only accounted for 18.20 percent of corporate taxes paid.
As a sometimes pundit, I feel obligated to own when I praise something that turns out unwell.
In speeches about state tax policy, I have sometimes referred to JCPenney's recent attempt to transform itself from a coupons-and-targeted-sales model (over 590 sales per year, with sales at an average 60% discount) to an always-low-prices model with in-store "shops." In my speeches, I praised the move and analogized it to state tax incentives vs. offering a good tax system.
JCPenney's board didn't think so, as they've ousted the CEO and are rethinking the strategy after terrible financial results. The general gist of the problem is that JCPenney's old customers stopped buying without constant sales and new customers didn't start buying because they don't trust the merchandise. I maintain that its attempted transformation was its best chance of success due to enormous competition for value-seeking retail customers, but that's obviously a debatable point.
I'm still musing about the implications for my state tax policy analogy. I suppose it could be that if everyone views you as having shoddy merchandise but frequent sales, it's tough to induce a bunch of new customers with streamlined pricing. It makes me wonder, though: do people prefer to buy a $7 shirt for $7, or a $7 shirt with a tag price of $12.99 marked down to $7.99? That said, business and even individual taxpayers aren't retail customers, so perhaps while the analogy was foolhardly from the beginning, it doesn't doom efforts to simplify state tax systems and get states out of the business of picking winners and losers.
Your thoughts are appreciated: henchman@taxfoundation.org.
Nevada's legislature voted this week to add a film and television subsidy program of $20 million per year. Any individual production can tap a maximum of $6 million per year, and 60 percent of expenses must be incurred in Nevada.
The bill's language and the debate describe it as a tax incentive, but that's hard to do for Nevada because they have neither an individual income tax nor a corporate income tax. Qualified film and television productions will receive transferable certificates that they can use to reduce any state tax liability, or sell to others to reduce their state tax liabilities. It may bear the name "tax credit" but it operates essentially as direct payments from taxpayers to film productions.
Perhaps it was the persuasiveness of Nicolas Cage, or anxiety over California's relatively new (2009) $100-million-per-year film incentive program, or general concern about high unemployment and uncertain economic prospects. Whatever the reason for passage, every independent analysis of film incentive programs has found that they generate less than 30 cents on the dollar in tax revenue for every $1 paid out by state governments. Research by scholars on the left and right has found that most jobs “created” by movie productions are often temporary with limited upward mobility, the kinds of jobs that end when shooting wraps and the production company leaves. Hollywood folks are clear that if the tax spigot is ever turned off, they’re gone. This isn’t a case of the state providing a bit of seed funding to a new industry. It’s subsidizing Hollywood productions for a few weeks’ work. Studio lobbyists are eager to ask for money, but promise no loyalty in return.
Ultimately, there are better uses for scarce dollars that to subsidize one of America's most profitable industries. More about film incentives here.
New York’s Governor Cuomo has been getting a lot of coverage for his plan to give new start-ups ten years of tax-free operation if they locate close to universities in the state. While similar special tax preferences in “economic development zones” are available in many states, this proposal is unique in that it truly is tax-free. Businesses that open on college campuses would be exempt from all business, property, and income taxes. Employees that work at these companies would even be exempt from state individual income taxes.
This plan is interesting for a few reasons. The first is that it is an implicit acknowledgment that taxes matter for business location decisions. The second is that it is an implicit acknowledgment that New York’s tax system is indeed uncompetitive.
While both of these priors are true, this plan goes about trying to fix them in an inappropriate way. By just lowering taxes on a particular type of business operation (in this case, start-ups on campus) the administration is trying to direct the creative power of the market from the statehouse. This approach, while couched in sexy terms of promoting an “epicenter [of] nanotechnology,” is actually antithetical to what makes for innovation.
Innovation comes from many small efforts on the part of entrepreneurs, only a few of which take hold and are profitable. The whole point of a market-based economy is that people do not know what will be valuable to society until they try it. Cuomo's plan, by contrast, takes this discovery process out of technological advancement and only gives preferences to tech companies that partner with higher education institutions. Nanotechnology is great, and so are university research programs, but economic growth and innovation come from all sectors.
Of course, another flaw with this plan is that it’s not guaranteed to keep companies in the state after the ten year tax-free window is finished. This is perhaps disproportionately true for start-up companies, which often get sold off to larger companies as their product proves viable. A good case study of this problem is the 2009 episode where Dell Computers got $240 billion in incentives from the state of North Carolina, only to move their operation from the state after four years.
Cuomo contends in a recent op-ed that broad-based cuts are impractical, saying, “we must deal with a reality wherein reducing income taxes just one point would cost $6 billion an impossible sum [sic].” But this flippant dismissal ignores the option of broadening the tax base to pay for rate cuts, the formula for equitable tax reform. In the end, this kind of fundamental tax reform is what New York needs to be competitive in the coming decades. Flashy gimmicks won’t fix New York’s tax problem, even if they do come with ribbon-cutting ceremonies.
Follow Scott Drenkard on Twitter @ScottDrenkard.
This week's Monday Map takes a look at the total state debt per capita in each state at the end of the 2011 fiscal year. Tennessee has the lowest ranking with a debt of $925 per capita, and Massachusettes has the highest at $11,309.
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Click on the map to enlarge it.
View previous maps here.
Most people know by now that the United States has the highest corporate tax rate in the world. At 39.1 percent, it sits 14 percentage points higher than the OECD average.
However, many will point to all the “loopholes” that narrow the corporate tax base and say: “sure, we have the highest statutory rate, but no company pays that!” The implication is of course that U.S. corporations don’t pay a high tax rate compared internationally.
Contrary to this claim, studies show that not only does the United States have the highest statutory rate, but one of the highest effective tax rates. Our 2011 study on effective corporate tax rates shows this. It reviews a number of recent studies and concludes that the average effective rate is around 27 percent, while the average around the world is 20 percent.
Adding to these studies, PricewaterhouseCoopers released a new report that also finds the United States has one of the highest effective corporate tax rates in the world.
Looking at six different industries (Automotive, Aerospace and Defense, Chemicals, Engineering and Construction, Industrial Manufacturing and Metals, and Transportation and Logistics), the study found that U.S. corporations face an average effective corporate tax rate of 30.9 percent in 2012. The only country whose corporations face a higher effective tax rate in the study was Japan at 36.7 percent. The lowest effective tax rates were in the United Kingdom and Hong Kong which had ETR of 16.7 percent and 16.5 percent, respectively. The average effective tax rate in the study was 28.3 percent in 2012.
Although this study looks at a narrow set of industries and countries, it still shed light on the tax burden of U.S. corporations compared internationally.
The growing discussion over corporate tax reform, and the recent Senate hearing over Apple, underscores the importance of understanding where the United States stands internationally. Anecdotes about individual companies paying very little corporate income tax tells us little about the overall competitiveness of the U.S. corporate tax system. With this study and many others, there is no doubt that the U.S. imposes a high tax burden on corporations, no matter how you measure it.
The tax reform debate in North Carolina is heating up again as Gov. Pat McCrory weighs in with a statement on the competing bills in the General Assembly:
I believe the bipartisan plan set forth by Senators Fletcher Hartsell and Dan Clodfelter as well as Representative David Lewis’ bill are closest to my position. After more than five months of serious dialogue with community, business and legislative leaders, we are on the cusp of tax reform.
[…]
Our ultimate goal is to reduce tax rates for North Carolina families and businesses. The final tax plan must make North Carolina more competitive in order to create jobs and put our people back to work. This in turn will increase state revenue, allowing future tax relief without cutting public services.
At issue are both rate reductions to the individual and corporate income tax and proposals to expand the tax base by designating more services as subject to the sales tax.
The Tax Foundation published a comprehensive look at North Carolina’s tax code earlier this year with the book North Carolina Tax Reform Options: A Guide to Fair, Simple, Pro-Growth Reform by Joseph Henchman and Scott Drenkard. They followed up with a summary of the findings in the form of an op-ed published by the Raleigh News & Observer:
North Carolina policymakers are poised to face that question this legislative session. Tax reform ranks high on the agenda, as the state ranks 44th in the Tax Foundation’s 2013 State Business Tax Climate Index, a comprehensive ranking of tax structures in the 50 states. Compared with other states, we find that North Carolina has high rates on narrow tax bases, meaning some favored activities get preferential treatment while everything else is subject to discouragingly high tax burdens.
Taxes are just one thing that drives individual and business location decisions, but a tax change can have immediate effects. Many states today have crafted their own “tax personality” that distinguishes them as attractive places to live and work. Florida and Texas taxpayers enjoy going without a personal income tax, while Delaware residents embrace tax-free retail sales. North Carolina policymakers and taxpayers will decide which plan is best for the Tar Heel State.
Since then we’ve seen more action in the state. Economist Elizabeth Malm journeyed down south to debate Jared Bernstein, former economics advisor to Vice President Joe Biden, on the best path forward for North Carolina. A video of the event is below.
Tax Foundation analyst and programmer Nick Kasprak also created a way for taxpayers in the state to estimate how their personal finances might be affected by the reform plans, with the North Carolina Tax Fairness Calculator.
Nick also appeared on an episode of the Tax Policy Podcast explaining the work that went into the calculator and how it arrives at its estimates. We're also currently working on a revised analysis of the most current legislative language in the House and Senate, which will be out soon.
See yet more information and analysis on North Carolina here.
Lawmakers in Texas have voted a bill along to Governor Rick Perry that starts to make limitations to the state’s problematic Margin Tax. HB 500 makes permanent the $1 million exemption level on the tax, and decreases the rate from the current 1 percent to 0.95 percent. Both reforms help to curb some of the destructive nature of the tax, which is based on gross receipts.
This change comes in the wake of the repeal and replacement of the Michigan Business Tax (another gross-receipts tax) last year with a flat corporate income tax, a move which improved the state’s score in the corporate component of our State Business Tax Climate Index from 49th to 7th. Virginia gubernatorial candidates this year are recommending cutting or eliminating that state’s Business Professional Occupational License (BPOL) tax.
Texas’ Margin Tax took full effect in 2008, and has been highly unpopular in the business community since then. We have previously chronicled the problems with calculating the cryptic tax here, and we’ve written extensively on the economic problems of gross receipts taxes. The biggest problem with gross receipts taxes (though there are many) is that they are like a sales tax that is levied at every point along the production chain, meaning that industries with long supply chains get disproportionately burdened by them. This creates a host of distortions in the economy, and is a serious transparency issue, as the true tax burden is baked into the price of products as they move through the production structure.
I hope other states are watching this move. Texas has a very competitive tax code and good environment for business, and other states seem to notice this. But sometimes politicians suggest mimicking the state’s Margin Tax, which is a highly destructive part of an otherwise good code. This move by Perry demonstrates what those of us in the tax world already know—the Margin Tax experiment is failing.
Follow Scott Drenkard on Twitter @ScottDrenkard.
California released the price for its Obamacare health care exchange, and the story in the media is that the premiums are a lot lower than expected. The Wonkblog in the Washington Post put together a breakdown of the cost, with and without subsidies, for various plans at income levels up to 400 percent of the federal poverty line.
The blog seems pleased with the way the California exchange, Cover California, has come together. But just because the costs are lower than projected doesn’t mean the care is cheap. A Forbes blog points out that the new rates for health insurance premiums in California are more than double the cost of premiums without the Affordable Care Act and its exchanges. But putting that aside for the moment, these people still have to purchase this mandated insurance, or pay the fine.
Assuming these people would not have purchased insurance without Obamacare, the chart below uses the premium information from the Post blog to calculate the percentage of pretax income that will now go to purchasing the mandated health insurance. This chart uses the Cover California exchange’s “silver plan,” which covers about 70 percent of health care costs and displays the out-of-pocket cost for each income group after the subsidy.
|
Silver Plan (40 year old) |
150% of FPL |
200% of FPL |
250% of FPL |
300% of FPL |
400% of FPL |
|
Least Expensive with Subsidy |
40 |
104 |
177 |
259 |
276 |
|
Percentage of Income |
2.79% |
5.43% |
7.39% |
9.02% |
7.21% |
|
2nd Least Expensive |
58 |
122 |
195 |
277 |
294 |
|
Percentage of Income |
4.04% |
6.37% |
8.15% |
9.64% |
7.68% |
|
3rd Least Expensive |
64 |
128 |
210 |
282 |
299 |
|
Percentage of Income |
4.46% |
6.68% |
8.77% |
9.82% |
7.81% |
|
Silver Plan (25 year old) |
150% of FPL |
200% of FPL |
250% of FPL |
300% of FPL |
400% of FPL |
|
Least Expensive with Subsidy |
44 |
108 |
181 |
216 |
216 |
|
Percentage of Income |
3.06% |
5.64% |
7.56% |
7.52% |
5.64% |
|
2nd Least Expensive |
58 |
122 |
195 |
230 |
230 |
|
Percentage of Income |
4.04% |
6.37% |
8.15% |
8.01% |
6.01% |
|
3rd Least Expensive |
63 |
127 |
200 |
234 |
230 |
|
Percentage of Income |
4.39% |
6.63% |
8.36% |
8.15% |
6.01% |
As you can see, those at about 150 percent of the poverty line receive a substantial subsidy, which keeps their costs relatively low. But when looking at the costs for those in the 200 to 400 percent of the poverty line groups, Obamacare takes a chunk out of their monthly paychecks.
For a 25 year old who makes about $34,470 a year (300 percent of the federal poverty line), the least expensive version of the “silver plan” will cost them about 7.5 percent of their pretax income. For a 40 year old who makes the same, the least expensive option will be a little over 9 percent.
When we look at the more affordable “bronze plan,”the cost drop to nothing out of pocket for those at 150 percent of the poverty line and down to about 6 percent of income for the people at 300 percent of the poverty line.
|
Bronze Plan (25 year old) |
150% of FPL |
200% of FPL |
250% of FPL |
300% of FPL |
400% of FPL |
|
Least Expensive with Subsidy |
$0 |
$64 |
$137 |
$172 |
$172 |
|
Percentage of Income |
0.00% |
3.34% |
5.72% |
5.99% |
4.49% |
|
2nd Least Expensive (Subsidy) |
$5 |
$69 |
$142 |
$177 |
$177 |
|
Percentage of Income |
0.35% |
3.60% |
5.93% |
6.16% |
4.62% |
|
3rd Least Expensive (Subsidy) |
$14 |
$78 |
$151 |
$185 |
$185 |
|
Percentage of Income |
0.97% |
4.07% |
6.31% |
6.44% |
4.83% |
|
Cost before the ACA |
$92 |
$92 |
$92 |
$92 |
$92 |
|
Percentage of Income |
6.41% |
4.80% |
3.84% |
3.20% |
2.40% |
This, in itself, doesn’t sound awful, but if we assume these people purchasing health insurance prior to Obamacare, things look bleaker when we consider the costs they were paying without Obamacare and what will they will pay under the Affordable Care Act.
According to an article in Forbes, the average costs of the five cheapest plans in California runs $92. For the people at 150 and 200 percent of the poverty line, the ACA, through Cover California, saves them a monthly $92 and $26, respectively. But for those above that threshold, they see their costs go up. Those at 250 percent of the poverty line will pay an additional $45 a month, as those at 300 and 400 percent of the poverty line will see their monthly health premium nearly double for similar care. The graph below shows this comparison as a percentage of income with and without the Affordable Care Act.
For more on the distributional effects of Obamacare, see here.
Today, Center Forward released a report entitled “Why Health Insurance Premiums are Changing.” This report analyzes the possible changes to health insurance premiums due to Obamacare in six different states, “the results provide an overview of the potential impact across varying age, gender, income, and health status levels.”
Within the analysis of how different state health insurance markets will be affected, the report underscores the massive amount of redistribution inherent in Obamacare, especially in the individual insurance market. Their analysis shows a clear shift of costs and taxpayer dollars from certain groups to others. The redistribution comes in two forms.
One form is through the insurance regulations that shift costs from once group of people to another. One such regulation is called “community rating.” This regulation essentially prevents insurance companies from experience rating individuals; that is the price of insurance cannot vary among people of varying health statuses within states. So what happens is insurance companies then have to use an average of all individuals in the insurance pool to come up with a price, adjusting only slightly based on age, family size, geography and tobacco use. Those who are healthy will be paying a much higher price than their health status reflects in order to subsidize unhealthy individuals’ access to lower insurance prices.
The following chart shows the difference in premiums between two identical people of differing health status under current law in many states and under a simple example of community rating. In the situation before community rating, these two individuals were priced based on the insurance company’s expected pay out. Under community rating, this pricing is prohibited as the insurance company can only price people based on the average. So the premiums for a healthy individual increases in this simple case by 50 percent, while the premium of the unhealthy individual decreases by 25 percent.
|
Example Calculation of Experience Rating of Two Identical Individuals under Current Law and Under ACA Community Rating |
||||
|
|
Chance of Illness |
Cost of Illness |
Actuarially Fair Premium |
|
|
|
Before Regulation |
|
||
|
Healthy Individual |
10% |
$200 |
$20 |
|
|
Unhealthy Individual |
20% |
$200 |
$40 |
|
|
|
After Regulation |
Change: |
||
|
Healthy Individual |
10% |
$200 |
$30 |
+50% |
|
Unhealthy Individual |
20% |
$200 |
$30 |
-25% |
The chart below from the report illustrates how community rating plus the effects of other Obamacare taxes and regulations such as minimum benefit coverage, guaranteed issue will work out in select states. Healthy, young males in states that currently do not have the Obamacare regulations (Arizona, Florida, Illinois, Ohio, Wisconsin) will see large premium increases the new regulations (some more than 100 percent), while less healthy individuals will see modest reductions in their premiums. New Jersey doesn’t change much because it is one of the few states that implemented these insurance regulations on its own and already had insurance premiums 60 percent higher than the national average.
However, Obamacare also comes with tax subsidies that make sure that low-income individuals do not have to pay the full price of these insurance premium increases. From the report:
“Premium subsidies are available to eligible people with incomes less than 400 percent of the federal poverty level (FPL) who do not qualify for Medicare, Medicaid, or have access to qualified affordable employer-sponsored insurance.”
So those below 400 percent FPL will not have to pay the full 50 to 125 percent premium increase while those above this level will pay the full price increase.
The following chart shows the average rate change for individuals at different income types in Arizona going from a sample plan to a healthcare exchange “silver plan.” According to this analysis, healthy, 27-year-old males who make 140 percent of the FPL will have a rate reduction of 74 percent after subsidy due to Obamacare. Those men making 500 percent of the FPL ($57,450 or more for a household of one) will see their premium increase by more than 116 percent due to not receiving any taxpayer subsidy.
Since these subsidies are paid for by tax dollars, those who pay more income taxes will be paying for these health insurance subsidies, while not receiving the benefit from them. This leaves those who pay little to no income taxes to benefit from the subsidy.
All this being said, it still doesn’t speak to whether this is the desired result for our health insurance market or not. States throughout the country have used community rating and other regulations, shifting costs from the sick and elderly to the young and healthy. They felt it was fair that sick and elderly people not have to pay far more than younger, healthier people. The subsidies are of course one way to deal with the fact that low-income, healthy individuals will be hit hard by the resulting higher premiums. However, it is still important to realize how much cost-shifting and redistribution there is in Obamacare and this is one way of looking at it.
Today's big news out of Rhode Island is Gov. Lincoln Chafee's decision to affiliate with the Democratic Party. Chafee, a former Republican U.S. Senator, won the governorship in 2010 as an independent in a four-way race.
Chafee's tax proposals have generally been positive reforms, for a state with many problematic tax policies, and hopefully his efforts won't change in that regard. A pending reform proposal of his is to reduce the state's corporate income tax rate from 7 percent to 5 percent while paring back some credits, a step in the right direction (to quote the Rhode Island Public Expenditure Council).
A separate tax reform idea is being heard in the state Senate Finance Committee today at 2pm: eliminating the state sales tax. Rhode Island presently has the highest state sales tax in the country (7 percent), higher than neighboring Connecticut (6.35 percent) and Massachusetts (6.25 percent). If enacted, the proposal would add Rhode Island to the list of states with no state sales tax (currently Alaska, Delaware, Montana, New Hampshire, and Oregon). Estimates of the revenue loss range from $230 million to $800 million -- a fairly big gulf due to different estimates of how eliminating the sales tax might boost economic activity and thus other tax revenues. (The Rhode Island Center for Freedom and Prosperity has championed much of this research.)
The zero sales tax proposal's sponsor, Rep. Jan Malik (D), hopes it may spur at least a reduction in the sales tax. It's a noble goal: Rhode Island's taxes corporate AND sales taxes are high, uncompetitive, and badly structured. The revenue loss from the sales tax proposal is a big concern, certainly, but I hope Rhode Island won't be afraid to do something dramatic with their tax system, or at least one of the component parts of it.
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