Category Archives: Taxation

State takeovers do little to help cash-strapped cities like Flint

Source: Eric Scorsone, Joshua Sapotichne, The Conversation, January 29, 2016

…Thanks to this harmful combination of state aid cuts, lost revenues and economic distress, revenues in Flint’s city budget fell by nearly 50 percent from 2004 through 2014 –the year in which a state-appointed emergency manager approved a plan to disconnect the city’s water supply from the increasingly pricey Detroit Water and Sewerage Department…. Some observers in Flint have called for a critical reevaluation of the state emergency manager policy. Our research suggests that a review is certainly warranted. The purpose of state takeovers is to minimize damage to credit markets and protect public safety, but sometimes state policies actually help cause cities’ financial distress in the first place. Relaxing some of the constraints that states impose on local governments could reduce the need for state takeovers…..

Beyond State Takeovers: Reconsidering the Role of State Government in Local Financial Distress, with Important Lessons for Michigan and its Embattled Cities

Source: Joshua Sapotichne, Erika Rosebrook, Eric Scorsone, Danielle Kaminski, Mary Doidge, Traci Taylor, Michigan State University, MSU Extension White Paper, November 2015

From the summary:
One provocative pattern to emerge from the Great Recession is that instances of acute local fiscal distress have clustered in certain states and not others. As recently as last year in Michigan, a state appointed Emergency Manager was operating in each of 17 local governments and school districts. A recent California Policy Center report suggests that more than a dozen cities and counties in California – a state that has already experienced three recent, high-profile municipal bankruptcies and a nearbankruptcy in San Jose, the “capital of Silicon Valley” – are on the cusp of defaulting on general obligation bonds.

With the generous support of the C.S. Mott Foundation and Michigan State University, we have engaged in a multi-pronged, multi-method research program to assess the crucial but often overlooked role of state governments in shaping the ways in which cities respond to financial difficulties. This report, based on our analysis of a unique, nearly half-century-long dataset of state and local financial and policy information and correspondence with state officials, analysts and legal experts involved in state-local fiscal affairs, elaborates several key findings:
– Municipal fiscal distress is not simply a local problem. State laws and policies provide state governments with extraordinary influence over the ability of cities to balance revenue and expenditure flows. The common perception that critical taxing and spending decisions are largely within a city government’s control tends to conceal this fundamental detail about American statelocal fiscal relations.

– The ways in which state lawmakers act on this influence varies from state to state and over time. We refer to the complex mix of laws and policies that prescribe the powers, rights and capacities of local lawmakers to respond to their financial conditions as the state context for local fiscal distress. Section 1 of this report assesses key elements of this state context for the lower 48 states since 1970.

– Some states incubate local financial stress by simultaneously driving up spending pressures on their cities while curtailing their capacity to raise critical revenue. Since the 1970s, the proliferation of state-imposed tax revenue limitations, coupled with recurring cuts to state aid, has fostered a system that limits a city’s ability to fund critical services. Some state governments further undermine the fiscal capacity of their cities via state laws and policies that engender steep expenditure-side pressures (e.g., devolving program responsibilities or driving up labor costs). We classify these states as incubators of fiscal distress.

– Michigan incubates financial stress among its local governments. Michigan’s particular mix of stringent limitations on local revenue and its relatively low level of financial assistance to cities, coupled with spending pressures stemming from spiking local service burdens and increased labor costs, creates conditions that drive up the potential for local fiscal distress.

– Because state governments can foster dramatically different state contexts for local fiscal stress, there is no single model policy for state intervention in distressed cities or for prevention of local fiscal distress. A policy that does not address a state’s unique context is unlikely to help cities escape financial trouble over the long term. State lawmakers must decide which legal and political tradeoffs they are willing to make to support city fiscal health. Michigan lawmakers, for instance, must recognize that the state context contributes to the problem of local fiscal distress. An aggressive intervention policy does little to curtail the consequences of this state-imposed context. Section 2 of this report draws policy lessons from comparable states in an effort to illustrate alternative approaches to state involvement in local fiscal affairs.

This report’s practical recommendations are aimed at assisting the C.S. Mott Foundation, state and local officials, and Michigan residents in identifying a more effective policy and legal approach to local fiscal crises. These are not overly startling recommendations, yet they are easy to neglect because policymakers tend to focus more on shortterm political gain rather than the histories and unintended consequences of policies that, over time, become increasingly difficult to alter. Some key recommendations:
– Creating a state agency that coordinates services to local governments and offers technical support and fiscal monitoring.
– Raising awareness among citizens and state decision makers that the causes of fiscal distress are not solely at the local level. Though state governments are certainly part of the solution, they can be a big part of the problem as well.

State and Local Tax Policy

Source: Adam A Millsap, Olivia Gonzalez, George Mason University – Mercatus Center, January 12, 2016

From the abstract:
This paper provides an overview of economically efficient tax policy for state and local policy makers and contains a short literature review of papers that analyze the economic effects of state and local taxes.

Beyond the Affordable Care Act’s Premium Tax Credit: Ensuring Access to Safety Net Programs

Source: Mary L. Pareja, University of New Mexico School of Law, UNM School of Law Research Paper No. 2015-19, 2015

From the abstract:
The United States took a gigantic step toward universal health care with the passage of the Affordable Care Act (“ACA”). Under the ACA, nearly everyone is required to have coverage, and correspondingly, no one can be turned away. To ease the financial burden of the individual mandate, the ACA subsidizes coverage for lower-income people. The primary subsidy is a refundable tax credit called the Premium Tax Credit, first available in 2014.

To claim the credit, a person must file a tax return — but not just any return. The ACA requires married individuals to file jointly. For many, this is problematic if not downright dangerous. The tax code currently has some exceptions that allow married individuals to be treated as single, but those exceptions do not reach all people for whom filing jointly is dangerous or difficult. In recognition of this reality, the IRS published temporary regulations implementing an exception to the joint filing requirement for certain victims of domestic abuse or spousal abandonment.

This article urges the IRS to expand the exception to other categories of individuals who face serious hurdles to filing jointly, such as long-separated spouses. Couples in long-term separations tend to be low-income racial and ethnic minorities with children, exactly the target population for the Premium Tax Credit. This article makes concrete suggestions for reforms that would better protect vulnerable populations and lead to more equitable results.

Looking beyond the Premium Tax Credit, this article outlines other tax benefits that are lost when not filing jointly. The Premium Tax Credit is but one example of a more systemic problem. For example, the Earned Income Tax Credit, the single largest federal cash assistance program, is lost to a married taxpayer without a joint return. This article looks critically at why the tax code repeatedly requires joint filing to claim tax benefits and argues that the Premium Tax Credit exception should be extended to apply to other tax benefits. If we are truly concerned that a domestic violence victim cannot (or should not) file jointly with an abuser, then we should enable the victim to receive all the tax benefits that are so critical to our anti-poverty efforts.

An Economy For the 1%: How privilege and power in the economy drive extreme inequality and how this can be stopped

Source: Deborah Hardoon, Sophia Ayele and Ricardo Fuentes-Nieva, Oxfam International, ISBN 978-1-78077-993-5, January 2016

From the press release:
Pre-Davos report shows how 1% now own more than rest of us combined.

Runaway inequality has created a world where 62 people own as much as the poorest half of the world’s population, according to an Oxfam report published today ahead of the annual gathering of the world’s financial and political elites in Davos. This number has fallen dramatically from 388 as recently as 2010 and 80 last year.

An Economy for the 1%, shows that the wealth of the poorest half of the world’s population – that’s 3.6 billion people – has fallen by a trillion dollars since 2010. This 41 per cent drop has occurred despite the global population increasing by around 400 million people during that period. Meanwhile the wealth of the richest 62 has increased by more than half a trillion dollars to $1.76tr. Just nine of the ’62’ are women.

Although world leaders have increasingly talked about the need to tackle inequality, the gap between the richest and the rest has widened dramatically in the past 12 months. Oxfam’s prediction – made ahead of last year’s Davos – that the 1% would soon own more than the rest of us by 2016, actually came true in 2015, a year early….
English summary
English methodology note
English Excel data file
Spanish paper
Spanish summary
French paper
French summary

Did the Community Renewal Tax Incentives Pirate Businesses From Other Places?

Source: Richard Smith, Economic Development Quarterly, Vol. 30 no. 1, February 2016
(subscription required)

From the abstract:
An early concern regarding place-based economic developments was that they might encourage business relocation into target neighborhoods at the expense of other places. To address this concern, when the U.S. Congress passed the Empowerment Zone/Enterprise Community (EZ/EC) program, it included an “antipirating” provision prohibiting use of grants for business relocation. Later iterations of the EZs and Renewal Communities (RCs) received tax incentives only. The RC program did not include an antipirating provision. Did businesses relocate? This study compares business moves within 1,000 feet inside a given RC/EZ with moves within 1,000 feet outside the RC/EZ before and after the intervention. Data are from the National Establishment Time Series (NETS) Database for California and Tennessee. Moves into some RC/EZs increased but so did moves out, leading to no statistically significant net change in numbers of firms. There were no obvious differences between RCs and EZs. The article concludes with policy recommendations.

The Role of Expressive Versus Instrumental Preferences in U.S. Attitudes Toward Taxation and Redistribution

Source: Kirk J. Stark, University of California, Los Angeles (UCLA) – School of Law, Law-Econ Research Paper No. 15-18, 2015
(subscription required)

From the abstract:
Polling data suggest that Americans are concerned about rising economic inequality, yet the same polls reveal popular opposition to redistributive tax policies that would help mitigate inequality. Numerous commentators have drawn attention to this paradox, attempting to explain why voters would support policies contrary to their pecuniary interests. In this article, Professor Kirk Stark connects the debate over U.S. tax attitudes with research on the role of expressive preferences in electoral choice. An expressive account of political behavior emphasizes the low likelihood that any one voter’s views will influence policy outcomes and thus locates her cost-benefit calculus in the expression itself rather than its effect on policy outcomes. Expressive considerations include the reputational consequences of taking sides in popular debates, especially as those consequences bear on the voter’s effort to portray herself to the people that matter in her life — her family, friends, co-workers, and most of all, herself. The author explains how an expressive account resolves the supposed “paradox” of popular opposition to redistributive tax policies and discusses the implications of this view for U.S. tax politics.

How Republican Approaches to Social Spending Increase Income Inequality in the United States

Source: Christopher Faricy, Scholars Strategy Network, Key Findings, November 2015

From the summary:
Political parties in control of government can modify social spending in ways that either increase or decrease inequality in America. According to the conventional wisdom, social spending goes up when Democrats are elected to office, leading to reduced inequality. But this is only part of the story, because it ignores alternative kinds of social expenditures and the role of the Republican Party and other conservatives in shaping social policy. Republicans, it turns out, also tend to increase federal social spending – on policies that benefit the privileged.

Both political parties, not just Democrats, have incentives to increase federal social spending because many Americans, including most Republican voters, demand that the federal government play an active role in the provision of social benefits and services. For the GOP, the challenge is how to meet such expectations in ways that align with an avowed small-government philosophy. The solution for many Republicans has been to create and expand tax subsidies (also called tax expenditures) for social spending by businesses, individuals, and other private interests, while cutting back on direct public spending. Good examples include tax breaks received by employers who provide private health insurance plans and tax exclusions to citizens who donate to charities and nonprofits. Such tax reductions amount to transfers of resources to the rich largely at the expense of tax revenues that could pay for broad-based public social benefits that help the middle and working classes. With few exceptions, income inequalities increase as a result of such transfers….

NYC Lets Luxury Building Owners Stiff Workers and Still Get a Tax Break

Source: Cezary Podkul and Marcelo Rochabrun, ProPublica, December 30, 2015

City regulators haven’t enforced a 2007 law that requires doormen, janitors and other service workers at taxpayer-subsidized apartment buildings to be paid wages comparable to union rates.
The Rent Racket
Source: ProPublica, 2015
ProPublica is exploring New York City’s broken rent stabilization system, the tax breaks that underpin it, the regulators who look the other way and the tenants who suffer as a result.