Will Puerto Rico’s governor part ways with Grover Norquist?
Last month, Puerto Rico Governor Luis Fortuño delivered a speech at the libertarian Reason Foundation on “how Puerto Rico avoided becoming “America’s Greece.” In his talk, the governor espoused the anti-government ethos of Grover Norquist, whom he cited as a friend in the first minute of his remarks. Fortuño has been a staunch advocate of “right-sizing” government: Soon after taking office, he laid off a substantial number of the commonwealth’s employees and reduced the island’s personal, corporate and property taxes.
Despite these cuts, Puerto Rico’s budget is still unbalanced. Fortuño has been relying on bond issuance through COFINA, the government’s off-balance-sheet, special-purpose vehicle, to make up for annual shortfalls to his budget.
Now, Republicans in Congress are working to blow another hole in Fortuño’s budget. As part of their effort to stave off the impending, automatic cuts to the defense budget, House Republicans passed legislation that kills a special provision of the Affordable Care Act increasing Medicaid grants to Puerto Rico. Faced with the threat of losing billions of dollars in federal payments each year, Fortuño now seems to think that lower federal spending is not that appealing. He pushed back on these cuts in an op-ed on CNN.com:
Historically, Puerto Rico’s Medicaid program has been chronically underfunded by the federal government. In 2010, Puerto Rico and the other territories secured corrective legislation to provide $6.3 billion in Medicaid funding over 10 years, which includes $5.4 billion for Puerto Rico.
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Now, House Republicans have assembled a package of budget cuts to replace the automatic, across-the-board sequester. The proposal does not cut the Medicaid expansion funds for the 50 states, but Puerto Rico’s $5.4 billion Medicaid provision has been singled out for elimination.
It’s important to note that residents of Puerto Rico are already treated differently in the federal government’s eyes, at least when it comes to the tax code. Its residents do not pay federal income tax on money earned within Puerto Rico, making federal tax collections there much smaller than in any U.S. state. The most recent data available showed federal per capita collections of $888; West Virginia, the state with the second-lowest federal per capita collections, took in $3,599. According to the AARP, Puerto Rico has a higher percentage of residents receiving Social Security than the national average, and only half of those recipients are retirees.
A smarter way for Congress to talk about muni tax code
Chris Mauro, head of U.S. municipal strategy at RBC Capital Markets, sent around a comment note suggesting that the media coverage of the Senate Finance Committee hearing Wednesday that included discussion of possible changes to the taxation of municipal bonds was overheated:
Yesterday, the Senate Finance Committee held a hearing entitled “Tax Reform: What It Means for State and Local Tax and Fiscal Policy”. A simple reading of the media accounts of this hearing would lead one to believe that the entire event was dedicated to a detailed discussion of the future of the tax-exempt status of municipal bond interest. So we decided to review the tape of the hearing in order to see what in fact was discussed. In reality, the vast majority of the hearing was focused on two issues – the deductibility of state and local taxes by federal taxpayers and the ability of state and local governments to collect sales taxes on internet and catalog purchases.
Both Committee Chairman Max Baucus and Ranking Member Orrin Hatch made some passing comments about tax-exempt bonds and the federally subsidized taxable Build America Bond (BABs) program, with Baucus making generally positive statements about BABs and Hatch making generally negative ones. Senator Maria Cantwell of Washington State expressed some concern about the importance of tax-exempt bond financing to public power utilities in the northwest, but beyond that, there wasn’t a whole lot of discussion about the muni tax exemption.
In our view, the biggest take-away from the hearing was just how far away we seem to be from a comprehensive tax reform package actually becoming reality. We found it informative that at several points during the hearing, Senator Baucus discussed the difficulty Congress has in identifying which tax expenditure items need to be cut in order to lower overall tax rates, asking the witnesses during one exchange to contribute some creative ideas in that regard. This confirms something that the market already knows but needs to be continually reminded of – real comprehensive tax reform is extremely difficult to pull off and will take a considerable amount of time to accomplish.
I didn’t watch the hearing but it sounds as if RBC’s Mauro read the tea leaves pretty well. I’m sure that Congress is having difficulty identifying where to amend the tax code to make it fairer and raise additional revenue or have revenues remain neutral. The deliberative congressional process gives all the issue’s players a chance to be heard, and tax matters are often the most fiercely fought. But the other thing I noticed in Mauro’s note was that Congress is looking for new ideas to address this complex issue.
The state of state and local taxes
In addition to federal taxes, Americans are responsible for paying state and local sales, personal income and property taxes, and a variety of fees for the use of their cars, sewer systems and water systems. Although approximately 47 percent of the population pays no federal income tax, those people do contribute to public safety, education and welfare through their state and local taxes (and, it should be noted, also pay federal payroll taxes). Across the nation, sales taxes bring in about one-third of state revenues, personal income tax revenues bring in another third, and a variety of other taxes and fees make up the balance.
Rarely do you hear cries from the citizenry to have their taxes raised – usually you hear people lament that rates are too high. A recent Bloomberg slideshow listed aggregate tax rates by state but used data that did not include local tax rates. Many of the 1,256 comments on the slideshow pointed out that the information was wrong. In almost every comment that I read, people thought that their taxes were too high.
Pennsylvania to forgo $24 billion in fracking royalties
There are shale gas fields covering more than half of the United States, but Pennsylvania has emerged as the rising star of domestic energy production with its “Mighty Marcellus” fields. This is a great resource for Pennsylvania, but I’ve been confused about legislation that would impose an “impact fee” on shale gas producers instead of the traditional volume-based royalty structure used by other states. The loss of revenues to the state over the next 20 years using the “impact fee” could be approximately $24 billion using current gas prices. If gas prices doubled (they are currently at 10-year lows), losses to the state could exceed $48 billion or more.
The energy states of North Dakota, Wyoming, Texas and Oklahoma historically have earned substantial revenues from energy royalties. It seemed odd that Tom Corbett, the Pennsylvania governor who received substantial campaign contributions from gas producers, barred his shale gas commission from even considering a royalty or gas tax.
When home prices and property taxes diverge
The latest S&P/Case-Shiller Home Price Index, released yesterday, wasn’t pretty. Housing values continued to fall, their 5th consecutive year-on-year decline. (You can download the data here). The Federal Reserve Bank of Cleveland had this to say about the release:
According to today’s [Case-Shiller] report, the fourth quarter started with broad-based declines in home prices… On an annual basis, the 10-city composite is down 3 percent and the 20-city composite is down 3.4 percent, and eighteen of the 20 MSAs are also in negative territory.
Basically, there’s blood on the streets everywhere.
Who carries the heavier tax burden: corporations or people?
Ever wonder whether people or corporations carry a heavier tax burden? Well, it’s not even close: people pay more in taxes by a long shot.
First, let’s look at federal tax statistics. In 2008, corporations paid 12.0 percent of federal revenues; the figure for individuals was 45.3 percent. Similarly, total corporate income tax after credits came in at $200 billion in 2008, while total individual federal income tax over the same period was $1.145 billion.
Now let’s look at state tax stats. In 2008 corporations paid 4.27 percent of state and local revenues; over the same period individuals paid 27.9 percent of state revenues. Similarly, state corporate income taxes came in at $52 billion while state personal income taxes came in at $301 billion and state sales taxes came in at $ 278 billion.
Are teachers a protected class?
State and local employees have not been as hard hit as the general economy. At 19 million strong, this workforce comprises about 14.6 percent of total U.S. non-farm employment. It looks as if education workers are particularly being shielded from job cuts.
Chris Mauro, Head of U.S. Municipals Strategy at RBC Capital Markets wrote today in a privately circulated research note (emphasis mine):
State taxes on fire
State tax collections are hot, hot, hot. The taxman rustled up 16 percent more in state income taxes for the second quarter of 2011 compared to the same period in 2010. Where is this phenomenal growth coming from?
Based on the most recent data collected by the Rockefeller Institute, states are raking in about $900 billion a year from their three major tax categories: the sales tax, personal income tax and corporate income taxes. Revenues from these three taxes total about 6.25% of U.S. GDP.
An army of corporate lobbyists in the halls of Congress
Now that the Senate failed to pass President Obama’s jobs legislation last night, various pieces of his plan and other pet projects are likely to be introduced separately. It’s unclear whether an extension of the payroll tax reduction or additional unemployment benefits — two key planks of the President’s plan — will get floor time. But corporate interests are getting plenty of attention from members of the Senate. In particular, an army of corporate lobbyists has been vigorously promoting a tax holiday for U.S. multinationals.
Politico says the senior New York US Senator, Democrat Chuck Schumer:
When national and state data diverge
In our turbulent times, middle-income households are falling behind and national data depicts an economy that’s stagnating. But tax revenue data for many states hints that some earners have had substantial increases in their incomes.
Let’s start with the national numbers. There has been a lot of reporting this week about median personal income dropping since the official end of the recession in June 2009. Robert Pear wrote in the New York Times:
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