Charles Chieppo: Can Mass. get its tax giveaways under control?

By CHARLES CHIEPPO 

BOSTON

A few months ago, I wrote about Massachusetts Gov. Charlie Baker’s plan to end the state’s film tax credit. Powerful opponents succeeded at killing the proposal, but if a pending piece of legislation becomes law, those special interests will have won the battle but lost the war.

Most states offer an array of business tax breaks that result in significant foregone revenue. In Massachusetts, the amount is in the billions. Legislation backed by state Auditor Suzanne Bump would give her office access to business tax returns solely for the purpose of auditing “tax expenditures,” as the various tax breaks are known.

Under the legislation, the auditor’s office would be able make sure businesses actually qualify for the breaks they receive; track whether state agencies are appropriately pursuing “clawbacks” that require businesses to reimburse taxpayers if the recipient fails to meet requirements of the tax-break agreement; and determine if commitments to job creation or other public benefits have been met.

Predictably, the bill has drawn howls of opposition from business organizations, and the legislature must indeed carefully craft any legislation to limit the scope of the auditor’s review of business tax returns to gathering tax-expenditure data. But the fact that 37 other states already grant the entity that performs their audit function access to this information demonstrates that it can be implemented without making a business that receives a tax break the victim of a public witch hunt.

Other Massachusetts agencies, including the Massachusetts Probation Service and the Department of Transitional Assistance, already have access to the returns. It seems appropriate that tools to make sure that people aren’t wrongfully collecting welfare benefits also should be available to government to ensure that businesses aren’t getting tax breaks they don’t qualify for.

Most business tax breaks are likely to be more effective than the film tax credit, which cost Massachusetts taxpayers about $88 million in foregone revenue during fiscal 2015. A Department of Revenue report found that state taxpayers paid nearly $119,000 for each job created by the credit in 2012.

And Massachusetts is hardly alone. A report from Maryland’s Department of Legislative Services estimated that, even assuming that every production filmed in that state would have gone elsewhere but for tax credits, state and local taxpayers would still recoup just 10 cents on every dollar awarded in credits between 2012 and.2016.

Government incentives to promote economic development are by no means always bad. But with one U.S. Government Accountability Office report finding that state and local tax revenues are not on track to return to pre-Great Recession rates as a percentage of gross domestic product until 2058, taxpayers deserve to know that any funds diverted from schools, transportation funding or other priorities are actually boosting the economy. Providing public auditors with the data to review those incentives is an important step toward providing that assurance.

Charles Chieppo (Charlie_Chieppo@hks.harvard.edu) is a fellow of the Ash Center at Harvard’s Kennedy School. This piece first ran at governing.com.

Editor’s note from Robert Whitcomb: Rhode Island House Speaker Nicholas Mattiello seems determined to raid the Rhode Island state coffers to give what are now called the Pawtucket Red Sox a stadium in Providence with massive tax giveaways as part of the deal. Of course those who don’t get the giveaways will have to make up the lost tax revenue.

Male public officials like to be associated with professional sports teams as an affirmation of their masculinity and a opportunity to meet present and future sports celebrities. Photo ops!

They think it's glamorous to be in bed with these rather rapacious  and  usually very profitable sports businesses.

That even Major League stadiums rarely make macro-economic sense for their communities, let alone farm teams like the PawSox  in cool climates, gets swept aside in what is really a psychiatric and emotional problem. It isn’t serious public policy.

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Gregory N. Hicks: U.S. must stay at the trade table

  The Boston Tea Party remains one of the seminal events in American history, and it continues to resonate among political elites, because most Americans believe that the “Tea Party” was a protest about taxation without representation.

It really wasn’t. It was actually about the setting of rules for international commerce without representation. John Hancock, a signer of the Declaration of Independence, merchant, ship owner and one of wealthiest men in the colonies, along with the Sons of Liberty, instigated the Boston Tea Party because the British government had given the British East India Company a monopoly to transport tea to the colonies and sell it there, effectively excluding American merchants from competing in a trade in which they had been profitably engaged. From the very beginnings of our republic, Americans have demanded the opportunity to compete internationally on a level playing field.

Two thousand years ago, Roman Senator Marcus Tullius Cicero said “the sinews of power are money, money, and more money.” This observation is as true for the 21^st Century as it was in the First Century BCE. National power comes from national prosperity.

Fifteen years into the 21^st Century, it is clear that the international economy has entered a transition period similar to the change that occurred a century ago, when the United States emerged as the world’s leading economic power. When that occurred, the United States did not use its economic power to influence global events, instead adopting a foreign policy of isolationism and international disarmament.

“The business of America is business,”  said President Coolidge, and America’s insistence on repayment of World War I debts contributed to economic instability in Europe. Isolationism led to the Smoot-Hawley Tariff, the Great Depression and World War II.

Fully cognizant of this history as well as the necessity of rebuilding the world’s economy after World War II, the U.S. government  leveraged America’s overwhelming post-war economic superiority to establish the dollar as the dominant currency of international finance and trade and to found the multilateral institutions that are the girders of today’s rules-based international economic system. The relatively level playing field for international commerce that was created has led to 70  years of economic growth and prosperity that has lifted millions from poverty.

Economies rose from the ashes of World War II by adopting key aspects of the American economic model, but in 1990, the United States was still the world’s largest economy. Our nearest competitor, Japan, had a GDP only 40 percent the size of America’s; China’s GDP was less than one-sixth the size of ours.

Today, the United States is no longer the world’s largest economy; that status belongs to the European Union. Most economists project that China will soon overtake the United States as the world’s largest national economy, although some argue that milestone has already been passed. Meanwhile, India’s economy is not too far behind.

Despite the emergence of multiple global economic competitors, the United States remains the acknowledged leader and fulcrum of the international economy. Five major trends in the global economy – the internet impact on international commerce, the emergence of global value chains, the oil exploration technology revolution, the rebound in U.S. manufacturing, and the resilience of the dollar after the 2008 financial crisis – illustrate the centrality of the United States to both the international economy and international relations.

We’re all familiar with the Internet’s impact on our daily lives, and at work, we experience the internet’s effects on productivity, but on a larger scale, it is also transforming international trade opportunities. For instance, E-bay and Amazon are fostering an Internet-based international retail revolution. The first company makes it possible for any individual to engage in an international commercial transaction. Any American who offers a good on E-bay could find that it has been purchased by someone from Ghana or Fiji; and the reverse transaction is equally possible. For its part, Amazon, based on its global warehouse network and relationships with modern logistical companies, has built a virtual mall in which customers can buy almost anything and have it delivered to their doorstep within a few days.

Internet communication has also made cross-border vertical integration of production, or global value chains, possible. Pioneered by Nike and improved by Apple, the process is perhaps epitomized today by Gilead, a San Francisco-based pharmaceutical company that is saving thousands of lives by developing and lowering consumer drug prices through innovative production arrangements with pharmaceutical producers in a number of developing countries.

Global value chains are inducing a reconsideration of the statistical analysis of international trade, which is changing perspectives on international economic policy. Analysts are grasping the importance of trade in intermediate goods, i.e., components or partially finished goods that are moving across borders through vertically integrated production processes. For the United States, one-third of exports and three-fifths of imports are intra-firm trade in intermediate goods.

A recent International Monetary Fund study looked at the major economic powers from the standpoint of domestic value-added (DVA) and foreign value-added (FVA) in their national output. The study found that China’s economy is the most dependent on foreign value-added content of any of the major economies, while the United States is the least dependent. The study also suggested that if China let its currency, the Yuan, appreciate, it would both move up the value chain and reduce the dependence of its economy on foreign inputs. Perhaps tellingly, China’s leaders have been allowing the Yuan to appreciate steadily over the past decade.

“Fracking,” that uniquely American technological innovation, is also changing the international policy landscape, and if the U.S. resumes exporting oil and natural gas, could have an even greater impact. The current policies of Arab oil-producing states clearly reflect their unease with growing American energy independence, while Europe, through employing fracking to develop its own energy resources or importing American oil and gas, has the potential to reduce its energy dependence on Russia by substantial amounts.

The manufacturing sector provides the tools of national power, and a newly released Congressional Research Service study suggests that all the talk of the demise of U.S. manufacturing is premature. While China became the world’s top manufacturing country in 2010, the United States remains second by a wide margin. In addition, U.S. manufacturing output grew between 2005 and 2013 by 5 percent, despite the Great Recession. Much of this growth was powered by inward foreign direct investment, 39 percent of which has been landing in the manufacturing sector.

Despite setbacks to the dollar’s reputation arising from the international financial crisis, the dollar continues to symbolize American economic strength and prowess. The dollar’s central role in international finance and trade provides unique avenues for the United States to use economic power in lieu of military intervention or other forms of pressure to resolve international problems. Yet that unique role is under competitive pressure as China, the European Union, Japan, Russia, India and Brazil all seek to put their currencies on an equal footing with the dollar.

International economic policy offers the U.S. government a range of tools to advance U.S. foreign policy and commercial interests in an increasingly competitive, multipolar environment. Among those tools, preferential trade and investment agreements positively affect more aspects of economies than any other. Not only do trade agreements lock-in existing trading and investment patterns, they create new links by eliminating trade barriers through reducing taxes and writing new trade and investment rules that go beyond those found in the 1994 World Trade Organization agreement.

In  national power, trade agreements not only generate economic growth, jobs, and tax revenue, but they also create economic interdependence among agreement parties. The voluntary acceptance of that interdependence is an unambiguous symbolic foreign-policy statement. In a multipolar world, such agreements are essential to economic competitiveness and peaceful coexistence.

Our competitors understand these characteristics very well, including the axiom, illustrated by the 1773 Tea Act that sparked the Boston Tea Party: “He who writes the rules, wins.” They are aggressively negotiating trade pacts around the world, changing the terms and rules of trade in their favor. Currently, the European Union, formed itself by a trade agreement, has 32 preferential trade agreements in place with 88 countries, and it is currently negotiating 12 agreements covering an additional 36 countries. India’s existing preferential trade network includes 26 countries via 14 agreements, and it is negotiating four new agreements covering 37 additional nations. Japan has implemented 14 agreements with 16 countries, and is negotiating three trade agreements covering 35 nations. China has 12 preferential trade pacts in force with 21 countries, and is negotiating three more agreements that would cover 14 additional states.

Completing both the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) negotiations would expand the U.S. preferential trade network consisting of 14 agreements covering 20 countries to an additional 33 nations. TPP and TTIP involve three of the world’s top four economies and cover a majority of the world’s existing trade.

Moreover, they seek to write new trade rules that facilitate the growth of 21^st Century international trading patterns such as e-commerce, global value chains, and foreign investment, among others. As importantly, they revitalize longstanding strategic relationships with our Asian and European allies, an important signal to both China and Russia that the United States intends to remain a competitive actor in Asia and Europe. Conversely, failure to complete these agreements would be an act of unilateral economic-policy disarmament with long term consequences for U.S. economic growth and national power.

In a 21^st Century world that is more multipolar, more complex, more integrated and more competitive than the United States has ever experienced in its history, U.S. competitors and strategic allies alike – Brazil, China, the European Union, Japan, India, and Russia – are seeking to amass economic power and to deploy it as a leading element of their foreign policies. In many cases, they seek  strategic advantages through these efforts, often at the expense of U.S. interests.

International economic-policy tools such as trade negotiations provide an effective, peaceful means to compete with these challenges.   If we do not participate in making the rules for international trade, others will write our companies out of the competition, many jobs will be lost and many more never created, and our national prosperity and national power will decline. If they were alive today, John Hancock and the Sons of Liberty would support the negotiation of TPP and TTIP. We should too.

Gregory N. Hicks is State Department Visiting Fellow at the Center for Strategic and International Studies, in Washington; an economist and a veteran U.S. diplomat. The views expressed in this article are those of the author and do not necessarily represent the views of the U.S. Department of State or the U.S. government.  This piece stems from Mr. Hicks's remarks at the June 9 meeting of the Providence Committee on Foreign Relations (thepcfr.org)

Sam Pizzigati: The cost of American inequality

 

Have you ever wondered what inequality costs the average American family?

That is, what price do we pay — in actual dollars and cents — for tolerating an economy fixated on pumping our treasure to the top?

That question has no simple answer.

How much, for instance, should we value an added year of life? We know — from hundreds of research studies over the years — that people live longer, healthier lives in more equal nations.

We also know that more equal societies have lower levels of mental illness, higher levels of trust, and fewer teenage pregnancies and homicides. Placing dollar signs on quality-of-life indicators like these can get complicated.

On the other hand, dollar signs do come easy when we’re talking about income and wealth.

The Economic Policy Institute has gone through one exercise along this line. How much income would middle-class Americans be making today, EPI researchers asked, if the United States had the same distribution of income now as our nation had back at the end of the 1970s?

The difference between now and then could hardly be starker. Since 1979, households in America’s top 1 percent have more than doubled their share of the nation’s income, from 8 to nearly 20 percent.

What if this increase in inequality had never happened? What if middle-class households were taking in the same share of the nation’s income they took in four decades ago?

EPI focused its calculations on 2007, the last year before the Great Recession. In that year, the average middle-class income in the United States — that is, the average for the middle 60 percent of American households — amounted to $76,443.

If America had been as equal in 2007 as it was in 1979, that average income would have been $94,310. In other words, inequality is costing the average American family about $18,000 a year.

But the global economy, some might argue, has changed fundamentally over the past four decades. Simple comparisons of then vs. now, they say, no longer tell us much.

For argument’s sake, let’s accept this rather dubious claim — and make a different comparison. Let’s contrast the wealth of ordinary Americans today with the wealth of ordinary people in a more equal country.

France makes for a good comparison. France and the United States, the Swiss bank Credit Suisse reported last fall, have about the same total wealth per adult.

If you divide the wealth of the United States by our adult population, that is, you end up with $347,845 per adult. If you do the same for France, you end up with $317,292 per adult.

Total equality, of course, reigns in neither France nor the United States. But if both nations divvied up their wealth on a totally equal basis, the average American would have slightly more wealth than the average person in France.

What do we actually see?

In France today, “median” adults — those with more wealth than the poorest half of France’s adult population but less wealth than the richest half — have $140,638 in net worth to their name. In the United States, by contrast, median adult wealth stands at a mere $53,352.

The bottom line? If the United States had as equal a distribution of wealth as France, typical American adults today would have almost triple their current net worth.

So how much does inequality cost America’s middle class? More than we realize. Much more.

Sam Pizzigati, an Institute for Policy Studies associate fellow and otherwords.org columnist, edits the inequality weekly Too Much. His latest book is The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970.