Archive for category Economic Development

Louisiana’s Budget — The Norquist Wriggle

| NEW ORLEANS | The Economist

EVEN in a place inured to budget trickery, the stratagem was absurd. Louisiana’s treasurer, John Kennedy, called it “nonsense on a stick”. He was referring to the “tax credit” that would apparently balance Louisiana’s budget for the coming fiscal year, closing a deficit gap of $1.6 billion.

This was the plan. The state’s cigarette tax, the third-lowest in the country, would be raised substantially, with the proceeds going to higher education. But rather than declare it as a tax increase, the state would create a phantom fee of about $1,600 applied to each of its 220,000 university students. The students would not actually pay the fee, because it would come with a matching tax credit. This credit would then be handed over to the universities, which would in turn receive the actual money generated by the cigarette-tax increase and a few other things.

Louisiana’s governor, Bobby Jindal, who is expected soon to leap into the crowd of Republican presidential hopefuls, is desperate to be among the fiscally untainted. Since April he has been wrestling with the problem of how to close the budget gap without either raising taxes, which would inflame Mr Norquist, or inflicting further damage on programmes like higher education. Louisiana’s colleges, on his watch, have already sustained some of the deepest cuts in the country.

A simple solution might have been to pare back some of the state’s lucrative and questionable tax breaks for business. But Mr Norquist would frown on that. According to his rules of engagement, any legislative change that results in extra revenue—even eliminating a poorly crafted giveaway—is a tax increase. In February (as furious legislators point out, before he had consulted them), Mr Jindal sought advice privately from the guru himself.

As a result, in came the SAVE Act, an acronym for “Student Assessment for a Valuable Education”. (One legislator moved to amend its title to the DUMB Act, for “Don’t Understand Meaning of Bill”.) Mr Norquist has previously blessed tax increases, provided they are paired with offsetting cuts that make the whole package revenue-neutral. He therefore gave the nod to Louisiana’s contrivance.

Even the legislators who backed the bill cringed at it, and admitted it served only to protect Mr Jindal’s anti-tax credentials. A group of ten Republican legislators, including four who had signed the ATR pledge, added their names to a letter to Mr Norquist written by Joel Robideaux, the chairman of the Ways and Means Committee of the Louisiana House. The letter, released to the media, tartly noted that the SAVE Act was a “purely fictional, procedural, phantom, paper tax credit”, and asked Mr Norquist whether he really endorsed it. He replied, the next day, by saying that the SAVE Act was Louisiana’s creation, not his. If the conservatives didn’t want to use that workaround to balance the books, he suggested, they should make cuts elsewhere.

In the end, lawmakers held their noses and voted for a budget that included SAVE, after Mr Jindal made it clear that he would veto the package otherwise. It was quite a spectacle. One of the bill’s chief backers, arguing for its adoption, sold it thus: “Our love for higher education is greater than the embarrassment over the instrument.”

Although Messrs Jindal and Norquist won the battle, it is unclear whether they have won the war. The episode has soured many Louisianian lawmakers on ATR for good. Add in resentment at having to please a Washington power-broker, rather than local constituents, and it seems that Mr Norquist may well have pushed his anti-tax crusade too far.

GRAMM: A GOP Gameplan for Tax Reform

A GOP Gameplan for Tax Reform
by Phil Gramm

Thanks to the efforts of Democrat Sen. Max Baucus and Republican Rep. Dave Camp, Congress will take up tax reform this year. Before the debate begins, however, Republicans need to set out the principles that represent our values. In my 24 years in the House and Senate, I never wrote a bill that represented a 100% statement of my values, but I always found it important to know where the North Star was as I tried to navigate through the swamp.

First, under no circumstances should Republicans agree to make the tax system even more progressive than it already is, or to increase the number of people who do not pay income taxes. In 1980, the top 1% and 5% of income earners in America paid 19.1% and 36.9% of total federal income taxes. Today, the top 1% and 5% pay 37.4% and 59.1%. Meanwhile, 41.6% of American earners now pay no federal income taxes.

The more progressive the tax system becomes the more unstable the country’s public finances get. High-income Americans earn a large share of their income in bonuses, dividends and capital gains, all of which are highly sensitive to the business cycle. This means wide swings in tax collections that play havoc with government budgets. The removal of large numbers of people from the tax rolls makes the political system more unstable. Individuals and households that pay no income taxes have a diminished stake in limited government.

Second, government should collect the minimum revenues needed to support and protect a free society and do so in a way that is, as far as possible, neutral in its effect on individual behavior. In its purest form, this means no individual deductions, credits or tax expenditures. No matter how committed Americans may be individually to charitable giving or home ownership, the government should not promote those values through special provisions in the tax code.

Third, Republicans should require all similarly structured firms be treated the same. If sweat equity is taxed as a capital gain for a mechanic who opens a garage with a financial partner, it should be treated the same for a hedge fund or private-equity manager who shares in the gains of his investors.

Fourth, business subsidies and credits should be eliminated. Ending subsidies to fund lower tax rates improves the efficiency of capital allocation. The sine qua non of tax reform is a more efficient allocation of investment capital. If the tax breaks that create crony capitalism are allowed to survive, then tax reform failed.

Fifth, all costs of production should be equally deductible when they are actually incurred, and all income should be recognized at the time it is actually earned and taxed only once. President Obama’s repeated proposal to force large Subchapter S corporations and limited liability entities to be taxed as C corporations is a movement in the wrong direction. Revenues flowing from those changes would come almost exclusively from the double taxation of corporate income: first on corporate profits, and again when individuals pay taxes on dividends and capital gains.

Other things being equal, the efficiency of a nation’s corporate tax system can be measured by the lack of special-interest provisions in the code and how low the tax rate is. But things are never equal—and a fixation with achieving a given corporate tax rate is dangerous. That’s because you can, within limits, make the tax rate whatever you want it to be by changing the definition of what is a deductible business expense.

For example, by limiting or eliminating the deductibility of interest cost—a perfectly legitimate cost of doing business—the “savings” could be used to lower the corporate tax rate. But such changes would further distort the cost of capital relative to the cost of labor and almost certainly be detrimental.

Similarly, you could eliminate the deductibility of wages and other costs of doing business and simply tax gross receipts instead of net profit. The tax rate would be low, but would economic efficiency be increased? No.

Sixth, tax reform should move toward the elimination of taxes on the foreign earnings of American companies, whose profits are already taxed abroad. Other countries recognize that the competitiveness of their companies would be severely damaged if they had to pay higher taxes than their competitors in foreign markets and do not impose domestic taxes on foreign earnings.

By attempting to tax foreign earnings when they are repatriated, the United States has incentivized companies not to repatriate earnings. As a result, U.S. companies hold huge hoards of cash abroad while domestic investment lags.

Since America is now the worst place in the world to earn corporate profits, we might be better off ending all business subsidies and using the savings to eliminate the dual taxation of corporate income and the taxation on foreign earnings—and to lower the corporate tax rate as much as is consistent with revenue neutrality, using static scoring. We could then write a provision into the law that if the improved code collects more taxes than the static revenue estimates, the rate would automatically be lowered over time by the amount of over-performance, down to 25%.

Some final advice: Compromise is fine if it moves you in the right direction. But don’t compromise on things that will only make rational reform harder in the future. If you can improve the tax code and help the economy now, do it. But remember, the Obama administration too shall pass, and a poor deal now will make a good one harder to achieve in the future.

Mr. Gramm, a former Republican senator from Texas, is an economist by education, a senior partner of U.S. Policy Metrics, and a visiting scholar at the American Enterprise Institute.

Maginnis: Newspaper Rivalry Good for Readers

By Louisiana-based political columnist John Maginnis

When I was growing up in Baton Rouge , after my family moved there from New Orleans just before I was born, the Times-Picayune was thrown in our yard each morning. After school, I would get on my bike to deliver the State-Times, the afternoon counterpart of the then-called Morning Advocate.

Besides the paper route, I’ve never worked for either paper (this is a syndicated column), but like most of their dual readers, their newly engaged business rivalry holds my attention as much as any stories they publish these days.

On May 1, both papers ran front-page banner headlines announcing their big changes: GEORGES BUYS ADVOCATE and T-P ADDING NEWSSTAND TAB 3 DAYS A WEEK.

The great south Louisiana newspaper war is on. This one is unlike those from the early 20th century in big cities, when the struggle was between two established papers rooted in the same market. New publisher John Georges plans to expand on the Baton Rouge Advocate’s recent incursion into New Orleans , while the Picayune prepares to defend its turf with its new tabloid, TP Street , to be published on three of the four days of the week on which it has stopped printing. The Picayune also is making a foray into the capital with its new tabloid BR, while both companies will compete digitally through their websites.

It is an audacious move by Georges to buy a newspaper that one member of the owning Manship family said was not worth what he was offering to pay. Such an assessment by a seller would give the ordinary buyer pause. But Georges is nothing if not confident, optimistic and driven.

He built a family fortune into a much bigger one that supplies grocery and convenience stores and services cigarette and video poker machines. He will say that gambling makes up only a small part of his holdings, but Georges Enterprises, which he founded, is a major player in the state’s video gaming industry.

With those businesses producing enormous cash flow, Georges has estimated his net worth at about $100 million. But men richer than he have lost more than that by trying their hands at newspaper publishing. (Ask Chicago real estate tycoon Sam Zell what owning the Tribune did to his bottom line.)

Georges becomes a publisher after running unsuccessfully for governor in 2007 and for mayor of New Orleans in 2010, making him a Louisiana-style William Randolph Hearst in reverse.

In his brief career as a politician (who’s to say it’s over?), he distinguished himself as one of the more colorful characters of the post-Edwards era. The man would say anything, and on the record. My favorite quip of his came after Bobby Jindal, then running for governor in 2007 as was Georges, delivered his wife’s baby in their Kenner bedroom when there was no time to get her to Woman’s Hospital in Baton Rouge . While others heralded Jindal’s heroics, Georges faulted him for “poor planning.”

In those days, Georges loved talking to political reporters, helpfully telling them how they should write their leads. To succeed as publisher he will need to resist that temptation, mighty as it is.

The daunting challenge facing him is to publish separate editions for two vastly different communities. The two cities have grown somewhat closer since Hurricane Katrina, but the remaining gap can still be as wide and impenetrable as the great swamp that lies between them.

To increase its New Orleans circulation to the point where it can compete for advertising, the new Advocate needs to offer a product that is embraced and not just accepted, while not losing the connection to its hometown readers.

TP Street needs to be more than a day filler if the Picayune is to woo back former subscribers who feel jilted by not having their daily paper on their front steps every morning.

The solution for both, of course, is to beat each other to the best stories and to better capture the cultural vitality of both cities. Doing so will require big long-term investments for both companies, with the dividends to be reaped by better informed and entertained readers. How this all plays out could foreshadow the future of daily journalism across the land. The whole newspaper world is watching. Gentleman, start your presses.

The Mayor of New Orleans Has the Wind at His Back

Mitch Landrieu is presiding over a major economic turnaround.
by Adam Kuschner for National Journal

NEW ORLEANS—Among the many other changes unfurling in this town, its chief executive is another kind of break from the past. Mitch Landrieu is the first white mayor since his father left that office in 1978; to get the job, which he began in 2009, he had to assemble a broad-based, multiracial political coalition. The Landrieus may be a political dynasty in Louisiana (the mayor’s sister, Mary, is a three-term U.S. senator), but these are tough times for political machines in New Orleans, and Mitch has been able to slough off patronage awardees from city posts and contracts, inching closer to a meritocratic administration. He talked with National Journal’s Adam B. Kushner, a New Orleans native, about how the city’s economy is transforming, and how to make it last. Edited excerpts follow.

NJ There’s a sense of optimism I’ve felt in my reporting that I don’t remember from growing up here.

LANDRIEU Anybody who comes to New Orleans right now feels a palpable spirit of energy and hopefulness. They see physical manifestations of that transformation taking place in front of their eyes. You can see the medical complex going up, designed not just to take care of people’s health care needs or train doctors or do research, but also as a fairly aggressive step toward information and economic development. You take the smart thing coming out of the research and turn it into a product; we’re going to take the technology and transform it into a industry sector. The second thing is that we now have a working system of schools. We’ve redesigned the governing mechanism, and consequently you’ve seen the scores—which are what counts—begin to grow exponentially from the inner city. The achievement gap between kids here and in the [rest of the] state is closing rapidly. Graduation rates are now better than the national average, and that’s a structural change.

The people in New Orleans are not just deciding to build the city back the way it was. They’re accepting responsibility to build it the way they always wanted it to be. It’s amazing how many young people we have from around the country who are starting to create stuff.

NJ How do you build a knowledge economy? And how does it serve upwardly mobile New Orleanians who don’t have elite educations?

LANDRIEU Generally, we’ve been a place with a lot of raw material and talent and intellectual capital, and we’ve extracted it and exported it. Think of Wynton Marsalis at Lincoln Center. So if you want to have a knowledge-based economy, you’ve got to create the kind of jobs. GE Capital basically said, “I like what you’re doing down there.” They put 300 jobs downtown. Gameloft [which develops smartphone games] did the same. Pre- and postproduction film work is happening here now. All of a sudden, you’re attracting these industries, and then you’ve got to supply them with workers. Kids are coming to New Orleans and don’t want to live in the suburbs; they want to live downtown, so we have a construction boom, restaurants opening up.

NJ Are the young people who move here staying?

LANDRIEU Yes, they’re becoming citizens and leaders of New Orleans. I have a bunch working in my office right now. They’re moving into government, running for office, starting businesses. And because those jobs are here now, there’s a pathway to prosperity, a pipeline to success, through primary and secondary education, from college and tech schools to [knowledge-economy] jobs. You want to train people so that an older, African-American woman living in [a new, mixed-income development downtown] can walk down the street and have the job as phlebotomist at the new health center. You’ve got to train workers on the low scale, the medium scale, and the high scale. The same thing can be true about high schools and colleges.

NJ Violent crime here is 80 percent worse than the national average. Does that put a ceiling on economic growth?

LANDRIEU You have to know the difference between the crime rate and the murder rate. For the crime rate, we’re number 73 in the nation, meaning that major American cities are much less safe than New Orleans is. But the murder rate is 10 times the national average. Both those things are depressors, which is why we’re spending so much time working on that. Who’s killing, who’s being killed, where they are, and how to change that—it’s a complicated problem that has provided no easy answers for a long time. We hope, as the police department and the school system get better, and culturally we identify where the problems are, we can change it. But there’s no question that it has a negative impact. It should not be a ceiling. It is absolutely possible to change that trajectory. New York City did it; Chicago did it to a certain extent, though they’re having trouble now.

NJ How can you tell whether the gains in the tech and entrepreneur sector are lasting and will take deep root? These haven’t really begun to represent a major share of growth yet.

LANDRIEU When Forbes says we’re the most improved and best for jobs, when The Wall Street Journal says we’re best for business, something’s happening. [New Orleans was the most improved metro on The Journal’s “Best for Business” list last year, up 44 places from 2010. Forbes ranked Louisiana most improved on its “Best States for Business” and gave New Orleans the top spot for “America’s Brain Magnets,” attracting college graduates under 25.] They’re looking at objective data on a sea change of how a place operates. U.S. News & World Report says Tulane is the most popular school. All this stuff has nothing to do with culture and tourism and food. Now, seven years on, they’re beginning to see how change works.

NJ How can the improvements outlast your tenure?

LANDRIEU There’s probably no more important structural change for the future of the city than how the schools work. At some point, the governance of the school system has got to come back to local control [it is now administered by the state]—but not until we have absolute stability. We don’t have that back yet. When it comes back, the new school board must be designed as an oversight board of schools that are run at the site, where the principal has autonomy, where he can fire and hire based on merit, students are accountable, and parents have choices. Those are the kinds of inputs that will close the achievement gap.

This article appeared in the May 4, 2013, edition of National Journal.

Kennedy: A Plan B For Income Tax Reform

By Louisiana Treasurer John Kennedy

I appreciate Gov. Jindal’s plan to end Louisiana’s personal and corporate income tax. Our state needs a tax code that looks like somebody designed it on purpose, and the Governor is correct, in my estimation, that the income tax, which taxes work, makes us less competitive.

Though well-intentioned, the Governor’s plan was not going to pass. Nor should it, if for no other reason than it would have raised taxes on businesses by $500 million.

Now that the Governor has withdrawn his plan we need a Plan B. Several plausible ones have been hinted at. Here’s another.

1. Draft the Legislative Fiscal Office, the Legislative Auditor, PAR and CABL to count the beans. They have credibility.

2. Forget about raising the state sales tax rate or taxing services.

3. Concentrate instead on reducing the state income tax by making it and the state sales and excise taxes flatter. Our goal for income, sales and excise taxes should be the lowest possible rate (everyone pays as little as possible) and the broadest possible base (everyone pays something), consistent with the promotion of shared social and economic policies (for example, no one should have to pay sales tax to eat at home).

4. Achieve our goal by objectively analyzing the efficacy of each statutory (not constitutional) exemption, exclusion, credit and rebate our current state tax code gives to people and companies that would be paying income, sales or excise taxes, like everyone else, but aren’t because a law exempts them. Why were they exempted in the first place? Job creation? Fairness? To promote a shared value? If the exemption is achieving its purpose, keep it. Perhaps even double down on it if it is working exceptionally well. But get rid of it if the preference falls short of its purpose. All it takes is a majority vote of the legislature.

5. The state has 19,000 consulting contracts, according to the Legislative Auditor. We don’t need all of them. Eliminate at least 10% by value, and demand a reasonable discount, perhaps 5%, on the rest when the state has superior bargaining strength, which is most of the time.

6. Implement a centralized collection process and automated collections management system to collect the state’s accounts receivable (debts owed the state, such as fines, medical bills and taxes) by passing HB 629 by Rep. Chris Broadwater (R) and Rep. Ted James (D). CGI Technologies and Solutions, Inc. estimates HB 629 will bring in an extra $158 million over 5 years, and likely more.

7. Eliminating exemptions, winnowing down and renegotiating consulting contracts and doing a better job of collecting state debt will save enough money to reduce the state income tax without raising the state sales tax rate or taxing services. The more money we choose to save this way, the more we can reduce the income tax. Enough could be saved to eliminate the income tax, if we want to. This sounds simple, and mathematically it is, but this exercise will require extraordinary political will. The buffet may be large-19,000 contracts; 468 exemptions worth $4.8 billion-but each has a constituency. We’ll find out quickly how serious we are about tax reform.

8. Finally, if Plan B passes, make it effective only if the voters agree. Gov. Roemer and Gov. Foster let people vote on their tax code revisions. So should the proponents of this plan.

Gov. Jindal has called for a fairer, flatter and simpler tax system that creates jobs and encourages growth. This Plan B achieves each one of his goals.

Infrastructure spending and the gas tax

Traffic congestion in Baton Rouge constantly forces a debate about whether to build a loop around the city.  I don’t think I want to wade into that discussion although I do have an opinion (Hint: what did Shreveport do?)…

Instead, let’s look at the bigger transportation and infrastructure picture. This Wall Street Journal story – “The Gas Tax Is Running Low But What Should Replace It?” – is a GREAT look at the options available for shoring up the nation’s highway trust fund and getting our core infrastructure back to the level Americans deserve.

Yes, each option involves some sort of tax, but the fact remains that if we want quality, modern infrastructure, it costs money. I’m not advocating for carte blanche tax increases, but I would suggest a dedicated source of funding that takes into account infrastructure usage and inflation rates is worthy of consideration.

In case you’re interested in the subject but don’t want to read the whole article, or don’t have access to a subscription, below are the suggested funding solutions:

• Tax the Miles
• Tax the Roads
• Index the Gax Tax to Inflation
• Tax Oil, not Gasoline
• Tax Cars

Why is infrastructure spending so critical? Well, for starters did you know that according the American Society of Civil Engineers (ASCE), more than 26 percent of our nation’s bridges are either structurally deficient or functionally obsolete? This fact is scary on its face but also indicative of the challenges facing federal, state and local governments who are all grappling with budget deficits and limited resources.

The ASCE states “a structurally deficient bridge may be closed or restrict traffic in accordance with weight limits because of limited structural capacity. These bridges are not unsafe, but must post limits for speed and weight. A functionally obsolete bridge has older design features and geometrics, and though not unsafe, cannot accommodate current traffic volumes, vehicle sizes, and weights. These restrictions not only contribute to traffic congestion, they also cause such major inconveniences as forcing emergency vehicles to take lengthy detours and lengthening the routes of school buses.”

Infrastructure spending affects every person’s life almost every day. Core transportation infrastructure is a significant driver for the nation’s long-term growth and economic development. Without a modern infrastructure, the cost of moving goods increases, making us less competitive with other nations, particularly China. For example, that country announced earlier this month a $157 billion plan to fund 60 major infrastructure projects across the country.

Meanwhile we can’t get Congress and the President to agree on a long-term transportation bill, so a series of short-term extensions force states like Louisiana to delay or constantly revise planning and implementation of the state’s long-term transportation plan.

Again quoting the ASCE, in Louisiana our infrastructure needs abound and are highlighted below:

• 30 percent of Louisiana’s bridges are structurally deficient or functionally obsolete.
• Louisiana’s drinking water infrastructure needs an investment of $4.11 billion over the next 20 years.
• Louisiana’s ports handled 456 million tons of waterborne traffic in 2005, ranking it 2nd in the nation.
• 44 percent of Louisiana’s major roads are in poor or mediocre condition.
• 43 percent of Louisiana’s major urban highways are considered congested.
• Vehicle travel on Louisiana’s highways increased 20 percent from 1990 to 2007.
• Louisiana has $3.33 billion in wastewater infrastructure needs.

These statistics are significant, but they are not a condemnation of the Jindal administration or even a previous administration. States are mostly, though not entirely dependent on the whims and finances of the federal government and the highway trust fund. I merely point these statistics out to show that we have a long, long way to go (a long road to travel, so to speak) and given the condition of our infrastructure, a short time to get there.

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Also published on Louisiana Daily and the Hayride.

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