Category Archives: Tax Issues

Welcome to the ‘Hotel Seattle’

And you were thinking about moving west…

WSJ 6/22/2020

Seattle’s City Council prides itself on being an early adopter of new business mandates. Seattle was the first major U.S. city to adopt a $15 minimum wage and one of the first to require businesses to provide paid sick leave. The City Council achieved another first last week, when it unanimously enacted an ordinance requiring food-delivery app companies to provide gig workers “premium pay” for deliveries in the city, on top of their usual compensation, and prohibiting the companies from raising fees or leaving the city in response, even if the new rule causes them to lose money.

Instead of erecting a wall to keep people out, Seattle is attempting to create a legal wall to keep businesses in.

The ordinance was first suggested by Working Washington, a Seattle labor organization backed by the Service Employees International Union. On-demand delivery workers in the city—think Instacart shoppers and DoorDash couriers—must be paid a premium of $2.50 a stop in the city for the duration of the Covid-19 emergency declared by Mayor Jenny Durkan.

With thousands of homebound Seattle residents in need of grocery deliveries, the costs add up. The City Council expects the companies to eat it: The ordinance states that gig companies may not “reduce or otherwise modify the areas in the City that are served,” “reduce a gig worker’s compensation,” or “add customer charges to online orders for delivery of groceries” in response to the new premium. If a company violates the ordinance, the city can pursue it with penalties beyond the city limits.

To understand how unprecedented this is, imagine if Seattle’s $15 minimum-wage law restricted restaurants from closing their doors or adjusting their prices in response, effectively forcing them to continue operating at a loss.

If that sounds illegal, it probably is. In a detailed memo sent in May to Mayor Durkan, the trade group TechNet described how the ordinance would violate the Takings Clause of the Fifth Amendment.  By “forcing a business to continue unprofitable operations, the City would be extracting payments from an unwilling person and thus taking private property without any—let alone just—compensation.”

That isn’t the only problem. The ordinance may also thwart the will of Washington state voters, who in 2018 approved an initiative under which “a local governmental entity may not impose or collect any tax, fee, or other assessment on groceries.” Charges and exactions on the transportation of groceries were specifically precluded.

Seattle’s City Council has a history of legally questionable legislation. In 2017 it passed a “wealth tax” on the income of wealthy households, even though the city attorney had advised that it would be illegal under state law. The courts agreed, and in April the state Supreme Court denied the city’s bid to review the decision. The city also recently walked away from a long legal dispute over a 2015 law that gave Uber and Lyft drivers, who use apps provided by the companies to work as independent contractors, the right to bargain collectively.

Seattle may believe it has the budget to back another costly legal fight, but other municipalities—whose budgets are strained as a consequence of the coronavirus crisis—will think twice before imitating the ordinance.

Even without mandates, gig companies are providing Covid-related benefits to workers who contract with them. Shipt is providing up to two weeks of financial assistance to its shoppers if they get Covid. DoorDash is offering financial assistance to “Dashers” who test positive or are told by a medical professional to self-isolate.

There may be merit to offering additional pay during the current crisis, but it’s a policy best handled voluntarily, in cooperation with gig companies, not in opposition to them.

Mr. Vernuccio is a senior fellow at the Mackinac Center for Public Policy. Mr. Saltsman is managing director at the Employment Policies Institute

https://www.wsj.com/articles/welcome-to-the-hotel-seattle-11592865795?mod=opinion_lead_pos7

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WHO SHOULD BAIL OUT NY?

WSJ 5/18/20220

Democrats want a $915 billion budget bailout for states and cities, and the leading lobbyist is New York Governor Andrew Cuomo. His main public antagonist on the subject is Florida Senator and former Governor Rick Scott. Both men were first elected Governor in 2010, so let’s do the math to consider which state has managed its economy and finances better over the last decade.

In 2010 New York’s population of 19.378 million was larger than Florida’s 18.8 million. By mid-2019 Florida had grown to 21.48 million, according to the Census Bureau, while New York had barely increased to 19.453 million. Yet Mr. Cuomo recently signed a budget for fiscal 2021 of $177 billion that is even bigger than last year’s, papering over what was a $6 billion deficit before the coronavirus. Florida’s budget for fiscal 2021, not yet signed by new Governor Ron DeSantis, is expected to be about $93 billion.

Democrats in Albany are claiming to be victims of events that are out of their control. But they have increased spending by $43 billion since 2010—about $570,000 for each additional person. Florida’s budget has increased by $28 billion while its population has grown 2.7 million— a $10,400 increase per new resident.
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New York has a top state-and-local tax rate of 12.7%, while Florida has no income tax. Yet New York has a growing budget deficit, while Mr. Scott inherited a large deficit but built a surplus and paid down state debt. The difference is spending.

New York’s spending on worker retirement benefits has nearly doubled since 2010 and is six times greater than Florida’s. Its debt-service payments have also doubled. Albany’s biggest cost driver is Medicaid, which gobbles up 40% of the state budget—twice as much as education. Florida spends about the same on schools as on Medicaid.

Blame New York’s cocktail of generous benefits, loose eligibility standards and waste. New York spends about twice as much per Medicaid beneficiary and six times more on nursing homes as Florida though its elderly population is 20% smaller. Many New York nursing homes and hospitals are organized by unions, which use their political clout to drive generous pay and benefits.

Mr. Cuomo in 2014 expanded Medicaid as part of ObamaCare to able-bodied individuals earning up to 133% of the poverty line. Florida didn’t. While the federal government initially picked up 100% of the ObamaCare expansion tab, New York is now on the hook for 10%, which contributed to this year’s $4 billion Medicaid shortfall.

New York spends about $76 billion a year on Medicaid—three times more than Florida. Swelling Medicaid costs have squeezed spending on transportation, causing Empire State trains and roads to fall into disrepair. Florida has found money to pave potholes and increased transportation spending 10 times more than New York between 2010 and 2019.  Mr. Cuomo pleads poverty by claiming New York is a “donor” state to the federal government. But federal dollars account for about 35.9% of New York’s spending compared to 32.8% of Florida’s, according to the Tax Foundation. New Yorkers pay more in federal taxes than what Albany gets back because the progressive federal tax code hits high earners the hardest and New York still has many high earners. The “donors” are individuals, and the money isn’t Mr. Cuomo’s.

In any case, many high earners are moving to lower-tax states. New York lost $9.6 billion in adjusted gross income to other states in 2018 while Florida gained $16 billion. Workers are following jobs, and vice versa.
The rate of private job growth in Florida has been about 60% higher than in New York from January 2010 to January 2020. Finance jobs expanded by 25% in Florida compared to 9.7% in New York. By our calculations, New York would generate $10 billion more annually in tax revenue if its personal income had grown at the rate of Florida’s over the last decade.
New York’s future has been discounted before, but the coronavirus may be its most serious economic challenge. Many service businesses are learning they don’t need as many workers in the office and can save money by downsizing. Morgan Stanley has said it intends to reduce office space in New York City, and Twitter has told employees they can work remotely as long as they want. Many restaurants were struggling before the coronavirus due to New York’s high minimum wage, taxes, rents and suffocating regulation. Some may now close permanently.
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Mr. Cuomo no doubt realizes all this, which is why last week he cited a repeal of the $10,000 limit on the state-and-local tax deduction as his top request from Congress to keep more high earners from leaving. He also wants $61 billion in budget relief, which the Empire Center’s E.J. McMahon notes would cover projected deficits for four years assuming spending increases by 4% annually.

The policy question is why taxpayers in Florida and other well-managed states should pay higher taxes to rescue an Albany political class that refuses to restrain its tax-and-spend governance. Public unions soak up an ever-larger share of tax dollars, but Albany refuses to change. Mr. Scott is right.

Source: The Wall Street Journal

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Income inequality?

Help me understand..

The Truth About Income Inequality – WSJ 11/4/2019

By Phil Gramm And John F. Early

Never in American history has the debate over income inequality so dominated the public square, with Democratic presidential candidates and congressional leaders calling for massive tax increases and federal expenditures to redistribute the nation’s income. Unfortunately, official measures of income inequality, the numbers being debated, are profoundly distorted by what the Census Bureau chooses to count as household income.

The published census data for 2017 portray the top quintile of households as having almost 17 times as much income as the bottom quintile. But this picture is false. The measure fails to account for the one-third of all household income paid in federal, state and local taxes. Since households in the top income quintile pay almost two-thirds of all taxes, ignoring the earned income lost to taxes substantially overstates inequality. The Census Bureau also fails to count $1.9 trillion in annual public transfer payments to American households. The bureau ignores transfer payments from some 95 federal programs such as Medicare, Medicaid and food stamps, which make up more than 40% of federal spending, along with dozens of state and local programs. Government transfers provide 89% of all resources available to the bottom income quintile of households and more than half of the total resources available to the second quintile.

In all, leaving out taxes and most transfers overstates inequality by more than 300%, as measured by the ratio of the top quintile’s income to the bottom quintile’s. More than 80% of all taxes are paid by the top two quintiles, and more than 70% of all government transfer payments go to the bottom two quintiles.

America’s system of data collection is among the most sophisticated in the world, but the Census Bureau’s decision not to count taxes as lost income and transfers as gained income grossly distorts its measure of the income distribution. As a result, the raging national debate over income inequality, the outcome of which could alter the foundations of our economic and political system, is based on faulty information.

The average bottom-quintile household earns only $4,908, while the average top-quintile one earns $295,904, or 60 times as much. But using official government data sources on taxes and all transfer payments to compute net income produces the more complete comparison displayed in the nearby chart.

The average bottom-quintile household receives $45,389 in government transfers. Private transfers from charitable and family sources provide another $3,313. The average household in the bottom quintile pays $2,709 in taxes, mostly sales, property and excise taxes. The net result is that the average household in the bottom quintile has $50,901 of available resources.

Government transfers go mostly to low-income households. The average bottom-quintile household and the average second-quintile household receive government transfers of some $17 and $4 respectively for every dollar of taxes they pay. The average middle-income household receives $17,850 in government transfers and pays an almost identical $17,737 in taxes, while the fourth and top quintiles of households receive government transfers of only 29 cents and 6 cents respectively for every dollar paid in taxes. (In the chart, transfers received minus taxes paid are shown as net government transfers for low-income households and net taxes

The census fails to account for taxes and most welfare payments, painting a distorted picture.

for high income households.) The average top-quintile household pays on average $109,125 in taxes and is left, after taxes and transfer payments, with only 3.8 times as much as the bottom quintile: $194,906 compared with $50,901. No matter how much income you think government in a free society should redistribute, it is much harder to argue that the bottom quintile is getting too little or the top quintile is getting too much when the ratio of net resources available to them is 3.8 to 1 rather than 60 to 1 (the ratio of what they earn) or the Census number of 17 to 1 (which excludes taxes and most transfers).

Today government redistributes sufficient resources to elevate the average household in the bottom quintile to a net income, after transfers and taxes, of $50,901—well within the range of American middle- class earnings. The average household in the second quintile is only slightly better off than the average bottom-quintile household. The average second-quintile household receives only 9.4% more, even though it earns more than six times as much income, it has more than twice the proportion of its prime working-age individuals employed, and they work twice as many hours a week on average. The average middle- income household is only 32% better off than the average bottom-quintile households despite earning more than 13 times as much, having 2.5 times as many of prime working-age individuals employed and working more than twice as many hours a week.

Antipoverty spending in the past 50 years has not only raised most of the households in the bottom quintile of earners into the middle class, but has also induced many low-income earners to stop working. In 1967, when funding for the War on Poverty started to flow, almost 70% of prime working-age adults in bottom- quintile households were employed. Over the next 50 years, that share fell to 36%. The second quintile, which historically had the highest labor-force participation rate among prime work-age adults, saw its labor-force participation rate fall from 90% to 85%, while the top three income quintiles all increased their work effort.

Any debate about further redistribution of income needs to be tethered to these facts. America already redistributes enough income to compress the income difference between the top and bottom quintiles from 60 to 1 in earned income down to 3.8 to 1 in income received. If 3.8 to 1 is too large an income differential, those who favor more redistribution need to explain to the bottom 60% of income-earning households why they should keep working when they could get almost as much from riding in the wagon as they get now from pulling it.

Mr. Gramm is a former chairman of the Senate Banking Committee. Mr. Early served twice as assistant commissioner at the Bureau of Labor Statistics.

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Nickel-and-Diming Democrats – WSJ

Tax everything, if it moves or not.
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Democrats claim they will pay for their cradle-to-grave welfare state by soaking the rich, but progressive states are now graciously showing that they will eventually try to dun everyone. Witness how Democrats are nickel-and-diming taxpayers like budget airlines without the service.

Like predecessor Dannel Malloy, new Connecticut Gov. Ned Lamont promised not to raise taxes. So much for that. Mr. Lamont got off to a fast start this week by proposing a slew of new taxes to close a $3.7 billion deficit swollen by labor contracts and pension obligations. Mr. Lamont says he merely wants to “expand” the tax base.

And is he ever expanding it. His budget extends the state 6.35% sales tax to nearly all services—hair salons, veterinarians, parking, boat storage, campground rentals—digital downloads and non-prescription drugs. It doesn’t make sense “to tax the materials you need to repair or renovate a home, but not on the architect, engineer, or contractor who do the work,” Mr. Lamont says.

The Governor has a point that tax exemptions can create economic distortions, and it would be worth broadening the base as part of a reform that lowers tax rates. But Mr. Lamont’s sole aim is to grab more revenue. Hence, he also wants to tax newspapers, textbooks and magazines.

A Puritan at heart, Mr. Lamont also calls for “sin taxes” on wine bottles, liquor containers, e-cigarettes, plastic bags and sugar-sweetened beverages. “These are the sins of the 21st century,” the Governor says. Since driving too is apparently a sin, he wants to toll all cars and trucks that traverse state highways.

Why not raise the gas tax? Perhaps because Connecticut already has the second highest gas tax in the Northeast (43.8 cents a gallon) after New York (45.8 cents), and commuters could avoid it by filling up in other states. Though Mr. Lamont last fall proposed tolling only trucks, that won’t raise nearly enough revenue to fix roads and bridges that have deteriorated as the state shovels out ever more for pensions.

Speaking of disrepair: New York Gov. Andrew Cuomo is pushing a “congestion tax” to fix the city’s broken subways—an $11.52 surcharge for cars, $25.35 on trucks and $5 on for-hire vehicles on every trip into Manhattan’s central business district. This is on top of a dozen or so other subway taxes and a $2.50 to $2.75 surcharge that Democrats imposed last year on taxi and Uber rides that is raising only enough revenue to offset declining subway and bus ridership.

Mr. Lamont drew his toll inspiration from Rhode Island Gov. Gina Raimondo, who has lately been scrounging for cash to finance “free college,” universal preschool and Medicaid. Last month she proposed extending the state 7% sales tax to Netflix , e-books, iTunes, interior decorating, landscaping, shooting ranges, beach parking and more.

She also wants to reimpose the ObamaCare penalty for individuals without health insurance. And she’d create a new $1,500 penalty on large “for-profit” employers for each employee who enrolls in Medicaid. This new tax is loosely based on legislation proposed by Bernie Sanders and would essentially punish businesses for hiring low-income workers.

Ms. Raimondo did yeoman work eight years ago fixing the state’s public pensions, so it’s a shame she’s now driving off businesses like Democrats in Connecticut and Illinois. Speaking of the Land of Public Unions, retirement costs consume a quarter of Illinois’s budget and would eat up half if the state were paying as much as it should. The state is still running a $3.2 billion deficit this year.

New Gov. J.B. Pritzker’s plan? Refinance the pension debt and tax plastic bags, marijuana and sports betting, which will supposedly cover the shortfall until voters approve a referendum next year replacing the state’s flat 4.95% income tax with a progressive tax. Mr. Pritzker says a progressive tax will spare the middle class, though there may be a reason he hasn’t proposed a specific higher rate.

Research outfit Wirepoints calculates that the top rate would have to rise to 11.2% on millionaires and at least 8.5% on everyone earning more than $50,000 to finance Mr. Pritzker’s spending proposals. The progressive model is California, where individuals earning more than $56,000 pay a top marginal rate of 9.3%.

Tax the rich? Right. The problem with progressive governance is that eventually Democrats run out of everyone’s money.

via Nickel-and-Diming Democrats – WSJ.

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