Thursday, May 5, 2016

Paying a Fair Share

One of great mysteries of Greg Gianforte’s gubernatorial campaign is how on earth he thinks he’s
going to get elected by promising to get rid of the business equipment tax. After all, every voter in Montana who owns property   - a home, a commercial building, farm or ranch land, a forest tract – pays property taxes. And while we may not be particularly happy about it when we’re writing the check, most of us recognize that property taxes go to pay for essential local services like schools, or the fire and police departments, or the upkeep on parks, or street maintenance.  We all know we benefit from those services and we all have to pay our fair share of the cost of providing them. But now along comes Gianforte saying, “Hold on a second: It’s all right for all you other suckers to pick up the tab, but when it comes to big companies with a pile of business equipment, well, that’s a different matter.”

Of course Gianforte doesn’t enunciate his position in quite those terms. On the contrary, he needs to convince us that we all have a stake in letting those big companies off the hook. Here, from his website, is the argument, such as it is:

One Montana business person told me that he invested in a single piece of equipment that created 20 high wage jobs.  His reward?  A $300,000 business equipment tax bill over 10 years.  If we want Montana small businesses to grow and succeed, why would we punish job creators for purchasing more equipment to hire more Montanans?

The Business Equipment Tax is one of the most regressive taxes on the books in Montana.  It is an annual tax on all the equipment job creators own.  Hotel owners even have to pay it on every fork and spoon they own—EVERY YEAR!  It hits farmers, manufacturers, construction, oil/gas and high tech hard; basically any business that invests to create jobs is currently incentivized to invest elsewhere.  It chases off investment and jobs.  Most states don’t have a tax like this.  Also, because equipment value is self-reported, the tax is prone to being under-reported.  I am committed to eliminating the business equipment tax over 4 years as revenue from other sources grows.  Any reduction in the business equipment tax must also provide relief to counties that depend on these tax revenues today.

So there you have it: The reason we should give large corporations a pass on the taxes all the rest of us have to pay is that if we don’t, they’ll take their business elsewhere. Republicans have been saying this kind of thing since Reagan was president, and it’s weird that Gianforte, who’s supposed to be an outsider who knows how to get things done, can’t come up with a fresher idea. What’s even weirder is that he doesn’t seem to realize that in recent legislative sessions the business equipment tax has already been hacked to bits. Sixty percent of Montana businesses – the small guys – don’t pay it all. And for the somewhat larger guys, the rate has been cut in half.* We even have – get this! – the sixth best business tax climate of any state in the country. And so while Gianforte constantly bemoans the current state of Montana’s economy, his prescription for fixing it is to do even more of what we have already been doing for the past decade.**

Gianforte has a prodigious capacity to overlook evidence and rely instead on a choice anecdote, no matter how implausible, fabricated or inapt it may be. After all, this is a guy who ignores everything known about human life expectancy and forms his notions about when you should be able to retire based on the ancient myth of a 600 year old boat builder. He says he knows that the business equipment tax is keeping companies out of Montana because somebody at Facebook told him so, but the narrative is made up out of whole cloth. And now he cites, as evidence of the tax’s destructive impact on investment, the story of a company that invested and payed the tax!

Gianforte wants you to believe that when companies invest in new plant and equipment, they invariably create more jobs. That’s why you should pay property taxes and big companies shouldn’t have to – one of those new jobs may be yours, or your neighbor's, or your kid's. He trades here on the misconception that businesses are always “job creators.” They are, of course, but if hiring people is creating jobs, then laying people off is destroying jobs, and that happens all the time. The fact is that hundreds of thousands of people lose jobs every week; here's the chart showing weekly new unemployment claims since 2000:

Properly managed businesses eliminate jobs all the time; indeed, reducing labor costs (which is a more attractive way of saying laying people off) is often taken to be a sign of efficient management. And while lowering the cost of capital, which is what happens when the business equipment tax is cut, may well encourage investment, new plant and equipment coming on line can displace workers rather than leading to new hiring. Consider the mechanization of agriculture: When farmers replaced steam threshers and mule teams with combines and tractors, thousands of people lost their jobs.

Now obviously, all those combines crawling across the land were a good thing, even if they did put a lot of people out of work. They dramatically increased agricultural productivity and output. Investment in plant and equipment contributes importantly to the growth of employment and economic activity, but firms do not build new factories or buy new machines and computers because they are itching to create jobs. They buy that stuff in order to produce more efficiently, lower costs, improve product quality and ultimately make more money.  Business equipment is not being taxed to “punish job creators.” It’s being taxed, like all other property, because is enhances the ability of its owners to generate income and pay a fair share of the costs of government services from which they benefit.

* Given these changes in its structure, it’s a mystery how Gianforte concludes that the business equipment tax is “one of the most regressive on the books in Montana.” A regressive tax is one that falls disproportionately on low income individuals and households, and it’s hard to imagine that those are the folks that own the large businesses paying the business equipment tax.

** The problem here is not just with the logic. Montana’s economy, and the state’s budget, are actually performing well. But as Dave Parker, at the Big Sky Political Analysis blog, points out, Gianforte is relying on the wrong data to get to the opposite conclusion. He’s got to do that, of course; otherwise, what would he run on?