Tax Plan Politics

You may have been pulling your hair out during the presidential debate the other night for any number of reasons, but one of them was surely that the President and Mitt Romney were making conflicting factual claims about taxes that simply couldn't all be true.

Case in point: President Obama said, over and over again, that Romney planned to cut tax revenues by $5 trillion, thereby swelling the deficit, while Romney said, over and over again, that his plan wouldn’t reduce revenues or grow the deficit at all. Those two claims can’t both be right, can they?

It turns out that it all depends on what you mean by the word “plan.” What Romney is definitely planning is to reduce tax rates by 20% across the board. Over 10 years, that alone would reduce Federal revenue by about $5 trillion, and that’s where the President gets his number. But Romney also says he will get the revenue back from “closing loopholes,”  that is, by eliminating some of the many deductions, exemptions and credits with which the tax system is riddled.

The trouble is that he hasn’t been at all clear about which loopholes he would close, and understandably so.  After all, when you close a loophole, you raise somebody’s taxes, and that’s not something we talk about in polite society.  And a lot of number crunchers have concluded that closing enough of them to make the whole package “revenue neutral” would end up raising taxes for middle income families, which Romney has promised not to do. Romney is also apparently vaguely planning that the problem will be partly solved by that old Republican favorite, supply side economics: lower tax rates = happier “job creators” = more jobs = higher tax revenue.

So while the Romney plan is pretty clear about cutting rates, it’s pretty half-baked when it comes to assuring revenue neutrality. Whether it’s fair or not to call that a plan to cut revenue by $5 trillion – which is what the President  calls it – you can decide.*

Whatever it is, if Romney could make his tax plan work it would have, on the surface at any rate, a certain appeal.  It’s the classic prescription for tax reform: if we shut loopholes, broaden the tax base and reduce tax rates, we can simplify the tax system without a loss of revenue. 

But before we do away with any particular credit or deduction or exemption, it’s important to bear in mind that there might be a good reason it was created in the first place.  For example, the Federal earned income tax credit was enacted to provide tax relief to low income working families. And the mortgage interest deduction is intended to encourage home ownership.  Are those really things we want to give up?

Consider the attempt in the 2011 legislature to eliminate Montana’s energy efficiency tax credits. Montanans who improve the energy efficiency of their homes and businesses can claim a 25% tax credit for the cost of those improvements.  Individuals can claim up to $500 and a married couple filing jointly can claim up to $1,000. Homeowners can install anything from energy-saving appliances and programmable thermostats to energy-efficient windows, and the credit helps them afford these simple improvements that reduce energy use and lower their monthly energy bills.  The community benefits as well, with greater energy independence, lower environmental costs from energy production, and the robust growth of businesses that provide energy conservation products and services. 

The Montana legislature created these tax credits in 1983.  And although thousands of Montanans since then have used the credit to capture energy savings in their homes and businesses, the Legislature in 2011 passed a bill (SB 253), carried by Senator Bob Lake (who’s currently running for the Public Service Commission) that repealed the credit entirely.  Lake’s bill, which initially called for the repeal of a whole slew of other credits, was intended to generate revenue to offset a Republican plan to reduce the business equipment tax

Fortunately, Governor Schweitzer vetoed SB253, which he called “largest tax increase proposed by the 2011 Legislature.” And he was right. In 2010, 29,000 Montana households claimed a total of $10.4 million  in energy conservation credits on their state income taxes. Eliminating these credits would have made low and middle income families pay more (both in higher income taxes and higher energy bills) in order to provide business equipment tax relief.  Almost 70% of that relief would have gone to about 450 large companies with more that $1 million worth of equipment. And the progress Montanans have made in conserving energy would have suffered a sharp setback.

Energy efficiency is the least expensive, cleanest, and most reliable energy resource for Montana utilities— and the same goes for Montana families.  Thankfully a misguided tax policy proposal failed, and Montanans still have the opportunity to take advantage of tax credits that help pay for energy efficiency improvements in their homes and businesses.

* Robert Samuelson, writing in the Washington Post, doesn’t think it’s fair, but he doesn’t think that Romney is being a straight shooter, either.

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A Little Job Growth Fact Checking

Judging by Mike Dennison’s report on the gubernatorial debate in Helena this week, when it comes to explaining what’s wrong with Montana’s economy and what should be done about it, Rick Hill is “on message.” It’s the usual story: we’re falling behind, we have a bad business climate, our taxes are too high, we over-regulate, we need to develop our natural resources (particularly coal), etc.

Now it’s fine to say all that, if you believe it, but it would be nice not to mangle the facts while you’re at it.

For example: Dennison quotes Hill as saying that “We’re trailing all our neighboring states in creating jobs” which “has been a pattern in Montana for almost three decades.” Hill especially envies Wyoming, which he thinks has a better economy than Montana’s because it “embraced coal development” 40 years ago. Well, look at the chart below. It shows trends in total employment in Montana, Idaho, Wyoming and North and South Dakota over roughly the past two decades (1990 to 2010). Employment each year is measured as a percent of its value in 1990, so all the lines start from the same place, 100 in 1990.*

As you can see, we have not been “trailing all our neighboring states in creating jobs … for almost three decades.” We trailed only one, Idaho, and came in ahead of North and South Dakota and yes, even Wyoming.  Of course none of this means that Montanans shouldn’t be concerned about job growth and economic recovery or that we shouldn’t look at what other states have done to promote their economic health. But in looking for states to emulate, shouldn’t we choose the ones – like Idaho - that are doing relatively well? At a minimum, shouldn’t we know which states those are?

The fact that Idaho did a lot better than Wyoming should make us all – including Hill – think long and hard about an economic development strategy based on more natural resource extraction. Here’s another graph. It shows natural resource employment as a percent of total employment in Idaho and Wyoming over the same 1990 to 2010 period.

As you can see, starting out in 1990, natural resource employment was less important in Idaho than in Wyoming. And over time, the relative importance of natural resources in the Idaho economy fell. The strength of Idaho’s economy came from diversifying, away from natural resources and towards high growth sectors – for example, computer manufacturing -  in the national and world economies. Wyoming, which remained more dependent on natural resource production, did not fare anywhere near so well.

Montanans are proud of their history of living off the land as loggers and ranchers and cowboys and miners, and it’s hard to believe that what worked for us in the past won’t necessarily work for us in the future. But like it or not, the world is changing, and the key to our economic future is to make the public investments – in education, infrastructure, research, and communications – that will allow us to change with it.

*I prepared this chart using data from the US Department of Commerce, Bureau of Economic Analysis, Regional Economic Accounts. If you’d like to make a chart of your own, or check to see if I’ve done mine right, you can find the data here.

The Big Picture on Medicaid Expansion

Last July, when the Supreme Court ruled on Obamacare (I never liked that term, but now even the President has proudly embraced it), it tossed something of a hot potato into the states’ laps.

Under the Affordable Care Act (that’s the politer way of saying it), states were required to extend Medicaid coverage to everyone living at 133% of poverty or below; if they didn’t, they would lose all the Federal funding they already receive for the Medicaid patients they cover right now. And since the Federal government covers about 75% of current Medicaid costs, that’s a pretty hefty chunk of change. But the Supreme Court threw out that provision of the law, and states can now decide whether or not they want to extend Medicaid, without fear of losing current Federal Medicaid dollars. That’s the hot potato: whether or not to extend.

For most states, extending coverage to 133% of the poverty level means a big increase in the Medicaid population (in Montana, for example, the Medicaid roles would expand by more than 50,000 people).  So to make it easier for the states, under the ACA the Federal government will pay for 100% of the expansion for the first three years; after that, the states will have to pick up an increasing share of the cost, topping out at 10% after another three years.

Now that sounds like a pretty good deal. For every one dollar the state spends to cover low income people who currently have no insurance, the Federal government will throw in nine. What’s not to like? Seems like a no brainer, but as Mike Dennison recently reported, a lot of folks, including Governor Schweitzer, Steve Bullock and Rick Hill, are sounding kind of worried. And what they seem to be worried about is the impact that Medicaid extension will have on the state budget and taxpayers.

It’s a legitimate concern. The state will certainly have to spend something to extend Medicaid, although it’s not clear at this point how much or whether, if the program gets too expensive, it can be trimmed back. And with Romney and Ryan promising draconian fiscal austerity, we probably need to think about what  will happen if they are elected and the 9 to 1 Federal match disappears.

But when it comes to deciding whether or not to insure another 50,000 Montanans, worrying only about the state’s bottom line misses the big picture.

For one thing, those 50,000 people already get medical care, albeit haphazardly, in hospital emergency rooms and public clinics. And somehow, Montanans end up paying for most of that care one way or another: in higher hospital rates, higher health insurance premiums, higher taxes to pay for higher premiums for state employees, and so forth. But when these 50,000 patients get covered by Medicaid, most of the cost will be shifted to the Federal government. So while extending Medicaid may cost Montana taxpayers a chunk of money, they will make it back, several times over, in lower health insurance premiums and hospital charges.

Of course Montanans are going to pay some of the taxes that will make the Federal contribution to Medicaid extension possible, but we’re going to do that even if we turn down extension here at home. In that case, we’d not only continue to cover costs for the uninsured in Montana through higher premiums and hospital charges, we’d also help pay for Medicaid extension in Florida and Maine and California and New Jersey and… well, you get the idea.

Maybe the most important thing to think about, however, is this: when those 50,000 uninsured Montanans get covered by Medicaid, the amount and kind of health care they receive will change significantly, and their outcomes will improve dramatically.  They will receive more preventative care, experience greater medical security and fewer medical bankruptcies, feel better and live longer.* In short, they will enjoy the same relationship with and access to the health care system as the rest of us. They will be treated as the rest of us expect to be treated. And without that, health care reform is a hollow shell.

*There have been a number of studies of the impact of Medicaid expansion in a number of states in which it has occurred. Check out reports in Bloomberg and New York Times on reduced mortality, and again in the Times and the New England Journal of Medicine on impacts on costs and medical and financial outcomes for new Medicaid patients.