The latest advertisements on behalf of Larry Hogan, the GOP candidate for Maryland’s Governor, have focused on tying his opponent, Lt. Governor Anthony Brown, to the tax policies of Governor Martin O’Malley (D). In his tenure as Governor, O’Malley has increased or created new taxes 40 times , including a sales tax increase from 5% to 6% and an alcohol tax hike from 6% to 9%. But perhaps the most infamous is the highly debated “rain tax.” As we have reported previously , the “rain tax” is a storm water tax, based on the amount of “impervious surface” on a property. That is, the more building space and pavement on a taxpayers land, the more money owed to mitigate the runoff damage. Government property is exempt from the tax, while religious and nonprofit organizations (including environmental organizations) are not. Several counties around Maryland have come up with their own ways of protesting the rain tax. Frederick County executives voted to make the tax just a penny, while Carroll County diverted county funds to state storm water management rather than levying the tax. Baltimore City, on the other hand, charges at least $144 per residential single family home. Surprisingly, the use of taxes to regulate storm water runoff may not be an EPA-required program, as has been suggested. The tax derives itself from the Clean Water Act (CWA), but federal district courts in Virginia ruled that the CWA does not authorize the EPA to limit storm water flow in Total Maximum Daily Loads ( TMDLs ) because such flow itself is not a pollutant. The EPA has chosen not to appeal the decision. At this point, Marylanders are being asked to pay a tax that other states aren’t paying based on a law that was wrongly applied. While other Chesapeake Bay border states have opted not to fund the bay cleanup program, Maryland chose to enact the tax in its 10 most populous jurisdictions . The tax unfairly targets a select few “polluters” (although as the courts ruled, stormwater itself is not technically a pollutant) —a neutral tax would require all watershed citizens being charged. Furthermore, government properties, with their expansive paved areas and large buildings, no doubt also contribute to runoff. Finally, a tax based on impervious surfaces doesn’t even capture the supposed pollutant correctly: houses on differently sloped land, with different yard plants, with different roof structures and catchment systems, neighborhoods with different topographies, and even local weather conditions can lead to radically different amounts of runoff. With Maryland having the 7th highest state-local tax burden in the nation, the rain tax piles more weight onto an already cumbersome tax code. Read more on Maryland . Follow Amber on Twitter
Center for Worker Freedom Urges California Governor to Intervene in Labor Dispute on Behalf of Farm Workers
Over the years, the tax code has been altered by changes to statutes, regulations and case law, adding up to over 70,000 pages of instruction to filing taxes. It is the IRS’s job to enforce tax policy, so they keep track of the time and cost of filing taxes for individuals and businesses. Individual Compliance Burden Tax filers face the task of understanding IRS instructions in order to comply with paying taxes. According to the IRS , filing taxes will take taxpayers an average of 8 hours and cost $120 for each nonbusiness return. An IRS publication shows nearly 169 million individual tax returns (including all individual tax forms and estimated tax forms) were filed in 2012, costing over $20 billion in compliance costs. This is not the cost of actually paying taxes, but only the cost of filing. The time consumption is further burdensome to individual tax filers. Considering 8 hours each for 169 million returns, Americans spent over 1.35 billion hours filing individual taxes. Business Compliance Burden The IRS states that business returns will take an average of 23 hours to file and cost an estimated $420 each. Businesses in the U.S. filed over 10 million tax returns in 2012. Assuming the IRS’s estimated $420 filing cost holds true, over $4.4 billion was paid in compliance cost by businesses and non-profit organizations. Again, this does not include the actual tax burden but only the cost of filing. For those 10 million returns, the IRS estimates it will take on average of 23 hours to file, equaling nearly 240 million hours of filing tax returns. Business and organization also face additional compliance burdens not dealing with income tax filing. An independent study found that when including labor taxes and consumption taxes with corporate tax filings, the average time for businesses to complete all taxes increased dramatically. Labor tax compliance alone cost businesses an additional 55 hours. The IRS reported that nearly 30 million employment tax forms were filed in 2012. This adds an additional 1.65 million hours. Maintaining the same $420 IRS estimate, this cost firms an additional $12.6 billion in compliance costs. Total Compliance Burden All said, Americans spent over 3.24 billion hours, which is about 369,858 years, preparing and filing tax returns in 2012. Considering individual, business and employment taxes, this costs $37 billion annually in compliance cost for federal taxes alone. Additional time is spent filing state taxes each year. For most states, the number of expenditures (deductions, credits, exclusions, rebates and other provisions) tallies into the hundreds. Each of these expenditures cost more time to file and many must be verified by state officials after returns are submitted. A simpler, transparent tax system can greatly reduce the cost of compliance for U.S. taxpayers. A complicated tax system creates not only a huge time and money expenditure for taxpayers, but also for government officials verifying returns, which can lead to higher tax burdens later. Follow Josh on Twitter
On the heels of a poor jobs report—but another drop in the unemployment rate down to 6.1 percent—Adam Hartung published in Forbes a piece titled “Obama Outperforms Reagan on Jobs, Growth, and Investing.” In the article, Hartung leads with the unemployment rate as his metric to prove President Obama’s success on the job front as compared to President Reagan. In the first 67 months of President Obama’s administration, the unemployment rate climbed to 10 percent before falling to 6.1 percent. This is a whole percentage point below Reagan’s 7.1 percent unemployment rate after his first 67 months. But this comparison of job performance misses a couple points. The Unemployment Rate Fell Faster in the 1980s than Following the Great Recession Instead of looking at the first 67 months of each presidency, let’s consider how long it took the unemployment rate to fall to 6.1 percent (the rate for August 2014) following the peak of unemployment. This will give us a better look at how quickly the economies recovered. In the 1980s, it took a shorter amount of time for the unemployment rate to fall from its peak rate to 6.1 percent. In December of 1982, the unemployment rate reached a peak of 10.8 percent following a year-long recession. In July of 1987 (55 months later), the unemployment rate had dropped to 6.1 percent. Before the end of Reagan’s term, the unemployment rate had fallen to 5.3 percent in December of 1988. In the post-Great Recession era, the unemployment rate reached its peak of 10 percent in October of 2009. From here, the peak it took 58 months for the unemployment rate to fall to 6.1 percent in August of 2014. (Note: The unemployment rate drop to 6.1 percent in June of this year before increasing to 6.2 percent in July.) The Unemployment Rate Depends on Demographic Trends Another factor worth considering is that the unemployment rate is dependent on both the numerator and the denominator. The labor force participation rate is the share of working age population who are either employed or actively looking for work. Labor force participation is essentially the denominator in the unemployment rate calculation. If we hold the number of unemployed constant, this means that as the labor force participation rate rises, the unemployment rate will rise. Conversely, as the labor force participation rate decreases, the unemployment rate will decrease. In fact, over the last couple years, we have seen the labor participation rate influence the unemployment rate. From Bloomberg in May (emphasis added): “The share of the working-age population either employed or seeking a job declined in April for the first time this year, helping drive the unemployment rate down to 6.3 percent, the lowest since September 2008. At 62.8 percent, the so-called participation rate matches the lowest since March 1978.” In fact, between October 2009 and August of 2014 (the period over which the unemployment rate fell), the labor force participation rate fell from 65 percent to 62.8 percent. This has contributed to the fall in the unemployment rate from 10 percent to 6.1 percent. It was different story for the 1980s. As Hartung’s own piece shows , from the late 1960s all the way through the 1980s, the labor force participation continuously increased from 59 percent to nearly 67 percent at the start of 1990 (driven by the large number of baby boomers and women entering the work force). If we look specifically at the 55 months between December of 1982 and July of 1987, the labor participation rate rose from 64.1 percent to 65.5 percent. Yet, all the while, the unemployment rate fell. This means that while the denominator (labor participation) grew, the nominator (employment growth) saw even greater increases. The Unemployment Rate Doesn’t Tell the Entire Story In an editorial earlier this year on Real Clear Markets , Nick Eberstadt of AEI makes the case that, while the unemployment rate once was a good way to measure workless in America, it is not nearly as effective today because the work force is different. In Eberstadt’s words: “The workplace is no longer a men’s club — in 2014, fully 47% of the civilian labor force is female. And while being without work still entails hardship, it is no longer the financial disaster and source of shame it once was. In that former America, there was basically no alternative to paid work for able-bodied men; no alternative economically, and no alternative socially. But this is no longer true today. Thanks at least partly to the growth of government support programs, voluntary joblessness – or something close to that – is, increasingly, a viable lifestyle option.” Eberstadt suggests that there are now three employment statuses in the U.S.: employed, unemployed, and choosing neither to work or look from work. This “flight from work,” as he calls it is clear in the post-recession U.S. Eberstadt uses a version of the chart below to shows that the civilian employment to population ratio has completely dropped off since the great recession and remained relatively flat between 58 and 59 percent for the last four years. The drop in the unemployment rate to 6.1 percent tells a story that seemingly isn’t true. As discouraged or tired workers drop out of the labor market, the unemployment rate may drop, but this does not demonstrate the health of the labor market. A falling labor participation rate and a depressed and stagnant employment to population ratio tell a story of long-term unemployment that require structural changes to address. Tax reform isn’t the only solution, but it should be one them.
Majority Leader Kevin McCarthy recently sent a memo to the House of Representatives indicating the agenda for the fall session. In his memo, he advocates for an, “honest, simple and effective” approach to government, and bundles up previous jobs and tax bills into his economic package for the fall. Key tax and job highlights of the package include: The Hire More Heroes Act ( H.R. 3474 )—Allows employers to be exempt from providing healthcare coverage to an employee given the employee already receives healthcare through a Department of Defense Program. The bill prevents double coverage on certain employees (i.e. military veterans) and could save a business, on average, $2.36 per hour, totaling $4,531.20 per year for each employee that qualifies. Permanent Internet Tax Freedom Act ( H.R. 3086 )—Creates a permanent ban on state and local taxation of internet access. Given a similar system to how states currently tax other expenditures, internet connections would have an approximate 8 percent tax . This bill aims to end discriminatory taxing practices on the internet, but will also decrease sales tax revenue by $1.7 billion. Our previous research discussed the potential economic harm from and the lack of an economic reason for internet taxation. America’s Small Business Tax Relief Act ( H.R. 4457 )—Permanently allows taxpayers to deduct expenses for certain business investment. Expensing limitation would remain at $500,000 rather than dropping to the pre-2010 level of $250,000 and levels would be adjusted accordingly each year to match inflation. Such tax exemptions and benefits will incur growth in small and medium sized businesses and inspire confidence to invest in the future, as we talked about in a previous blog post . Making Permanent 50 Percent Expensing ( H.R. 4718 )—Permanently extends 50 percent expensing, often called bonus depreciation, which allows businesses to expense 50 percent of their investments in equipment and software in the year they are purchased before depreciating the remaining cost. According to our previous work , 50 percent expensing helps mitigate the tax code’s bias against capital investment and, if made permanent, it would boost investment, wages, GDP, and federal revenues. These small and measurable changes can certainly contribute to economic growth, although many of these provisions have previously failed in the senate on individual votes. Follow Amber on Twitter