Sunday, May 24, 2009

Another tax reform idea

The property tax is supposed to be a tax on wealth. The idea is that the more wealth you have, the more you pay. But it isn't. For individuals, the tax only applies to the wealth or assets each taxpayers has in their home. For most Washingtonians, almost all of their assets are in their home.

Most of the assets in our state are held in the form of financial assets such as stocks and bonds. Unlike the value of assets held by individual homeowners, the vast majority of these assets are owned by those at the top. The top 1% in America owns 42% of the financial assets and the top quintile owns 92.5%. This form of wealth is known as an intangible asset (as compared to the tangible asset - your home). Guess what? Intangible wealth is exempt from the property tax.

One approach to tax reform would be simply take away the exemption. Since the valuation of financial assets on an annual basis is difficult to measure, the tax would take the form of an in-lieu property tax. The tax would be based on a proportionate value of the income to the asset. This is exactly how are state leasehold excise tax is applied to property that is leased. Since it is difficult to apply the property tax to the value of leases, the tax applied to the in-lieu income from the lease. This tax is constitutional by any measure.

The end result would be a tax system that is fair. The problem would be that the tax would fall disproportionately on senior citizens whose income is entirely based on their savings. This would require a property tax exemption that evens the playing field.

If you're worried that this is some kind of soak the rich populism, take note that a 3% tax on intangible income would be lower than the income tax paid in all of our neighboring states including the People's Republic Of Idaho where they would be 7%.

If we were unable to pull off an intangible property tax we ought to at least take up the idea of a homestead property tax exemption. Most states exempt the first fifty to one hundred thousand or so value of a home from the property tax. Like the intangible property tax, this makes the tax system more fair and more progressive. Given our sales tax dependence which has made our tax system the most regressive in the country, this just make sense.

There is more than one way to tax reform.

Saturday, May 23, 2009

Tax Reform: If not now, when?

Washington's tax system is a disaster. Unlike other states, the tax system is based on inability to pay. Higher income residents pay a much smaller share of income in taxes than the lower income residents and every analysis shows that it is the most regressive tax system in the country. No state is as dependent on the sales tax as Washington since we have no income tax. The only other states without an income tax are significantly less depedent on the sales tax. These states get most of their revenues from oil and gas severance taxes or in the case of Nevada, revenues from gambling. Washington is the anomaly.

Meanwhile, the sales tax is highly volatile and grows more rapidly in a boom (creating more spending) and declines more rapidly in a bust (devastating government services). Furthermore, the portion of the sales tax base you can actually get at is shrinking as untaxed services have become a bigger proportion of the economy thus the tax is inelastic, not growing at the same rate as income.

Business taxes are regressive as well with a business and occupations tax that is imposed based on gross income rather than profits. New businesses are taxed heavily as they struggle to become profitable as they grow.

The income tax has become the third rail in Washington politics with politicians of both parties fearful of even saying the word. But clearly the biggest problem is the courts. In the past, the elected state supreme court has ruled that income is property and must follow the constitutional guidelines that property taxes must be uniform. Thus, reforming our tax system would require a 2/3 majority of each house and a vote of the people Likely story.

The argument that income is property is antiquated and bizarre. Before income taxes became the norm in the 1930s, state courts in many areas of the country ruled against income taxes making the same argument. Only Washington jurists may have "stayed the course".

There are several attorneys who argue that perhaps we should take another run at it. The court would have the opportunity to review the income as property argument and perhaps catch up with the rest of the country and perhaps even reviews changes in economic analysis since the 19th century. Maybe they will realize that in both economics and accounting there is a different than income and an asset. It's a least worth a try.

Sen. Lisa Brown made a valiant attempt to put income taxes on the agenda during the recent legislative session. While public opinion polling looked good, during the legislative session allies were unable to commit since revenues would come in far to late to stem the budget cuts this session. Setting up a progressive tax system would take over 18 months.

As the smoke clears from the legislative session, this could change. This could be the time.

Friday, May 22, 2009

Unemployment as retooling

David Wessel is the chief economic editor for the Wall Street Journa. In David's Thursday column he argues persuasively for unemployed workers to enroll in community college job training programs in lieu of looking for jobs that don't exist.

The biggest problem we are facing is that a record 46% of the unemployed have been on benefits for at least a half year. According to Wessel this is bad for the economy as their skills atrophy and employers balk at hiring people who have been unemployed for a long time.

He quotes Harvard economic Lawrence Katz, "But when people are out ff work for a long time, they become discouraged and stop thinking of themselves as the in the labor force. Keeping them connected to they think they're still workers is important."

Wessel points out the Barak Obama is pushing states to enact programs that encourage workers to enroll in professional and technical programs at community colleges.

Business Week reported earlier in the month that there are actually three million jobs that employers are actively recruiting for and are unable to fill. According to Peter Coy, "it's evidence of an emerging structural shift in the U.S. economy that has created serious mismatches between worker and employers. People in the shrinking sectors such as construction, finance, and retail lack the skills and training for openings in growing fields, including accounting and health care...As bad as it is now, the mismatch will create bigger problems when the economy begins to expand again. "

Washington State is way ahead of the curve here. The state's worker retraining program is the largest in the country now serving at least 14,000 students and providing programs designed to retool skills. The state also provide up to two years of unemployment benefits when workers are in retraining.

Sen. Jim Hargrove passed legislation this session that doubled the size of the program and linked it more carefully to the the federal Workforce Investment Councils. Since demand for the program has already stripped seats at colleges, Hargrove vows to do more next year.

Thursday, May 21, 2009

A flexible labor movement

Jonathan asked me to explain what I mean by the flexible labor movement described in my last blog. For me that means using what ever organizing and bargaining model that is sustainable and leads to an increase in union density

A good example is SEIU 925 who organizes both workers and owners to work in partnership to advocate for high quality child care. SEIU's home care division has broken new ground by creating a new framework for organizing and bargaining for a large number of home care workers who work as sort of independent contractors. Many unions have been successful with regional industry bargaining where the union signs a contract with employers but don't bargain over the contract till a majority of employers sign up. This ensures that employers who are union don't have a competitive disadvantage with nonunion employers.

A bad example might might be the IAM strike last Fall. While the objections of the union to the proposed Boeing contract might be justified, the strike in the midst of a deep recession cost the company billions and may have turned Boeing against Washington state as a location for future expansion.

Wednesday, May 20, 2009

Where are we headed as a state?

I had a provocative conversation today with my friend Denny Heck this morning on the future of Washington State. We wrestled with the question, where are we headed?

A few things jump out and set the stage for thinking about the question.

First of all, we are in one hell of a fiscal mess. The state does not have the dollars to compete in the future. We ended up this year with a record budget deficit that equalled about one-quarter of our maintenance level state budget. We filled the whole with about $4.0 billion in cuts, $3 billion in federal stimulus dollars and another $2 billion in short term fixes. The bottom line, we are likely to be in the same mess in two years as we are in now. Right off the bat, the federal stimulus dollars are unlikely to be there and the $2.5 billion in short term fixes won't work for four years in a row. In 2011, we are unlikely to find another $2.5 billion in short term fixes. We start off in a $5.5 billion hole. Can we grow out of this. I don't know.

Meanwhile we have cut shredded our safety net and damaged both our k12 and higher education capacity with cuts to college faculty, teachers, health care for the working poor and services to the mentally ill, disabled and the poor.

Secondly, our economy is down but we are well positioned for a recovery. We are well set for employment growth in the next big wave of green jobs and clean energy. Our information technology industry based on employers like Microsoft, Amazon, Adobe and many others looks stable and growing. Our health care industry is anchored in federal research dollars at the University of Washington, a strong research based biotech industry and a powerful health care cluster in Spokane. Our diverse and high value-added agriculture industry is likely to continue to be our state's biggest industry with value-added and wages rising as it becomes more tech dependent. Our industries have decades of experience in the global economy and we have become the most trade dependent state in the nation.

Thirdly, we face big questions with many of our traditional industries. Boeing has already moved their corporate headquarters out of the state. After a bruising strike last Fall, the Chicago company has threatened to move new lines of commercial airline production to nonunion states.

Weyerhauser and much of the forest products industry is facing a major upheaval that could transition more of the industry out of the state into the South, Russian and parts of Asia.

Finally, unemployment is likely to remain high for another two to three years. Income inequality in our state is at the highest level since statistics have been kept and cuts to the safety net threaten to make it worst. Our tax system is the most regressive in the country. But we have a highly trained workforce and excellent institutions of higher education who have the potential to counter the trend if we can find a way to restore the knowledge capacity we have just cut.

We have tremendous problems but we also have all the ingredients for success. I think there are five key steps that need to be taken in the next four years. We need to:

1. Reform our tax system and rebuild our fiscal infrastructure.
2. Restore cuts to k12 education and higher education systems and make smart investments in education reform and in higher education instruction.
3. Continue to clear the way for a strong clean energy and green jobs sector to grow into our industry of the future.
4. Build a stronger and flexible labor movement in our state that can level the economic playing field and do a better job of building more stable relationships with our major employers.
5. We need to provide stable and workable incentives to retain our state's traditional industries.

I'm hoping to focus future blogs on each of these issues.

Tuesday, May 19, 2009

What do Yale and Dubya have in common?

No. Not that he went there.

My daughter Mia is a junior in high school and is starting to look at colleges. She has visited a few and we've talked to a lot of folks about what the right school for Mia might be. She pretty much can pick the college wants but figuring out what is right isn't easy.

The one bizarre yet overwhelming academic wisdom about colleges is that the more selective they are the better thy are. The college acceptance rate, the lower the better like golf, is the key indicator.

I have yet to talk someone who has questioned the logic of this. Why is the measure of success for a college the level of selectivity? The default answer has to be that being amongst the "brightest" will make you even smarter. That the faculty can teach to a higher level and the academic dialogue with fellow students will be a higher level.

This argument is credible. But it is hard to imagine that those are the only factors that are relevant in learning. What about the quality of instruction or the diversity of student interactions? What is missing is an actual measure of the value-added that the college provides to each student.

The late columnist Molly Ivins once described George W. Bush has someone who was born on third base and thought he hit a triple. The same metaphor could be used to describe academia. Select the best students and then call yourself an elite institution. There just has to be more to it than that.

Thursday, May 14, 2009

A mistake to avoid this recovery

In 1973, monopolistic control of oils supplies combined with an Arab oil embargo led to record oil prices. Prices hit record levels in 1973 and continue to rise up until 1981.

High oil prices were believed by many economists to be responsible for the 1975 recessions, the deepest since 1948. President Carter responded by creating a new and powerful Department of Energy (reminiscent of Bush's Homeland Security Department) to develop a national energy independence strategy designed to ween us off foreign oil and into alternative energy. Billions were invested in research and development of new energy technologies.

Smaller, more fuel efficient Japanese cars began to penetrate the U.S. market and Congress passed fuel efficiency standards to try and move the U.S. auto industry into the future.

Prices continued to rise until the 1980-82 recession hit bringing the economy to a grinding halt. Demand for oil declined and prices plummeted to levels below the historical average. Sound familiar? To some extent you could say this is where we are now.

Back then, when the economy again began to grow, demand for oil again grew with it increasing imports of foreign oil soared to record levels. Investments in alternative energy were curtailed (largely by low prices) and Detroit continued to pump out even bigger and less fuel efficient cars and Americans kept buying them.

I guess the question is are we going to go through this again? What may prevent that is a national consensus, particularly among young people on the impact of burning carbon on the environment.

In fact, the best scenario for how we are going to get out of this mess is public and private sector investments in clean and alternative energy. A clean energy boom could look a lot like the last big technological wave, the tech boom in the 90s as businesses change their operating model and improved productivity through investments in information technology.

It could also look like a smaller reverse version of the post world war II auto boom that created the American middle class but also got us into this climate change mess. Instead of massive investments in automobiles, new suburban energy sucking dwelling requiring long commutes and the rise of huge parking lots in massive auto based shopping malls we could see their reversal. Sort of a bizarro 1950s (in superman comics, bizarro superman was the exact opposite of superman and bizarro America was opposite of superman's America. OK, OK., you have to read the comic book).

What could actually drive us forward could be investments mass transit, wind and solar energy, transit based housing and energy efficient homes and buildings.

But somehow I'm afraid it will take high oil prices to keep us on track. Really high oil prices.

Wednesday, May 13, 2009

What have we learned from the great recession?

Sen. Debbie Regala from Tacoma asked the question in a Senate Democratic caucus meeting late in the session. What can we say that we have really learned from this great recession ? What are we going to do differently because we are living through this? We can we take away from this that will make us a better people?

That's a tough question. No one answered the question that day. We should know that things will be different when we emerge. But do we we know what is actually changing and do we have influence on it?

In the 1980-82 recession economic game changed entirely. At that time, our old economy transitioned to the new economy as our large mass production economy teetering under high operating costs and declining productivity floundered. After the recession, companies laid off a lot of workers and lowered their pay scale to save costs. They reinvested in new capital equipment that raised productivity on new scale through investments in electronics and information technology and that started to rebuilt America's competitiveness which had lost ground to the more productive Europeans and the Japanese in the previous decade.

This helped our economy emerge from the downturn but kept wages down for another decade or so and unemployed high for another three years. For the next decade productivity increased but wages did not and money moved from labor to capital on a massive scale.

This time are we on the other end of the scale? Does the now 25 years of a casino economy that rewarded handsomely risk taking and even greed now take a turn towards a more equitable society. Does the next round of productivity and growth come from investments in the green economy? Or do we begin to focus on family prosperity and stability over risk taking and high growth?

Definitely worth thinking about.

Monday, May 11, 2009

Safety Net for the Unemployed; the good, the average and the ugly

No state invests more state dollars in the retraining of unemployed workers for the jobs of the future than Washington State. In the next fiscal year the state will be investing $38 million for starting and expanding community college programs in high demand fields like health care, aerospace and green energy - fields that even today have vacancies. More than 14,000 unemployed workers will be in training programs.

To help provide income support for these students, Washington state extends unemployment benefits for workers who are in retraining. Students can get unemployment benefits for a long enough time period to start and complete a two years occupational training programs. We are the only state in the country who has such a program.

Where we have lost some ground is how effective unemployment benefits have been in replacing the income they had in their previous job.

In the year 2000 workers who are unemployed in Washington on average were able to replace roughly 53% of their wages with unemployment benefits in 2000. At this point we were 7% above the national average. Today, we have fallen to 48% about a percent above the national average. The system in Washington state works better for low income workers. Workers earning less than $25,000 per year are able to retain nearly 2/3 of their income with unemployment insurance while those in the middle about 50%, those at the top 19%.

Where we truly have a problem is in the percentage of workers who are eligible for unemployment benefits. In 1994, over 55% of Washington workers who were unemployed were eligible for unemployment benefits, some 20% higher than the national average. Today, Washington has fallen to the national average of roughly 35%. Many people without jobs today simply get no benefits.

Here we may need to think this through a bit more. Many of these folks have ended up on welfare which has seen a 30% increase in caseloads. Others are facing a safety net that is being slashed in order to close our state budget deficit.

Sunday, May 10, 2009

What is an economic recovery?

The last big recession was in 1980-82 when unemployment hit a peak og 12.2% in November 1982. Unemployment is a lagging indicator and Washington state did not see unemployment below 8% for over three years after the peak. In 1983, economists proclaimed that we were in a recovery. Given the high unemployment, the question was, whose recovery?

Last Thursday, The Wall Street Journal compared the jobless safety net in the U.S. with Europe and concluded that we came up short. While the unemployment is currently at the same level in both the U.S. and most of Europe, American workers are facing a much more several loss in income as in Europe. Only roughly a third of U.S. workers get unemployment benefits and of those workers wage recovery average 44% and ranges only from 19-66%. In Europe, jobless benefits benefit nearly all workers and jobless benefits can pay up to 90% of lost wages.

The Journal and many economist opine that this is a bad thing that will slow their recovery.
But what does that mean? Exactly what is a recovery and what is an economy for? Isn't stability and prosperity the main objective of economic growth?

It might actually be worth taking a second look at the American safety net. Looking at today's New York Times cover story it appears not only inadequate but often arbitrary and certainly uneven depending on what state you live in.

What can we do to knit a more functional safety net in Washington State? Do all of our programs fit together? If you are without a job but don't have the hours to get unemployment benefits can other programs help? How does eligibility for food stamps, emergency housing, unemployment, training benefits compare? Is there a logic to all of the different requirements? Is everyone eligible or does it appear arbitrary or uncoordinated?

These are some questions we might want to focus on since unemployment probably won't peak again until growth actually starts to pick up late this summer and it is likely to remain high for a few years after that.

Tuesday, May 5, 2009

The Safety Net

The Seattle Times reported today that welfare caseloads welfare caseloads had spiked up by a third over the past year.

This might seem intuitive. You would expect that caseloads would rise in the down economy. However, over the past 13 years they did not appear to be impacted by either unemployment or real wages. The Times also notes that the increase is most prounced amongst two parent families in economic trouble.

There are a number of different programs designed to help people hit by economic hardship. They include TANF or welfare, unemployment insurance, housing assistance, food stamps and probably most importantly health care. Forty percent of the unemployed have no health care coverage. This might be the time to look at how these programs work together.

Monday, May 4, 2009

FUSE review of legislative session - ouch!

FUSE is an online progressive advocacy group that brought out thousands of new voters for Obama and Gregoire last fall. They are the left's answer to Tim Eyman and a grass roots organization that uses creative approaches to organizing online.

In their 2009 legislative report card FUSE wasn't kind to us down in Olympia. According to their report card, "As key national leaders are responding to unprecedented challenges with bold and decisive action, our State's leaders gave us a muddled retreat backwards.". The Governor and legislators were given Ds for their work on the budget and the environment, a D- for labor and an F for good government. For FUSE, the only redeeming values were domestic partnership legislation and several small measures in consumer protection.

I've said it before and I'll say it again, for many legislators, the bad economic climate had the effect of making them much more risk aversive. Rightly or wrongly, legislators were more reluctant to go against business on labor and environmental issue out of fear of harming the business climate.

More importantly, unlike the federal government, state's cannot run a deficit and invest billions to stimulate the economy or protect the vulnerable. We have to balance a budget. Worse yet, initiative 960 requires a 2/3 majority for the legislature to raise taxes forcing us to save $9 billion (about 25% of the budget) through cuts alone.

Senate Majority Leaders Lisa Brown made a valiant attempt to strike down 960 by appealing to the U.S. Supreme Court. The risk aversive and highly political court refused to rule arguing that the "issue was not before them". As session rolled on, Brown and other legislators started an effort to send a progressive income tax to the state voters. However, since it would take up to a year and a half to start collecting revenues, it key Senators were unable to find major organization backing for the initiative.

But I think we have to take FUSE's criticism to heart. We can do better. The question is how can the legislature and the Governor turn things around as the state comes out of it's recession.

Sunday, May 3, 2009

Progress is good. Right.....?

As a life-long social democrat and positivist I've always believed that the world gets better as history marches on and growth brings with it better health care, longer life-spans and a more tolerant society. This is why I find myself in endless arguments with my greener wife, children and friends.

I found English Philosopher John Gray's book "Gray's Anatomy: Selected Writings" unsettling. According to Gray, "The idea of progress is detrimental to the life of the spirit, because it encourages us to view our lives, not under the aspect of eternity, but as moments in a universal process of betterment. We do not, therefore, accept our lives for what they are, but instead consider them always for what they may someday become."

Gray believes that the "dawn of the age of endless expansion" is "perhaps the most vulgar idea ever put before suffering humankind."

Flat versus equal?

Populist fair traders have argued to years that globalization makes the world less equal. Deutsche Bank AG Chairman and CEO Josef Ackermann appears to agree with them. According to Ackerman, " Society appears to be choosing lower growth rates in exchange for greater stability. There is likely to be a greater emphasis on equality. And there may be less openness to foreign trade and capital flows, particularly as governments press banks that receive subsidies to lend more locally." . To Ackerman this is a bad thing.

Friday, May 1, 2009

Legislative Democrats and their Allies - a not so happy legislative session

Last week's legislative session was rough. Lawmakers were forced to make radical cuts in programs that serve the most vulnerable, cut health care for the working poor, layoff teachers and raise classroom size in our schools and slash enrollments and layoff professors in our colleges. Everyone knew from the beginning knew that this was going to be hard and most legislators knew they would leave with fewer friends than they came in with.

The real shock was the extent to which the session hit the friends and allies of the legislative democrats. As I said in my previous entry, Democrats and Republicans alike work together with friends and allies with whom they share mutual values. This session they departed on many issues.

You can start with the budget. Democrats balked on mitigating the impact of budget cuts on state employees. State employees face layoffs, salary freezes, unpaid furloughs and a 25% increase in their out of pocket health care costs. Already laboring under a 25% pay differential with private sector, recruiting and retaining state workers is going to be difficult or impossible in the future. Given the severity of the budget crisis however, these cuts shouldn't be a surprise. Lawmakers wanted to treat everyone equally. They were simply doing what they thought they had to.

The surprise was the issues that weren't related to the budget. The Governor and the legislature abandoned organized labor on their two biggest issues, worker privacy and unemployment insurance. Legislation to help child care organizers also failed in the Senate. While their overall scorecard could be seen as positive Environmental organizations were also less that satisfied.

Worker privacy and unemployment insurance were by far the most difficult issues because they were both zero sum games. Labors gain in unemployment insurance was business's loss. The labor proposal on the unemployment insurance bill would have reduced a business tax cut by $200 million and provided an equal increase in unemployment benefits over that same 6 year period.

Killing worker privacy was the number one issue for business and passing it was the number one priority for labor. This issue is the quintessential business versus labor issue. The bill would allow employees to opt out of anti-labor propaganda meetings. The idea is that this would put labor and capital on an even playing field. Labor organizers can't require prospective members to attend organizing meetings (and in fact, participants have been fired for just that reason) The problem is that business doesn't want to be on an even playing field. They don't have to and they are quite happy with the union density of the private sector continuing to fall.

So why did their Democratic allies balk? For one very simple reason. The economy is very bad and a majority of legislators in both parties were simply afraid of making it worst. Many analysts argued that Boeing was already looking for a reason to leave the state and after last Fall's bloody strike were not eager to face a more empowered labor movement. Boeing and other big companies, hemorrhaging from the deep recession, vehemently fought both bills. Boeing's CEO told lawmakers that he felt he needed access to employees to explain the impact of a strike on their customers. Without that access he felt it would be hard to run the company in Washington. The explanation seemed credible.

Other legislators were unclear as to why they would risk the ire of business and possibly the business climate when they were uncertain that the legislation would survive a court challenge.

Fears of making the recession worst were also reflected in the mood of the electorate. Polling and focus groups done in February around a possible revenue initiative to mitigate budget cuts indicated that the public was very worried about the economy and strongly opposed to any measure that would impact business negatively. Focus groups indicate that the public was very concerned about the business climate.

The bottom line is that given the severity of the session, both lawmakers and the public were wary of any moves that could be seen as hindering the business climate.

This sessions wounds are going to take a lot of time to heal. But people on both side should cool their jets. There are fair and logical explanations on both sides of the argument. People just need to be honest and listen to each other.