WashACE Blog

Time to Reset Public Employee Compensation

That's the theme of my column in the Puget Sound Business Journal.

Who'd have thought that New York Gov. David Paterson would agree with me?

Good News: Bad Business Bill is Buried

Congratulations to Rep. Ross Hunter, who said the bill to yank Boeing's tax incentives will not get a hearing.

Quip of the Day (re Oregon Tax Vote)

"Oregon's business assisted suicide plan." Nike founder Phil Knight's assessment of the Oregon tax hike, via Rich Karlgaard's Digital Rules blog for Forbes.

Karlgaard adds:

Some Oregonians will vote with their feet and leave the state. My guess: enough of them to cancel out the expected revenue gains from higher taxes.

He points out that rich Portlanders can just move across the river, supporting the Columbian's view.

TNT's Must-Read Editorial Supporting Workers' Compensation Reform

In this forceful and direct editorial, The News Tribune stands behind sensible reforms in our state's workers' comp system. Please read the whole thing.

A sample:

The state workers’ compensation system is simply unsustainable as is. All signs point to the need for reform – all signs, that is, except the signal coming from labor.

Another:

...the unions ... have people in powerful places in the Legislature. Rep. Steve Conway, a Tacoma Democrat who serves as secretary-treasurer for Local 81 of the United Food & Commercial Worker’s Union, is chairman of the House Commerce and Labor Committee that would handle workers’ compensation legislation.

Conway is refusing to hear any workers’ comp bills this year – not even the measure sponsored by his own speaker pro tem, Jeff Morris of Mt. Vernon. Conway says businesses will have to find a compromise that’s acceptable to labor before he’ll let it through.

As the editorial points out, the employer-supported legislation sponsored by Morris is mainstream.

Conway should let the bill be heard.

More Reaction to the Oregon Tax Vote

After noting the enthusiasm the governor and Democratic leaders displayed in the wake of Oregonians' vote Tuesday ro raise other people's taxes, this morning's Seattle Times gets right to the heart of the matter.

Increasing taxes on businesses in a state with nearly 11 percent unemployment does not make a lot of sense. Higher taxes will not produce more jobs and may limit the ability to add people to payrolls.

Even the most avid referendum supporter will admit the limitation of the process is it asks a simple up-or-down question. In the case of the two measures, the questions could be boiled down to: "Would you like to raise taxes on someone other than yourself?"

No wonder Oregon voters said yes ...

The editorial counsels lawmakers:

This is no time for a tax party.

Yesterday, the Herald of Bellingham carried a story with this significant comment from House Speaker Frank Chopp:

But with the tax measures having passed, they're still uncertain those results will translate to Washington.

"It is not changing our direction," said Washington's House Speaker Frank Chopp, D-Seattle.

For more on the theme, watch this exchange between Senators Joe Zarelli and Rodney Tom on TVW (begins at about 14:32 minutes in).

Neither believes the Oregon vote says much about the willingness of Washington voters to endorse higher taxes.

Washington Businesses More Highly Taxed than Oregon Firms

As lawmakers consider the message from Oregon, they should consider an often overlooked difference between the two state tax structures. Washington relies much more heavily on business taxes than does Oregon, a fact that may have played into voter willingness to boost business taxes.

A study released by the Council on State Taxation last year makes the difference clear (Table 7, page 15). In Washington, businesses pay 51.3 percent of all state/local taxes, with a total business tax burden claiming 5.5 percent of Gross State Product. Oregon businesses pay just 38.2 percent of s/l taxes for 3.7 percent of GSP.

Nationally, the business share of s/l taxes is 44.1 percent and the share of GSP paid by business in taxes is 4.9 percent. 

The 2002 Tax Structure Study Committee noted Washington's high reliance on business taxes.

The finding is that Washington's tax system places a relatively high tax burden on low profit margin firms mainly because of the B&O tax.  Due to the B&O tax, low profit margin firms and firms that are new or expanding may suffer a competitive disadvantage compared to their competitors in other states. 

Firm location studies show that taxes matter in location decisions when other factors are equal.

Oregon, with an unemployment rate of 11 percent compared with Washington's 9.5 percent, chose to boost taxes on job creators, a category that includes wealthy individuals as well as businesses. I doubt they've helped their economy much.

UPDATE The editorial page of the Columbian understands what the Tax Structure Study Committee was saying about "taxes matter in location decisions" (and what Oregon voters apparently don't get). They offer an open door to Oregonians looking for relief. (h/t Jason Mercier).

What we’re talking about here is an overall message from voters and politicians to entrepreneurs, venture capitalists and small businesses: “We’re going to sock it to you good, and we’ve got the public employee unions’ voter base, plus the deep campaign-spending pockets of those same unions, to pull this off.” And then, legislators will not only skate on their responsibilities to rein in an extravagant system of public employee pay and benefits, they’ll skate on their duty to reform government overall.

...Here’s one last offensive message that was imparted to Oregon businesses: “We’re even willing to launch this assault on companies during the worst business climate in seven decades.”

That's a message our lawmakers should do their best not to repeat.

Don't Read Too Much Into Oregon's Tax Vote

Yesterday's 54 percent approval of a pair of tax hikes in Oregon yesterday has had the expected effect. The governor and legislative leadership see the vote as a signal that the public is ready for higher taxes to avoid budget cuts. Brad Shannon collected some reactions in the Olympian. Here's the governornor's statement.

... Gregoire took nourishment from the vote, saying:

"Oregon voters met the challenge of these difficult times and clearly said that schools, healthcare, public safety and other essential services cannot be forsaken..."

House Speaker Pro Tem Jeff Morris also sees it as a go ahead for tax increases.

Speaker Frank Chopp this afternoon had this, from the Seattle Times.

What I take away from it is if you come up with common sense solutions to meet the priorities of the people, the people will sustain you," Chopp said at his regular media briefing.

Let's not get carried away. Oregon voters mostly voted to increase taxes on other people - the rich and businesses. The AP pinpointed the strategy in this story. 

But Democrats who have commanding majorities in the Legislature said they were careful to target the upper 2 percent of individual taxpayers and the businesses with the biggest sales, many headquartered out of state.

Still, the measures passed largely because of high turnout in liberal Portland and Multnomah County.

For a quick primer on the two ballot issues, Measures 66 and 67, check out this Q&A from the Oregonian.

So Oregon voters went to the mailbox and voted to make their income tax more progressive. The Oregonian, which opposed the measures, notes the effect in an editorial today.

Measure 66, in particular, only further unbalances the state's shaky tax system by pushing up one of the nation's highest income-tax rates.

And they decided to increase business taxes on unprofitable businesses. (Washington businesses, profitable or not, pay B&O taxes on gross receipts.)

With an unemployment rate of 11 percent, then, Oregonians chose to stick it to the wealthy and employers. Credible economists estimate the effect of passing the two tax hikes will be to cost the state another 70,000 jobs.

Chopp acknowledged, but chose not to give much weight to, the key differences.

"They have a different tax system than we have so it's not exactly the same, obviously," Chopp added.

As Times reporter Jim Brunner writes,

...the task for lawmakers here may be more difficult since our most lucrative tax source -- the sales tax -- cannot easily be targeted toward the wealthy like Oregon's income tax.

That, and we're already heavily taxing businesses, profitable and unprofitable. Let's not forget the substantial increases in unemployment insurance and workers' compensation costs.  

Legislative leaders here should not draw much inspiration from the Oregon vote. It just doesn't travel well.

More than Nickels and Dimes in Tax Plans

A little bit here, a little bit there. Eventually, it all adds up to something more than a little bit. That seems to be legislators' early plans for plugging the budget shortfall. I write about it in The News Tribune. The marketing push behind the tax plans involves linking a tax to a public benefit, the way the governor did a few years ago in tying the estate tax to education.

From snuff to muffins, anything that somebody thinks is bad for you justifies a tax for something good.It’s all marketing. Matching taxes with popular social or political objectives to minimize opposition has been elevated to an art form in Olympia.

In a very clever column, TNT columnist Peter Callaghan points out the problem. 

Do you believe the state Legislature can find $750 million to help fill a $2.6 billion budget hole without raising the sales tax, the property tax or the business and occupation tax?

If you do, you might also believe in the Tax Loophole Fairy.

Read the whole thing. As Callaghan writes, there's no TLF. When the legislature gets serious about raising taxes, and they will soon, they'll turn to the Big 3 (sales, property, business).

For now, though, we have the candy tax, bottled water tax, attempts to re-write tax incentive laws, and pleas to Congress for federal money.

The governor's more comprehensive tax plan will come out February 12. From the TVW blog:

This morning in her press conference, Gov. Chris Gregoire said all tax options are still on the table — though she said property taxes and across-the-board B&O tax increases are difficult — and that she’s still hopeful for federal help.

In today's editorial, the Olympian reminds its readers that state employees may see more compensation reductions.

State employees and their union leaders already have made sacrifices, but the budget deficit has grown. The challenge is to maintain the strength of core services through the next few budget cycles, not just this one. The private sector continues to see reductions in hours, pay and benefits, and state workers must brace themselves for additional cuts.

Tense times.

Getting the Jobs Agenda Right

At WashACE, we're pro-job. Not a bold stance, I recognize. With state unemployment at 9.5 percent, I reckon everyone is pro-job. Nationally, we've seen the conversation shift - I think 'pivot' is the term of art - from health care to jobs. Particularly middle-class jobs. Particularly if they're in small businesses.

I'm not sure if unemployed workers are that picky about where they're next job comes from a small business or a large one. And, of course, a lot of small businesses exist primarily as corporate suppliers or service businesses that depend on the customer base provided by major regional employers. But, quibbles aside, it's good to see jobs back at the top of the legislative agendas here and in D.C.

Last week, Wenatchee World editorial page editor Tracy Warner wrote a good column on government's role in job creation.

I wish government could create jobs at will. A vote, a law, the stroke of a pen, and there you have it — tens of thousands of people returned to gainful employment. If that is not the way it actually works, sometimes that’s what they want us to think. If only it could.

After noting the particularly tough employment conditions today, Warner notes:

If government could create productive jobs at will it would do a lot more of it. More often, the taxing-and-hiring schemes cost more jobs than they create. If these plans worked we could be happily employed filling in holes government hired people to dig. But, if government can’t create jobs itself, it can create the conditions and help supply the means for private business to create jobs, the kind of jobs that produce more wealth than they consume. It’s been done.

Surveying the landscape of current legislative proposals he identifies some good and not-so-good ideas.

Gov. Gregoire wants tax credits for small businesses hiring new employees. She wants tax incentives for private investment. She wants streamlined permitting and regulation. This will lower the government-added cost of hiring. Make hiring new employees less expensive and you increase the odds people will do it.

Senate Democrats today endorsed the governor's tax break. (Link is to Publicola; not yet up on Senate site.) UPDATE: LInk on Senate site here.

Warner's skeptical of some other ideas.

The “green jobs” gambit, the idea that government can create an entirely new industry by subsidizing uneconomical forms of energy production, has not worked elsewhere and won’t work here.

...Other plans have little more promise. Adding $860 million to the state’s debt load to pay people to insulate schools is unlikely to have as much positive impact as promoters contend. It will save $190 million a year in energy costs, they say, but with energy prices so low in this state, large returns are not easily found. And borrowing such sums is problematical.

I share his skepticism. And I'm a little less confident in the small business tax break. People hire when it makes sense to hire from a business perspective. But it might help. Of more help would be action to reform workers' compensation and mitigate the extraordinary unemployment insurance tax increases that just hit employers here.

Warner's conclusion sums it up well.

The old-fashioned, less photogenic means of government job creation still work. Build on our infrastructure — transportation, energy, education, basic research. Do all to remain fiscally sound and minimize risk. Keep taxes on employment low and predictable. Do that first.

Do that. And don't do this.

Taxes and Job Creation

Oregon voters, who no longer go to the polls, will have their votes counted tomorrow on two major tax increases. Measures 66 and 67 have garnered national attention as a key test of the public's willingness to accept higher taxes to close state budget shortfalls.

Right now, it's too close to call. The Portland Tribune reports:

The new poll by Davis, Hibbitts & Midghall Inc. showed supporters of Measures 66 and 67 retain narrow leads, but their edge has shrunk considerably since a poll by the same firm last week. Measure 66, an income tax increase for high-income individuals, is now leading 50 percent to 44 percent, Hibbitts said. Measure 67, a tax increase on some corporations and other businesses, is leading 48 percent to 45 percent.

John Hood, blogging at National Review Online, calls it correctly.

Intended to raise more than $700 million, the taxes will damage the state’s competitiveness and cost 70,000 Oregonians their jobs, according to a news release from the Cascade Policy Institute in Portland. You can read more about the underlying research here.

I imagine the vote will be watched closely in Olympia