The Tax Cuts and Jobs Act: Many Won’t “See the Forest for the Trees”

The Tax Cuts and Jobs Act currently being considered by the Congress, according to Martin Feldstein, Chairman of President Reagan’s Council of Economic Advisors and renowned Harvard Economics professor, “could increase the U.S. capital stock by $5 trillion and cause a $500 billion rise in annual income.” Yet, many special interest groups will take aim because their tax preferences are being eliminated or reduced. Most Virginia families, however, will benefit significantly, as would the Virginia and U.S. economy. It is critically important that Virginian’s look at the overall benefits of job creation, investment, economic growth and simplification and focus on the forest and not the individual trees.   

The tax code has not been reformed since the author worked on the 1986 Reagan tax reform. The tax code has become a mess of special interest provisions, complex global tax rules and loopholes and a burden on U.S. business and our economy. Our corporate tax stifles small business, is too complex and encourages multinational corporations, many of which reside in Virginia, to hoard their global income abroad in lower tax environments. The Tax Cuts and Jobs act will reduce taxes on pass through small businesses from 35% to 25% and the overall corporate tax rate will drop from 35% to 20%, from almost the highest in the world to one of the lowest. This will stimulate significant wage increases of $3,500 to $9,000 per worker annually, according to economists Laurence Kotlikoff and Kevin Hassett.   

While measures of who bears the incidence of the corporate tax are constantly debated, it should be understood that corporate taxes are passed on to owners (shareholders via reduced dividends and stock prices), consumers (in higher prices) or workers (in lower wages or fewer jobs). Shareholders, consumers and workers are all benefit from a lower corporate tax rate.

In recent years, Virginia’s position as a low tax and pro-business state has dwindled.  According to the Tax Foundation, we now rank 33rd out of 50 in its “Tax Climate Index” calculation. Since Virginia’s tax code dovetails with the federal tax code, the positive impact of tax reform on the Virginia economy could be profound.   

The increase in the standard deduction to $24,000 will greatly simplify the tax code for the majority of Virginia families and allow them to keep more of their hard earned money. Individual rate reduction will also reduce taxes on most wage earners, reducing 7 tax brackets to four, at 12%, 25%, 35% and the current top rate of 39.6%. Most Virginian’s would fall into the 12% and 25% brackets. In high income Northern Virginia, married taxpayers earning under $260,000 per year would fall into the 25% rate. The 35% tax rate and top rate of 39.6% would fall on only the estimated top 2% of income earners.   

And what will the regional impacts be for Virginia from these proposed tax changes? Some high income Northern Virginian’s could see overall increases… those who have several homes and earn over $500,000 per year. However, if they are small business owners, they will likely see tax reductions. With lower corporate tax rates, the U.S. will again become a target for foreign investment and it is likely that Virginia will gain investment capital and global business startups due to our lower rates.  Allowing 100% of expensing for corporate investment will be a huge boon to our technology and manufacturing sectors.   

Government workers, even two income families, will likely see reductions in taxes and lower level government workers most certainly will benefit from the increase in the standard deduction. Wages for private sector corporate workers will also rise. Some of the corporate tax reduction will be passed through to workers and productive investment will rise.   

Finally, military families should see benefits and the Port of Norfolk should thrive. The lowering of rates and increase in the standard deduction, as well as the increase in the child tax credit to $1,600, should significantly help active duty military families.   

Some special interests will attack reductions for the high income earners in state and local tax deductions, a cap on mortgage interest at $500,000 instead of current $1 million, and eliminating mortgage interest on second homes or vacation homes. These are just a few of the individual and decaying trees and underbrush in the forest. Their advocates will pull out all stops to save their trees, and ignore the fact that nearly all Virginia taxpayers will benefit from reduced rates, more jobs, more exports, higher wages and a greatly simplified tax system.   

The tax code has become a forest filled with old and dying trees that need to be culled for more vibrant growth and expansion. It is critical to support this effort since a growing GDP, higher wages and lower unemployment cannot be overlooked in the coming debate.  

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Virginia Could Get Its Own Clean Power Plan

Terry McAuliffe’s days as governor of Virginia are rapidly drawing to a close, but proposed carbon-dioxide regulations working through the administrative process could prove to be his most lasting legacy. If adopted, the rule would cap carbon emissions at large power plants in 2020 and then require 3% reductions annually for 10 years, reports the Richmond Times-Dispatch.

After convening a working group more than a year ago to develop recommendations on cutting power plant emissions, McAuliffe signed an executive order in May directing the Department of Environmental Quality to prepare the regulations. The State Air Pollution Control Board is expected to vote on the measure Thursday.

The regulations will be tied to the Regional Greenhouse Gas Initiative (RGGI), a cooperative including nine other states in the Mid-Atlantic and New England. The regional initiative will allow power companies to purchase carbon allowances from one another. The regional approach allows utilities in one state to purchase offsets from utilities in other states that might be able to reduce carbon output more cheaply.

DEQ models indicate that Virginia’s rule could increase the wholesale cost of electricity by about 7% by 2030, although the actual impact on consumers should be lower, say backers of the rule. In other states, expanded energy efficiency programs have offset the higher electricity rates with lower consumption with the result that electric bills are no higher.

While Attorney General Mark Herring has rendered the opinion that the state air board has the power to regulate carbon under its existing authority, others disagree. Air board regulations prevent it from enacting regulations more stringent than federal requirements, Jay Holloway, a partner with Williams Mullen, told the Times-Dispatch.

Republicans also have problems with the rule, arguing that it will weaken the Virginia economy. John Whitbeck, Republican Party chairman, accused McAuliffe of catering to liberal votes in Iowa and New Hampshire for his presidential bid.

Dominion Energy has remain notably silent as the carbon-cap proposal has wended its way through the system. “We already are a low-carbon producer of energy, and have continued to work to lower emissions both in anticipation of future state or federal regulation and because it’s the right thing to do,” said Dominion spokesman David Botkins.

The carbon-cap initiative ties back to the debate over the electricity rate freeze. Critics have lambasted Dominion for the freeze, which arose from fears of the impact of the Obama administration’s proposed Clean Power Plan. Dominion agreed to keep its base rates fixed, which has locked in excess profits for the first couple of years, in exchange for taking the risk of asset write-downs if the federal carbon regulations forced the utility to close one or more of its coal-fired power plants. The Trump administration is rolling back the Clean Power Plan, so Dominion critics say the freeze is no longer justified. But Dominion countered that the McAuliffe initiative still could compel a reduction in carbon emissions, and that the company still is at financial risk.

Bacon’s bottom line: The point that intrigues me is the argument that a 7% increase in electricity rates would not harm Virginia consumers because, by adopting energy efficiency measures, they would offset the higher rates with lower consumption. Voila! With this new alchemy, we can impose regulations that cost hundreds of millions of dollars to comply with, and miraculously, everybody wins and nobody loses!

Pardon my skepticism. The carbon-reduction rule may be justified (if you buy into the more alarmist predictions of the global warming movement) but let’s not pretend there is no cost to consumers. Yes, it’s true, business and homeowner investments in energy efficiency can counter the higher rates. But someone has to pay for those investments!

(This article first ran in Bacon’s Rebellion on November 15, 2017)

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Job Openings – Facts and Figures

Every once in a while, I hear someone say tens of thousands of jobs are open in the Richmond region and candidates can’t be found for those positions.

There might be only some truth to that.

From August through October, for instance, more than 65,000 jobs were posted online for positions in the Richmond region.

But just because a job is posted on the internet does not mean that candidates can’t be found.

The median number of days of 65,167 job postings in Richmond was 27 days, meaning that 32,583 get filled in less than 27 days and the remainder take longer.

In fact, 52 percent of the job postings in the Richmond area were filled within a month, and about 70 percent were filled by the 45-day mark.

But about 13 percent of jobs remain unfilled after three months.

It seems reasonable to interpret these unfilled jobs after being open for a long while as those difficult to fill due to supply-demand imbalances. Of the 65,167 total job postings from August through October, more than 8,400 may be hard to fill.

The amount of time a job stays open in the Richmond region varies by occupation.

Highly skilled jobs and those needing specific licenses or certifications, such as education, arts and design, engineers and health care practitioners, stay open longer.

For low-skilled jobs such as office, retail sales and personal services, it takes a shorter time to fill open positions.

There is one exception — food service, which shows a high percentage of open positions. In this case, rather than advertising job postings for specific vacancies, companies hiring in these occupations often keep a posting open perpetually in order to collect an applicant pool, which they then draw from when a vacancy arises.

A few firms, including Chmura Economics & Analytics, collect online job postings to identify current job demand and trends for occupations and regions. These job postings can provide some insight into how many jobs go unfilled, but there are some caveats.

For example, some openings are not posted on the internet. This is particularly true in the construction industry, where openings are often communicated by word of mouth.

On the other hand, some job openings may be posted on the internet even though a candidate is already identified for the job. This is more prevalent in large businesses where the human resources department requires that jobs be posted for a period of time or for firms that are constantly recruiting for the same positions due to high turnover.

Despite those caveats, job posting data collected by Chmura Economics generally are consistent with national reports and can yield useful insights on what jobs get filled and how soon.

The data show that there were 25,765 active open positions to be filled in the Richmond metro area as of last week.

These numbers appear to be in line with the U.S. Bureau Labor Statistics’ Job Openings and Labor Turnover survey which reports 6.1 million open positions in August across the nation.

With the Richmond area having about 0.4 percent of the national population, proportionally, it is likely that about 24,400 of the nation’s job openings are in the region.

How does Richmond stand relative to the nation on job postings?

Using the nation as a benchmark, the Richmond metro area, with 65,167 total postings from August through October, has 28 percent more job openings than the average region based on the number of people employed here.

That ranks Richmond 93rd among the 381 metropolitan areas in the country.

The Charlottesville and Washington metro areas have higher job openings — 29 percent and 33 percent, respectively.

(This article first ran in the Richmond Times Dispatch on November 6, 2017)

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GAO study: Damage to agriculture from climate change

The Government Accountability Office (GAO) is the audit, evaluation, and investigative arm of Congress. GAO evaluates federal programs and provides analyses to help Congress make informed funding decisions. Sens. Maria Cantwell (WA) and Susan Collins (ME) requested the GAO to evaluate how climate change impacts will increase costs for the federal government and presumably need more tax money to support.

GAO reviewed two national scale studies and asserted it interviewed many national experts. The two studies reviewed by GAO are The American Climate Prospectusstudy…produced by the Rhodium Group in 2014 to assess the economic effects of potential climate changes on different sectors of the U.S. economy and regions of the country.” The Rhodium Group, LLC is located in New York City and is a nonprofit which does not list its board of directors. No background information is provided by the Rhodium Group but its web page makes claims regarding its research capabilities.

The second study relied on by GAO is EPA’s study entitled Climate Change Impacts and Risk Analysis. EPA’s study reviewed future greenhouse gas emissions growth, climate sensitivity, natural variability and climate model selection. There is no indication to the experts GAO interviewed and I would suspect none were the experts who signed the petition filed with EPA which claims greenhouse gases such as carbon dioxide and methane are not endangering the planet.

Federal dollars spent on weather events

The GAO advised the two senators that $350 billion is being spent by the federal government in 2017 because of extreme weather and fire events. GAO believes these numbers will increase and that floods and drought once considered rare will become more common and intense because of climate change. The letter to the senators indicates “A November 2016 assessment by the Office of Management and Budget (OMB) and the Council of Economic Advisors found that recurring costs that the federal government incurred as a result of climate change could increase by $12 billion to $35 billion per year by mid-century and by $34 billion to $112 billion per year by late century,…” GAO admits that measuring the effects of climate change in the United States is difficult to measure. GAO says models produce imprecise results, imprecise climate model uncertainty, and that it is difficult to model climate change over long time frames.

Notwithstanding these caveats, GAO relies on a report by the Rhodium Group which had its project funded by Bloomberg Philanthropies, Paulsen Institute, Skoll Global Threats Fund, and the Rockefeller Family Fund. The Rhodium study was published by the Columbia University Press in 2015.

EPA’s climate change study and the Rhodium study plus experts “…suggested that potential economic effects of climate change in the United States could be significant and unevenly distributed.” As expected, agriculture is examined closely. On page 20 of the GAO climate change report, it is indicated there could be a change in our crop yields because of temperature, precipitation, and carbon dioxide fertilization. GAO projects between 2020-2039 agriculture could benefit by $8.5 billion to a loss of $9.2 billion. From 2040-2059, GAO estimates crop yields could possibly benefit from carbon dioxide fertilization by as much as $8.2 billion and lose as much as $19 billion. Another economics chart on page 22 indicates that if we have significant global emissions reductions in the United States, agriculture could save as much as $1.2-1.4 billion by 2050.

Forestry might have increased economic benefits by as much as $9.6 billion by 2050.  EPA suggests that “…estimated costs of climate changes without any emissions reductions…[will be] $5.0 trillion in economic costs to coastal property from climate change through 2100…”

According to the American Climate Prospectus study, “…the Southeast, Midwest, and Great Plains regions will likely experience greater combined economic effects than other regions…”

The purpose of this GAO study is to look at potential effects of climate change and therefore federal decision makers can better manage climate risks. If you believe that, I am sure you believe the government is here to help you.

(This article first ran in Farm Futures on October 31, 2017.)

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Trump and P3 Infrastructure: What Now?

Like much of the transportation infrastructure community, I was stunned and dismayed when President Trump suddenly told several Democratic members of Congress that “P3s don’t work” and are “more trouble than they’re worth.” He even trashed the largely successful experience of Vice President Pence’s home state of Indiana, which is moving toward a toll-financed, P3-delivered reconstruction and widening of its Interstate highway system.

After a week of reflection, and with no confirming actions or announcements from the White House, I’m less dismayed, for a number of reasons. First, nearly all P3 infrastructure projects are developed by state and local governments, which own the infrastructure. They will continue to launch such projects because they make sense—witness the $9 billion announcement by Maryland Gov. Hogan the week before, to use P3 concessions to add express toll lanes to three major highways.

Second, there is bipartisan support in Congress for the P3 infrastructure approach. In September 2014 a special panel of the House Transportation & Infrastructure Committee issued a report, “Public-Private Partnerships: Balancing the Needs of the Public and Private Sectors to Finance the Nation’s Infrastructure.” The report represented the consensus views of this bipartisan panel that included Ranking Democrat Peter DeFazio (D, OR). And just the other day, the House’s New Democrat Coalition released a three-page statement on infrastructure improvements that includes the use of P3s both for long-term fixes to existing infrastructure and to foster innovative solutions.

Third, it’s important to remember the old saw, “The President proposes, the Congress disposes.” Whatever approach the White House proposes, the actual infrastructure bill will be crafted, debated, and eventually passed by Congress. The latest indications are that the White House proposal will focus more on rethinking the respective roles of the federal government versus those of state and local governments. Since the latter own the infrastructure, this kind of rethinking is long overdue, especially given the ever-worsening fiscal position of the federal government. Despite the recent call from what we might call the Old Democrats (in this case, members of the Senate Environment & Public Works Committee) for $500 billion in net new federal spending on infrastructure—funding source unspecified—there is no hat from which to pull out a $500B rabbit.

We have aging highways, leaking municipal water systems, and decrepit locks on the inland waterways for two reasons. First, those who use and benefit from these systems have been unwilling to pay what it actually costs to use them—and seem to think that somebody else should do it for them. Second, those who manage these vital facilities have not leveled with the users about paying the real costs.

Users-pay/users-benefit is still the fairest and most effective way to pay for airports, seaports, waterways, highways, electricity, water supply, and other infrastructure for which the users are the ones who receive the vast majority of the benefits. That makes all of these systems viable candidates for revenue-based P3 reconstruction and modernization, but those decisions are properly made by the governmental jurisdiction responsible for the facilities—not by central planners in Washington.

As the federal government inevitably reduces its role as sugar daddy due to running short of money, there are things it can do to assist states, cities, and counties to become better stewards of their own infrastructure. Some of these were proposed by the Obama Administration: expanding tax-exempt revenue bond financing to all categories of P3 infrastructure, rather than just highway and transit projects; streamlining loan programs such as TIFIA and WIFIA, while continuing taxpayer safeguards; and liberalizing existing pilot programs such as those for airport privatization and toll-financed Interstate reconstruction.

I’d encourage the White House to forget about a grandiose $1 trillion total, and focus instead on giving state and local infrastructure owners better financing tools and assistance in using better procurement methods such as design-build-finance-operate-maintain (DBFOM). More important than an arbitrary dollar total is ensuring that infrastructure investment goes to the highest-value projects, where benefits solidly exceed costs. That’s how to make our economy more productive.

(This article first ran in the October 2017 issue of Surface Transportation Innovations.)

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