Goldilocks and the three tax cuts

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One was too hot. One was too cold. And one was just right. The governor has one: The Working Families Tax Cut. The lieutenant governor has one: The Taxpayer Pay Raise Act. And the speaker has one: call it the Mine is Bigger than Both of Yours Tax Cut. Which one is just right for Goldilocks taxpayer?

Kelley Williams,   Chair Bigger Pie Forum,   March 6, 2015

Goldilocks and the three tax cuts 

One was too hot.  One was too cold.  And one was just right.  The governor has one: The Working Families Tax Cut.  The lieutenant governor has one: The Taxpayer Pay Raise Act.   And the speaker has one:  call it the Mine is Bigger than Both of Yours Tax Cut.   Which one is just right for Goldilocks taxpayer?    How long has it been since there were three tax cut proposals on the table?  Everybody wants to get in on the act.   What’s going on?

Maybe the light has dawned: That many taxpayers don’t need or want government to spend their money.  That taxes kill jobs.  That more government spending means more bureaucrats,  more regulators, and more crony payoffs that discourage business risk taking.  That many taxpayers want less government and no government bets on or bailouts for technology experiments like Kior, Stion, and Kemper.   But then, maybe nothing has changed.   Maybe it’s just posturing by some politicians:  Who expect some votes if they propose tax cuts even it they don’t pass.  Who expect or already have support from those who get bailouts.

Let’s look at the three proposals.   All mean more money for taxpayers and less money for government.  The money impact is small for all.  But all are steps in the right direction.  How to rate or rank them?    Seems to me the governor’s is most populists.   The lieutenant governor’s is most pragmatic.  And the speaker’s is most political.   Here’s why.

The governor’s Working Families Tax Cut is for individuals.  It proposes tax credits on up to $52,000 of personal earnings.   However, it is subject to state revenue growth and to funding the Rainy Day Fund.  So it’s iffy.  The complicated tax credits could generate $79 million of tax relief  annually for individuals beginning in 2016.   That’s about 1.3% of the state’s budget.  The governor says he’s open to other tax cuts that put money in the pockets of working Mississippians and will sign a tax bill if put on his desk.   Does that include tax cuts for businesses providing jobs for working Mississippians?

The lieutenant governor’s Taxpayer Pay Raise Act is for individuals, small businesses, and investments.  It’s not conditional or iffy.  But it phases in over ten years.  It could average about $40 million per year of tax relief over the ten years.  That’s about 0.7% of the state’s budget.   It eliminates the 3% tax bracket on personal income and lets small business owners deduct their own employment taxes.   It also kills the franchise tax (not a fast food tax).  This is a tax on business property and investments in Mississippi.  Killing it would make Mississippi more attractive to businesses that might invest in other states that don’t have this tax.   Capital does go where it is welcome – and creates jobs there.

The speaker’s Mine Is Bigger than Both of Yours Tax Cut eliminates all individual income taxes.  That’s a $1.4 billion cut.    Sounds good, but theres a catch.  It phases in over 15 years if state revenues grow 3% per year.   The last time revenues grew 3% for 15 years was never.   It’s probably political wishful thinking now, but might happen over 30 years.

It’s hard politically to cut taxes because it usually means spending less than otherwise, albeit not less than last year.   So tax cut proposals are often subject to higher revenues that will fund both more spending and tax cuts.  The governor’s and speaker’s proposals have such revenue hurdles.  The lieutenant governor’s doesn’t.   More spending provides instant gratification.   Tax cuts take time to pay off.   But they have a multiplier effect and provide lasting benefits.   Spenders and tax cutters are like Aesop’s’ grasshopper and ant.

The elephant in the room.   Tax cut proposals themselves send encouraging messages of economic literacy.   They can prompt voters to look for and reward political courage for hard decisions.   Thanks to the governor, lieutenant governor, and speaker for their encouraging messages.  They could also send encouraging messages if they made hard political decisions to do something about the elephant in the room squashing taxpayers and quashing investments.  That’s Mississippi Power’s Kemper County Lignite plant.

Customers have to pay taxes, and they have to pay electric bills.   But most taxes are recycled back into the economy and do some good.   In contrast, most of the money paid for Kemper’s electricity leaves the state.   So Kemper’s ever increasing rates are more damaging than higher taxes.   Their ripple effect will do statewide damage for years if customers pay the extra $5.2+ billion construction cost of the company’s gasifier plus its high operating cost.   The Public Service Commission will decide who pays for this company mistake.   But it won’t do it in a political vacuum.  If cutting taxes is good, cutting Kemper’s rates and making the company pay for it is better – for customers and taxpayers.  But harder for many politicians.

To put Kemper’s harm in perspective: The lieutenant governor’s carefully designed proposal could save taxpayers $280 million over the first 7 years.   Kemper’s rate increases due to construction interest alone have already cost retail customers $290 million.   The Supreme Court reversed the increases and ordered refunds.    But the company has stalled on the refunds and asked the court to reconsider.   If it reconsiders and blinks, customers will pay $2+ billion more over the next ten years.   That’s over five times the projected tax cuts.   And that just covers part of Kemper’s extra cost.

Mississippi Power has been consistently wrong and deceptive about Kemper.  It cannot be trusted.  Many supporters don’t care.   Others may feel used but won’t call out the politically powerful company for its mistakes and abuses.   It’s time for some economic literacy and political courage to deal with its damage.

Taxpayers, customers, and investors would get a twofer.  The company would get what it deserves.   And that porridge would be just right.

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