The Leaflet - Approaching the Fiscal Cliff

Approaching the Fiscal Cliff

As we approach 2013, taxpayers are waiting to see if Congress will let the nation go over the so-called fiscal cliff by allowing the largest tax increase in American history and budget cuts to go into effect. There is still wide disagreement over which tax hikes to prevent and what spending cuts should take place. The nation is facing a massive debt problem that must be addressed long term by looking at ways to reform and overhaul entitlements.

In a new Research & Commentary featured below, Senior Policy Analyst Matthew Glans gathers a collection of Research & Commentaries from The Heartland Institute on Taxmageddon and the fiscal cliff, plus other documents examining the subject. In the commentary he explains that, “With the U.S. economy still struggling to crawl out of the economic downturn, it’s important to avoid policies that impede growth and investment. Allowing the nation to go over the fiscal cliff is not the right choice.”

With so many questions regarding what going over the fiscal cliff could mean, Heartland will be hosting our monthly Emerging Issues Conference Call on Wednesday, December 5 at 1:00 p.m. EST. Heartland Research Fellow Steve Stanek will give his view of what it means for public policy at the state level and to answer some of your questions. To RSVP, please email Robin Knox at rknox@heartland.org to make sure that you receive all the information for the call.

This week's edition of The Leaflet features research and commentary addressing the fiscal cliff, use it or lose it, teacher quality, Oregon capital gains taxes, internet taxes, franchise taxes, and Florida’s Medicaid solution.

Respectfully,

John Nothdurft
Director of Government Relations
The Heartland Institute

Lead Story

Research & Commentary: The Fiscal Cliff and Taxmageddon
Budget & Tax

Absent action from Congress and the president, the United States will face what many are calling a “fiscal cliff” at the beginning of 2013. That describes the increase of several key tax rates as the early-2000s tax cuts expire, the reduction of certain jobs provisions, activation of $1.2 trillion in across-the-board budget cuts (“sequestration”) as part of the 2011 Budget Control Act, sharp reductions in Medicare physician payments, the end of the Alternative Minimum Tax patches, and the expected need to raise the debt ceiling.

These combined tax increases and spending cuts would increase federal revenues but would have very little effect on total federal spending. According to estimates from the Congressional Budget Office, the mandates under the current law would increase revenues from 15.7 percent of GDP in 2012 to 18.4 percent of GDP in 2013, while spending would fall by only about 0.5 percentage points, from 22.9 percent of GDP to 22.4 percent of GDP—still 1.4 percentage points above the historical federal spending average of 21 percent.

Many of the proposals for addressing the fiscal cliff have centered on extending the early-2000s tax cuts—either in their original form for all taxpayers, or for everyone but the highest earners. Neither proposal has gained any traction in Congress. The Heartland Institute has written about many of the individual elements of the “fiscal cliff” scenario, including several specific hikes on financial taxes that would have a dire effect on financial markets, investment, and the economy.

With the U.S. economy still struggling to crawl out of the economic downturn, it’s important to avoid policies that impede growth and investment. Allowing the nation to go over the fiscal cliff is not the right choice. Congress should consider delaying these mandates and taking the time to craft tax and spending policies that make the nation more competitive internationally and allow the economy to gather the strength to pull out of the current recession.

What We're Working On 

Research & Commentary: "Use It or Lose It" Proposals 
Environment

Politicians are telling oil and gas companies to “use it or lose it” when it comes to offshore federal leases, saying industry needs to first develop their current leases before the federal government leases any more. While this might be a good way to rile up one’s base against fossil fuels, it’s not exactly an accurate representation of the energy development process. Even worse, it distracts the public from the necessary steps it takes to achieve domestic energy production, and the energy security, econom ic growth, and increased government revenue it provides.

In this new Research & Commentary, Taylor Smith a policy analyst for Heartland says that, “Currently, approximately 85 percent of U.S. offshore areas are off-limits to energy production. According to the Wood Mackenzie energy consulting firm, leasing in currently off-limits federal areas beginning in 2012 would create more than half a million jobs by 2021.”

 
Research & Commentary: Efforts to Improve Teacher Quality
Education

The teaching profession has expanded dramatically over the past few decades, resulting in lower teacher-student ratios. Unfortunately, the quality of these new teachers is sinking.

Heartland’s research fellow for education policy, Joy Pullmann, says, “Teachers who enter the profession from content-specific majors or careers have higher personal and student test scores than those who enter from a traditional education major and certification background.”

Research & Commentary: Oregon Capital Gains Tax Reform
Finance, Insurance & Real Estate

As Congress considers whether to allow the capital gains tax rate to increase at the beginning of 2013, states across the nation are debating whether to change their own capital gains tax rates.

In this Research & Commentary, Senior Policy Analyst Matthew Glans argues that Oregon should focus on implementing tax policies that encourage capital formation and investment in the state. Lowering or eliminating the state’s capital gains tax would be a big step in bringing capital back into the state and promoting economic growth.

The commentary explains that “Oregon’s capital gains taxes are among the nation’s highest. According to the Federation of Tax Administrators, Oregon is tied with Hawaii for the highest capital gains tax rate at the upper bracket, at 11 percent. Although not every citizen pays capital gains taxes, the levies can do much damage to a state’s economy by slowing capital formation and reducing wages.”
 
Research & Commentary: Internet Sales Taxes
Telecom

In the past few years, members of Congress have proposed several bills to expand states’ ability to tax purchases made online and from mail-order catalogs. The Main Street Fairness Act, Marketplace Equity Act , and Marketplace Fairness Act all would expand states’ ability to charge sales taxes on out-of-state retailers regardless of whether the retailer has a physical presence in the state. These proposals would allow states to impose scores of new taxes on consumers and open the door to other new taxes.
 
In this Research & Commentary, Senior Policy Analyst Matthew Glans argues that eliminating the physical presence standard would undermine tax competition and place an undue burden on consumers and businesses.

Research & Commentary: Franchise Taxes
Budget & Tax

Several states either have begun transitioning away from franchise taxes or are considering repeal. A franchise tax is a state tax levied on businesses and partnerships chartered within a state. It acts as a privilege tax: A company paying the tax is allowed to do business in a state under its corporate name.
 
Franchise taxes are determined differently in each state, with the rates based on several value bases, including company assets, net worth, capital stock, capital stock plus surplus, capital, profits, or property in the state. Some states use a variety called a margins tax.
 
In this Research & Commentary, Senior Policy Analyst Matthew Glans argues that lowering or eliminating franchise taxes improves a state’s competitiveness by eliminating a double tax on business.

As States Consider Program Expansion, Focus Turns to Florida Medicaid Cure
Health Care

As many states consider expanding their Medicaid programs, many are also looking for different solutions. In this article, Health Care News Managing Editor Benjamin Domenech discusses a program that is attracting attention in several states–Florida’s “Medicaid Cure.”