Wednesday, 17 December 2014

A State Carbon Tax?

Washington State Governor Jay Inslee has announced that he will propose some sort of a carbon pricing program to help raise revenues for his state's starved budget, which is currently about $2 billion in the red (over two years, and out of a total budget of about $33 billion), and which includes a Washington Supreme court-mandated increase in school funding. The details remain sketchy at this point, like whether it is a carbon tax or a cap-and-trade program (Greeenwire is calling it a "carbon  fee" and the Seattle Times is reporting it as a cap-and-trade), but the Governor is hoping that it will produce $400 million per year. He has tied it to transportation funding, which both parties in Washington state would agree is badly needed.

Inslee is a Democrat and Republicans have a majority in the Washington Senate, and are just barely a minority in the State House, so prospects of passage might appear dim. But this is a state where the parties still seem capable of working together. Republican state senator Curtis King of Yakima (the hometown of Justice William O. Douglas) criticized the Governor's plan for linking such a tax to general spending projects like transportation projects, but praised the Governor for proposing something in advance of January budget negotiations. (Can we get some of those Republicans down here in Florida?)

I have one problem with this. Washington State still has to figure out a way to comply with the Obama Administration's Clean Power Plan to reduce emissions from the electricity generating sector. Washington's goal is already a heavy lift -- 1,379 lbs./MWhr down to 215 by 2030 -- this is a state with only one coal-fired power plant so it does not have much low-hanging fruit to pick. I would save my political capital for when I needed to propose something for the Clean Power Plan, which is going to really cost Washington State. What Washington could do, much more directly if it truly wishes to fund transportation projects, is just raise its gasoline taxes, currently at 37.5 cents per gallon. That is high (ninth among states) but Washington is one of seven states with no state income tax. If I am a motorist in the Emerald State, I would accept a gasoline tax as the price of having good roads and bridges (a major and important bridge collapsed in Northwest Washington in 2013), and could separate that from carbon reduction measures. Washington State consumed about 64 million barrels in 2013, or 2.7 billion gallons. A tax of 10 cents per gallon would raise $270 million dollars, and 15 cents would raise about $400 million, the hoped-for amount raised by the carbon "fee," or permit price, or whatever it is going to be. Do it now, when gas prices are low!

Thursday, 4 December 2014

House Republicans: One Million Dollar Deduction for Big Trucks, $4,000 for College

There is an op-ed in Wednesday's New York Times on the push by some Republicans to extend a stimulus tax incentive, a "bonus depreciation" provision that allows businesses to deduct the full purchase price of qualifying equipment, essentially deducting it as a business expense (like a luncheon or business travel) up to, in some cases in the past, 50% of the value of the equipment. The provision is part of a tax extenders package in H.R. 5771 which passed the House on Thursday 378-46. That is a bipartisan vote, but make no mistake: it was House Republicans that have been pushing for this provision. In comparison, the maximum deduction for higher education expenses would be capped at $4,000 for an individual whose maximum adjusted gross income can be no more than $65,000 (or $130,000 for joint filers). $500,000 for business equipment, $4,000 for higher education. Qualifying property includes vehicles heavier than 6,000 lbs., off-the-shelf software, office furniture, equipment, and property not part of a structure.

However, there is something else that is moving forward as part of H.R. 5771. Even before you get to bonus depreciation, under section 179 of the Internal Revenue Code businesses can take a first-year deduction of up to $25,000. That means that business, whatever and whoever they are, can expense up to $25,000 of equipment right away. The limit had been, as part of a 2008 economic stimulus package lifted up to $250,000 on capital equipment having a total value of no more than $800,000. That generous limit expired, and House Republicans are now seeking to lift that limit from the current level of $25,000 up to $500,000. That's a total of $1 million for business capital, $4,000 for higher education, in case you were keeping score.

There is actually a website,, that spells everything out for anybody, most prominently small businesses, to figure out exactly how the bonus depreciation works. It is not complicated. For qualifying capital equipment, you can basically expense anything up to $25,000, which becomes $1 million if the House package becomes law.

What is the effect of these tax provisions? These provisions have gone up and down over time, and Eric Zwick and James Mahon have looked at these provisions and their effects on business investment, and how changes in these rates over time have changed investment from year to year. They found that bonus depreciation raised investment by 17.3 percent from 2001 to 2004 and 29.5 percent from 2008 to 2010. They carry out a number of robustness tests, leading them to conclude that these provisions really do work. In fact, insofar as the up-and-down movement of the limits of section 179 and bonus depreciation create "kinks" in the optimal investment levels of firms, firms are observed to be investing right up to the kinks, in effect taking full advantage of these provisions. Firms tend not to take full advantage if they do not have the ordinary income against which to take these deductions (though bonus depreciation has, in past years, been used to create losses which can be carried forward to offset income in future years).

That said, what kind of capital are we subsidizing, and what good is it doing? Even if we ignore the distributional impacts of this disparity between funding business equipment and higher education, what good is this increased business investment doing? This we do not know.