Herald lead editorial cites BHI sales tax study

Expanding the debate on taxes, The Boston Herald cites BHI's new study on a proposed sales tax increase for Massachusetts. The choice words are here:

That 20 percent increase in the sales tax no doubt will be filed as an amendment to the House budget on which debate is expected to begin April 27. That’s because for many lawmakers hitting up the taxpayers is easier than saying no to public employee unions (who would be asked to pay a greater portion of their health insurance under the proposed House budget) or cops (who would lose Quinn Bill pay hikes for college degrees).

But the Beacon Hill Institute study found that the 20 percent sales tax hike would “destroy 10,182 private sector jobs and reduce investment by $41.31 million per year. The average person would lose approximately $369 a year in wages.”

The tax, of course, is the most regressive and would hit low income families hardest. Also bearing the brunt of the impact would be small retailers along the New Hampshire border - already an endangered species - as Massachusetts residents head north to avoid taxes on computers and a host of high-ticket electronics.

The Institute noted that the state was already losing about 2.2 percent to 3.5 percent in sales taxes to Internet sales. And that Amazon.com’s 2008 holiday season sales increased by 16 percent over the previous year, while Massachusetts’ sales tax revenue dropped 8.6 percent for the same period.

There may be nothing that can be done to stop that kind of bleeding, but there’s no need to make it worse either. And that’s what a sales tax hike would do.

Tax increases have consequences.

A bad idea for retail in Massachusetts: Legislature again considers sales tax hike

Increasing the state's sales tax by 20 percent will have negative effects on the Massachusetts economy. According to BHI's trademark STAMP tax model, raising the rate to 6% would destroy approximately 10,000 jobs and preclude some $41 million in business investments. Sales taxes raise prices. They may raise revenue in the short-run but they have corrosive effects over the state's long-term competitiveness. A higher sales tax also means that shopping across the border in New Hampshire for big ticket items such as furniture, electronics and other home goods becomes more attractive. Moreover sales taxes (including the state's generous exemptions for necessities) are always regressive.

The BHI FaxSheet is available here.

Background on the current proposal from the Boston Globe.

Who's to blame for the fiscal crisis facing all 50 states? Reason Foundation suggests the states, for spending far beyond population growth and inflation.

The Boston Tea Party pays a visit to BHI's neighborhood

David G. Tuerck, BHI's executive director, addresses the April 15, 2009 Boston Tea Party.

BHI reads The Nation

Yes it's true, we're glad to read The Nation, particularly when it unmasks some really bad bipartisan policies.

Thanks to an obscure tax provision, the United States government stands to pay out as much as $8 billion this year to the ten largest paper companies. And get this: even though the money comes from a transportation bill whose manifest intent was to reduce dependence on fossil fuel, paper mills are adding diesel fuel to a process that requires none in order to qualify for the tax credit. In other words, we are paying the industry--handsomely--to use more fossil fuel. "Which is," as a Goldman Sachs report archly noted, the "opposite of what lawmakers likely had in mind when the tax credit was established."

The massive tax subsidy has barely been reported in the press, but it's caused a stir in the paper industry, which is struggling to stay profitable in the teeth of the recession. "Everybody's talking about it," paper industry analyst Brian McClay told me. "In the US and elsewhere in the world--in Canada and Brazil and Chile and Europe."

On March 24 International Paper (IP) announced it had received its first check from the IRS for a one-month period this past fall. The total? A whopping $71.6 million. "It's probably close to a billion a year of cash," McClay said. "If you look at the economics of this business, to make that kind of money today you'd have to be on another planet." IP's stock rose 12 per-
cent on the news.

The origins of the credit are innocent enough. In 2005 Congress passed, and George W. Bush signed, the $244 billion transportation bill. It included a variety of tax credits for alternative fuels such as ethanol and biomass. But it also included a fifty-cent-a-gallon credit for the use of fuel mixtures that combined "alternative fuel" with a "taxable fuel" such as diesel or gasoline.

Enter the paper industry. Since the 1930s the overwhelming majority of paper mills have employed what's called the kraft process to produce paper. Here's how it works. Wood chips are cooked in a chemical solution to separate the cellulose fibers, which are used to make paper, from the other organic material in wood. The remaining liquid, a sludge containing lignin (the structural glue that binds plant cells together), is called black liquor. Because it's so rich in carbon, black liquor is a good fuel; the kraft process uses the black liquor to produce the heat and energy necessary to transform pulp into paper. It's a neat, efficient process that's cost-effective without any government subsidy.

"Seventy-three percent of the energy we use in our mill system we produce," says Ann Wrobleski, IP's vice president for global government relations. "We feel like we're the original green industry, if you will." (In developed nations, paper is the third-largest industrial greenhouse gas emitter, behind the steel and chemical industries.)

By adding diesel fuel to the black liquor, paper companies produce a mixture that qualifies for the mixed-fuel tax credit, allowing them to burn "black liquor into gold," as a JPMorgan report put it. It's unclear who first came up with the idea--Wrobleski told me it was "outside consultants"--but at some point last fall IP and Verso, another paper company, formerly a part of IP, began adding diesel to its black liquor and applied to the IRS for the credit. (Verso nabbed $29.7 million at just one of its mills in the final quarter of 2008 for its use of mixed fuel.)

Hat tip: Mankiw.

The pitfalls of ethanol

Another reason to get rid of taxpayer subsidies for ethanol: wasted water resources.

The current Energy Secretary, Steven Chu, is no fan of corn-based ethanol, presumably because a variety of studies have suggested that it takes a significant amount of energy to produce, diluting its impact on carbon emissions. Nevertheless, the Energy Independence and Security Act sets hard targets for ethanol produced from biofuels, and the US has largely met those through corn-based ethanol to date. A study that appeared in the journal Environmental Science & Technology suggests that we should carefully consider how we meet future goals, as different regions in the US require radically different amounts of water to get the ethanol to market.

Past studies have suggested that the cost in water use for ethanol derived from corn might be high—as high as several hundred liters of irrigation water for each liter of ethanol to make it to the pump, with an added 40 liters of water used in the process of converting the corn to ethanol. Still, those estimates were based on models of irrigation use that didn't account for regional variations in use, and relied on evapotranspiration models to estimate the amount of water needed.

The new study avoids these issues by diving down into data that's available from a variety of governmental organizations. These include the Census of Agriculture and the Farm and Ranch Irrigation Survey, made available by the US Department of Agriculture and the US Geological Survey. These provide a state-by-state breakdown of the use of irrigation water, while the USDA has data on the amount of corn produced at the county level.

Crunching the numbers revealed radical differences among the states. Some of the major corn-producing states, like Iowa and Illinois, required very little irrigation to get a liter of ethanol to market (5 and 11 liters, respectively). At the other end of the spectrum, drier states like Colorado and California required staggering amounts: nearly 1,200 liters for Colorado, and a staggering 2,138 for California.

"The largest corporate welfare program in the history of the U.S."

The coming Cap-and-Trade debacle.

The Supreme Court's decision last year that the Environmental Protection Agency (EPA) has the authority to regulate carbon dioxide under the Clean Air Act and the EPA's ruling in March that carbon dioxide threatens the public's health and welfare, have put considerable pressure on Congress to act. Naturally, when the federal government puts hundreds of billions of dollars in play, it attracts a lot of rent-seekers. "The special interests that seek to derail, blunt, or tailor any new climate policy to their narrow agendas have already gathered in staggering numbers," declared The Climate Change Lobby, a study conducted by Center for Public Integrity. In 2008, more than 770 companies and interest groups spent an estimated $90 million funding 2,340 climate change lobbyists in Washington, DC.

The prospects of carbon rationing and permanently higher fuel prices are going to produce far-reaching changes in the ways companies do business and hit consumers hard in their pocketbooks. In March 2008, House Energy and Air Quality Subcommittee member Rep. Mike Doyle (D-Penn.) told the Capitol Hill newspaper Roll Call, "You are either at the table or on the menu." Mixing his metaphors, Doyle added, "This train is leaving the station." Now it's largely a question of whom it's going to run over.

The House hikes the ante on climate change bill.

No one ever sold short the ambitions of individual Congressmen. They see opportunities in every crisis. The first draft of the climate change bill casts caution to the wind (excuse the pun).

The cap-and-trade portions of the draft bill are incredibly ambitious, covering 85 percent of the economy's carbon pollution—from electric utilities to oil companies to large industrial sources, leaving out only smaller entities. The legislation would aim to cut U.S. greenhouse-gas emissions 3 percent below 2005 levels by 2012, 20 percent by 2020, and 83 percent by 2050. That's slightly more stringent than what Obama has proposed, though not quite as steep as what the IPCC has called for to avoid drastic climate impacts.