A response to the Institute on Taxation and Economic Policy's misguided critique of the STAMP model

On May 21, 2014, The Institute on Taxation and Economic Policy (ITEP) released a report entitled, “STAMP is an Unsound Tool for Gauging the Economic Impact of Taxes.” The report makes several criticisms of the Beacon Hill Institute (BHI) State Tax Analysis Modeling Program (STAMP®).  BHI responds here on what ITEP gets wrong about the STAMP model. (PDF file)

Has the optimal gas tax been identified?

Mass High Tech's Kyle Alspach

In 2007, a study in the Journal of Economic Literature found that the ideal average gas tax for the U.S. would be $2.10 a gallonhttp://www.blogger.com/img/blank.gif. At the time, the average tax was 40 cents a gallon — 18.4 cents for federal and 22 cents for state (it’s currently 23.5 cents in Massachusetts).

The $2.10 figure takes into account greenhouse gas emissions, local pollution and oil dependency, along with the costs of congestion and accidents.

To make the tax palatable, economists say the government could cut taxes in other areas — say, the income tax for consumers or corporate taxes for businesses.

The tax trade-off seems like a reasonable idea but revenue-hungry politicians would never take up the offer.

In the rush to move toward a Pigouvian tax model, supporters of higher taxes tend to forget that such excise taxes are regressive. More than they did in the past, low-income workers rely more heavily on jobs in the suburbs and most use cars to get there.

"Taxachusetts Minus"

Jon Keller interviews BHI's David Tuerck on taxes in Massachusetts

Major takeaway: "Our competitiveness is a fragile thing."

Massachusetts 10th in the nation in Tax Freedom Day

Massachusetts ranks tenth in the nation in terms of how long its residents must work to pay off the federal, state and local tax man according to the Tax Foundation. Mass taxpayers toil to raise the taxes to pay all governments through April 14, one day before the official federal income tax filing deadline. (Thanks to the holiday Massachusetts taxpayers have until April 19 to file this year).

Overall, American taxpayers will recognize their freedom on April 12.

High-income Connecticut finished first. Its taxpayers will see the light of day on May 2. Mississippi ranked last with a Tax Freedom Day of March 26.

To learn how Tax Freedom Day is calculated visit the Tax Foundation.

How business leaders view tax credits

The best take-away is from Todd Dagres, General Partner, Spark Capital:

“I am not a big fan of tax incentives because they are a Band-Aid for an unfavorable tax environment.”

Explaining the Shadow Budget

Director of Research Paul Bachman describes the Shadow Budget and its application to the Commonwealth of Massachusetts in an interview with Jim Musser of the Mercatus Center.

The "Shadow Budget" is part of a proposal outlined in BHI's latest study, Massachusetts Fiscal Policy: The Legend v. the Facts.

The study also hypothesizes how the Commonwealth of Massachusetts would have performed it a Tax and Expenditure (TEL) were in place since 1999.

Has North Carolina handed out an unfair tax break?

The problem with targeted tax breaks? They apply only to the favored few companies that government thinks will win out in the marketplace.

Charlotte Observer: Apple to build computer data center in North Carolina

Apple will come to North Carolina, investing $1 billion in a computer data center over nine years.

Gov. Beverly Perdue announced the expansion this afternoon after signing legislation that will cut the California company’s tax bill in North Carolina by about $46 million over a decade. Legislators moved rapidly last month to approve the measure, which changes the way corporate income taxes are calculated for a capital-intensive business like Apple. It is expected to be the only company that will benefit.

“North Carolina continues to be a prime location for growing and expanding global technology companies,” Perdue wrote in a statement. “We welcome Apple to North Carolina and look forward to working with the company as it begins providing a significant economic boost to local communities and the state.”

The data center is expected to have at least 50 full-time employees, although another 250 contractors could be employed to manage security, landscaping and heating and air conditioning systems. Including construction jobs, the presence of the facility could put a total of 3,000 people to work, according to Department of Commerce estimates.

The best tax system is comprised of a low rate with few or no exemptions.

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.

Taking on the sacred cow, the mortgage interest deduction

No policy better demonstrates how the tax code distorts the market than the federal income tax deduction for mortgage interest. Ed Glaeser offers a modification to this gem.