Washington Policy Blog

There's a lesson in tax policy here: can you spot it?

July 1, 2010 in Blog

A fantastic case study in unintended consequences vis a vis tax policy in today's Wall Street Journal. As a part of the massive health care overhaul the Obama Administration and Congress passed earlier this year, they decided to implement a special tax on the tanning industry (apparently to the disdain of Jersey Shore's Orange-tinged Snookie).

If only it were that simple.

According to the story in the Journal, the tax depends not only on the type of tanning bed, but also where the fake 'n bake takes place:

"When Jeanne Chamberlain turns up at work Thursday, she's going to have to grapple with America's first federal tax on tanning services, a 10% levy designed to help pay for Congress!
's health-care overhaul. Ms. Chamberlain runs a video-rental store."

About 20 years ago, to help with the fledgling video rental market, Ms. Chamberlain expanded her shop to include tanning beds. I suppose tanning and a video rental go hand-in-hand to some folks. In fact, Ms. Chamberlain offers a free tan for every three rentals.

Enter the ever-evolving IRS rules on the matter:

"Free tans at video-rental stores might be taxable, but tanning services offered by health clubs mostly aren't, thanks to a late exemption. Ultraviolet tans are taxed. Spray tans aren't. Tanning salons are fretting over how to calculate unlimited memberships that combine taxed and non-taxed tans. Customers, meanwhile, have been racing to cram in tanning sessions to avoid the levy."

Essentially, if you tan at your health club, you're tan is tax exempt, as is your faux fake 'n bake spray-on tan. But if you !
head to the neighborhood tanning salon or hit up one of these !
video/tan hybrid stores, you're now pitching in for Congress's health care overhaul.

What's even more troubling, according to this story, is that the IRS isn't helping matters. Many business owners interviewed in the story are simply confused by the application of the new tax. There are simply too many variables -- how are memberships taxed? are free tans taxable? what if I put some treadmills into my tanning salon? why is the gym next to me tax-exempt but my business is not?

The IRS's response?

"A spokesman for the IRS said it's not clear whether the free tan would be taxed, and that business owners should 'make the best determination they can based on their own facts and circumstances.'"

This is remarkably similar to the language used to justify the health care overhaul bill, "We have to pass it in order to find out what's in it." But now it's "We don't !
know how to tell you to implement this tax, so do your best guestimation and we'll tell you after the fact if we think you're wrong."

The other unintended consequence:

"In June [tanning customer] Ms. Scheible developed her own solution [to avoiding the tan tax]: She tanned two to three times a week 'to get in before the tax.'"

I wonder what the surgeon general has to say about loading up on ultraviolet tans in a short amount of time. Probably nothing good.  

The bottom line is that this new tax has plenty of loopholes, exemptions, confusion and unintended consequences. However you feel about the health care bill, this approach at taxing tans is going to harm the small businesses community and should serve as a lesson in how NOT to write tax policy via favoritism.

Spokane County wastes another $588,000 on raceway

June 30, 2010 in Blog

While cutting back core public services, Spokane County Commissioners voted 2-1 this week to spend another $588,000 taxpayer dollars to make upgrades to Spokane Raceway Park. Commissioners Todd Mielke and Mark Richard voted in favor, Commissioner Bonnie Mager voted against.

The Raceway Park was purchased by the county for $4.3 million in a controversial move several years ago. Since then, the county has spent $1.1 million on repairs. Meanwhile, most county departments are still trying to figure out how to cut 12.5% from their budgets. The park was purchased under the assumption it could lead to economic development. It hasn't yet. Even if it eventually does, government does not have a responsibility to own and operate raceway facilities.

Next year, Spokane County Commissioners plan to ask voters to raise property taxes even higher to build a new jail. Money spent on the raceway could and should have been used on essential government services, such as the jail. The purchase and subsequent managing of the raceway is yet another example of the struggles government faces when it gets involved in running a business that can be better-served in private hands.

Governor in D.C. to pitch Congress for more funds

June 30, 2010 in Blog

Governor Gregoire is holding a press conference with several other governors today in Washington D.C. to ask Congress to provide states with additional Medicaid funds (FMAP).

Along with about 30 other states, Washington assumed an additional $480 million in FMAP funds to help balance the budget this year. This is more than the $253 million ending fund balance meaning if the funds aren't approved the state's ending fund balance would be negative by more than $200 million.

For the third time last week the U.S. Senate rejected a bill with the FMAP funds. Last month the House removed the FMAP funds from the bill sent to the Senate. 

On the eve of the Governor's D.C. visit, Senate Majority Leader Harry Reid appeared to raise a w!
hite flag on efforts to approve the FMAP funds for states. Last night he authored a new version of the bill with Senate Finance Committee Chairman Max Baucus that does not include the FMAP funds

This means that if the new bill moves, the FMAP funds will need to be included in a different or standalone bill. One possibility is a bill introduced by Senator Scott Brown. According to Brown's press release last night

“While my bill pays for additional FMAP assistance for one more year, this phase-down provides states an opportunity to g!
et their fiscal houses in order – but also makes it clear th!
at they can no longer pass the buck to the federal government, which has budgetary problems of its own.”

This morning Governor Gregoire held a conference call with reporters to discuss her effort. Gregoire said she plans to tell Congress that although the state has every expectation that there will not be enhanced federal dollars in the next biennium, the state needs them for the current budget.

If Congress doesn't act by its August recess, Gregoire says she will either call a special session or issue across the board cuts to balance the budget. She hasn't decided which option to use yet. To replace the entire $480 million in assumed FMAP funds would require across the board cuts of approximately 7.5%. To simply bring the state's balance sheet to zero would be cuts of around 4% but this would leave no reserves.

While a special session would provide more flexibility, the Governor says she has no desire to bring lawmakers back to!
Olympia for another 30 day special session. This option would only be used if lawmakers pledge to get in and out of Olympia within 24 hours.

With even Reid now sponsoring language without the FMAP funds, it would be prudent for states to proceed as if the additional FMAP funds aren't coming at all.

The longer they wait to face the inevitable the deeper the necessary cuts will have to be.

Report: FCC reclassification could cost billions in investment and thousands of jobs

June 30, 2010 in Blog

A new report out this month from the Advanced Communications Law & Policy Institute at New York Law School underscores why the FCC should be very wary of increasing the regulatory burden on Internet Service Providers through the reclassification process (changing the definition of the Internet from an "information service" to a "telecommunications service").

Getting involved in your dirty dishes

June 29, 2010 in Blog

Residents throughout Washington state are going to find something out this week that people in Spokane and Bellingham already know- dishwashing detergent without phosphorus doesn't always do a very good job washing dishes.

Starting July 1st, a state-wide ban on dishwashing detergent with phosphorus goes into effect. The ban is nothing new in Spokane and Whatcom counties, which yanked the detergent from the shelves in 2008. The phosphorus, environmental groups say, degrades water quality in lakes and streams. Before the ban, detergent like Cascade had phosphorus levels of roughly 5-6%. After the ban, dishwashing detergent companies sold a phosphate-free product, but it left dishes looking dirty with a cloudy substance caked on glasses. Some of the initial problem was because of Spokane's 'hard water.'

In Spokane, since the ban went into place, estimates have varied as to how effective it has really been. One estimate, from this Spokesman-Review article, says there has been just a 10.7% drop in the phosphorus levels in the Spokane River. The Spokane office of the Washington State Department of Ecology says it’s doing a 'quality assurance report' to see exactly what kind of impact the ban is having on the water.

But the results may not be that much more promising. The reason? Like crossing state-lines to avoid Washington's high tobacco tax, dishwashing detergent smugglers continue to make their way into Post Falls and Coeur d'Alene to buy detergent with phosphorus. At one Wal-Mart in Idaho, a cashier said she could tell who was from Idaho and who was from Washington, simply by looking to see how much detergent they were buying. Recently, stores in Idaho have begun selling only phosphorus-free detergents.

Also, water in the Spokane River comes from North Idaho- where phosphorus detergents are still widely being used.

In Spokane County, any environmental benefits gained by banning the phosphorus detergents have been lost by people who jump in their cars and travel the 10-20 miles across state lines to buy their dishwashing detergents, and by people who are actually washing the dishes twice.



Furthermore, the ban has cost the state of Washington sales tax revenue and cost many grocery stores business. All of this effort is not worth just a 10.7% drop in phosphorus levels in the Spokane River.

Longview Daily News calls for more legislative transparency

June 28, 2010 in Blog

The Longview Daily News has called on the Legislature to follow our recommendations to improve legislative transparency. From the editorial:

"A report released this month by the Washington Policy Center (WPC) correctly takes the Legislature to task for violating the fundamental tenets of transparency. The report, authored by Jason Mercier, director of WPC's Center for Government Reform, lists a number of "transparency abuses."

The three most notable abuses involve holding the routine cancelling of rules requiring five-day notice before holding a hearing on a bill, holding public hearings on bills with no text and voting on bills the same day details were made !
available to the public . . .

The Washington Policy Center's recommended prescription for more transparency going forward is a constitutional amendment that would: Require 72-hour public notification before any bill could receive a public hearing, prohibit title-only bills, and prohibit votes on final passage until the final version of the bill has been publicly available for at least 24 hours.

These strike us as sensible and much-needed constitutional mandates. We'd like to see an amendment containing them approved. But there's no good reason lawmakers should wait for voters to give their approval. The Legislature is going to be in much the same budget fix next year that it weathered earlier this year. The next budget could be short as much as $3 billion. Legislators would be doing the public and themselves a favor by adhering to these WPC recommendations when writing that budget."

The Columb!
, The Olympian, The Everett Herald, and The Seattle Times have also endorsed our proposed transparency reforms.

U.S. Poised to Become Worldwide Leader in...Corporate Tax Rate

June 25, 2010 in Blog

Today's Daily Caller reports that Japan is about to lower its corporate income tax rate, which would mean that the good ol'd U.S. of A. is about to take the lead as the country with the highest corporate tax rate in the developed world. According to the article, the average tax rate amongst OECD countries is 26 percent. The United States is currently at 39.2 percent while Japan is at 40 percent -- for the time being.

From the article,

"Within the pages of the Democratic Party of Japan's newly released economic "growth strategy" report, one section outlined a plan to slash corporate tax rates by up to 15 percent...'Japan's economy has basically been in a slump for the past 20 years and people have been overwhelmed by a sense of stagnation,' Japan's Economy, Trade and Indus!
trial Minister Masayuki Naoshima told Agence France Presse, a wire service. 'It is now the time to decide (on cutting corporate tax) for the sake of future economic vitality, employment and securing increased tax revenues.'"

Is Japan in the midst of such a desperate economic climate that they're willing to cut taxes? Say it aint so. But not to worry. According to the same article, "Despite Japan's decision to lower taxes on corporations, Democrats in Congress and the White House have made it clear they have no intention to follow Japan's path any time soon."

Strike three for FMAP

June 24, 2010 in Blog

Looks like it is time to dust off the state's budget reductions options. For a third time the U.S. Senate has failed to move the bill states are counting on for billions in FMAP (Medicaid) funds.

The state assumed an additional $480 million in FMAP funds to help balance the budget this year. This is more than the $253 million ending fund balance meaning if the funds aren't approved the state's ending fund balance would be negative by more than $200 million.

It is unclear if Senate leadership will bring the bill back up for a fourth vote.

At her budget press conference today, Governor Gregoire said she will be forced to act if Congress doesn't approve the FMAP funds by its August recess.

The House Ways!
and Means Committee explored the options available earlier this week

With the best case scenario at this point likely being a smaller bailout than initially assumed, it would be prudent for states to proceed as if the additional FMAP funds aren't coming at all.

Governor creates Fiscal Responsibility and Reform Panel

June 24, 2010 in Blog

Facing a projected $3 billion budget gap for 2011-13, Governor Gregoire announced today she is calling executive budget hearings over the summer to help guide the budget she proposes. The Governor has invited Washington Policy Center to join her fiscal responsibility and reform panel to assist this effort. The goal is to help the Governor answer these questions “about every program in state government:” 

  • Is a particular function required by law? If a program is not mandatory, can we reduce or eliminate it?
  • If it is mandatory, can we change the law that requires it? If we can't change it, can someone else provide the same service?
  • Does the program benefit a narrow constituency or serve the broader public? If a program is narrowly targeted, can those who benefit for it pay a fee to support it?

As noted by the Governor’s June 15 letter to WPC, “State government cannot manage the kind of revenue reductions we are experiencing without significantly changing how we do business … and how we budget for the business we do.”

We look forward to working with the Governor to streamline state government and bring about the fundamental spending reforms necessary to help improve the budget’s sustainability and performance for taxpayers.

Additional Information
Governor Gregoire’s press release
Governor Gregoire’s letter to WPC
OFM Budget Overview PowerPoint (May)
Building a balanced budget

Lawmakers explore FMAP options

June 22, 2010 in Blog

With Congressional approval of additional FMAP (Medicaid) funds still in question, the state House Ways and Means Committee met today to explore the options available to balance the budget if the funds aren't approved.

The state assumed an additional $480 million in FMAP funds to help balance the budget this year. This is more than the $253 million ending fund balance meaning if the funds aren't approved the state's ending fund balance would be negative by more than $200 million.

According to a staff presentation the options are:

  • the Legislature or Governor can call a special session. This choice provides the most flexibility to respond to the problem;
  • the Governor can order across-the-board cuts; or
  • the Governor can attempt targeted reductions, though this option is of questionable constitutionality. 

The legal issues identified with targeted reductions are: 

  • Separation of powers questions (even with legislative consultation) - Limits and safeguards?
  • Uncertainty for agencies that don’t report directly to the Governor.
  • Absence of change to any statutory terms/requirements for a program or service.
  • Risk of constitutional or other challenges.

Even if enhanced FMAP funds are ultimately approved by Congress, it is increasingly looking like it will be at a lower level than assumed by the state. According to CQ Politics:

"Senate Democrats are discussing with a pair of pivotal moderate Republicans a scaled-down version of a tax and benefits extension bill that they have so far failed to move.

The most significant change being discussed would shrink the cost of a $24.2 billion provision that extends extra federal Medicaid funds to struggling states. In a new version, which was circulating among lobbyists Tuesday morning but not released or confirmed by lawmakers and aides, the federal assistance first enacted in the 2009 stimulus law would be gradually phased down over the coming fiscal year.

Democrats have b!
een insisting that the Medicaid money remain in the bill to aid vulnerable patients and help cushion the economy against potential layoffs in state governments. The House removed the money last month to cut the cost of the bill, but, under pressure, the Senate added it back."

The high water mark expected for the state under this scenario according to staff is around $410 million (versus assumed $480 million) though it could continue to be negotiated down in Congress to reduce federal deficit costs. 

Using the $410 million assumption, the state's ending fund balance would be reduced to around $180 million or less than 0.6 percent of budgeted spending. It would also be less than the $203 million drop in forecasted revenue just exper!
ienced by the state. This means a similar reduction in future forecasts would leave the state with a negative ending fund balance.

Balancing State and Federal Responsibilities in Broadband Development

June 22, 2010 in Blog

All the recent talk about the need for greater broadband rollout and adoption has taken place on the federal level. Earlier this spring the FCC released its long-awaited National Broadband Plan (NBP), laying out the Obama Administration's future goals on increasing access to, and adoption of, broadband. 

PSRC says light rail will carry half of what Sound Transit told voters

June 22, 2010 in Blog

How many people will ride light rail? It depends on who you ask.

Two years ago, Sound Transit asked voters to expand its regional public transportation system (ST2). During the election, Sound Transit officials told voters the expanded rail portion (137 miles of light rail and commuter rail) would carry 310,000 passenger trips (page 5) per day by 2030.

Voters agreed and raised sales taxes within the Sound Transit district.

City of Seattle to Contractors: No White Males Need Apply?

June 21, 2010 in Blog

An interestingly-written PowerPoint presentation from the City of Seattle caught our attention recently. As Seattle moves forward with the Mercer mess construction project, a multi-year and multi-stage project to basically re-make the South Lake Union neighborhood, it has set up rules and regulations in concurrence with federal and state regulations for working with contractors and subcontractors.

Some of the money set aside for the Mercer Corridor Project comes from the American Recovery and Reinvestment Act, aka the "stimulus package" President Obama signed into law in early 2009. As stipulated by federal requirements, the city must set aside a certain amount of work for disadvantaged business enterprises (DBEs) -- these are businesses owned and operated by women or minorities -- and certified by the state's Office of Minority and Women's Business Enterprises

The state DOT says, "The purpose of the MWBE program is to provide maximum practicable opportunity for firms owned and operated by minorities and women in public works projects and procurement."

The city of Seattle recently hosted a pre-bid meeting to let contractors and subcontractors know how to comply with training requirements for minority apprentices. Apparently the current system is complex enough to merit extra explanatory meetings. On the PowerPoint presentation (slide 7) is the bullet point telling interested subcontractors that they "Must use under represented groups -- No white males w/o WSDOT approval and extensive good faith effort documentation." 
MercerCSDPreBidPresentation 7

So what does this really mean? Could the city of Seattle really be telling contractors and subcontractors bidding for work on this project that no white males need apply?

Fortunately, the answer is no; but the City sure has a funny way of putting things. Turns out that both federal and state laws require outreach for DBEs on public projects. These programs are to ensure that DBEs get a shot at doing lucrative business with government entities. The phrase "no white males" is actually hinting at a federa!
l training program requirement. The Federal Highway Administration has apprenticeship programs set aside for minority workers. It is possible for non-minority workers to get into these apprenticeship programs, but they need a special waver. This is what the PowerPoint slide refers to: no white males in these apprenticeships programs unless they've already received the official exemption.

Should government projects extending business opportunities to DBEs? Probably not. But according to the city itself, this PowerPoint presentation was necessary because according to the city, "The City of Seattle has seen a large increase in rejected bids due to bidders incorrectly using DBEs toward the contract goal. In order to reduce these errors, the City of Seattle is holding an additional pre bid meeting for the Mercer Corridor Project."

Obviously, this i!
s a big construction project with tens of millions of the publ!
ic's money. But a few things stand out. 

First, it is evident that the rules as applied to these projects are so complicated that a special meeting had to be held to explain how businesses could apply. This does not bode well for low barriers to entry for small businesses in competing for work.

Second, doesn't anyone proofread these presentations? Did no one think that a slide showing that "No white males" need apply would go unnoticed? 

Third, even though these programs are set up with the best intentions, during this time of economic recession, shouldn't we take a look at temporarily suspending some of these rules? A bigger question should be, are these rules ruling out competitors from bidding, thereby shutting out competition or potentially raising the cost to the taxpayer? Among the other rules that contractors have to abide by are the prevailing wage laws, which, as we've said before, artificially raise the cost !
of projects (which are funded by taxpayers). 

When you add up the cost of compliance with some of these well-meaning rules, are the benefits outweighed by the costs? What does it say when small businesses in the construction industry (the two worst combinations of business classifications during this recession) feel like they are unable to compete for public works projects based on racial preferences?

The cost of traffic congestion: 7 out of every 10 construction projects delayed

June 21, 2010 in Blog

The Associated General Contractors of America recently surveyed 1,200 construction firms across the United States on the impact of traffic congestion.

Not surprisingly, traffic congestion does possess a negative financial impact on construction companies. In Washington, 72 percent of construction projects are delayed at least one day because of traffic.

Here is a sample of questions comparing results in Washington to the national average: 

impact does traffic congestion and shipping unreliability have on your
No impact on operations 7% 7%
Occasional impact on operations 40% 25%
Frequent impact on operations 31% 36%
Significant impact on operations 22% 32%
much is your cost of doing business increased by delays, wasted fuel and
other impacts caused by traffic congestion?
No, it is not impacted 8% 4%
Yes, less than one percent 19% 11%
Yes, one to five percent 44% 46%
Yes, six to ten percent 20% 28%
Yes, eleven percent or more 9% 11%
the total number of hours of lost productivity per worker caused by traffic
delays and congestion.
Not at all 8% 7%
Less than 10 hours per worker per year 28% 11%
Between 10 and 20 hours per worker per
28% 34%
Between 21 and 30 hours per worker per
14% 11%
More than 30 hours per worker per year 22% 37%
you made changes to schedules or business operations to adjust to traffic
congestion and unreliable shipping schedules?
Yes 59% 63%
No 41% 37%
the additional number of days it takes to complete a project because of the
impacts of traffic congestion.
No delay 28% 28%
One to two days 37% 43%
Three to four days 15% 11%
Five or more days 20% 18%

Investigators: Back room deal puts true ferry reform in question

June 18, 2010 in Blog

KING 5 investigation on state ferries includes an interview. Collective bargaining is an adversarial process so It is troubling when one side can influence who sits across the table.