SBE Council Chief Economist on Obama Tax Plan

Today, Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), issued the following statement regarding the tax plan details released by the campaign of U.S. Senator Barack Obama, the presumptive Democratic Party presidential nominee:

“Senator Obama likes to talk about change. Unfortunately, his tax plan reflects the kind of old and tired class warfare thinking we’ve heard too many times in the past.

“Obama would jack up the two highest personal income tax rates, hike capital gains and dividend tax rates, increase Social Security payroll taxes on upper-income earners, and maintain a death tax with a top rate of 45 percent. Obviously, these measures would raise the costs of working, investing and entrepreneurship.

“Ironically, Obama’s plan and his economic advisers say his tax plan would benefit small business. But it should be obvious that raising the costs of work and investment are not positives for small business. For good measure, higher personal income tax rates directly hit the bottom line of small businesses.

“Data released earlier this year by the Treasury Department noted that 74 percent of taxpayers benefiting from the reduction earlier this decade in the top personal income tax rate are entrepreneurs with pass-through businesses (such as sole proprietorship, partnership, and S-Corps), and 70 percent of those reaping rewards from reductions in the top two tax rates own small businesses. So, these Obama tax increases would hit small businesses hard, with fallout coming in the form of restrained economic growth and job creation.

“In the end, class warfare tax policy is all about using envy to political advantage. Envy never makes for sound economic policy.”

SBE Council Chief Economist Statement on Inflation

Today, Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), issued the following statement regarding the U.S. Bureau of Labor Statistics release on the July 2008 Consumer Price Index (CPI) data:

"According to the latest data, consumer price inflation is running red hot. Over the past year, CPI inflation hit 5.6 percent. And over the past three months, the annualized inflation rate was a breathtaking 10.6 percent."

"These are the kinds of inflation numbers that we experienced from the late 1960s into the very early 1980s - America's worst period of inflation. Even more troubling is that this is not just inflation, but stagflation. The economy is in a slow growth or no growth mode, while inflation is running extremely high. It is critical to understand that rising oil prices, for example, are not the cause of inflation. Inflation is all about monetary policy gone awry. It's about the Federal Reserve failing to do its job, that is, to maintain price stability. The Fed has to stop trying to be everything to everyone, has to stop attempting to manage economic growth, and has to get inflation under control.

"To get the economy back on track, it is clear we need sound monetary policy to quell inflation, and pro-growth tax and regulatory relief to spur growth."

A Property Rights Victory Over Blight

Politicians trample all over property rights in a variety of ways. Eminent domain misuse is a favorite tactic.

Simply ignore the U.S. Constitution’s requirement that private property can only be taken for a “public use,” and take property from one private owner in order to hand it over to another private entity in the name of “economic development” and/or the desire to rake in more tax dollars. Of course, the outrageous 5-to-4 U.S. Supreme Court decision in Kelo v. City of New London gave the green light for politicians to abuse eminent domain powers in whatever fashion they like.

Local governments often use a “blight” designation to grease the skids. However, one politician’s blight often turns out to be the home or small business of a hard-working American.

But in New Jersey last week, a state appellate court ruled against the city of Long Branch, NJ, which seeks to grab the oceanfront homes of various residents and hand the property over to a private developer.

The North Country Gazette reported:

A three-judge panel of the New Jersey Appellate Division this week unanimously reversed the June 2006 decision of Superior Court Judge Lawrence Lawson, which allowed the city of Long Branch, N.J., to condemn a charming seaside neighborhood known as MTOTSA for a luxury condominium development.

This is the latest in a series of major decisions from New Jersey courts, including the Supreme Court, recognizing that state law and the New Jersey Constitution place real limits on the power of government to condemn property for private development.

After explaining how the lower court misapplied the law, the court of appeals found that the city did not provide “substantial evidence” to support its findings of blight.

“The Court basically told the city that if that’s all it has, it can’t take these homes,” said Scott Bullock, a senior attorney with the Institute for Justice, which represents many of the homeowners along with Peter Wegener of Bathgate, Wegener & Wolf in Lakewood, N.J. “It’s too late for the city to manufacture more evidence, so the Court’s ruling is a fatal blow to the city. We are confident the owners will prevail on remand.” The owners will also have the opportunity to show that changing the plan to use eminent domain was illegal”.

An August 13 Gannett New Jersey news story further explained:

City officials continue to weigh their options in the wake of an appellate court decision that set aside the 1996 blight designation in a controversial oceanfront section where residents are fighting the use of eminent domain.

After an executive session Tuesday night, City Attorney James G. Aaron said that no final decisions had been made, and the clock is ticking on at least one aspect of the case. If the mayor and council opt to appeal the appellate decision's
determination that the 1996 redevelopment report did not comport with 2007 standards on blight, they have only 20 days from last Thursday, the date the appellate decision was released, to file a motion asking the state Supreme Court to review the decision…

The appellate decision stemmed from a 2003 request from residents of the Marine Terrace, Ocean Terrace, Seaview Avenue area to be withdrawn from the redevelopment zone. Negotiations between the group and the city soon broke down and the case ended up in court. 



The appellate panel found for the city in several areas, saying it had engaged in bona-fide negotiations with MTOTSA and also had not committed any conflicts of interest in the planning process, a decision DeStefano called "a big victory for us" because it cleared the air about the propriety of relationships between the council, the developers, lawyers involved in the process and a bank that lent money to the developers. 



Lori Ann Vendetti, a core member of MTOTSA, who last week called the decision a vindication of their fight, said it was always about standing up for a principle, for the idea that everyone deserved their piece of the American Dream.

In his August 12 Wall Street Journal column, William McGurn weighed in. He wrote:

The good news is that while New Jersey's politicos are apparently content to leave their citizens vulnerable to these kinds of seizures, the courts have been more, well, judicious. In a welcome ruling last year, the New Jersey Supreme Court in Gallenthin Realty Development Inc. v. Borough of Paulsboro said that the government could not declare a property blighted just because someone else might put it to higher economic use. Last week the appellate court followed up by sending the Long Branch case back to the lower court. The three judges made clear they were skeptical of the blight designation -- and put the burden on the city to prove it.

Now, anyone who walks down these streets can see that while the homes may be modest, they are not blighted. A visitor can also see how terrible it is for ordinary Americans to have to live under the threat of a forced sale simply because some government official decides their homes aren't upscale enough.

One might not expect a blow to be struck in favor of property rights in a big government state like New Jersey. But is has been, and that’s good news. The Long Branch nightmare is not over for property owners, but they clearly have a fighting chance now.

Of course, the burning question remains: How did we ever get to this point in the United States of America?

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

To E-Verify or Not to E-Verify -- What is the Law?

There is some confusion among federal contractors as to whether they are now mandated to use a government-run electronic database(E-Verify) to check the employment eligibility of their employees who work on government contracts.

(To learn more about E-Verify visit: http://www.dhs.gov/xprevprot/programs/gc_1185221678150.shtm)

A sentence on the Department of Homeland Security’s website reads: “E-Verify is a voluntary program for all employers, with the exception of federal contractors.”

On June 9, 2008, President Bush amended an Executive Order (EO) directing all federal agencies to require government contractors to use an electronic system to verify each worker’s employment eligibility – however, that order is not final.

At this point in time, the EO remains in the rulemaking process – that is, a notice of proposed rulemaking has been issued. The public (by law) is given 60 days to comment on the proposed rule. Coincidentally, the comment period closed on August 11, 2008, and SBE Council provided feedback with respect to the proposed rule. We commented that the E-Verify mandate (as proposed) will be burdensome, confusing and costly for small government contractors.

You may read SBE Council’s comments at:
http://www.sbecouncil.org/legaction/display.cfm?ID=2823

So, E-Verify for government contractors is not yet a requirement as the rule governing how the program will work has not been finalized! DHS is way ahead of how the system (the regulatory process) is supposed to work.

Karen Kerrigan
President & CEO

Business, China, and Climate Change at the Olympics

If you need a break from watching European handball, archery or Michael Phelps, the fastest man in water, at the Olympic Games, check out an interesting and well-written article by economist Irwin Stelzer about the business of the Olympics.

In “Taking Home the Gold” on The Weekly Standard’s website, Stelzer puts the Olympic Games broadcast rights, advertising dollars and sponsorships in perspective.

In closing, though, Stelzer also makes an interesting point about the realities of global warming policies:

The final lesson of the Olympics is an unexpected one--all the fuss about stopping global warming is itself a game. Using totalitarian muscle, the Chinese regime has made the air quality of Beijing a bit less threatening to the health of the participating athletes. But democratic countries cannot order people out of the city and into the country, close down roads and factories, and take other steps to clean the air, even if only temporarily.

When the games end, it will be business as usual in China. That includes constructing 500 coal-fired generating stations to fuel the growth the regime needs if it is to provide the millions of jobs it must create in order to avoid massive social unrest. That will offset most of the steps being taken in the West to reduce CO2 emissions.

Ah yes, economic reality wins out over political games.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Lessons from Alaska’s Windfall Profits Tax

Just because someone else does something stupid, doesn’t mean you should do it as well.

Most parents, at some point in time, have told their children something along these lines. I heard it from my mother and father, and I’ve said it to my children as well.

The same lesson applies to public policy.

The August 10 Seattle Times ran a piece – titled “Windfall tax lets Alaska rake in billions from Big Oil” by Angel Gonzalez and Hal Bernton – worth reading about the state of Alaska’s tax on oil companies. Alaska politicians love the tax – in fact, they recently hiked the levy – but does it make any sense in terms of sound energy policy?

The article explained: “Over the opposition of oil companies, Republican Gov. Sarah Palin and Alaska's Legislature last year approved a major increase in taxes on the oil industry — a step that has generated stunning new wealth for the state as oil prices soared.” This point is mistaken. Taxes do not generate wealth. Instead, by sucking resources away from the private sector, taxes discourage new wealth creation. Instead, taxes can generate more revenues for politicians to spend.

How does the tax work? The article explained: “The Alaska tax is imposed on the net profit earned on each barrel of oil pumped from state-owned land, after deducting costs for production and transportation, which are currently estimated at just under $25 a barrel. The tax is set at its highest rate in Prudhoe Bay, where the state takes 25 percent of the net profit of a barrel when its price is at or below $52. The percentage then escalates as oil prices rise over that benchmark. Alaska gets about $49 of a $120 barrel, not counting other fees. ConocoPhillips said that in total, once royalty payments and other taxes are added in, the state captures about 75 percent of the value of a barrel. An accounting benefit eases the sting for oil companies. They get a huge deduction on their state taxes when calculating their federal taxes.”

But a tax deduction is not a tax credit, for example. The companies only recapture a portion of the state tax on their federal tax returns. And since taxes paid in other states also are deductible, Alaska’s tax burden is still massive.

What’s been the impact on the Alaska budget? “Alaska collected an estimated $6 billion from the new tax during the fiscal year that ended June 30, according to the Alaska Oil and Gas Association. That helped push the state's total oil revenue — from new and existing taxes, as well as royalties — to more than $10 billion, double the amount received last year. While many other states are confronting big budget deficits because of the troubled economy, Alaska officials are in the enviable position of exploring new ways to spend the state's multibillion-dollar budget surplus. Some of that new cash will end up in the wallets of Alaska's residents. Palin's administration last week gained legislative approval for a special $1,200 payment to every Alaskan to help cope with gas prices, which are among the highest in the country. That check will come on top of the annual dividend of about $2,000 that each resident could receive this year from an oil-wealth savings account.”

Sounds great, right?

Well, as is always the case when taxes are increased, there are costs. It was reported: “The industry, however, warns new taxes are already discouraging future exploration and development in newer, more expensive projects needed to boost waning production in Alaska's oil patches. ‘Clearly, from the investor standpoint, Alaska has become a less attractive place to invest exploration and production dollars,’ said Marilyn Crockett, executive director of the Alaska Oil and Gas Association.”

Is this just talk?

Consider the following: “Still, oil-industry officials contend the tax already has affected investment decisions. BP Alaska, which runs Prudhoe Bay, said earlier this year that it had delayed the development in the western region of the North Slope as a result of the tax. ConocoPhillips cited the same reason for scrapping a $300 million refinery project. ‘What the tax has done is take away all the upside,’ said Doug Suttles, president of BP Alaska. The U.K.-based oil company paid more than $500 million in taxes to Alaska last quarter — far more than it earned in profits from Alaskan oil, according to Suttles. Investment dollars are flowing instead to places that have a better return, like the massive deep-water projects offshore in the U.S. Gulf of Mexico, where ConocoPhillips said the government take equals less than 50 percent of the barrel. In July, BP announced it would begin developing the Liberty oil field, a $1.5 billion project expected to yield 100 million barrels of oil, located on federal lands in Alaska. If the project had been located in state lands on the North Slope, ‘I don't think we'd have been able to make that investment,’ Suttles said.”

Alaska politicians can try to justify this formidable tax in all kinds of ways, but the economic realities of high taxes on energy production cannot be wished away. It’s straightforward: Higher taxes on energy production serve as a restraint on and disincentive to energy production.

Federal elected officials, as well as state lawmakers in energy rich states like Alaska, should be focused on how they can remove governmental barriers to energy production, such as reducing tax and regulatory burdens. Federal and state taxes – especially a tax as exorbitant as Alaska’s oil tax – should be targeted for reduction.

The lesson from Alaska is not that the federal government can impose a windfall profits tax with impunity. Instead, the lesson is, like mom and dad said, when others do something stupid, don’t do the same thing.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council