No accountability without choice

I went swimming this morning with a pro triathlete. It wasn't my intention, but there’s a triathlon in town tomorrow and a number of pro athletes are visiting and working out.

I got talking with her manager/trainer, who said they live in Florida. Because the triathlons are around the country (and the world), they can live anywhere they want. Like many athletes, they (and other triathletes) live in tax-free Florida, while others live in Texas.

The triathlon was invented in San Diego and popularized in Hawaii, and handful of professional triathletes still live here. But — between taxes and housing costs — most find it cheaper to live elsewhere and pay an accountant $5-10K a year to keep track of various state laws that require they pay the nonresident athlete tax for the days they work in high-tax states. The St. Louis Cardinals didn’t care whether the Tigers or Red Sox make the World Series, but clearly the Red Sox are better off playing three games in St. Louis (top rate 6%) than in Los Angeles (top rate 10.3%).

Pro athletes can arbitrage tax rates (for endorsements) and live where they want (off season). San Diego native Phil Mickelson was roundly criticized for the (factual) observation that he pays a 60%+ tax rate living in California and was considering living elsewhere.

Entertainers can also live anywhere also, and this should work well for musicians. However, it appears that actors still tend to cluster in Los Angeles and New York City, two of the highest tax jurisdictions in the country. I’d argue this is because while athletic performance is directly measurable, acting performance is not: do we care which 25-year-old starlet or 45-year-old aging acting star is cast in a big-budget movie? Probably not. Actors have to stay in the network, attending parties etc., so the decision-makers don’t forget them when casting the next movie, TV show or high-visibility stage production.

Still, other types of professionals and business owners lack job mobility. At one extreme, Silicon Valley is largely about access to venture capital (since it has no monopoly on smart people or good universities). At the other extreme, restaurants and dry cleaners can’t move to a low tax state and take their customers with them. With its unfavorable business climate, California will hold these two extremes and has been driving out the average business in the middle (such as manufacturing).

California is now a one-party system and the ruling party assumes it can charge what it wants. I have a fairly low salary for a b-school professor and I’m at the 9.3% marginal tax rate. This used to be the tops until they instituted two millionaire surcharges (bringing the maximum rate to 13.3%), the latest being including a retroactive tax increase passed last year to capture Facebook IPO gains.

Even worse, California taxes capital gains as regular income, and thus the long-term capital gains rate is higher than New York, France, Finland or Sweden (let alone notorious tax havens like Hawai‘i and D.C.) If you are a Google or Facebook founder, it isn’t going to change your standard of living, but trying to sell a $1-2 million business to retire would leave a lot less money to live on in your old age.

In a one-party system, there is no accountability for bad ideas — only for overt corruption. So if people can’t have a choice of economic policies, what remains is the option to vote with their feet ala Hirschman’s Exit, Voice and Loyalty†. Despite increasing centralization to the national government, the US — like Canada and to some degree Germany — has a Federal system that allows policy experimentation and competition of ideas.

New York and Massachusetts paid a price (in terms of employers and job growth) for their high tax policies — but apparently not enough of a price to cause them to rethink their policies. Like California, they have a small cluster of high end jobs (Wall Street and drug companies respectively), the immobile local jobs and have discouraged or driven away the jobs in the middle.

Since Hollywood’s business model is in decline, California’s ability to pay its bills seems tied to what fraction of the global tech economy remains in Silicon Valley. No matter how much you believe in Silicon Valley’s uniqueness, this is a bold (if not foolishly optimistic) bet on a small fraction of the state’s 38 million people. However, with term limits, politicians have a short-term mentality and are betting they will be long gone if something bad happens 5 or 10 years down the road.

† Writing in 1970, Hirschman (p. 84) assumed that a lack of voice would cause people to quit organizations but they cannot exit the “state” (i.e. national government). But this was before intra-EU job mobility and even the flight of jobs from the northeastern to the southeastern regions of the U.S.

California politicians claim imaginary Amazon tax revenues

California Governor Brown promised to end smoke and mirrors budgets that were the hallmark of the Governator’s political weakness and failure to confront the state’s structural budget shortfall.

This year, the Democrat-dominated legislature passed an “Amazon tax” — an attempt to broaden sales taxes to out-of-state e-commerce sites. This tax was in the budget Brown vetoed, but is also in the final budget deal he signed Wednesday. (The Governator vetoed a similar law two years ago.)

Of course, more taxes are favored by politicians who want more money to spend. In this case, they have also been championed by local businesses (and national brick & mortar businesses like Barnes & Noble and Target) who are stuck paying the tax and don’t like giving Amazon a 10% cost advantage.

Being temporarily out of the state, it’s been hard to find a serious discussion of the tax online. The mainstream media seems to be demonstrating willful ignorance while the anti-tax bloggers are using doom-and-gloom hyperbole.

Thus, it was refreshing to find this description in Accounting Today:

The tax would bring in an estimated $200 million a year. The bill would allow California to collect taxes from any online retailer that has nexus with an affiliate site in California. Amazon.com and Overstock.com have been dropping their affiliates in several other states in a bid to fight against such laws.

The bill also includes two other bills that were also passed by the California State Legislature that would require online retailers that have corporate subsidiaries and distribution centers in a state to collect sales tax from customers, along with another bill that clarifies when other kinds of physical presence require a sales tax to be collected. The three bills were combined into one and sent to Brown's desk earlier this month.

There are three problems with the bill.

First, from a technical standpoint, there are questions are whether this is a tax increase that requires a 2/3 vote. Either it is or it isn’t, but this may take a lawsuit (and appeals up to the SCOTUS) to resolve.

The biggest issue is that the belief that Amazon will pay sales tax contains an (un)healthy degree of self-delusion. First, the Supreme Court has held that sales taxes can only be assessed if there is a physical presence in the state, and Amazon has responded to previous such efforts (like in NY) by eliminating any physical presence.

Thus, this story from Thursday’s LA Times predicting swift payment of taxes is either pure propaganda or willful ignorance:

Online retailers must start collecting sales taxes from California customers

Beginning Friday, Amazon.com Inc. and other large out-of-state retailers will be required to collect sales taxes on purchases that their California customers make on the Internet.

The new tax collection requirement — part of budget-related legislation that was signed into law by Gov. Jerry Brown Wednesday — is expected to raise an estimated $317 million a year in new state and local government revenue.
…
Brown's signature on the budget bills is aimed at closing a loophole that freed online retailers, such as Seattle-based Amazon, from collecting sales taxes and sending them to the state when they had no brick-and-mortar stores, warehouses or offices in California.

Not collecting sales taxes gave Internet retailers a competitive price advantage over California's small businesses such as independent booksellers and big-box retailers with a presence in the state, including Barnes & Noble Inc., Wal-Mart Stores Inc., Best Buy Co. and Target Corp.

"You can't give one segment of retail a 10% discount every day. It's just not fair," said Bill Dombrowski, president of the California Retailers Assn., a major player in a coalition of large and small stores supporting the legislation.

California's new requirement will generate badly needed state revenue and send a signal to Congress that "we want to see a national solution" to the issue of taxing Internet sales, Dombrowski said.

The LAT assumes that Amazon subsidiaries in California make it vulnerable to the tax, but those subsidiaries can be moved or sold. Who thinks Amazon is going to keep IMDB if it forces a 10% price increase for 12% of its US customers?

The other nexus of presence is the affiliates program. In fact, I was alerted to this issue by an e-mail Wednesday from Amazon, that — as predicted — announced their intention to cancel the Amazon Affiliates program for all California residents:

For well over a decade, the Amazon Associates Program has worked with thousands of California residents. Unfortunately, a potential new law that may be signed by Governor Brown compels us to terminate this program for California-based participants. It specifically imposes the collection of taxes from consumers on sales by online retailers - including but not limited to those referred by California-based marketing affiliates like you - even if those retailers have no physical presence in the state.

We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action.

As a result, we will terminate contracts with all California residents that are participants in the Amazon Associates Program as of the date (if any) that the California law becomes effective. …

You are receiving this email because our records indicate that you are a resident of California. If you are not currently a resident of California, or if you are relocating to another state in the near future, you can manage the details of your Associates account here.

No subtlety on that last point, eh? For me it doesn’t matter much, because my revenues from Amazon links are negligible — much less than the rebate from my Amazon credit card.

(Update: At 9:42pm, Amazon sent a follow up email that said: “Governor Brown has signed into law the bill that we emailed you about earlier today.  As a result of this, contracts with all California residents participating in the Amazon Associates Program are terminated effective today, June 29, 2011.”)

And this brings up the final point: as the anti-tax advocates note, terminating these affiliate programs terminates revenues for small businesses that depend on them. Their choice is either to give up the revenue permanently or move to a state (like Nevada) without sales taxes.

To its credit, the LA Times mentions the problem (without suggesting that Amazon’s gambit may prevent it from ever paying the tax):

Many of about 25,000 affiliates in California, especially larger ones with dozens of employees, are likely to leave the state, said Rebecca Madigan, executive director of trade group Performance Marketing Assn. The affiliates combined paid $152 million in state income taxes last year, she pointed out.

That's what Ken Rockwell of San Diego, the owner of a 12-year-old photography website, said he planned to do.

"Will it be Las Vegas or Scottsdale or Ensenada?" he said. "It's a question of where, not if."

Personally, I’d pick Flagstaff — a beautiful small town with a relatively mild climate for Arizona — but only if one believes that Arizona politicians won’t go ahead and do the same thing.

The anti-tax site BigGovernment.com notes that the new law may also tax eBay, specifically its online merchants. Since eBay is a San Jose-based company, it can’t (easily) eliminate its presence. Attempts by Bay Area politicians to carve a loophole to help eBay may not be enough — instead, non-California eBay merchants who don’t want to pay sales tax may jump to Amazon.

In the end, the politicians will claim they’ve raised taxes in the name of “fairness,” while (as in NY’s attempts to tax Amazon) failing to collect taxes from Amazon while this spends several years winding its way through the courts.

Perhaps this is the true intention of the legislature in passing the law: millions of dollars in billable hours for their trial lawyer friends as Amazon, Overstock and other out of state retailers sue the state seeking to get it invalidated.

Taxing their way to greatness

As part of ongoing cost reduction via outsourced economic criticism, here are excerpts from a WSJ op-ed this morning by Arthur Laffer and Stephen Moore.

Soak the Rich, Lose the Rich
Americans know how to use the moving van to escape high taxes.

With states facing nearly $100 billion in combined budget deficits this year, we're seeing more governors than ever proposing the Barack Obama solution to balancing the budget: Soak the rich.
…
Here's the problem for states that want to pry more money out of the wallets of rich people. It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states.

And the evidence that we discovered in our new study for the American Legislative Exchange Council, "Rich States, Poor States," published in March, shows that Americans are more sensitive to high taxes than ever before.
…
[W]e found that from 1998 to 2007 … the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.
…
We believe there are three unintended consequences from states raising tax rates on the rich. First, some rich residents sell their homes and leave the state; second, those who stay in the state report less taxable income on their tax returns; and third, some rich people choose not to locate in a high-tax state. Since many rich people also tend to be successful business owners, jobs leave with them or they never arrive in the first place. This is why high income-tax states have such a tough time creating net new jobs for low-income residents and college graduates.
…
States aren't simply competing with each other. As Texas Gov. Rick Perry recently told us, "Our state is competing with Germany, France, Japan and China for business. We'd better have a pro-growth tax system or those American jobs will be out-sourced." Gov. Perry and Texas have the jobs and prosperity model exactly right. Texas created more new jobs in 2008 than all other 49 states combined. And Texas is the only state other than Georgia and North Dakota that is cutting taxes this year.

There is an assumption by California and New York politicians that taxes can be raised indefinitely, because certain high-income residents (Silicon Valley, Wall Street) have no choice but to live here. Given that assumption, there is no incentive to cut costs and improve efficiency.

That philosophy almost destroyed NYC in the 1970s. I will be curious to see whether these high income residents prove more mobile than anticipated.

Tax: none dare speak its name

From Tom Friedman’s column this week:

Advocates of cap-and-trade argue that it is preferable to a simple carbon tax because it fixes a national cap on carbon emissions and it “hides the ball” — it doesn’t use the word “tax” — even though it amounts to one. So it can get through Congress. That was true as long as no one thought cap-and-trade could ever pass, but now that it might under Mr. Obama, opponents are not playing hide the ball anymore.

In the past two weeks, you could hear a chorus of Republicans, coal-state Democrats, right-wing think tanks and enviro-skeptics all singing the same tune: “Cap-and-trade is a tax.” …

Since the opponents of cap-and-trade are going to pillory it as a tax anyway, why not go for the real thing — a simple, transparent, economy-wide carbon tax?

Since it appears that the NYT has run out of dictionaries and their Internet connection is down this week, let me provide a few common definitions of the word “tax”:

tax. Money paid to the government other than for transaction-specific goods and services. — Wikitionary

tax. n. (14th century). 1a.a charge usually of money imposed by authority on persons or property for public purposes. — Merriam-Webster Dictionary

tax. 1. a. A compulsory contribution to the support of government, levied on persons, property, income, commodities, transactions, etc., now at fixed rates, mostly proportional to the amount on which the contribution is levied. — Oxford English Dictionary.

Here is an old Reuters story about the cap-and-trade plan:

WASHINGTON (Reuters) - President Barack Obama's estimate of $646 billion in revenue for the first years of a carbon-capping program to curb climate change is realistic or possibly a little low, policy analysts said on Thursday.

Obama's budget for 2010 projects this revenue, from 2012 through 2019, will fund $150 billion in clean energy technology investments over 10 years and a tax credit to help Americans make the transition to a less carbon-intensive economy.

It appears that one of the prerogatives of a pundit is to say that red is green and expect people to believe it. This is nearly as Orwellian as “love is hate.”

Compelling $600+ billion in payments to enable other spending does not “amount to” a tax: it is a tax. The regressive nature of the wealth transfer is worth debating, but there are more fundamental issues. The regulation will distort the market, and create a government addiction to that distortion and the associated tax revenues.

In normal circumstances, a tax increase of a half-trillion dollars annually would be a cause for alarm. But it appears that today too many voters are inured to such excesses.

Cellphones no longer a luxury

The LA Times has a great story this morning about how the obsolete tax treatment of cellphones is causing hassles for employers and employees:

When the makers of the 1987 film "Wall Street" wanted to convey corporate raider Gordon Gekko's power and success, they gave him one of the era's most exotic executive perks: a cellphone.

The Motorola DynaTAC 8000X that actor Michael Douglas carried as he strolled along the beach was roughly the size of a brick and cost $3,995 when introduced three years earlier. A call during peak times cost upward of 50 cents a minute.

Times and technology have changed. Federal tax rules have not. The Internal Revenue Service still considers cellphones to be a pricey fringe benefit and has started enforcing regulations beginning in 1989. That's when Congress decided that mobile phones should be treated like company cars and other executive perks: Their personal use qualifies as extra compensation.

The law requires employees to keep detailed records of all calls made on their work-issue cellphones, indicating whether they were business or personal. If they don't, the phone and wireless service are deemed a perk that must be listed as taxable income to the employee.

Of course, what’s new is not the law but the IRS decision to start enforcing it by sending employers tax bills for this “fringe benefit.” Reporter Jim Puzzanghera reports the story in the context of the University of the California, where 8% of its employees have UC-provided cellphones.

This onerous record keeping is an example of the tax code at its most asine — a negative sum drag on the economy, in which the taxes collected will hardly pay for the cost of compliance by IRS auditors, UC pencil pushers and of course the individual employees.

HR. 5450 was introduced earlier this year by Rep. Sam Johnson to repeal this rule. Small business accountants applauded this temporary burst of Congressional sanity.

Alas, such sanity was only temporary. Not surprisingly for this Congress, the PayGo guidelines were used as an excuse to impose onerous record keeping somewhere else. With this addition, Johnson voted against his own bill when it passed the House in April.

Perhaps our “elected representatives” (i.e., self-perpetuating ruling class) will see fit to eliminate this obviously foolishness without substituting a less obvious one. Given the rise of Nanny State thinking in D.C., somehow I doubt it.

No taxes on iTunes ... for now

Attempts by the California government tax iTunes downloads have failed, if only temporarily.

To avoid painful cuts, state legislators are looking everywhere for new sources of revenue. Democrat Charles Calderon introduced AB 1956 to tax digital downloads, but to avoid the Proposition 13 requirement (for a 2/3 vote on new taxes), tries to impose the tax through a reclassification.

The bill stalled (died?) in the Assembly Revenue and Taxation committee Monday. The only publication to report on the story was the Merc, who said the bill got only 4 votes (one Democrat voting no, one abstaining) and needed five. Since the committee had 6 Democrats and 3 Republicans, presumably this meant a vote of 4-4-1, with all Republicans opposed (but the Merc doesn’t say). There is no official vote in the legislative record, presumably because Calderon has asked for reconsideration to twist more arms to get his fifth vote.

A story last week about the tax plan explained the revenue goals as follows:

The Board of Equalization believes state and local revenues would increase by about $114 million a year, but Calderon's estimate, which he said includes pornography downloads, is about $500 million.

Some (including Board members in charge of collecting the tax) say that the tax increase will encourage a shift to illegal downloads. One thing it will clearly do is give Apple’s out-of-state competitors (such as Amazon) a price advantage, since from a practical standpoint they cannot be compelled to collect the tax.

Pro-tax politicians consistently underestimate the impact that taxes have upon people’s behaviors — i.e., the steps they will go to to avoid paying the tax. (Remember the “luxury” tax). So even if Apple is a sitting duck for $100 million in download taxes (less whatever market share it loses to Amazon), the expectation value for porn downloads should be zilch. Nada. Zip. If ever there was an industry that will flee state jurisdiction to avoid taxes, this is it.

Perhaps Calderon is being paid off by Las Vegas real estate interests, who need the porn industry to relocate 270 miles northeast to prop up commercial real estate rents. That — or support from Apple’s competitors — is the only logical reason why the state would want to pass such legislation.