Posts Tagged law

Grow Private Sector, Not Government


 

Tax policy received scant attention in the presidential debates, but when it did both candidates displayed a serious lack of understanding regarding at least one critical component of the tax code: carried interest. Although arcane in nature and unheard of by most, carried interest is a tax rule that fosters capital formation, encourages investment and ultimately leads to job creation.

Simply put, carried interest is a type of capital gain.  Homeowners are familiar with the term ‘capital gain’ which in that circumstance refers to the increase in value of your home over time as you make improvements or rising market prices increase its sale price.  If you sell your principle residence and make more than $500,000 in profit as a married couple, you must pay a capital gains tax.  You pay the capital gains tax rate, not the ordinary income tax rate, on the transaction because you have already paid taxes on the income used to purchase the house.

Likewise carried interest is a long-term capital gain that is earned by an investment partnership.  In this case the asset is not a house, but an investment portfolio that the partnership established and grew over time. When sold, the portfolio manager pays a lower capital gains tax rate on the fund’s profit, not the higher ordinary income tax rate.

The presidential candidates have, unfortunately, decided to portray carried interest capital gains as a loophole granted to special interests.  Both candidates want to raise this capital gains rate claiming it gives investment fund managers an unfair tax break.  Fairness, however, is not what such an increase would achieve. Rather it would amount to double taxation.

The negative effects would be much worse than over-taxing a sub-set of taxpayers.  The partnerships that are formed when an investor joins with a fund manager results in a structure that fosters informed investments that grow over time.  This growth generates profits.  When the profits are re-invested that is called capital.  Such capital is invested in businesses so that they can grow, expand and create jobs.

Carried interest capital gain rules play a critical role in allowing capital to form.  If you raise the carried interest capital gain tax rate, the government will take more in taxes–dramatically decreasing the amount of capital available for investment in the economy.

A significant portion of that capital available for investment is invested right here in Pennsylvania.  According to the American Investment Council, private equity firms invested an estimated $24.49 billion in Pennsylvania-based companies in 2015.  There are 143 private equity firms headquartered in Pennsylvania.  These companies support more than 185,103 workers at facilities both in Pennsylvania and in other states.

In other words, carried interest capital gains is not a tax device aimed at making Wall Street fund managers richer. Rather, it is appropriate taxation that makes more capital available for investment in the companies that are creating much needed new jobs for Pennsylvanians and elsewhere.

It is common in an election year for candidates to propose new government spending programs in an effort to win votes.  They then go looking for ways to pay for that higher spending. “Reforming” the nation’s complex tax structure is often an effective target.

But, changes can have unintended consequences.  Raising the current 23.8% carried interest rate to 33% as proposed by Donald Trump or almost 50% as suggested by Hillary Clinton would result in only a modest increase in tax revenue flowing into the federal treasury.  And we all know that any move to raise this rate would likely be coupled with other tax hikes on working families and small businesses.

Even if you set aside the unfairness of double taxing investors, raising the carried interest tax rate or eliminating that category of capital gain entirely would have the detrimental effect of reducing capital formation.  That means dramatically fewer dollars available for companies to grow and create new jobs.  Carried interest is not a tax break for the wealthy; rather it is a way for investors to put their earnings to work creating the new jobs needed as the nation struggles to recover from the Great Recession.

Lowman S. Henry is Chairman and CEO of the Lincoln Institute of Public Opinion Research, Inc. and host of the weekly Lincoln Radio Journal. His e-mail address is lhenry@lincolninstitute.org

Permission to reprint is granted provided author and affiliation are cited.

Advertisements

, , , , , , , , , , , , , ,

Leave a comment

Eye of the Storm


By Lowman S. Henry

As August melts into September the halls of the state capitol building are relatively quiet. This is a marked contrast to a year ago when state government was in what turned out to be the early phases of the longest budget stalemate in state history.  This year the budget, or at least the spending part of it, was done reasonably close to the constitutionally-mandated June 30th deadline, the revenue component followed several weeks later.

But is this just the eye of the storm?

In capitulating to too many of Governor Tom Wolf’s spending demands the state legislature larded up the budget with nearly $1.4 billion in new expenditures.  This despite claims of a $1.5 billion dollar “structural deficit” the governor claimed needed to be addressed.  Even those using Common Core math can calculate that left the state nearly $3 billion in the hole.

To pay for this spending orgy some $650 million in new taxes were cobbled together, and accounting gimmicks employed, to produce a “balanced” budget.  But the budget isn’t really balanced and even that $650 million contains projected revenue that will never actually materialize.  For example, lawmakers planned to charge the state’s casinos $1 million each to purchase 24-hour liquor licenses.  Apparently nobody thought to ask if the casinos wanted such licenses, as there now appears to be no takers.

The budget also includes revenue from on-line gambling.  The problem is legislation has yet to be passed authorizing on-line gambling.  After adopting the budget, the General Assembly adjourned for a two month recess delaying any possible revenue from that source deep into the fiscal year.

And, predictably, the taxes that were hiked on existing businesses are having a dramatic negative impact.  A 40% tax imposed on vaping supplies is driving many vaping stores – almost all of which are small businesses – out of business.  That means not only will projected revenue from the tax fall short, but the state will also lose out on sales tax revenue as the stores shutter their doors.

That Republicans in the legislature caved into $1.4 billion in new spending defied logic.  The GOP had fought an epic budget battle with the governor the previous fiscal year and won. Not only did they win, but not a single lawmaker seeking re-election was denied by voters due to the budget fight.  After posting a historic win, Republicans essentially forfeited the next game.

All of these elements are coming together to produce the perfect fiscal storm as budget talks begin for next year.  Don’t forget that “structural deficit” of $1.4 billion hasn’t been addressed.  A significant portion of the new taxes enacted this year will fail to materialize.  And, Governor Wolf continues to demand a lengthy menu of spending hikes – and the taxes to pay for them.

Making matters worse the governor and the legislature have not been able to agree on how to deal with cost drivers, particularly the skyrocketing cost of public employee pensions.  Pension costs are gobbling up the lion’s share of any new revenue produced by a still slow-growing state economy.  Republicans have passed pension reform only to see it vetoed by Governor Wolf. There are new legislative proposals on the drawing board, but they fall woefully short of resolving the problem.  Even if some reform is enacted it will likely have minimal impact on the upcoming 2017-18 state budget.

Given all of this, will Republicans stick to their pledge that without addressing cost drivers they will not enact broad-based tax hikes – such as raising the personal income tax, expanding and/or raising sales taxes – or  will they again cave into the governor’s tax and spending demands?  Much rides on the outcome of this looming budget fight, primarily the fiscal health of the commonwealth.

But, 2018 is a gubernatorial election year and this budget will be enacted as the campaign heats up.  Governor Wolf, if he seeks re-election, will want to show his base voters that he delivered the goods of higher spending.  Republican voters will judge the GOP-controlled legislature by their ability to resist higher spending and more taxes.  Add these competing political imperatives to the state’s perilous fiscal circumstances and we should brace ourselves for the second wave of the hurricane.

(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal.  His e-mail address is lhenry@lincolninstitue.org.)

Permission to reprint is granted provided author and affiliation are cited.

, , , , , , , , , , , , , , , , , , , , ,

Leave a comment

Fixing America


Once again America is grieving.  The deaths of five Dallas police officers and two young men who died elsewhere having been shot by police have rocked the nation.  Set aside for a moment the politics and circumstances of these events and reflect on the fact that as a result today there are children without fathers, mothers without sons, wives without husbands, sisters without brothers.

The shootings, and the protests than inevitably follow, are becoming ever more common.  What has become abundantly clear is there are inequities in our criminal justice system. The growing violence stemming from those inequities has made the already difficult job of law enforcement even tougher, which in turn has yielded more violence.

This being a presidential election year the powder keg upon which we sit will become even more volatile.  President Obama is calling for more federal control over local police departments.  Donald Trump struck a traditional tough on crime posture.

The solution is none of the above. More federal regulation only hamstrings local police and social services agencies, and filling our prisons even further does nothing to address the root cause of the problem.  It is time to admit that, while government has a role, government alone cannot fix what is wrong.

What can government do?

Criminal justice reform is in fact one of the few areas of public policy where the Left and the Right have found some common ground.  Former Virginia Attorney General Ken Cuccinelli, speaking to the Pennsylvania Leadership Conference (http://www.paleadershipconference.org/2015-videos/205-ken-cuccinelli-2015) last year explained it well:  “Ninety-five percent of the people in our jails are coming back out.  So we can ignore that, or we can make the criminal justice system be what it was supposed to be and that is an opportunity for rehabilitation, for correction and for improvement.”

Some conservatives might recoil at that suggestion, but Cuccinelli explains: “I believe nobody is beyond redemption.  That doesn’t mean they don’t deserve punishment for doing wrong. But when you talk about literally or figuratively throwing away the key are you abandoning perhaps more important beliefs in your life?”

Those “more important beliefs” get to the heart of the ultimate solution, for our goal must be to prevent people from ending up in the criminal justice system in the first place.  The root cause of the current crisis is as much societal than it is governmental.

I served for four years as a Dauphin County Commissioner with oversight of human services.  During that time I watched many dedicated folks dealing with the result of what was a breakdown of family and community.  Simply put, government does not and cannot have the resources necessary to supplant the many individual support networks that family, church, and community provide.

While we must work with law enforcement and improve our criminal justice system, the ultimate solution comes down to three things: faith, family and education.  Until and unless we strengthen those institutions we cannot expect the situation to improve.

The removal of religion from the public square is not just some right wing talking point.  Religion – Christian or other – has throughout history provided the moral underpinning of our society.  It is through religion we learn not only rules of conduct, but find the most important of human yearnings including unconditional love, forgiveness and hope.  In the absence of these vital intangibles people, particularly the young, fill the void with drugs and crime.

There has never been born that person who did not need the guidance and discipline of strong family ties.  Define family in whatever way you will, but at the end of the day children and youth need someone who cares about them, provides for them, and nurtures them.  In particular, the absence of fathers has contributed to a breakdown of the family unit.  All of our institutions – government, school, church – must place an emphasis on responsible parenting.

The third fundamental building block of society is education.  Rather than endless debates over the minimum wage we should be focused on educating people for jobs that pay a living wage. And that includes preparing students for the hundreds of thousands of high paying jobs in manufacturing that go unfilled. Our education system must bring everyone up to the starting gate of their work life fully equipped.

Rather than looking at government, or the police, or around the room at others, repairing what is wrong with America begins with each of us.  We must strengthen our churches, our families and our communities.  Then, and only then will what we have witnessed in recent weeks become the exception rather than the rule.

(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal.  His e-mail address is lhenry@lincolninstitute.org.)

Permission to reprint is granted provided author and affiliation are cited.

, , , , , , , , , , , , , , , , , , , , , , , , ,

Leave a comment

When in the Course of Human Events


This is the time of year when Americans celebrate the anniversary of our declaration of independence from Great Britain.  It is ironic that the United Kingdom itself a few days ago found it necessary “for one people to dissolve the political bands which have connected them with another.”  By leaving the European Union the British people have reconfirmed that the longing for liberty is an eternal emotion.

Meanwhile, here in the colonies, the very document that ensured our rights as a free people has been under relentless attack.  The Constitution of the United States has withstood the test of time. After the Articles of Confederation failed to provide the framework for an effective federal government delegates from the 13 colonies met in Philadelphia and in September of 1787 put their signatures to the document which, at least theoretically, remains our nation’s ultimate authority.

On June 21, 1788, New Hampshire became the ninth state to ratify theConstitution which then took effect on March 4, 1789.  The document was, however, viewed as incomplete and several states insisted on the inclusion of ten amendments, which became known as the Bill of Rights.  Those amendments were ratified and became effective on December 15, 1791.

That the Bill of Rights was necessary is evidenced by periodic efforts throughout our nation’s history to disregard, water down, or remove them entirely.  Perhaps no amendment has been so violated as the tenth which limits the power of the federal government.  Congress and the president, frequently with complicity by the Supreme Court, have consistently throughout the ages infringed on this right.  Today the assault continues, especially upon the second amendment governing our right to keep and bear arms.  The non-existent “right” of freedom from religion has replaced the “free exercise of religion” guaranteed in the first amendment.

It is safe to assume that the founding fathers would place in the first amendment those rights that they viewed as most vital to a free people.  It is here that the Constitution guarantees our right to freedom of speech and of the press.  Now obviously there was no electronic media or internet back in 1787, but freedom of speech and of the press clearly applies to all means of communication.

A free press was instrumental in our nation’s founding.  The only method of mass communication was through the printing press producing formal newspapers, pamphlets, and broadsides.  From Thomas Paine during the revolution to the Federalist Papers, the expression of opinion via the printed word was a vital means of exercising free speech.  Throughout our history we have depended on a free press to keep government in check, such as it did during the Watergate scandal of the 1970s.  So vital is a free press that it is often referred to as the “fourth estate,” or fourth branch of government.

It is therefore disturbing to see candidates and elected officials from the national to the local level trampling this vital right.  In just the last few weeks, Republican presidential candidate Donald Trump has banned the Washington Post from covering his campaign events.  Here in Penn’s Woods, the Democratic mayor of Harrisburg, Eric Papenfuse, has revoked the credentials of the capitol city’s newspaper the Patriot News/Penn Live. Papenfuse’s actions are especially curious in that he is the owner of a prominent bookstore, so you would think he might have some loyalty to the unfettered circulation of the printed word.

My goal here is not to defend the content of these publications – whose left-wing ideology frequently taints their reporting of the news – but to stand up for their right to do so.  If elected officials, from mayors to presidents can decide who can cover the news they can also then control the news.  This is not only a violation of the media’s constitutional rights, but an existential threat to our democracy and ultimately our individual liberty.

As we celebrate our freedom with fireworks and back yard barbecues let us always remember that the trampling of one right is the trampling of all rights.  The loss of any one right puts us on a very slippery slope which will ultimately lead to the loss of all rights.  From freedom of the press, to freedom of religion, to our right to keep and bear arms, we must fight to protect our God-given rights against those who would take them away.

(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal.  His e-mail address is lhenry@lincolninstitute.org.)

Permission to reprint is granted provided author and affiliation are cited.

, , , , , , , , , , , , , , , , , , , , , , , , , , ,

Leave a comment

The Worm in the Education Apple


There is an old saying in politics that “perception is reality.”  That is how former Governor Tom Corbett got blamed for cuts in funding to public education that never happened.  To this day many Pennsylvanians believe he took an axe to education funding when in fact he left office with more state dollars being spent on K-12 education than at any point in the commonwealth’s history.

To drive the point home, Governor Tom Wolf campaigned promising to be the education governor.  He has done more to damage public education than any governor in recent history. This reality has been cloaked in the perception that he is pro-education.  In fact Wolf is really just pro-union, propping up a system that fails both students and taxpayers.

It is true he has proposed historic increases in education spending – and the higher taxes to fund that spending.  But, the proposed increases in both taxing and spending are so large they have proven politically impossible to implement. The untenable nature of these increases are such that even in the hyper-partisan atmosphere of the state capitol some Democrats have refused to go along.

The chances of Governor Wolf getting Republican support for more reasonable increases in k-12 public education spending are high if, as demanded by GOP leadership, reforms to cost drivers are included.  But the governor has adopted a “my way or the highway” attitude which gridlocked the process and produced a historic budget stand-off.

In the process of fighting that battle, the so-called education governor pushed school districts across Penn’s Woods to the cusp of closing due to the lack of state dollars flowing into their coffers.  Worse, many had to borrow money to keep their doors open, incurring costs that took dollars away from students.  His administration, willing to spend money to keep state bureaucracy operating, turned down appeals from school districts for relief.

Even if Governor Wolf were to push his education spending increases through the legislature precious few dollars would ever be spent benefitting students.  That is because the state’s pension system has become fiscally unsound. Its investments are under-performing projections and too generous benefits are draining the system faster than current employees add new dollars.  At the school district level, property taxes are rising to cover costs and the preponderance of any new state dollars directed to education must go to prop up the system as well.

June a year ago the legislature passed significant pension reform.  It was immediately vetoed by the governor who parroted the union line that the system is fine, just underfunded.  Thus an opportunity to at least partially address a major cost driver was missed.  The end result: fewer dollars available to directly benefit students.

Governor Wolf has also been waging a war on charter schools.  Even more so than traditional public schools, charters operate with minimal cash flow.  The epic budget battle resulted in teacher lay-offs, and even the closing of some charter schools.  More will likely close as the governor implements administrative policies aimed at forcing charter schools out of existence.  These policies are designed to deny parents and students valuable educational choices in an effort to preserve the union-dominated monopoly of public schools.

The latest example of Governor Wolf placing union interests over student interests involves legislation that would replace the seniority-based system for determining teacher lay-offs with a merit based system.  In other words, instead of “last in, first out” the best teachers would be retained.  At present, the legislation is on Governor Wolf’s desk – and he has vowed a veto.

Unless you are doing Common Core math, when you add all these factors together what you get is a governor whose every action has harmed students and made the state’s system of public education even more fiscally fragile than it was when he took office.  All of this is being done to prop up the very labor unions that financed the governor’s election.  For taxpayers, and for students, it is a very large worm in the education apple.

(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal.  His e-mail address is lhenry@lincolninstitute.org.)

Permission to reprint is granted provided author and affiliation are cited.

 

, , , , , , , , , , , , , , , , , , , , , , , , ,

Leave a comment

Budget Battle Ends With Electoral Dud


The final pieces of legislation ending Pennsylvania’s longest budget stalemate fell into place just days before the April primary election. And the story that dominated state news for over nine months had no apparent impact on voters who meted out no electoral punishment for the fiscal fray that had school districts on the cusp of closing, nonprofits cutting services, and politicians at each other’s throats.

This budget stand-off was different from those that took place during the Rendell era notably due to the lack of public pressure placed on Governor Wolf and the legislature.  There were no daily protests on the capitol steps. State employees did not go without pay.  When the battle commenced last summer Governor Wolf’s first salvo was an attack ad campaign. It fell flat. Outside the halls of state government and the few remaining news media that cover it, the budget battle went largely unnoticed.

Despite Governor Wolf’s threats of electoral retribution, lawmakers did not pay a political price for engaging in the budget battle.  The first clue that the fiscal free-for-all was not impacting the electorate came in February when there was no wave of candidates filing to oppose incumbent legislators.  Looking at the primary election results it would be difficult if not impossible to point to a single lawmaker who lost his or her seat because of the sustained budget stand-off.

In fact few lawmakers lost for any reason.  And those that did lose were a result of local political divisions rather than anything that happened in Harrisburg.  In Philadelphia, for example, Democrats engaged in their biannual exercise of primary fratricide.  The state’s longest serving House member – State Representative Mark Cohen – was defeated by a challenger who claimed he had been in office too long and was out of touch with his constituents.

Another rare defeat of a House incumbent took place in Lackawanna County where State Representative Frank Farina lost to former legislator Kevin Haggerty.  The two former colleagues found their districts merged in redistricting a couple of years ago and have been battling over the seat ever since.

While voters were busy returning incumbents to office some lawmakers even got a promotion.  State Representative Mike Regan ran for and won the Republican nomination to replace outgoing state Senator Pat Vance in Cumberland County.  In what was a hard fought and nasty campaign the budget crisis did not register as a key issue.

For Republicans looking to hold onto historic majorities in both the Senate and the House the future looks bright.  Senate Republicans could actually achieve a veto proof majority as the fall battles will be fought over swing seats currently occupied by Democrats.  On the House side, the primary yielded solid GOP nominees for open seats like Dawn Keefer in Cumberland County and Frank Ryan in Lebanon County.  Conversely, Democratic retirements in western Pennsylvania provide the opportunity for additional Republican pick-ups in an area already trending toward the GOP.

Further evidence of the impotence of the state budget battle on the electoral process can be found in the race for the Democratic nomination for the U.S. Senate.  Governor Wolf’s first chief of staff, Katie McGinty, was one of the prime architects of the budget proposal that triggered the lengthy stand-off.  She resigned last summer to run for the U.S. Senate and prevailed against three opponents in the primary.

Why did the epic budget battle fall so flat with voters?  Chalk it up to a lack of attention being focused on state government.  Or the fact the absence of a state budget had little impact on the daily lives of Pennsylvanians.  Timing was also a factor.  With the nation transfixed by the presidential race scant coverage has been afforded other matters.

And so we find ourselves back to where we began.  Another budget season is underway in Harrisburg.  Governor Wolf is pushing for more spending and higher taxes, Republicans are adamant in their refusal.  The fight will continue, apparently without consequence for anyone involved.

(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal.  His e-mail address is lhenry@lincolninstitute.org.)

Permission to reprint is granted provided author and affiliation are cited.

, , , , , , , , , , , , , , , , , , , , , , ,

Leave a comment

R.I.P. PA Constitution 1968-2016


Governor Tom Wolf has been in office for just over a year, but already we know historians will put the words “budget crisis” in their lead paragraph.  But a far more ominous phrase may get top billing: “constitutional crisis.”

Like his authoritarian counterpart in Washington, D.C., Governor Wolf is willing, in fact may prefer, to shred the constitutional separation of powers and enact by executive fiat that which the legislative branch is unwilling to do.  The commonwealth has entered its ninth month without a completed state budget and that has spawned a growing debate over the limits of gubernatorial power.

Days before Christmas the legislature again passed a state budget.  This time Governor Wolf signed off on most of the spending plan but “blue lined” or line item vetoed about a third of the items thus extending the budget crisis.  Three months later, there is no resolution, but the administration is spending money anyway.  This, many lawmakers argue, is a clear violation of the state constitution.

The Governor, and his appointed State Treasurer Timothy Reese argue there is a competing requirement for the state to keep certain agencies operating – especially those involved with ensuring public safety.  But Treasurer Reese has gone far beyond that even authorizing a “loan” from the state treasury to House Democrats to pay their staff during the ongoing budget crisis.

The public safety argument is nothing more than a distraction from the main issue which is can a governor spend taxpayer dollars without explicit authorization from the General Assembly?   It is a clear violation of the state constitution and one which will explode into a full blown crisis, especially if the governor’s illicit spending extends outside the realm of public safety.

The budget, however, is not the only area in which Governor Wolf is willing to trample on legislative powers.  He is trying to shutter the Public Employees Retirement Commission (PERC), an obscure state agency that earned his ire when it disagreed with his view of the pension crisis.  The agency was created by an act of the General Assembly and signed into law by a previous governor.  Lawmakers have sued in court to block executive dissolution of PERC pointing out it would take legislative action to do so.

This week Governor Wolf again by-passed the General Assembly on the issue of the state’s minimum wage. The governor has called for an increase in the state minimum wage, but the legislature has refused to go along.  So, he signed an executive order unilaterally raising the minimum wage paid to state employees to $10.15 per hour.  The action applies only to state workers, but will be extended to those companies doing business with the state.  The minimum wage hike does not extend to private business.

However, the impact on small businesses will be significant.  Neal Lesher, legislative director for the National Federation of Independent Business-Pennsylvania, points out that the governor’s executive order effectively prevents many small businesses from entering the bidding process for state contracts.  “Some small businesses simply cannot afford to pay inexperienced, entry level workers that much more per hour,” Lesher explained.  “This creates an unfair playing field that favors larger companies.”

Having fully bought into the Obama “pen and phone” style of governing there is no indication Governor Wolf plans to return to a constitutional model any time soon.  His “budget address” to the legislature last month was hostile and confrontational and had the effect of solidifying Republican opposition which at times had shown signs of wavering.

It is clear crisis government is now the new normal in Harrisburg.  With no resolution to the current budget impasse in sight, and the deadline for adopting a budget for the next fiscal year less than four months away, the governor is content to act as if the legislative branch of government does not exist.  But legislators will not sit idly by and be consigned to irrelevance.  If the governor continues on his current course the constitutional crisis will explode into the courts, and possibly even lead to impeachment proceedings.

(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal.  His e-mail address is lhenry@lincolninstitute.org.)

Permission to reprint is granted provided author and affiliation are cited.

, , , , , , , , , , , , , , , , , , , , , ,

Leave a comment