If business prospers, do new jobs follow?

Do government programs to encourage job creation work or do they merely guarantee corporate profits?

Nobody knows the answer with certainty, but there’s evidence corporations promote development subsidies more to boost their profits than to create new jobs.

The mantra of most politicians is “jobs, jobs, jobs.”  But many of them oppose direct government hiring or projects that will require government contractors to hire more workers.

Indirect corporate support is appealing, because it seems to have no cost for taxpayers.  The benefits are supposed to flow through the business and end up in employee paychecks and corporate profits.

Often government support for business development is offered through extremely complicated programs.  One reason for the complexity is reliance on tax breaks, which can obscure where the benefits really go.

Congress and state legislatures are convinced to enact indirect development measures without a full understanding of how they really play out.  Corporations can sell them based on the possible job gains, which sound politically appealing, without revealing the loopholes from which they expect to benefit.

Legislators believe that, if business prospers, new jobs will inevitably develop.  In that way, two objectives are met: job creation and allowing the private sector, rather than government, to shape economic priorities.  That’s consistent with a free enterprise economy and limited government.

Corporate incentives also have a clear political benefit.  As noted, they are offered without any apparent cost to taxpayers.  There’s no appropriation of public money though they receive support funded by tax revenues.  The flow of money from the taxpayer through the budget to the subsidy is too difficult to track.

Businesses like indirect support programs; their profits are virtually guaranteed even though job creation is not.  Corporate beneficiaries often turn up as political contributors, providing legislators with their own incentive for offering indirect support for business development. 

The New Markets Capital Investment program, recently revealed by the Maine Sunday Telegram, rings all the warning bells of an indirect program.  

Through gimmicks created by the corporations involved but not understood by the legislators, some of whom had received political contributions from those companies, investors will receive about $16 million from the state on a supposed $40 million investment, of which not a penny will have gone to creating jobs.

Instead of believing promises that a public indirect investment will be more than compensated by expected employment gains and resulting added tax revenues, legislators ought to regard the cost of any indirect program as an outright expenditure.

Besides, state business-boosting programs are essentially “beggar thy neighbor” measures.  They are intended to enable one state to pick up investment and jobs that might go to another state.  It’s not a competitive advantage that matters; it’s the gimmick.

At the federal level, Congress does much the same thing, willingly offering indirect corporate breaks while rejecting direct action.  It readily adopts tax breaks for the private sector, passing the resulting unpaid cost of government on to average taxpayers, while rejecting funds for roads and bridges, left to deteriorate.

Perhaps the central problem of both the federal and state governments in accepting such programs is the lack of an economic vision.  A mere commitment to “jobs, jobs, jobs” is not good enough for judging the value of proposed publicly supported programs.

A state with a coherent and consistent policy, not merely “special” job creation incentives, can prosper.  Texas, with its emphasis on little regulation and both major parties pro-business, has boomed.  New Hampshire consistently avoids a state income tax, and its economy has grown.

Maine places a higher priority on the environment.  Some investors, from renewable energy to tourism, can accept and prosper under a strong environmental regime. 

But the state fails to offer a consistent outlook to businesses.  Tax reform and a stable economic and social policy could be more effective than risky trade-offs tailored for specific companies.

The Maine Legislature signed onto an investment gimmick it did not understand in the mere hope of creating jobs.  At about the same time, it was willing effectively to expel one of the largest companies in the world that had already committed to a major renewable energy investment in the state.

The misguided New Markets tax refund program adopted by the Legislature had no chance of replacing the lost opportunity caused by breaking a deal, not involving tax dollars, with energy giant Statoil for off-shore wind energy.

Keeping policies consistent, uncomplicated and fair could produce better results with fewer chances for programs to backfire.  Such policies plus more direct economic support by government would likely produce more jobs.

Government raises taxes, while denying it

These days, people consistently oppose any proposed tax increases by the federal or state government.  Candidates rally support by promising to cut taxes.

If that’s true, the amount of money governments take out of people’s pockets ought to be going down or at least remaining the same.  In Maine, the governor has led the drive to cut the top income tax rate and now wants to eliminate the tax altogether.

If taxes had been brought under control, people ought to feel better.  The reduced costs imposed by government should offset some of the disappointing effects on personal income of the slow economic recovery.  But this is not happening.

One reason is that government uses several ways of tapping the income of most people without the levy showing up as a tax increase.

The most frequently used method is the so-called “tax expenditure,” better known as a tax loophole.  

In theory, the tax system is supposed to treat each taxpayer in similar circumstances in the same way.  That way, each pays its own fair share.

If government wants to encourage certain activities, it can allow some taxpayers to get a break on the amounts they pay.  The U.S. Treasury estimates that these breaks – tax expenditures – in 2013 were $1.1 trillion.

The cost of any break is picked up by taxpayers not getting the benefit of that tax expenditure.  It is built into the amount of money the government needs to raise.  In practice, that means each time government creates or increases a tax expenditure, it raises the taxes on all other taxpayers.

With 169 different federal tax expenditures, each taxpayer may be both getting some benefits and picking up somebody else’s costs at the same time.

At the federal level, many of the tax expenditures go to corporations.  Tax breaks for companies that develop oil production or earn some of their income abroad and leave it overseas are the targets of ongoing debate.  Is a tax expenditure that may have once been justified to help a new business still worth the cost to other taxpayers?

Tax breaks not only go to big corporations to increase their profits, but to individuals.  For example, if you are paying interest on a home mortgage, that interest may be deducted from your taxable income.

Breaks keep being added.  Just this year, the House of Representatives added generous deductions for the dollar value of business gifts of food.

If a state income tax is mostly based on the federal return, as in Maine, the federal tax expenditures influence state tax collections.  In other words, some people pay too much tax to the state, because of a federal subsidy for the oil industry. 

The recipient’s most desirable tax expenditure is the “refundable” tax credit.  That credit can be subtracted from the amount of taxes to be paid.  If there’s a balance, the government sends the taxpayer a check.

The earned-income tax credit, for lower income workers, is perhaps the best known.  Recently, the Maine Sunday Telegram revealed Maine is paying $16 million in refundable tax credits to investors in a project specifically designed to achieve that result.  Maine taxpayers foot the bill.

The tax system is riddled with loopholes.  The most elementary tax reform would be to eliminate as many tax expenditures as possible.  Then, the tax rates for all taxpayers could be drastically reduced.  That’s called tax simplification and is usually most strongly opposed by those benefiting from tax expenditures.

Without tax simplification, all taxpayers will be paying someone else’s bill.  There’s no easy way to know who gets a net benefit, but average taxpayers may wonder how much their taxes could be cut with the end of tax subsidies for energy companies or those with foreign operations.

That’s not all.  Governments can also boost their bill for people without even using the tax system.

The federal government is adjusting how much doctors are paid under Medicare, and the money will come from an increase in charges for upper income recipients.  While not strictly a tax, the funds will flow to the government.

In Maine, a debate now goes on about a bigger adder to electric utility bills to finance support for efficiency measures.  Again, increased rates are not taxes, but the money will flow to the government.

Congress and legislatures impose these new costs, secure in the knowledge they will not be seen as tax increases.

In a bewildering and incredibly complex world of taxes, loopholes and tax-like charges, the average person ends up blind to who gets what and how much.

To cut budget, government would be slashed

The battle continues to cut the size of government budgets and, as a result, the size of government itself.

In Maine, the proposed cuts come under the cover of tax reform.  In Washington, the struggle comes more openly.

The federal government is now operating under a rule called “sequestration.”  That effectively places a cap on federal spending and requires that for every increase there must be an offsetting decrease or tax increase.  It’s like an informal balanced budget amendment.

But it turns out there may be much less room for budget cuts than we might think.

Scott Lilly, senior fellow at Washington’s Center for American Progress, has provided a sound explanation and the following review is based on his work.

The budget has three pieces.  One is composed of “mandatory programs.” which obligate the government to make previously agreed payments.  Most are payments to retirees, mainly for Social 

Security and Medicare.  These expenditures are larger in total than what the federal government spends on all the rest of the budget.

That remainder consists of defense and non-defense spending, about equally divided between the two.  Together they amount to only about one-third of all spending.  Because these are supposed to be “discretionary,” they may be decreased or increased. 

In other words, only about one dollar of every three spent by the federal government is subject to the budget balancing game.

Few expect defense spending cuts.  In fact, many in Congress seek to increase it.  Their ploy is to shift some of the increase into accounts outside the budget itself, so it simply doesn’t count in the balancing game.  Of course, that blows up the whole point of trying to cut the size of government.

If defense spending is either untouched or stealthily increased, the balancing game has to be played in the remaining 16 percent of total federal government spending.  That’s all of the non-defense, non-mandatory money there is in the budget.

On what do we spend that money?  The top programs are veterans care, law enforcement, protecting health, fighting cheating in the mandatory programs and education.  Foreign aid, the favorite target of many, accounts for far less than one percent of all spending.

The problem with the spending cap, especially in the non-defense, discretionary area, is that new problems can suddenly arise to absorb funds.  Who could have foreseen the Ebola virus and the need for federal action to prevent its spread?

Many people and interests support cuts in federal spending so long as they are not in programs they consider vital or from which they benefit.  The sum of all their demands cannot result in major savings.  That may translate into increased support for more tax increases to support spending.  That’s where Lilly’s analysis leads.

If the budget and government cutters have their way, the outlook is not for tax-based solutions, but for non-defense reductions, possibly pretty deep.

The obvious targets are the “mandatory” programs.  They are only mandatory, because Congress says so, and Congress can change its collective mind.  Benefits under both Social Security and Medicare could become rich targets if spending shifted to a massive military buildup.

Within the discretionary spending for purposes other than defense, both health protection and research and education could be targets.  Although not really a big budget item, spending on environmental and consumer protection could be slashed.

Congress could raise taxes without leaving fingerprints.  Just recently, it increased Medicare payments to doctors by increasing the contributions of higher income participants.  There was no outcry against this tax increase on the wealthy.

The tax laws are riddled with “tax expenditures,” breaks that have to be covered by revenues from others or by cutting spending.  For example, they make it possible to subsidize the oil industry, even if that means cutting education spending.  Revenues could come from closing such loopholes.

The objective may go beyond blocking added expenses that are not covered by cuts or new revenues.  Gov. LePage’s proposed “tax reform” was obviously intended partly to reduce the size of government not merely block increases. 

Reductions in government revenues coupled with the prohibition on deficit spending, such as exists in Maine, lead inevitably to reductions in the scope and programs of government itself.

A key reason for capping government spending is the claim that taxes are too high.  No matter that, compared with almost all other major economies, taxes in the U.S. are not high. 

But people have grown accustomed to resisting government taking their money for common purposes, which they consider not essential for their personal well-being.

Religious rights may bring “nullification”

Two Native Americans, fired from their jobs at a rehab center because their blood tested positive for mescaline, applied for unemployment benefits.  Despite explaining the drug resulted from their religious use of peyote, they were rejected.

They sued the state of Oregon, and their case went to the U.S. Supreme Court.  Though it recognized the religious use of peyote by some Native Americans, the court rejected their appeal.  It said benefits would be denied to anybody with mescaline in their blood, so the Indians were not subject to religious discrimination.

The Court’s decision relied on a standard that had evolved over decades, allowing religious beliefs to be overridden, so long as the law applied equally and did not target certain religions.

When members of Congress learned of this case, virtually all of them agreed that this interpretation of government power went too far in denying religious rights.  So, in 1993, Congress almost unanimously adopted the Religious Freedom Restoration Act.

Under this law, there must be a “compelling government interest” that justifies overruling religious practices.  Mere neutral application of a law was no longer enough.

The general effect of the new law was to “restore” (hence the use of the word “restoration”) an older Supreme Court decision and invalidate the later interpretation that made it easier for government to overrule religious beliefs.

Congress also said that this requirement would apply to actions by both federal and states governments.  In 1997, the Supreme Court ruled that the constitutional provision allowing the federal government to impose standards on states did not cover this law.

A state could pass its own version of this law to ensure that its government accorded the same respect to religious belief as the federal government.  Some, but not all, states enacted such laws.

Religious freedom is guaranteed in the First Amendment to the Constitution.  Like other protections of the Bill of Rights, it is a right to be free from excessive government interference.  As matters now stand, government can only impinge on religious rights if there is a “compelling government interest” – an interest higher than unfettered religious practice.

The law came before the Supreme Court again in the Hobby Lobby case.  Hobby Lobby is a company owned by just a few people, whose religious belief opposes abortion.  They did not want to provide abortion coverage in their health insurance program or even to tell employees where else they could get such coverage without charge.

In 2014, the Court said that, because the employees could get the coverage, the company should not be forced to provide it or inform them of its availability.  In other words, there was no “compelling government interest,” because an alternative existed that left the owners’ religious beliefs untouched.

Since the adoption of RFRA, some have interpreted it to mean they could refuse to obey any law they claimed was contrary to their religious belief.  They would not have to seek judicial approval for their action.  The government would have to take them to court if it thought they could be forced to act because of a significant government interest.

To some, this development opened the door to “nullification,” the ability of people to refuse to obey the law, simply because they asserted a conflicting religious principle.  Thus, RFRA became part of the arsenal of weapons to be used by people who thought government had become too powerful.

The underlying conflict emerged when Indiana passed its own version of the law.  The state has no anti-discrimination law and hence no resulting “compelling government interest,” as do the United States and most other states, allowing it to limit a claim of religious rights. 

Opponents charged Indiana had enacted a license to discriminate and to resist government.

Gays and lesbians protested against the Indiana action.  Some national and state Republican leaders stated clearly that the purpose of the law was to allow businesses to deny at least certain services or products to homosexuals.

After a national outcry, in which major businesses opposed the new law, Indiana retreated and modified the law to ensure it could not be used to discriminate against LGBT.

Still, what had happened in the 22 years since the law was adopted was that it had shifted from a limit on government to a new right for individuals to refuse to obey the law.

Some states are considering simply refusing to apply federal laws they do not like.  RFRA may be the beginning, not the end, of new battles over “nullification,” the way to destroy or drastically limit federal government authority.