2018 California Propositions Summary: Property Tax (Prop 5) and Rent Control (Prop 10)

This year, there have been a slew of ballot initiatives throughout the country. So far this year, I have written on two ballot initiatives: Washington state's gun reform initiative and San Francisco's gross receipts tax initiative to fund efforts to fight homelessness. Today, I would like to briefly cover two initiatives coming up in the State of California.

Proposition 5: Property Tax

Proposition 13 was a 1978 ballot initiative that slashed property taxes. The Proposition 5 that is to be voted on this upcoming November would expand the property tax exemption (see below). When older individuals buy new homes, it often means taking on a higher property tax rate. What Proposition 5 would do is expand the removal of the transfer requirement, i.e., continue to pay the rate on the current home instead of the future home. The idea is to create savings for the homeowner. This does, however, deprive the State of tax revenue. According to the Legislative Analyst Office (LAO), the local governments will lose over $100 million annually in the short-run, and possibly $1 billion annually in the long-run. However, the State coffers will have an increase similar to the figure that the local governments lose. Also, allowing for this Proposition would let those 55 and older move more freely, which would be a particular help to those in nursing homes or those on a fixed income. Read more on the Proposition at Ballotpedia.

Proposition 10: Rent Control

In California, there is limited permissibility of rent control through the the Costa-Hawkins Rental Act. If Proposition 10 passes, rent control will expand to free-standing houses, condominiums, and townhouses, as well as housing first occupied after January 1, 1995. As I wrote over four years ago, rent control harms the very people it was meant to help, mainly those in low-income households. The LAO's findings were that there will be a potential loss of government revenue in the tens of millions. The LAO also anticipates lower-quality housing and greater geographical immobility. In all, my hope is that Californians vote "No" on Prop 10. 

San Francisco Proposition C: Gross Receipts Taxes Are a Poor Way to Fight Homelessness

Finding ways to help out the homeless is a noble goal, especially given how vital housing is for having a quality of life beyond mere survival. The causes of homelessness are complex, but at the same time, we should not stop finding ways to help alleviate the plight. The City of San Francisco has found a way to help with its homeless problem through a ballot initiative called Proposition C. If ratified, what Proposition C will do is enact a 0.5 percent gross receipts tax on all businesses with a revenue over $50 million. The intent of this goal is to fund homelessness programs in the City (e.g., housing, temporary shelters, mental health care, eviction prevention) so that other sources of tax revenue carry less of the burden. What could possibly be wrong with such a Proposition?

First, let's briefly get into what a gross receipts tax is and how it works. A gross receipts tax is a excise tax excised on all of its income, whether it its wages, capital gains, dividends, bonuses, or other sources. This is in contrast with net income, which is the the amount after deduction, adjustments, and credits are applied to the gross income. In short, the gross receipts provides an opportunity for more income to be taxed, which seems to be the proponents' thought process. The City and County of San Francisco's economic analysis of Proposition C estimates that it would bring in $250-300 million of extra revenue annually. The tax targets the "super-rich" only. It provides another stream of revenue to help an ongoing problem. Sounds like a win-win, right? Not so fast.

While these larger companies are levied for the tax, that does not mean they are the ones bearing the cost. Or in economic terms, where is the tax incidence? The truth is that many businesses are not going to be happy about the tax increase, and will find a way to pass on the burden of the cost. This phenomenon is hardly unique to the gross receipts tax. It can be observed with the corporate tax and payroll tax, amongst others.

One possible reaction of businesses is to reduce work-hours or to cut jobs all together. Remember that economic analysis from the City of San Francisco? It estimates that it would cost the city 725 to 825 jobs annually, or 0.1 percent of overall jobs. Why? Because the cost of labor just would increase substantially. As of now, these businesses pay an average of $2,500 per employee in business taxes. If Proposition C passes, that cost would increase to $3,700 per employee per year (see below).

Source: City of San Francisco, p. 19

If the cost of labor becomes that burdensome, it could potentially lead to firm relocation. The City did not include that in its direct analysis. Nevertheless, it did acknowledge that firm relocation would have a more significant negative impact on the City's economy. Plus, it would not be the first time in economic history that a firm relocates because of cost of labor issues.

Another possible reaction is shifting the tax burden over to the consumer in the form of higher prices. Using Texas as an example, if the gross receipts tax had not been implemented in Texas, the State would had increased its collective disposable income from $30.5 billion to $40.3 billion between 2006 and 2013.

Other Issues with the Gross Receipts Tax

• There is also an anticipated loss of $200-240 million of GDP annually, which is 0.1 percent of San Francisco's overall GDP. While this is not a catastrophic figure, it is not insignificant, either.
• While proponents argue that it requires all businesses to "pay their fair share," the truth is that the gross receipts tax creates a larger tax burden for start-up companies and companies with a smaller profit margin, e.g., restaurants, retail (Lawson, 2018). This lack of tax neutrality is particularly bad for start-up companies since they are more likely to lose money in their initial years.
• Because the gross receipts tax is taxed at all levels of production (i.e., when a taxable transaction occurs), it creates tax pyramiding (Fleenor and Chamberlin, 2006), which distorts companies' structures [to become more vertically integrated]. If more vertically integrated, it would become more difficult for new companies to enter the market, thereby making it less competitive. 
• The pyramiding causes the costs to be more passed onto the consumer, which creates an even more regressive tax for lower-income consumers that already have financial troubles (Ross, 2016).

Conclusion
There is a reason why so few states have their own gross receipts tax: because it distorts business, is inefficient at tax collection, and has negative economic consequences for business owner and customer alike. If that weren't enough, the particular set-up for Proposition C creates additional issues.

Mayor London Breed, who happens to be a Democrat, is against Proposition C because San Francisco should find ways to better allocate its current funds instead. If we do not find ways to ensure accountability, it could make the problem worse, says Breed. I think she is right. This is another example of "tax and spend" without asking how the money is being spent. San Francisco already spends $380 million annually on homelessness. Rather than repeating the same mistake of throwing money at a system that has not been successful at alleviating San Francisco's homelessness problem. I would ask for San Francisco to get rid of its rent control or land use regulations, but it will more likely go for Proposition C, an idea that is about as stable as a house of cards.

Washington State 2018 Initiative 1639: Gearing Up for Unnecessarily Stringent Gun Laws

'Tis the season for ballot initiatives. During even-numbered years in the United States, there are a slew of state- and local-level ballots during Election Day. I have had fun in the past writing on such ballots, whether it was about a carbon tax, a constitutional right to hunt and fish, genetically modified food (GMO) labels, or porn industry regulations. I hope this is not the only ballot-related blog entry I write this year, but I at the very least, I am writing this one on Washington Initiative 1639. You can read the initiative for yourself (see here), but essentially, it is making multiple changes to gun ownership and purchase requirements for semi-automatic rifles. Proponents view the Initiative as common-sense gun reform, whereas opponents see it as criminalizing self-defense.

First, some context. According to the Centers for Disease Control and Prevention (CDC), Washington has the 40th highest gun mortality rate in the country. This is not only below the United States' firearm death rate, but it is lower when considering homicides and suicides not committed with firearms (i.e., intentional death rate). In 2017, there was only one homicide [out of 228] that were committed with a rifle in Washington (FBI). All of this is to say that Washington already has a relatively low firearm death rate. So much for an epidemic! One could argue that "one firearm death is one too many," but at the same time, we need to be more realistic in terms of preventing as many deaths as humanly possible. We also have to keep in mind potential costs. That being said, let's dive into the Initiative itself.

• Definition of semi-automatic. According to Section 16 of the Initiative, a semi-automatic is defined as "any rifle which utilizes a portion of the energy of a firing cartridge to extract the fired cartridge case and chamber the next round, and which requires a separate pull of the trigger to fire each cartridge." We're not talking about fully automatic military-grade weapons. This definition includes hunting guns, target shooting rifles, and competitive shooting rifles. The definition is worded in such a way to attach stigma on commonly owned rifles for civilian use. The proponents point out that semi-automatics used in shootings kill more people. What they fail to mention is that according to the FBI, most homicides are committed with handguns, not semiautomatic rifles. 
• Raising age to purchase semi-automatic rifle. Under the Initiative, the age to purchase a semi-automatic will be raised from 18 to 21. Let's forget that 18 is the age we choose to allow humans to be developed enough to vote, serve in the military, get married, sign a contract, and purchase a home. If you're worried about younger adults not having the prefrontal cortex development (§1), then why not ban it for those who are younger than 25? Under this logic, we could ban semi-automatic rifle ownership for all males since men are disproportionately more likely to commit a firearm homicide than a female. 
• Ten-day waiting period. The bill includes a ten-day waiting period for the purchase of semi-automatic rifles (§4). The purpose of this waiting period is supposed to "keep these weapons out of dangerous hands." This logic has a couple of flaws. One, as already mentioned, most homicides are committed with handguns. The second is due to the effectiveness of waiting periods. I analyzed waiting periods back in 2016. What I found is that waiting periods have a positive impact on suicide rates, whereas they do not have an impact on homicide rates. Even if the waiting period were created with the intent of bringing down firearm suicides, ten days is excessive.  
• Secure Gun Storage and Self-Defense. Section 5 of the Initiative has gun storage provisions that are so inhibitive that they would de facto render them useless. If a gun is used in a self-defense scenario, it could come with a punishment as severe as a Class C felony (§5b). Defensive gun usage (DGU) is not so uncommon. Depending on which source you believe, there are anywhere from 100,000 to 2.5 million instances of DGU annually. 
• Eroding health care privacy. If an individual has a firearm under this Initiative, the government has the authority to access health records since a firearms purchase would be construed as a waiver of confidentiality (§7). 
• Gun safety training course. This is a provision (§3b) of the Initiative I actually approve of. Driving a car requires driver's ed or some equivalent knowledge. There should be training for something as potentially deadly as a firearm. Being a responsible firearm owner should entail training, especially since only 61 percent of firearm owners have received firearm training. On the other hand, the Initiative does not specify a minimum number of hours or qualifications of the trainer.
• Gun registry and potential confiscation. The Initiative allows for an Orwellian registry for the firearms (§14). What is even more worrisome is that there is an annual verification process to make sure the individual is still eligible to own a firearm. If deemed ineligible, firearms can be confiscated (§15b). 

Just because I think there could be a more comprehensive background check or that a gun safety training course are good ideas does not mean I like Initiative 1639. The Initiative cannot be voted on piece by piece. It is "either or," and I have to say that on the whole, it is a lousy bill that will, by U.S. standards, impose unprecedented regulation. Given the pervasiveness of the provisions involved, the Initiative would de facto treat gun owners like criminal suspects. It diminishes privacy greatly. It infringes so terribly that the the U.S. Supreme Court would very well overturn this Initiative because it treads on the Second Amendment that badly. I hope this doesn't pass, but given that the Initiative is polling at 59 percent, I'm not going to bite the bullet by holding my breath.

Universal Savings Accounts: A Better Policy Alternative to the 401(k)?

It's never too early to be saving for retirement. Making sure that you have enough saved in your accounts once you stop working is important because it means you can take care of yourself in old age. One way people save up for retirement is through an IRS provision known as the 401(k). Essentially, the 401(k) is an employer-sponsored pension account that a) can be pre-tax or post-tax, and b) allows for employers to make matching or non-elective contributions. I discussed the 401(k) last year in a blog entry. I thought it was an improvement over status quo because it allowed for more people to save.

At the same, time it was hardly a perfect retirement account. One of the flaws that it suffers from is leakage. In this context, leakage is when an individual makes a pre-retirement withdrawal from the 401(k), and incurs taxes and penalties as a result. Researchers at Boston University estimate that leakage has caused 401(k) savings to be 20 percent lower, on aggregate, than without the current leakage rules (Munnell and Webb, 2015). A study from Deloitte Consulting was released earlier this week saying that over the next decade, Americans are going to lose nearly $2.5 trillion as a result of leakage.

That is a huge number there! Over $2T lost because of some tax code inefficiencies? That's a lot! Fortunately, the Republicans in Congress proposed a solution to the issue: the Universal Savings Account (USA). Under the House Republican proposal, individuals can place up to $2,500 in the USA. These dollars would be post-tax, but the earnings on the funds would be tax-free. The USA differs from a Roth IRA in two ways. One, an individual can withdraw funds at any time for any reason. Two, there are no income limits on participation, whereas the Roth IRA has a limit of $200,000. The libertarian Cato Institute thinks that this is a wonderful idea, whereas the Left-leaning Center on Budget and Policy Priorities (CBPP) dislikes it. Who is right in this public policy battle? Let us go through the arguments in Cato's and CBPP's policy briefs to see who is right.

How much will USAs cost the American economy? According to the Joint Committee on Taxation, these USAs are going to cost $8.5 billion in government revenue over the next ten years. The CBPP opines that the JTC cost estimate is too low because the JTC is supposedly underestimating the shift towards the USAs. Let us assume that the JTC is understating the cost by tenfold (i.e., it's actually $85B). And let's say that the USAs only reduce leakage by 10 percent ($250B). Keep in mind these are two very generous assumptions in favor of CBPP. That would still mean that the USAs are creating a net benefit of $165 billion over 10 years.

Will USAs boost savings? CBPP does not think that USAs will boost savings. CBPP cites a Harvard University study showing that 85 percent do not respond to such savings, and that the remaining 15 percent shift the savings from taxable to tax-preferred accounts (Chetty et al., 2013). I would contend the findings since the study was conducted in Denmark, which means different tax and regulatory structure than that of the United States. If we take Chetty's findings at face value, it would mean that USAs would increase savings by 1¢ for every dollar of tax-cut benefit. The CBPP is also concerned that USAs could actually decrease savings because households would be too incentivized to withdraw funds pre-retirement, thereby leaving less for retirement.

Do USAs help out the rich only or all income levels? The CBPP argues that the wealthy are in the best position to rearrange their portfolios and shift over to the tax-preferred USAs. The Right-leaning Heritage Foundation supported CBPP's argument with its analysis from two decades ago: if most households had to choose between paying major bills and saving for retirement 30-40 years down the road, which would they be inclined to do? Pay bills now. Even with that being the case, Cato counters the argument by saying that low- and middle-income earners tend to avoid special-purpose savings accounts because of liquidity issues. Cato then uses the Canadian and U.K. success stories to show how lower-income households are incentivized to save when liquidity is no longer an issue with the savings accounts.

Conclusion: I'm on a bit of a time crunch, but I approve of USAs. If I have a major criticism about the Republicans' plan, it's that the $2,500 limit is too low. I love how some portray this as a subsidy for the rich when it is in fact reducing taxes on savings. The default assumption for critics is that the money belongs to the government, not the people who worked to earn their money. More to the point, there should be as much neutrality between savings and consumption since a given household knows its own financial sate and needs better than the IRS. Plus, the USA can stop the double taxation that occurs on savings. Given how low the U.S. personal savings rate has been, this should be passed through Congress. If the government cannot make the Social Security reform necessary to make Social Security solvent, it should at least get out of the way and allow people more freedom over their finances with USAs.

The Music Modernization Act: Is It Copyright Reform In Tune With the Times?

It is a rarity to see music-industry professionals, music publishers, tech companies, radio conglomerates, and music streaming service providers rally behind the passage of a congressional bill. It makes it all the more rare when such a bill has unanimous support from Democrats and Republicans alike. Yet that is exactly what happened late last week when President Trump signed the Music Modernization Act [MMA] (H.R. 1551) into law. Four years ago, I discussed the need for copyright reform, so in that respect, I am happy to see Congress pass something to better reflect the realities of the music market. At the same time, I would like to see what the potential impact is.

First, a brief discussion on what the MMA entails. The MMA is a combination of three bills. The first bill is the Music Modernization Act of 2018, which updates the licensing and royalties scheme for digital music. The second bill is the CLASSICS Act, which helps artists and songwriters receive royalties for pre-1972 recordings not already covered by federal copyright law. The AMP Act helps producers, mixers, and sound engineers receive royalties. These enjoined bills also call for the creation of a music database so the Federal government can better track potential copyright infringements. The goal of the MMA is to make sure that musicians and those who work in the music industry can make a living in an age in which streaming and other music services undermine the industry's bottom line. While this seems to be a wonderful bill with support from both political parties and those throughout the music industry's value chain, I wouldn't be doing my job if I didn't bring up some concerns with the MMA.

For one, this bill does a disservice to independent songwriters. There are instances in the music industry in which songwriters are excluded or industry workers are poorly treated. If you are a musician or producer who can afford a lawyer to fight the injustice, great. If you are one of the thousands of independent songwriters or musicians that cannot afford such legal fees, you're out of luck because no such grievance process exists. Second, the Congressional Budget Office estimates that the MMA will create a $47 million deficit between 2021 and 2028. That doesn't sound large in context of a $19 trillion economy, but given the amount of debt the U.S. is looking at, it doesn't exactly help to add onto out debt woes.

The final issue I find with the MMA is with the Musical Licensing Collective (MLC), which will create a database of music copyrights and their owners, collect and transmit royalties for digital streaming, and act as the licensing regime for digital downloads. The libertarian Cato Institute details the potential issues with the MLC in its June 2018 analysis, but essentially, a creation of the MLC would create a de facto monopoly. Performing rights organizations (PROs) already exist to perform the functions that the MLC is expected to perform. Since the MLC is not functioning as a natural monopoly, the MLC is expected to succumb to certain inefficiencies that would not exist in a competitive market. As a result, the Cato Institute ultimately argues that quality of service is likely to suffer.

The overall approval of such a bill gives me at least some hope that the MMA could be an improvement over the status quo. Plus, there is an argument to be made that the MMA will save on time and energy on paperwork and royalties processing. On the other hand, I have analyzed enough government-enforced monopolies (e.g., net neutrality, public-sector unions, the U.S. Postal Service, drug prescription patents) to merit enough skepticism. Stay tuned for whether or not the MMA creates more benefits than costs.

USMCA, The New NAFTA Deal That Is Slightly Worse Than the Old NAFTA

While the American press obsessed so much time last week over the nomination and confirmation of Brett Kavanaugh as the newest Supreme Court Justice, a major piece of news was overshadowed. On October 1, the renegotiation of the North American Free Trade Agreement (NAFTA), which has been titled the United States-Mexico-Canada Agreement (USMCA), was released. Renegotiating NAFTA was one of President Trump's major campaign promises back in 2016. If ratified, Trump could claim it as another campaign promise fulfilled. What about USMCA makes it different from NAFTA?

The Good

• Increased Liberalization of the Canadian agriculture market. This is the most rewarding part of USMCA. For a while, U.S. access to the Canadian dairy market has been an issue due to strict supply management. U.S. producers have greater access to the Canadian agriculture market, which will also be good for Canadian consumers because they will have more options readily available. 
• Tariff rates remain low. Trump has been using tariffs as a blunt weapon to coerce trading partners into submission (see here, here, here, and here), which does not help with long-term trade relations. Given how ineffective tariffs are as economic tools, it's nice to see an agreement where Trump lets up on the tariffs. 
• No Section 232 tariffs for Canada and Mexico. Section 232 is a trade loophole that the U.S. executive branch is allowed to impose when it wants to enact tariffs in the name of national security. While USMCA itself does not protect Canada and Mexico, side deals were made to de facto exempt them from this faulty policy. On the other hand, the fact that Trump could not have provided Canada and Mexico with blanket exemptions only acts to sour relations with the U.S.
• Trade dispute mechanism. Canada was adamant on preserving the trade dispute mechanism in Chapter 19 of NAFTA in order to defend itself from protectionist trade policies. Fortunately, it succeeded in this endeavor. 
• Improved shipping conditions (de minimis). For those of you who are unfamiliar, de minimis refers to a threshold below which no tax or duty is collected. Fortunately, the threshold has been raised under USMCA. The United States allows its consumers to purchase up to $800USD without tariffs and duties, which is great because the decision helps consumers and business owners alike. The Peterson Institute made the case for such an increase back in July (also see  McDaniel et al., 2016). 

The Bad

• Effects on Automobile Manufacturers. Under NAFTA, an automobile with less than two-thirds of North American parts was considered duty-free. With USMCA, the automobile needs three-fourths North American parts to move freely between the three countries. This will make automobile manufacturers more reliant on North American automobile parts. This is great for North American automobile parts manufacturers, but bad for automobiles and those who are looking to buy North American automobiles. As the Peterson Institute points out in its latest report on USMCA, it is poised to lead to a less competitive automobile market with less investment and fewer jobs.
• Automobile Manufacturer Wages. The deal also states that 40-45 percent of the value of automobiles be produced in plants where the minimum wage is $16. This will not have a major impact for U.S. workers since most of them make over $16. This will have a bigger impact on the Mexican auto manufacturing market because the minimum wage down there is $4.15/hour. While this might sound like a win for Mexican auto manufacturers, it probably will not be since a major increase in minimum wage leads to a major decrease in labor market employment. 
• Longer copyright terms. USMCA extends the copyright term from 50 years beyond the author's life to 70 years. As I pointed out over three years ago, longer copyright terms do not do anyone favors.
• Greater protection of pharmaceutical industry. USMCA also extends the intellectual protection of biologics and certain drugs from eight years to ten years. We will have to wait an extra two years before a drug can be open to generic competition, which means that more medical prescriptions will be expensive for longer.
• Discouraging other free trade agreements. Article 32.10 of USMCA details the rules that ultimately deter USMCA members from negotiating free trade agreements with non-market members (e.g., China). Limiting negotiations on free trade agreements is a bad idea since freer trade is all-around better.
• Continued limiting of government procurement markets. A good free trade agreement would allow access of FTA partners to compete in bidding processes. USMCA provides no new access. As we saw with Trump's "Buy American" idiocy, limiting procurement options lengthens project times, reduces quality, and costs the taxpayer more. 

Conclusion: The truth is that the changes made to NAFTA are largely cosmetic because the overall structure of NAFTA by and large remains intact. This could lead us to complain that USMCA is really not going to increase employment or create a major boost to the trade bloc's economy. However, USMCA is good in the sense that we avoided withdrawing from NAFTA without a replacement bill. It removes some trade uncertainty, although let's remember that Trump is the one who created this trade uncertainty in the first place.

This bill has more protectionist elements than it does elements of trade liberalization, surely more than the Trans-Pacific Partnership (TPP) had. Given that Trump is at the helm, this is probably the best-case scenario. Now that we have the NAFTA issue out of the way, Trump could focus on other trade issues, which might not be good. I would like to think that Trump could do something productive, such as work on trade liberalization with the United Kingdom, or even better, China. The sad truth is that we have already started a trade war with China. Instead of seeing the error of his ways on protectionism, the success with USMCA will likely embolden Trump to play hardball with China, which is the last thing we need.

Should We Still Celebrate Columbus Day?

"In 1492, Columbus sailed the ocean blue." I recall singing that popular rhyme in school to teach us about Columbus' arrival to North America. Columbus' initial goal was to sail from the Atlantic to the Indies in China in order to bypass the Mongol Empire. Instead of finding Asia, Columbus came across another continent that was in between Europe and Asia. Columbus' "discovery" is important because it initiated a major European presence in the Americas ever since. When I was in grade school and high school, I remember getting the second Monday of October off for Columbus Day. Honestly, I enjoyed it for a day away from school, not because I got to celebrate Columbus' achievement. While I enjoyed the extra time off as a child, some people are less than enthused about Columbus.

Criticism about Columbus Day dates back to the 19th-century, either from anti-immigrant nativists who did not like the association with immigrants from Catholic countries or from anti-Catholics (most notably the Ku Klux Klan) who wanted to keep the United States of America a Protestant country. That was then, this is now. The opposition to Columbus Day is not based on anti-immigrant or anti-Catholic sentiment, but on Columbus himself. There are two main reasons for such opposition that are interrelated. The first is that indigenous populations were treated horribly after Columbus' arrival to North America, which explains why a modern-day response to Columbus Day has been Indigenous People's Day. The second explanation has to do with Columbus himself. According to his compendium, author and UCLA professor Geoffrey Symcox pointed out that Columbus was a self-promoter so obsessed with success that he was willing to use slavery and distort biblical text to get the job done.

I have three other reasons to oppose Columbus Day. One is that Columbus was not the first European to discover America: that would be Leif Erikson. The second is that Columbus did not discover continental North America, much less the United States. Columbus never set foot on what is now called the United States. The third is that it is a relatively minor celebration in the United States, and as such, I personally do not find a need to close down stock markets, banks, or other businesses for a minor observance. Part of Columbus Day's staying power is that Columbus Day celebration dates back to 1792. Since 1792, Columbus Day has been a national myth to symbolize patriotism, loyalty to the nation, and social progress (Kubal, 2008), as well as a way to distinguish the U.S.A. from Europe (i.e., the Old World). It is part of American civic religion, whether we like it or not. With a resurgence of patriotism and the notion of heritage in this polarized country, I see certain political appeal for the holiday. Although I personally do not understand the need for Columbus Day, I would be hard-pressed to see Columbus Day be removed from the American calendar anytime soon.