Tax Reform is Key to Virginia’s Future

As of March 2017, our state’s unemployment rate was over 3%. Granted, these numbers are not awful, but I would argue there is room for improvement.  Many of these jobs are held by people who had better paying jobs just a few years ago.  And we still have too many who have taken themselves out of the potential work force and this makes that 3% number look better than it really is.

Our state’s economy should be and can be much stronger. The most important thing we can do to make this a reality is overhaul the burdensome federal tax code.

It’s been more than 30 years since our tax system underwent serious reform. Today, the tax code is too complex, too long, too unfair to small businesses (where most employment takes place), and has a far too high corporate rate. These factors prevent Virginia’s small businesses from growing, creating jobs, and maintaining vibrant local communities. The Thomas Jefferson Institute for Public Policy supports tax reform that will put in place a lower tax rate and foster an environment in which Virginia’s business community and our citizens can thrive.

The current federal tax code is incredibly complex and far too long—roughly 70,000 pages of incomprehensible jargon. This complexity makes it nearly impossible for small-business owners to file their own taxes, effectively forcing our small businesses to hire expensive professional tax preparation services.  This is also true of the average taxpayer who finds the tax code simply too complex to navigate without professional help.   

At the same time, big businesses and the wealthy individuals can afford armies of lawyers and accountants to make sure they pay as little tax as possible by taking advantage of the loopholes that are buried inside these 70,000 pages.  This gives big business a major competitive advantage over small-business rivals. The tax code must be made more fair for small businesses by getting rid of the vast majority of these loopholes while also greatly simplifying the tax code itself.

At the same time, it is vital that Congress and the President actively work to cut the corporate tax rate down considerably. At 35%, our nation has a corporate tax rate that is the highest in the industrialized world. This puts all American businesses at a significant disadvantage in the global marketplace. Cutting the rate to a more reasonable level — maybe to 20% — would go a long way towards improving the competitive position of the U.S. business community.  Indeed, a couple of years ago in congressional hearings, business executives testified that they would support getting rid of many loopholes if the corporate tax rate was significantly reduced.  Yet, nothing has happened!

If our leaders in Washington, D.C., are able to pass a modernized tax code along these lines, their efforts will translate into higher paying jobs and a more competitive job market in Virginia, stronger growth, and thriving small businesses, wealthier working families, and more vibrant communities.

Congress and the President have both introduced plans that generally align with the pro-growth approaches outlined above. Now they must move forward and actually get a final plan passed and on the books so our state and nation can return our economy to robust growth.

An economy that is growing at a more reasonable and historic rate of 3.5% to 4.00% (which we haven’t seen in ten years), will do wonders for our country.  Our companies will prosper, more people will be hired at better wages, the federal deficit will decrease, our entitlement programs will be on firmer financial footing, etc.

We cannot afford to wait any longer or we will pass up this unique opportunity. In 2017, both houses of Congress and the White House are in Republican hands.  This should make reasonable tax reform easier.  We may not see another chance like this to reform the federal tax code for a very long time. It is time for our elected officials to support serious tax reform that will encourage economic growth, boost investments in the Commonwealth, and create a more robust economic future for all Virginians.

For too long, we have accepted the status quo and allowed our small-business communities to suffer and placed our major corporations in a less competitive position worldwide.  This has been done by policy voted on by our elected representatives. It’s time to make the tax code work for better for our businesses, large and smaller, and for our families as well. It’s time we close unfair loopholes, lower our tax rates on businesses and on individuals. And we must not forget that many small businesses are “Subchapter S” corporations and pay taxes at the individual tax rates.  Lower individual taxes will be a big boost to these small businesses.  Tax reform will re-energize Virginia’s business community bringing wholesome good-paying jobs back to our state.  It will do the same nationwide.
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Posted in Government Reform, Taxes | 30 Comments

Building on Virginia’s Data-Center Boom

 

Map credit: “Intertubes: A Study of the US Long-haul Fiber Optic Infrastructure“

Data centers are the hottest trend in Virginia economic development these days. But the state is only beginning to think through the implications.

Loudoun County, home to 75 facilities, has developed the largest cluster of data centers in the country (and perhaps the world), and next-door-neighbor Prince William County is rising fast. Rural Mecklenburg County has attracted nearly $2 billion in investment as the location of Microsoft’s East Coast hub for online services. QTS has retrofitted an old microchip factory in Henrico County to open a data center, while DP Facilities, Inc., opened a $65 project center in Wise County. Soon, Virginia Beach will enter the data-center sweepstakes when construction is complete on a 4,000-mile transatlantic cable connecting Virginia to Europe.

According to Paula Squires writing in Virginia Business magazine, Virginia boasts more than 650 data processing, hosting and related establishments that employ more than 13,900 people. Since 2006, the industry has announced more than $11.8 million in new investment and 6,600 jobs. The jobs, while relatively few in number, pay well (more than $100,000 a year in Northern Virginia), and generate a gusher of local taxes.

Billions of dollars are flowing into the sector as the global economy embraces cloud computing to handle the massive surge in data collection and storage. A Markets and Markets research report estimates that the cloud storage market will grow from $23.76 billion in 2016 to $74.94 billion by 2021 — a compounded annual growth rate of 25.8%.

Loudoun County was one of the first localities anywhere to see the economic development potential. The county had a built-in advantage — a massive network of fiber-optic cable built by AOL and WorldCom during the heyday of the 1990s Internet bubble. WorldCom went bust and AOL has a much-diminished presence, but the cable infrastructure remained — and high-capacity connectivity is an essential prerequisite for a data center. Loudoun claims that 70% of the world’s Internet traffic passes through the county. The concentration of data centers is so pronounced that economic developers refers to a six-mile radius around Waxpool Road and Loudoun County Parkway as “data center alley.”

The county has built on its infrastructure advantage by learning how to expedite zoning, permitting and construction. CyrusOne completed construction of a 220,000-square-foot data center in Sterling in 180 days — reputedly the shortest construction time fever for a center that size, reports Squires.

To incentivize investment, the state exempts computer equipment bought or leased for a data center from the retail sales and use tax. Henrico County has dropped its business property tax rate on computers and related equipment from $3.50 to $.40 per $100 of assessed value.

Also, Dominion Energy has emerged as a significant partner. The endless racks of servers inside data centers consume electricity and generate heat, which must be cooled by massive HVAC systems. Dominion charges 5.2 cents per kilowatt hour for large facilities, and a slightly higher rate for small ones. “We’re very competitive,” says Stan Blackwell, director of customer service and strategic partnerships for Dominion. “We have some of the lowest data-center rates in the nation.”

Bacon’s bottom line: The rise of the data-center industry raises two pointed sets of public policy questions.

First, how can Virginia optimize this opportunity? What are the critical drivers? Obviously, the existence of high-capacity fiber networks is one consideration. It appears from the map atop this post that Virginia has one of the densest clusters of long-haul fiber capacity in the country. How crucial is that advantage? Does Virginia’s proximity to a relatively fiber-poor Southeastern U.S. give data centers serving that market an edge? Is the competitive advantage bequeathed by fiber-optic infrastructure such that Virginia should consider encouraging investment in more? Conversely, does it do any good for Virginia to invest in its own fiber infrastructure if connections to neighboring states are lacking? Many, many questions.

Electricity is one of the largest costs associated with operating a data center, accounting for roughly 10% of the total cost of ownership — and it is one of the largest costs that vary by location. Dominion’s electric rates confer a significant competitive edge for locations within its service territory.

Graph credit: Dominion Energy

One of the biggest challenges for Dominion — and the further expansion of the data-center industry — is delivering electricity to these data centers. In one particularly controversial case, the utility wants to build a 230 kV transmission line and substation from Gainesville to Haymarket to serve an Amazon data center. Locals have organized in opposition, claiming that the 100-foot-tall towers will disrupt views and harm property values to benefit a single industrial customer. They insist that Dominion bury the line at considerable expense. If Virginia wants to develop the data-center industry more fully, it may need to find ways to resolve the inevitable utility-landowner disputes fairly expeditiously. No company wants to wait years to find out whether a project will get the electric power it needs.

A second big public policy question centers on the implications of the data-center boom for electricity demand in Virginia. According to Virginia Business, data centers represent Dominion’s fastest-growing customer segment: About 7% of the company’s retail portfolio consists of data centers.

This feeds into the debate over Dominion’s future electric generating mix. Dominion’s 2017 Integrated Resource Plan (IRP) assumes that electric load will increase at a compounded rate of 1.5% over the next 15 years — considerably higher than PJM Interconnection’s forecast for the Dominion service territory. Dominion argues that PJM has not taken into account the phenomenal growth of demand by Virginia-based data centers. These projections matter because they influence how much new generating capacity — including nuclear, as I will explore in a forthcoming post — Dominion adds in the years ahead, with tremendous implications for rate payer and the environment.

The data center surge could prove to be an economic development boon for Virginia. But the industry’s growth impacts local zoning and land-use practices, tax policy, fiber-optic infrastructure development, and energy policy. The McAuliffe administration would be well advised to pull together a conclave to determine how to sort through these issues.

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(This article first appeared in Bacon’s Rebellion on June 2, 2017)
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Posted in Economic Development, Technology | 26 Comments

An Unhealthy Obsession with Climate Change

On June 1 came the encouraging news that President Trump has decided the United States will exit the U.N. Paris climate agreement. The agreement imposes huge burdens while producing little or no impact on the global climate.

From the outrage shared by the media, one would think Trump has doomed the world to certain destruction. Signs are clear the noise will continue, in one form or another: In March, just two months after Trump took office, a “Medical Society Consortium on Climate and Health” was launched to advise (alarm) the American public about global warming.

The consortium published, “Medical Alert! Climate Change is Harming Our Health.” In contrast to the public perception that climate change is in the future, the “alert” declares, “The reality, however, is starkly different: climate change is already causing problems in communities in every region of our nation, and from a doctor’s perspective, it’s harming our health.”

The consortium of nine organizations includes the American academies of Pediatrics, of Family Physicians, of Asthma, Allergy and Immunology, and the American College of Physicians. The alert lists calamities already occurring.

The first is “more very hot days; greater humidity; and longer, hotter and more frequent heat waves.”

A graph of heat waves since the late 1890s (attached) from an Environmental Protection Agency web page, however, shows the 1930s were far hotter than the past couple of decades.

The obvious benefits to warmer weather in some seasons and localities are never mentioned by climate changers. A 13-country study involving 74 million deaths from 1985-2012 found cold weather caused 17 times as many deaths as heat.

Even if temperatures have gone up, Americans have adapted. In a study of 105 U.S. cities, the average number of excess deaths attributable to each 10-degree (F.) rise in the same day’s summer temperature declined from 51 (per 1,000 deaths) in 1987 to 19 in 2005.

Hot weather accounts for few deaths: about two each year for each million Americans. About the same number die of tuberculosis or meningitis; there is no widespread campaign against either of these.

The numbers of heat-related deaths, meanwhile, are ambiguous because of their complicated diagnosis and definitions. Of the 3,332 “heat-related deaths” from 2006-2010 (666 per year) only 34 had “exposure to excessive natural heat” given as the only “underlying cause of death.” The others had either a modified underlying cause of death, or a contributing cause (“heat stroke and sunstroke,” “heat cramp,” “heat exhaustion,” or “other effects of heat and light”). A death in a hot automobile, for example, could occur even before the climate changes.

In data collected since 1999, the Centers for Disease Control and Prevention explains, “the inclusion of hyperthermia as a contributing cause of death increased by 54 percent the total number of heat-related deaths.” compared to those with a heat-related underlying cause alone.

How can heat-caused death trends be attributed to global warming when diagnoses are imprecise and definitions change?

The consortium’s next calamities: “increases in the frequency and severity of some extreme weather events such as heavy downpours, floods, droughts, and major storms.”

So it is raining harder, flooding more, getting drier and storms are packing more punch? Hardly!  Consider the most destructive storms, hurricanes: In the respective half-century periods, 1861-1910, 1911-1960, and 1961-2010, the U.S. mainland was hit by 25, 39 and 26 major hurricanes (categories 3, 4 and 5).

Except for Katrina, hurricanes have become less deadly. The 10 most deadly hurricanes to strike the country since 1900 resulted in 17,046 deaths; 89 percent of those before 1960.

The record flood in Baton Rouge, La., in August 2016, was taken as evidence of a trend toward more flooding. A Baton Rouge doctor writing on the “Medical Alert” page predicted “continued suffering from the physical and mental damage of extreme weather – which is happening more often and with greater strength due to climate change.” Yet, of the top 10 months for rainfall in Baton Rouge, six occurred before 1930; the second highest was in 1907.

Third on the list: “Climate change reduces air quality because heat increases smog, wildfires and pollen production.” This belies the use of the pseudo-synonym “climate change” for “global warming.” Not all climate changes increase pollution.

If warming is changing air pollution, it is decreasing it. All of the EPA’s six “criteria pollutants” have been reduced in the country since 2000. If global warming is causing health problems by increasing pollution, what about the decline in pollutants?

This consortium is obviously not intended to help protect citizens from health problems of global warming but to advocate for change in climate and energy policies. Their “medical alert” highlights the Northeastern states’ Regional Greenhouse Gas Initiative, which limits the amount of carbon dioxide that power plants can emit. Their final declaration on their web page: “We are sounding the alarm that climate change poses a risk to the health of every American.”

“Poses a risk” seems tentative for health harm allegedly already happening. In this “Medical Meteorology” specialty, standards are sketchy, the diagnosis is atrocious and a scientific second opinion is sorely needed.

Posted in Environment | 25 Comments

Is Capitalism Good for the Environment?

It has been said that capitalism works for a very simple reason – people can be counted on to do what is in their own interest. That has been the basis of human interaction since the beginning of time. One villager would catch fish and sell them to others, which helped the fisherman succeed, but also helped the others, who needed fish. In fact, the only way to make money in a free market is to supply others with something they need, and are willing to pay for. Selfishness does not profit unless it also helps others.

Government can never alter that essential motivation of human nature. Incentives drive all human behavior. If something isn’t working well, it is often because the incentives are wrong. Consider our modern approach to environmental issues, an enforcement system based on expecting people to do what is clearly not in their own interest. No wonder it so often results in controversy, confrontation, and litigation. It doesn’t have to be that way.   The Endangered Species Act is the poster child for backwards incentives. In 2010, the U.S. Fish and Wildlife Service was poised to take a fresh look at the problem under the leadership of a new Director, Sam Hamilton, but his life was tragically ended by a heart attack on the ski slopes at Keystone. Mr. Hamilton had studied the problem throughout his 30-year career with the agency, and reached his now-famous conclusion, that there is no mechanism for private landowners to benefit from investing in species conservation. In several speeches, he said, “The incentives are wrong here. If a rare metal is on my property the value of my land goes up. But if a rare bird is on my property the value of my property goes down.”

It is a crucial point because so much habitat conservation relies on private landowners. In fact, the government says the vast majority of all habitat for endangered species is on private land, so recovery cannot happen without the participation of landowners. Shouldn’t it be in their own interest to invest in the conservation of that habitat?

Aldo Leopold’s famous essay on “Conservation Economics” warned of “the time-honored supposition that conservation is profitable.” He thought long and hard about how to deal with private land that is also critical habitat. He concluded that conservation becomes possible on private lands when it also becomes profitable. In 1934 he wrote simply “that conservation will ultimately boil down to rewarding the private landowner who conserves the public interest.”

Instead, our heavy-handed system won’t even consult landowners in many cases, opting for government control and punishing the lack of “cooperation.” Such an approach has never worked (In 40 years, we have recovered and de-listed fewer than half of one percent of endangered species), and never will.

Sam Hamilton, 15th Director of the U.S. Fish & Wildlife Service

The Endangered Species Act was supposed to provide a carrot and stick, but today it’s all stick. Its sweeping prohibitions on activities that might affect a species or its habitat have created the exact opposite incentive for landowners. “Shoot, shovel, and shut up” is not a joke; it is standard operating procedure. But again, it doesn’t have to be this way.

Think about the tremendous activity often accompanying efforts to avoiding a species becoming listed in the first place. Innovation and cooperation among landowners, local governments, and conservation groups can be tremendous. Colorado spent more than $50 million preserving thousands of acres of habitat in the effort to avoid the Gunnison Sage Grouse listing. Yet despite that 20-year commitment, the federal government simply could not get past its single-minded focus on listing, regulating, and controlling. Similar efforts to avoid new listings in other states have met with similar broken promises and bad-faith outcomes, because the incentives are backwards not only for landowners, but also for federal officials, who are rewarded for how many new things they accomplish, not for how many things they avoid.

What if those incentives were reversed? What if landowners were paid to create and preserve habitat, or better yet, to raise endangered species as efficiently as they raise livestock? What if landowners knew that if a species’ population fell below a certain number it would certainly be listed – and if its population rose above a defined number it would certainly be de-listed? Those would be very powerful incentives for recovery of hundreds of endangered species. Some people might make money – by providing a service the rest of us want and are willing to pay for.

There is nothing morally wrong with self-interest. A stimulating website called Capitalism.org has an analysis of today’s twisted thinking. “The doctrine that one must sacrifice one’s own values and interests for others, in popular usage is regarded as good, though it in fact is evil; and to act rationally in one’s own self-interest, which in fact is good, in popular usage is regarded as evil.” That thinking is backwards, and it is demonstrably bad for the environment.

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Posted in Economy, Environment | 137 Comments

Study Says Farm Subsidies Distort Planting Decisions

In my last column, I provided a summary of the Heritage Foundation’s report on how to change the upcoming farm bill. This week I am addressing Heritage’s view on subsidies. It claims “Government intervention creates numerous problems and makes the status quo of agricultural subsidies an untenable situation. Subsidies distort planting decisions of farmers so that instead of responding to the market, they make decisions based on the incentives provided by the subsidies.” 

Heritage goes on to claim that agricultural subsidies lead to “moral hazard” because risk is shifted to taxpayers and not farmers. Heritage claims the Federal crop insurance program costs approximately $15 billion a year which comes from the taxpayer. Further, it claims “…only 25% of agricultural producers received payments…”. Furthermore it claims from 2005-2014 corn, cotton, wheat, rice, and soybeans received approximately 90% of farm payments.

Two other charges
Heritage claims from 1995-2012 only 10% of farmers received 77% of the commodity payments. The second charge is only 20% of the farmers received 73% of crop insurance subsidies. Heritage claims “Crop insurance has been a failure.” It also asserts “The costs of crop insurance programs are about six times greater than the disaster payment program adjusted for inflation.”

Heritage says USDA and Congress should not help farmers manage risk. It believes faulty assumptions are used by Congress and USDA and they are “Agricultural producers do not have the financial means to manage agricultural risk; agricultural risk cannot be effectively managed and requires government intervention.” 

Heritage then sets forth a number of data about the sizes of farms and farm sales. These numbers I included in last week’s blog. The piece of data attracting my attention was that half of all farm sales are less than $10,000 and that number represents 1% of all sales.

Heritage sets forth several reasons why farm subsidies need to be eliminated. It claims for the last 10 years between 2005/2014 median farm household income was 35% to 19% greater than all other U.S. households. Heritage claims in 2013 the net worth of farm households in the United States was a whopping $801,980 and the average U.S. household net worth was $81,200. With these numbers Heritage makes the point government subsidies are not needed for farm households.

Heritage claims in 2011, 65% of all farms received no payments; 75% of all farms received no commodity payments and 85% of all farms participated in no crop insurance program.

The argument against subsidies
Then, the stunner number Heritage uses to argue against farm subsidies is that from 2005-2014 “…the average annual percentage of income for farm households that came from off-farm income (unrelated to farming or subsidies) was 84% of total income.” Heritage is making the point that risk management in farming is not a big deal. In fact, Heritage claims that most farms are hobby farms.

As stated earlier Heritage says most farms – approximately 51% – have sales less than $10,000 a year. 

Finally the Heritage report claims farmers are well equipped to handle the loss of a crop. It believes that family farms have an average 3-4 commodities in production and that most farmers hedge their market risk if they are totally dependent on farming.

The argument agriculture will face in Congress over the next year and a half from Heritage is that farmers can handle significant risk and that “Farmers are more than capable of managing risk, and while the risks they face can often be significant, not unlike many other businesses, it is by no means a justification for government intervention.”

Heritage will argue that the status quo is untenable and that we in agriculture are presenting a “moral hazard” to the American taxpayer and to the country.

(This column first ran in Farm Futures on May 26, 2017)

 

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Posted in Agriculture | 51 Comments