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Commentary: Politicians buried real ‘time bombs’ of government costs

By   /   March 2, 2012  /   No Comments

COMMENTARY By FRANK KEEGAN

State Budget Solutions

Thousands of businesses planning to flee high-tax states and communities must be ready to conduct their own due diligence, because standard affordability studies don’t begin to show how extreme future tax hikes and service cuts will be.

Consider the Tax Foundation’s Location Matters study released Wednesday. This 198-page “Comparative Analysis of State Tax Costs on Business” provides excellent “comparisons of actual state business tax burdens.” (How did Montana do? Click here)

The danger word here is “actual.”

Right now, actual tax burdens do not even begin to tell how huge the true cost of government is because state and municipal leaders have spent more than a decade hiding and deferring costs. Those costs are going to hit the fan over the next 50 years, according to the Government Accountability Office.

GAO reported that even under the most optimistic assumptions, state and municipal governments had to begin real spending cuts of 12.3 percent a year “each and every year for the next 50 years” to pay off deferred costs.

No state or municipal government did that, so the tab is even higher now.

None of those costs show up in the official numbers the Tax Foundation used to calculate business tax burdens. But somebody is going to have to pay, and politicians always make business and industry their prime target.

“Location Matters” certainly is the best tool for determining where things stand now.

“… the Tax Foundation, in collaboration with KPMG LLP, the U.S. audit, tax and advisory firm, set out to develop … a landmark, apples-to-apples comparison of corporate tax costs in the 50 states. … economists designed seven model firms, and KPMG modeling experts calculated each firm’s tax bill in each state. The study accounts for all business taxes: corporate income taxes, property taxes, sales taxes, unemployment insurance taxes, capital stock taxes, inventory taxes, and gross receipts taxes. Additionally, each firm was modeled twice in each state: once as a new firm eligible for tax incentives, and once as a mature firm not eligible for such incentives.”

That is as good as it gets as far as it goes. It just cannot go far enough, because politicians have buried the real time bombs of government cost so deeply nobody can find them for sure, until they detonate right under some business that relocated because of relatively low apparent tax burden.

The hidden real total is at least $18 trillion, about 15 months of total U.S. gross domestic product.

Here are some things to check:

  • Dig through a few years of state, municipal and pension system Comprehensive Annual Financial Reports.
  • Check the official unfunded liabilities for pension and retiree health-care promises against reality-based estimates.
  • Find out whether apparent low unemployment insurance costs are real or due to gimmicks such as bonding, and if the state is replenishing its fund for the next downturn or acting as if there never will be another one.
  • Check out the real Medicaid burden a state faces over the next decade and what tax structure is in place to pay it.
  • Try to tally real public debt by checking State Budget Solutions’ aggregate state debt report, then cruise the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access database for specifics. But take it a step farther by asking how many bond issues by “authorities” — and for how much — do not even show up in the database.
  • Ask if any entities in the state are betting against their own bond issues.
  • Ask if the state or any municipalities and school districts got suckered into complicated derivatives or other sophisticated financial deals. Nobody knows how many of those are ticking out there, but when they blow up, taxpayers must pay up.
  • If the state has an alleged catastrophe fund, find out how far in the hole it is. Again, GAO found a pit $2.7 trillion deep two years ago. When a catastrophe happens, taxpayers get the bill one way or another.
  • Check which states have “balanced” budgets by delaying projects. Maybe the most important for business is the fact that at least $2.2 trillion in vital public infrastructure is beyond design life and must be replaced or refurbished in the next five years, according to the American Society of Civil Engineers.

The Tax Foundation’s “Location Matters” study is a great way to find out current business tax burdens and a better way to start investigating future burdens. It has two-page breakouts for each state.

The challenge is to find out which states might have low taxes now for all the wrong reasons.

Frank Keegan is editor of Statebudgetsolutions.org a project ofsunshinereview.org. The State Budget Solutions Project is nonpartisan, positive, pro-reform, proactive and anchored in fundamental-systemic solutions. The goal is to successfully engage political journalists/bloggers, state officials and opinion leaders in a new way of thinking about state government and budgets, fundamental reforms, transparency and accountability. frankkeegan@statebudgetsolutions.org

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