ProGrowthLiberal in his comments on my last post and in his own post at EconoSpeak highlights the fact that drug-maker AbbVie already makes most of its profits outside the United States, about 87% in fact over 2011-2013 by his calculation. For PGL, then, AbbVie is not the best example of an inversion because the horse is already out of the barn in terms of escaped profits.
I see things a little differently on this, but the case is also highly illustrative of a principle we have discussed before, transfer pricing. Let's take a look at AbbVie's Form 10-K Annual Report, downloadable here, to see what I mean.
Pre-tax profits ($millions) 2013 2012 2011 3-year total
U.S. -581 625 626 670
Foreign 5913 5100 3042 14,055
Total 5332 5725 3668 14,725
Source: AbbVie Annual Report, p. 92
I actually calculate the foreign percentage for these three years as 95%, given that AbbVie claims to have lost money in the United States in 2013. In any event, this is a very strange division of the company's profits given where its sales were made.
Net sales ($billions) 2013 2012 2011
U.S. 10.2 10.4 9.7
Foreign 8.6 7.9 7.7
Total 18.8 18.4 17.4
Source: AbbVie Annual Report, p. 40. Totals may not sum due to rounding.
As you can see, in each of the three years, over half of the company's sales were made in United States, but the company reports that only 5% of its profits are in this country. This is pretty funny math, if you like dark humor. Especially since Humira, AbbVie's biggest-selling drug by far, was developed in the United States. So with the patents in the U.S., and most of the sales in the U.S., the profits have to be in the U.S., right?
In reality, of course they are, but not in the Alice's Wonderland world of transfer pricing. In this byzantine world, the patent for Humira is almost certainly owned by a subsidiary in Ireland, where royalty payments are tax-free. How else could the company show a loss in the United States in 2013 when 54% of its sales are here? Despite this, the company reports paying about 39% of its worldwide income taxes ($226 million of $580 million worldwide, see p. 92), although we have seen that what companies report in taxes on their 10-K annual report is largely fiction
So what can we do? The answers remain simple, though as politically difficult as ever. First, require companies to publish what they pay, country-by-country. No more hiding behind consolidated accounts. Second, enact unitary taxation, using apportionment formulas to make transfer pricing irrelevant. Third, end the deferral of U.S. corporate income tax on foreign profits. Finally, despite what "everyone," including the President, says, don't reduce the corporate income tax rate. We've gone long enough with tax policies that exacerbate inequality; there's no reason to continue down that road when we have the world's largest economy.
Oh, and my tiny disagreement with ProGrowthLiberal: It seems to me that if a company is already draining giant chunks of its profits abroad, then allowing an inversion ratifies losing a bigger amount of tax money than it would for a company like Walgreen's that has not moved its profits offshore yet. But I imagine the IRS could still go after AbbVie post-inversion if it wanted to question its pre-inversion transfer prices, so this is a minor point indeed.
Cross-posted at Angry Bear.
Thursday, July 24, 2014
Tuesday, July 22, 2014
Unintentional tax humor at Forbes
David Cay Johnston emailed me that there were errors in Forbes contributor Tim Worstall's recent criticisms of the linked article. Indeed there are, but the biggest one (or at least the funniest one) isn't the one Johnston pointed me to.
Worstall writes that AbbVie's pending inversion will not, by itself, reduce the taxes the company owes on its U.S. operations, though it could be a preparatory move to drain profits from the United States. I'll come back to that point, but Worstall then gives the example of how AbbVie might sell its patents to a foreign subsidiary and pay royalties to that unit, thereby draining U.S.-generated profits to a tax haven subsidiary, for instance Bermuda (though Ireland is more germane in the real world for intellectual property). But then comes the zinger:
Let's be a bit more precise. What would it take for Apple to buy all of Microsoft's patents? In return for whatever lump sum Apple paid, it would need the equivalent back in terms of the present value of all Microsoft's future royalty payments. But if Microsoft sold its patents to its Irish subsidiary at that price, Worstall would be right that there would be no tax benefit. And it's not like it's cost-free to organize such a transaction. Not only would Microsoft incur the costs of drawing up the contract and so forth, but nowadays companies are taking reputational hits as a result of their tax shenanigans: Ask Starbucks, Google, and Amazon. So if the transaction created no true savings, yet hurt a company's reputation, we know that it wouldn't make the transaction. The fact that multinationals are flocking to sell their intellectual property to Irish subsidiaries where the royalties are tax free tells us that the transfer price is not the "full market value" Worstall claims.
Moreover, contra Worstall, it isn't a question of transferring the intellectual property before it's valuable. If you're a multinational drug company, you can make estimates of FDA approval, how much you think a drug will earn, and so forth. And you've got inside information! To take the simplest possible example, let's say AbbVie has two drugs it thinks are each 50% likely to generate revenues with a present value of $500 million each. If you believe Worstall, it will sell one of the patents to its Bermudan subsidiary for only $250 million. But it will sell its other patent for another $250 million, so the supposed cost will still be $500 million and the subsidiary will expect to earn revenues equal to a present value of $500 million off whichever drug turns out to be successful. It's inescapable that there is no point for a multinational company to sell the patent to its subsidiary at a fair price. There would be no tax benefit, and we wouldn't be seeing Microsoft with $76.4 billion offshore or Apple with $54.4 billion offshore in 2013. Or a total of $1.95 trillion for 307 companies. Heck, even AbbVie has $21 billion permanently reinvested offshore, according to its 2013 Annual Report (downloadable here), p. 93. "Full market value," indeed.
Finally, a note on Johnston's and Worstall's main dispute. Worstall argued that an inversion does not reduce the tax that a U.S. subsidiary would owe to the United States, noting that you can drain profits (except, as we saw, he doesn't really believe you can drain profits) from the American subsidiary as long as you have a tax haven subsidiary, i.e., you don't need inversion for that.
From a very narrow point of view, this is correct. But what Worstall overlooks is that, for the U.S., worldwide taxation substitutes for a general anti-avoidance rule making avoidance itself illegal, which is the approach most other industrialized countries take. Inversions make it impossible to police avoidance, so they indeed threaten tax collections from U.S. subsidiaries. But one might argue that deferral has almost completely neutered the benefit from worldwide taxation already. The bottom line is that the United States needs an end to deferrals at least until it adopts strong anti-avoidance rules, at which point it would only then be possible to discuss ending worldwide taxation.
But all of that will be for naught if we allow ourselves to be seduced by silly claims about how transfer prices have to be the same as "full market value."
Cross-posted at Angry Bear.
Worstall writes that AbbVie's pending inversion will not, by itself, reduce the taxes the company owes on its U.S. operations, though it could be a preparatory move to drain profits from the United States. I'll come back to that point, but Worstall then gives the example of how AbbVie might sell its patents to a foreign subsidiary and pay royalties to that unit, thereby draining U.S.-generated profits to a tax haven subsidiary, for instance Bermuda (though Ireland is more germane in the real world for intellectual property). But then comes the zinger:
However, do note something else that has to happen with that tactic. That Bermudan company must pay full market value for those patents when they are transferred. Meaning that the US part of the company would make a large profit of course: thus accelerating their payment of tax to Uncle Sam. This tax dodging stuff is rather harder than it sometimes looks: if you’re going to place IP offshore you can do that, certainly, but you’ve got to do it before it becomes valuable, not afterwards. [link in original]"Must pay full market value"? I'm falling off my chair! It's like Worstall doesn't think transfer pricing abuse exists. If patent, copyright, and other intellectual property transfers had to be made at full market value, they would never happen. As I explain in the linked post, academic research has shown that transfer pricing abuses, in this case underpricing the intellectual property transferred from the United States to Bermuda (again, really Ireland), are quite common when no arm's-length market exists for a good. Since companies aren't going to sell their crown jewels to strangers, how can a tax authority know what will be a fair price for a Microsoft patent going from the U.S., where it was derived, to its Irish subsidiary?
Let's be a bit more precise. What would it take for Apple to buy all of Microsoft's patents? In return for whatever lump sum Apple paid, it would need the equivalent back in terms of the present value of all Microsoft's future royalty payments. But if Microsoft sold its patents to its Irish subsidiary at that price, Worstall would be right that there would be no tax benefit. And it's not like it's cost-free to organize such a transaction. Not only would Microsoft incur the costs of drawing up the contract and so forth, but nowadays companies are taking reputational hits as a result of their tax shenanigans: Ask Starbucks, Google, and Amazon. So if the transaction created no true savings, yet hurt a company's reputation, we know that it wouldn't make the transaction. The fact that multinationals are flocking to sell their intellectual property to Irish subsidiaries where the royalties are tax free tells us that the transfer price is not the "full market value" Worstall claims.
Moreover, contra Worstall, it isn't a question of transferring the intellectual property before it's valuable. If you're a multinational drug company, you can make estimates of FDA approval, how much you think a drug will earn, and so forth. And you've got inside information! To take the simplest possible example, let's say AbbVie has two drugs it thinks are each 50% likely to generate revenues with a present value of $500 million each. If you believe Worstall, it will sell one of the patents to its Bermudan subsidiary for only $250 million. But it will sell its other patent for another $250 million, so the supposed cost will still be $500 million and the subsidiary will expect to earn revenues equal to a present value of $500 million off whichever drug turns out to be successful. It's inescapable that there is no point for a multinational company to sell the patent to its subsidiary at a fair price. There would be no tax benefit, and we wouldn't be seeing Microsoft with $76.4 billion offshore or Apple with $54.4 billion offshore in 2013. Or a total of $1.95 trillion for 307 companies. Heck, even AbbVie has $21 billion permanently reinvested offshore, according to its 2013 Annual Report (downloadable here), p. 93. "Full market value," indeed.
Finally, a note on Johnston's and Worstall's main dispute. Worstall argued that an inversion does not reduce the tax that a U.S. subsidiary would owe to the United States, noting that you can drain profits (except, as we saw, he doesn't really believe you can drain profits) from the American subsidiary as long as you have a tax haven subsidiary, i.e., you don't need inversion for that.
From a very narrow point of view, this is correct. But what Worstall overlooks is that, for the U.S., worldwide taxation substitutes for a general anti-avoidance rule making avoidance itself illegal, which is the approach most other industrialized countries take. Inversions make it impossible to police avoidance, so they indeed threaten tax collections from U.S. subsidiaries. But one might argue that deferral has almost completely neutered the benefit from worldwide taxation already. The bottom line is that the United States needs an end to deferrals at least until it adopts strong anti-avoidance rules, at which point it would only then be possible to discuss ending worldwide taxation.
But all of that will be for naught if we allow ourselves to be seduced by silly claims about how transfer prices have to be the same as "full market value."
Cross-posted at Angry Bear.
Saturday, July 19, 2014
Corporate "Inversions" Shift the Tax Burden to Us
Corporate "inversions" are back in the news again, as multinational corporations try every "creative" way they can to get out of paying their fair share of taxes for being located in the United States. With inversions, the idea is to pretend to be a foreign company even though it is physically located and the majority of its shareholders are in the U.S.
"What's that?" you say. At its base, what happens with an inversion is that a U.S. corporation claims that its head office is really in Ireland, the Cayman Islands, Jersey, etc. Originally, all you had to do was say that your headquarters was abroad. Literally.
Now, the rules require you to have at least 20% foreign ownership to make this claim, but companies as diverse as Pfizer, AbbVie, and Walgreen's are set to run rings around this low hurdle. The basic idea is that you take over a smaller foreign company and pay for it partly with your own company's stock to give the shareholders of the foreign takeover target at least a 20% ownership stake in your company.
Thus, with pharmaceutical company AbbVie's takeover of the Irish company Shire (legally incorporated in the even worse tax haven Jersey), Shire's shareholders will own about 25% of the new company, thereby qualifying to take advantage of the inversion rules. It expects that its effective tax rate will decline from 22.6% in 2013 to 13% in 2016. Yet nothing will actually change in the new company: it will still be headquartered in Chicago, and the overwhelming majority of shareholders will be American.
As David Cay Johnston points out, even some staunch business advocates like Fortune magazine are calling this tax dodge "positively un-American." Further, as he notes, Walgreen's wants to still benefit from filling Medicare and Medicaid prescriptions even if it ceases to pay much in U.S. corporate income tax. In other words, it will get all the benefits of being in the U.S., including lucrative government contracts, without paying for the costs of government.
As I told The Fiscal Times, if companies like these get their tax burden reduced, there are only three possible reactions that can occur: someone else (i.e., you and me) will pay more taxes; the government must run a higher deficit; or government programs must be cut. Of course, there is a limitless number of combinations of these three changes that can result, but one or more of them has to happen.
What can we do about this? One obvious answer to to raise the bar for foreign ownership to at least 50%+ to call a company foreign. Even more comprehensive, as reported by Citizens for Tax Justice, would be to continue to consider a company "American" for tax purposes as long as it had "substantial operations" in the United States and was managed from the United States. Furthermore, the Obama Administration has proposed limiting the amount of deductions American companies can take for interest paid on loans "from" their foreign subsidiaries, thereby preventing what is often called "profit stripping." Another idea, from Senator Bernie Sanders, would be to bar such companies from government contracts.
The whole concept of "inversions" no doubt sounds very arcane to the average person. But one of the bills to rein them in is estimated to raise $20 billion in tax revenue over the next 10 years. The stakes are substantial, so we need to take a minute to wrap our head around it if we want to head off yet another way in which the tax burden is shifted to the middle class.
Cross-posted at Angry Bear.
"What's that?" you say. At its base, what happens with an inversion is that a U.S. corporation claims that its head office is really in Ireland, the Cayman Islands, Jersey, etc. Originally, all you had to do was say that your headquarters was abroad. Literally.
Now, the rules require you to have at least 20% foreign ownership to make this claim, but companies as diverse as Pfizer, AbbVie, and Walgreen's are set to run rings around this low hurdle. The basic idea is that you take over a smaller foreign company and pay for it partly with your own company's stock to give the shareholders of the foreign takeover target at least a 20% ownership stake in your company.
Thus, with pharmaceutical company AbbVie's takeover of the Irish company Shire (legally incorporated in the even worse tax haven Jersey), Shire's shareholders will own about 25% of the new company, thereby qualifying to take advantage of the inversion rules. It expects that its effective tax rate will decline from 22.6% in 2013 to 13% in 2016. Yet nothing will actually change in the new company: it will still be headquartered in Chicago, and the overwhelming majority of shareholders will be American.
As David Cay Johnston points out, even some staunch business advocates like Fortune magazine are calling this tax dodge "positively un-American." Further, as he notes, Walgreen's wants to still benefit from filling Medicare and Medicaid prescriptions even if it ceases to pay much in U.S. corporate income tax. In other words, it will get all the benefits of being in the U.S., including lucrative government contracts, without paying for the costs of government.
As I told The Fiscal Times, if companies like these get their tax burden reduced, there are only three possible reactions that can occur: someone else (i.e., you and me) will pay more taxes; the government must run a higher deficit; or government programs must be cut. Of course, there is a limitless number of combinations of these three changes that can result, but one or more of them has to happen.
What can we do about this? One obvious answer to to raise the bar for foreign ownership to at least 50%+ to call a company foreign. Even more comprehensive, as reported by Citizens for Tax Justice, would be to continue to consider a company "American" for tax purposes as long as it had "substantial operations" in the United States and was managed from the United States. Furthermore, the Obama Administration has proposed limiting the amount of deductions American companies can take for interest paid on loans "from" their foreign subsidiaries, thereby preventing what is often called "profit stripping." Another idea, from Senator Bernie Sanders, would be to bar such companies from government contracts.
The whole concept of "inversions" no doubt sounds very arcane to the average person. But one of the bills to rein them in is estimated to raise $20 billion in tax revenue over the next 10 years. The stakes are substantial, so we need to take a minute to wrap our head around it if we want to head off yet another way in which the tax burden is shifted to the middle class.
Cross-posted at Angry Bear.
Tuesday, July 15, 2014
Piketty on the minimum wage
A lot going on with the minimum wage lately, but I will contextualize it first with Thomas Piketty's analysis in Capital in the Twenty-First Century, pp. 308-313. I'll have more to say about other parts of the book later, but for now it's important to remember that one of the keys to the book's success is that it is built on a gigantic trove of long-term data. His French wealth data, for example, goes all the way back to the immediate aftermath of the French Revolution! (Speaking of which, it's Bastille Day as I write this.)
Piketty writes in this section about increasing labor income inequality in the United States and the importance of labor market institutions in affecting wages in the medium term even as education (though see Jeff Faux's dissent in The Servant Economy) and technology are the keys to the long-run wage possibilities. He counterposes the steady increase in the real (i.e., inflation-adjusted) value of the French minimum wage since 1950 to the decline of the real U.S. minimum wage since it peaked in 1969 at $10.10 in 2013 dollars. At $7.25 today, it is a full 28% below its peak, and 1/3 less than the current French minimum wage at purchasing power parity in 2013 (see stats.oecd.org, search "data by theme" and select "labour," then "earnings," then "real minimum wages," and set the series to "US$PPP" and the pay period to "hourly.")
This decline of the real value of the minimum wage is why Piketty argues that an increase in the U.S. would make sense, much more so than in France. At this low level, there is much less danger of a negative impact on the number of jobs. His key insight is that if wages are too low, that itself causes economic inefficiencies and can even create inefficiencies for the firm. In particular, if wages are too low, it can cause workers to acquire fewer firm-specific skills than would be optimal for the employer. This would seem to hold economy-wide as well: if the general wage level is too low, workers have less incentive to acquire skills that would make them and the economy as a whole more productive. Additionally, Piketty argues that employers' superior bargaining position and the absence of "pure and perfect" competition in labor markets justifies the limits on companies' power embodied in the minimum wage.
The minimum wage has also been in the news this month. The biggest story is that for the first time Germany has adopted a minimum wage effective in 2015, set at €8.50 ($11.60) an hour. This was the price Angela Merkel had to pay to bring the Social Democratic Party into her governing coalition. In addition, the minimum wage in the future will be set by a national commission made up of labor and business representatives.
Finally, a new study by the Center for Economic Policy Research finds that the 13 states that raised their minimum wage on January 1 had higher rates of job growth (0.99% vs. 0.68%) through May 31 than the 37 states that did not raise their minimum wage. While the study does not claim to be definitive, it is one further piece of evidence that the minimum wage is not a job killer at the levels seen currently in the United States.
Cross-posted with Angry Bear.
Piketty writes in this section about increasing labor income inequality in the United States and the importance of labor market institutions in affecting wages in the medium term even as education (though see Jeff Faux's dissent in The Servant Economy) and technology are the keys to the long-run wage possibilities. He counterposes the steady increase in the real (i.e., inflation-adjusted) value of the French minimum wage since 1950 to the decline of the real U.S. minimum wage since it peaked in 1969 at $10.10 in 2013 dollars. At $7.25 today, it is a full 28% below its peak, and 1/3 less than the current French minimum wage at purchasing power parity in 2013 (see stats.oecd.org, search "data by theme" and select "labour," then "earnings," then "real minimum wages," and set the series to "US$PPP" and the pay period to "hourly.")
This decline of the real value of the minimum wage is why Piketty argues that an increase in the U.S. would make sense, much more so than in France. At this low level, there is much less danger of a negative impact on the number of jobs. His key insight is that if wages are too low, that itself causes economic inefficiencies and can even create inefficiencies for the firm. In particular, if wages are too low, it can cause workers to acquire fewer firm-specific skills than would be optimal for the employer. This would seem to hold economy-wide as well: if the general wage level is too low, workers have less incentive to acquire skills that would make them and the economy as a whole more productive. Additionally, Piketty argues that employers' superior bargaining position and the absence of "pure and perfect" competition in labor markets justifies the limits on companies' power embodied in the minimum wage.
The minimum wage has also been in the news this month. The biggest story is that for the first time Germany has adopted a minimum wage effective in 2015, set at €8.50 ($11.60) an hour. This was the price Angela Merkel had to pay to bring the Social Democratic Party into her governing coalition. In addition, the minimum wage in the future will be set by a national commission made up of labor and business representatives.
Finally, a new study by the Center for Economic Policy Research finds that the 13 states that raised their minimum wage on January 1 had higher rates of job growth (0.99% vs. 0.68%) through May 31 than the 37 states that did not raise their minimum wage. While the study does not claim to be definitive, it is one further piece of evidence that the minimum wage is not a job killer at the levels seen currently in the United States.
Cross-posted with Angry Bear.
Friday, July 11, 2014
Three Year Anniversary!
Today marks the three-year anniversary of Middle Class Political Economist. It's hard to believe I've been at this for three years!
According to Blogger, I've had over 480,000 page views in that time. I want to thank everyone for reading, commenting, and emailing me. I owe a debt of gratitude to all those who have helped promote my blog, including Marty Pflugrath at BartCop Entertainment, Mark Thoma, Brad DeLong, Laffy at The Political Carnival, the folks behind Mike's Blog Roundup at Crooks & Liars, Mike the Mad Biologist, Lynn Parramore at AlterNet, and Dan Crawford at Angry Bear. Many of my posts appear at Angry Bear and Daily Kos as well as here. My wife, Mary Hildebrand, comes up with some of the ideas for my articles and is a wonderful sounding board who is always there for me. None of them, of course, are responsible for my errors. My apologies to anyone I have left out.
My goal for the next year is to post on a more regular schedule. Look for Monday and Friday as my regular posting days. Naturally, posts in between are possible whenever warranted.
Thanks once again, everyone! I look forward to your suggestions and criticisms in the Comments section or via email to kpthomas55@hotmail.com.
According to Blogger, I've had over 480,000 page views in that time. I want to thank everyone for reading, commenting, and emailing me. I owe a debt of gratitude to all those who have helped promote my blog, including Marty Pflugrath at BartCop Entertainment, Mark Thoma, Brad DeLong, Laffy at The Political Carnival, the folks behind Mike's Blog Roundup at Crooks & Liars, Mike the Mad Biologist, Lynn Parramore at AlterNet, and Dan Crawford at Angry Bear. Many of my posts appear at Angry Bear and Daily Kos as well as here. My wife, Mary Hildebrand, comes up with some of the ideas for my articles and is a wonderful sounding board who is always there for me. None of them, of course, are responsible for my errors. My apologies to anyone I have left out.
My goal for the next year is to post on a more regular schedule. Look for Monday and Friday as my regular posting days. Naturally, posts in between are possible whenever warranted.
Thanks once again, everyone! I look forward to your suggestions and criticisms in the Comments section or via email to kpthomas55@hotmail.com.
Wednesday, July 9, 2014
Stopping Job Piracy in Dayton, Denver,... and maybe even Kansas City
As I have reported before, job piracy is a big problem in metropolitan areas like New York City and Kansas City. Giving subsidies to relocate existing facilities is a net loss for the country and for the region as well. The flip side is that the existence of job piracy makes it possible for companies to threaten to leave their current location unless they get a subsidy, as Sears has done twice in Illinois. I showed in my book Competing for Capital that several multi-state agreements to end job piracy have been total failures.
A new study by Good Jobs First, "Ending Job Piracy, Building Regional Prosperity," reports on a couple of success stories. Notably, these have not involved state governments, but take place in two metropolitan areas, in Dayton, Ohio, and in Denver. The study also reports on failed regional efforts in Minneapolis/St. Paul and Kansas City (but see more below).
The oldest of these successes is the Metro Denver Economic Development Corporation, created in the late 1980s. Its aim is to promote the entire metropolitan area as a single region, using transparency and information exchange among municipalities to prevent site selection consultants from playing different cities off against one another. All members sign a Code of Ethics committing themselves to these goals.
The Code is not a law, but it does provide for a dispute resolution process in the case of an alleged violation. A complaint triggers this process:
In Dayton/Montgomery County, Ohio, there are two programs that promote regional cooperation. Economic Development/Government Equity (ED/GE) began in 1991, and provides a $5 million annual pool for "regionally significant projects in the county." It also shares increased tax revenues with slower-growing municipalities in the county. Applications for the $5 million fund are judged competitively and the process will only consider funding for relocations under very narrow circumstances and only then with a letter of support from the city losing the company.
In addition, all the Montgomery county municipalities, as well as some in neighboring counties, participate in a program called Business First! that promotes the region as a whole and, like Denver's Code of Ethics, requires information sharing when a company is seeking to move within the region. Business First! also provides for a transitional tax-sharing agreement when there is an intra-regional move.
The new report emphasizes the need for engagement with economic development officials, because they actually do the work and they represent the institutional memory necessary for these agreements to remain viable in the long term. As always, transparency is a key element that is a precondition for accountable governance.
In addition to these success stories, potential good news on the job piracy front came out of Missouri last week. On July 1, Democratic Governor Jay Nixon signed a bill passed by the Republican-majority legislature that would disallow the use of state incentives to firms relocating from four Kansas counties to the four counties that make up the core of Kansas City, Missouri. This represents a dramatic turnaround from 18 months ago, when both Nixon and Kansas Republican Governor Sam Brownback told New York Times reporter Louise Story, on camera, that they would continue poaching from the other state.
Missouri's law takes effect only if Kansas passes a parallel law. As Kansas City business leaders have pointed out, the two states have given more than $200 million in tax breaks for relocations, only to see a net 400 jobs move to Kansas. Unfortunately, so far Kansas leaders have given no indication that they will follow suit. However, the Missouri law gives Kansas until August 28, 2016 to do so. Hopefully, some sense will prevail in Kansas by then.
Cross-posted at Angry Bear.
A new study by Good Jobs First, "Ending Job Piracy, Building Regional Prosperity," reports on a couple of success stories. Notably, these have not involved state governments, but take place in two metropolitan areas, in Dayton, Ohio, and in Denver. The study also reports on failed regional efforts in Minneapolis/St. Paul and Kansas City (but see more below).
The oldest of these successes is the Metro Denver Economic Development Corporation, created in the late 1980s. Its aim is to promote the entire metropolitan area as a single region, using transparency and information exchange among municipalities to prevent site selection consultants from playing different cities off against one another. All members sign a Code of Ethics committing themselves to these goals.
The Code is not a law, but it does provide for a dispute resolution process in the case of an alleged violation. A complaint triggers this process:
the Chair of the organization will call together three to five members into a meeting with the offender. If the member’s behavior is determined to be inappropriate, the offending individual is asked to issue a public apology or issue a statement to staff correcting their action and guiding future actions.As the Good Jobs First report points out, dispute resolution has only been invoked three times in the 26 years the agreement has been in effect, and no Economic Development Corporation member has had to be expelled, the strongest sanction available for violating the Code of Ethics.
In Dayton/Montgomery County, Ohio, there are two programs that promote regional cooperation. Economic Development/Government Equity (ED/GE) began in 1991, and provides a $5 million annual pool for "regionally significant projects in the county." It also shares increased tax revenues with slower-growing municipalities in the county. Applications for the $5 million fund are judged competitively and the process will only consider funding for relocations under very narrow circumstances and only then with a letter of support from the city losing the company.
In addition, all the Montgomery county municipalities, as well as some in neighboring counties, participate in a program called Business First! that promotes the region as a whole and, like Denver's Code of Ethics, requires information sharing when a company is seeking to move within the region. Business First! also provides for a transitional tax-sharing agreement when there is an intra-regional move.
The new report emphasizes the need for engagement with economic development officials, because they actually do the work and they represent the institutional memory necessary for these agreements to remain viable in the long term. As always, transparency is a key element that is a precondition for accountable governance.
In addition to these success stories, potential good news on the job piracy front came out of Missouri last week. On July 1, Democratic Governor Jay Nixon signed a bill passed by the Republican-majority legislature that would disallow the use of state incentives to firms relocating from four Kansas counties to the four counties that make up the core of Kansas City, Missouri. This represents a dramatic turnaround from 18 months ago, when both Nixon and Kansas Republican Governor Sam Brownback told New York Times reporter Louise Story, on camera, that they would continue poaching from the other state.
Missouri's law takes effect only if Kansas passes a parallel law. As Kansas City business leaders have pointed out, the two states have given more than $200 million in tax breaks for relocations, only to see a net 400 jobs move to Kansas. Unfortunately, so far Kansas leaders have given no indication that they will follow suit. However, the Missouri law gives Kansas until August 28, 2016 to do so. Hopefully, some sense will prevail in Kansas by then.
Cross-posted at Angry Bear.
Friday, June 20, 2014
Think Obamacare isn't working? Think again
Republicans seem obsessed with the idea that Obamacare is a failure; that it is a "train wreck" exacerbating unemployment. But is that really so?
First of all, the claim that the Affordable Care Act is a job killer flies in the face of reality, as Dan Diamond at Forbes reports: Since the law was signed in March 2010, the economy has added 7.7 million jobs, 982,300 of which are in the healthcare field. If Obamacare is a drag on employment, its effect is being drowned by other factors. Of course, the fact that healthcare is gaining jobs at a healthy clip suggests it's not a drag on employment at all.
Diamond also highlights important differences between states that expanded Medicaid and those which did not. He cites a Colorado Hospital Association study of 465 hospitals in 15 expansion states and 15 non-expansion states, which show sharply divergent patterns in the two groups on the number of people seen at the hospital without insurance, and the volume of charity care per hospital. Here is his chart, a selection from that available in the CHA study.
Source: Colorado Hospital Association, June 2014, link above
As we can see, hospitals in both expansion and non-expansion states were seeing between 4.5% and 5% uninsured quite consistently in 2012 and 2013. (Note that the study did not include Texas or California, the biggest state in each category, both of which had high overall uninsured rates.) In the first quarter of 2014, as new insurance began to kick in, there was an immediate drop to 3.1% in the expansion states, while the figure actually edged up in the non-expansion states to 5.0% from 4.8% a year previously.
For charity care, there was already a noticeable difference between the two sets of states over 2012-2013, where hospitals in expansion states provided an average of $3 million in charity care per quarter vs. about $4 million in non-expansion states. Again, we see an immediate improvement in the expansion states in the first quarter of 2014, falling by about 1/3 to $1.9 million, compared to a slight increase in the non-expansion states relative to the first quarter of 2013.
Meanwhile, rural hospitals are closing in non-expansion states, prompting the Republican mayor of Belhaven, North Carolina, where Vidant Pungo Hospital is closing, to call on the state to accept the Medicaid expansion made optional by the U.S. Supreme Court's ruling that upheld the ACA's individual mandate.
In another post, Diamond underlines other dimensions of Obamacare that usually go under the radar. Perhaps the most powerful, but rarely discussed, effect is that on healthcare quality. Diamond catches a December 2013 study from the Centers for Medicare and Medicaid Services (CMS). As Diamond explains, one early ACA initiative allowed CMS to reduce Medicare payments to hospitals that had high re-admission rates, which is generally an indicator of poor care. Specifically, as the study says, re-admissions within 30 days "often means there have been unclear instructions to patients or lack of follow-up care." Here is the 30-day re-admission rate for Medicare from 2007 through August 2013.
Source: Office of Information Products and Data Analytics, CMS (link above)
As we can see, there was virtually no change from 2007 through 2011. But in 2012, the rate fell by a full half-point, and by even more than that in the first eight months of 2013. As Diamond points out, this is pretty hard to spin as anything but a success for Obamacare. He also provides a map from the study which shows that virtually the entire country had an improvement (see link to the study or his article). In only six states were there any areas seeing worse performance, defined as an increase of over 0.25 percentage points. Numerous states saw increases in all of their CMS regions, and plenty of regions saw improvements greater than 1.5 percentage points, including Las Vegas, Memphis, and almost all of Kansas.
Finally, let's look at the issue that has dominated the discussion: Are more people actually insured? Paul Krugman sends us to the Gallup poll on the percentage of uninsured Americans. The poll, based on more than 30,000 interviews in April and May, showed that the uninsured rate dropped 3.7 percentage points for all adults from the 4th quarter of 2013 to April-May 2014 (see graph below). It dropped 6.2 percentage points for African-Americans and 6.0 points for those with an income below $36,000.
The best estimate of total ACA enrollments continues to come from Charles Gaba at ACAsignups.net, who estimates a range from 23.6 to 28.2 million gross enrollments.
Finally, don't forget the PP in PPACA, patient protection. Everyone can now get insurance regardless of pre-existing conditions, no one can have their insurance canceled because they get sick, and no one has annual or lifetime insurance caps anymore. Indeed, these factors may well lead us to see a decrease in the country's bankruptcy rate, as medical bankruptcies become less frequent.
Obamacare not working? Don't believe the hype.
Cross-posted at Angry Bear.
First of all, the claim that the Affordable Care Act is a job killer flies in the face of reality, as Dan Diamond at Forbes reports: Since the law was signed in March 2010, the economy has added 7.7 million jobs, 982,300 of which are in the healthcare field. If Obamacare is a drag on employment, its effect is being drowned by other factors. Of course, the fact that healthcare is gaining jobs at a healthy clip suggests it's not a drag on employment at all.
Diamond also highlights important differences between states that expanded Medicaid and those which did not. He cites a Colorado Hospital Association study of 465 hospitals in 15 expansion states and 15 non-expansion states, which show sharply divergent patterns in the two groups on the number of people seen at the hospital without insurance, and the volume of charity care per hospital. Here is his chart, a selection from that available in the CHA study.
Source: Colorado Hospital Association, June 2014, link above
As we can see, hospitals in both expansion and non-expansion states were seeing between 4.5% and 5% uninsured quite consistently in 2012 and 2013. (Note that the study did not include Texas or California, the biggest state in each category, both of which had high overall uninsured rates.) In the first quarter of 2014, as new insurance began to kick in, there was an immediate drop to 3.1% in the expansion states, while the figure actually edged up in the non-expansion states to 5.0% from 4.8% a year previously.
For charity care, there was already a noticeable difference between the two sets of states over 2012-2013, where hospitals in expansion states provided an average of $3 million in charity care per quarter vs. about $4 million in non-expansion states. Again, we see an immediate improvement in the expansion states in the first quarter of 2014, falling by about 1/3 to $1.9 million, compared to a slight increase in the non-expansion states relative to the first quarter of 2013.
Meanwhile, rural hospitals are closing in non-expansion states, prompting the Republican mayor of Belhaven, North Carolina, where Vidant Pungo Hospital is closing, to call on the state to accept the Medicaid expansion made optional by the U.S. Supreme Court's ruling that upheld the ACA's individual mandate.
In another post, Diamond underlines other dimensions of Obamacare that usually go under the radar. Perhaps the most powerful, but rarely discussed, effect is that on healthcare quality. Diamond catches a December 2013 study from the Centers for Medicare and Medicaid Services (CMS). As Diamond explains, one early ACA initiative allowed CMS to reduce Medicare payments to hospitals that had high re-admission rates, which is generally an indicator of poor care. Specifically, as the study says, re-admissions within 30 days "often means there have been unclear instructions to patients or lack of follow-up care." Here is the 30-day re-admission rate for Medicare from 2007 through August 2013.
 |
Source: Office of Information Products and Data Analytics, CMS (link above)
As we can see, there was virtually no change from 2007 through 2011. But in 2012, the rate fell by a full half-point, and by even more than that in the first eight months of 2013. As Diamond points out, this is pretty hard to spin as anything but a success for Obamacare. He also provides a map from the study which shows that virtually the entire country had an improvement (see link to the study or his article). In only six states were there any areas seeing worse performance, defined as an increase of over 0.25 percentage points. Numerous states saw increases in all of their CMS regions, and plenty of regions saw improvements greater than 1.5 percentage points, including Las Vegas, Memphis, and almost all of Kansas.
Finally, let's look at the issue that has dominated the discussion: Are more people actually insured? Paul Krugman sends us to the Gallup poll on the percentage of uninsured Americans. The poll, based on more than 30,000 interviews in April and May, showed that the uninsured rate dropped 3.7 percentage points for all adults from the 4th quarter of 2013 to April-May 2014 (see graph below). It dropped 6.2 percentage points for African-Americans and 6.0 points for those with an income below $36,000.
The best estimate of total ACA enrollments continues to come from Charles Gaba at ACAsignups.net, who estimates a range from 23.6 to 28.2 million gross enrollments.
Finally, don't forget the PP in PPACA, patient protection. Everyone can now get insurance regardless of pre-existing conditions, no one can have their insurance canceled because they get sick, and no one has annual or lifetime insurance caps anymore. Indeed, these factors may well lead us to see a decrease in the country's bankruptcy rate, as medical bankruptcies become less frequent.
Obamacare not working? Don't believe the hype.
Cross-posted at Angry Bear.
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