OUR FRENZIED FISCAL FUTURE

Often wrong, but never in doubt. ~ Ivy Baker Priest 

So here we are, attempting to figure out how much we may benefit or lose from the ever-changing Republican tax “reform” proposals now winding their way at nearly legislative warp speed through the lobbyist-infested Congress. What is a knowledgeable citizen to do – let alone the vast majority of taxpayers who haven’t a clue about macro- or micro-economic fiscal policies?

Here’s a cast-in-concrete general canon about any change in tax legislation, rules or regulations:

Tax reform always creates winners, losers and unintended consequences.

The winners quietly chortle. The losers loudly cry, complain, moan and commiserate, and hope their public upset will change the rules to lessen their expected torment. Others hope they're not negative unintended consequences. 

I’d suggest we pay some attention now to discussions about who will come out ahead and who will suffer from the Republicans' currently-proposed tax changes. My advice also includes applying a very large discount to the mandated 10-year forecasts that accompany each and every change in federal fiscal policy for the simple fact that making such macro predications are always challenging, and rarely accurate. The Economist posted an assessment of “budgetary crystal balls” that illustrates forecasting’s fallacies. Most forecasters recognize this inevitable problem, but only mention it sotto voce. Outwardly, forecasters firmly stand by their predictions. But as Ivy Baker Priest, a Republican US Treasurer in the 1950s cogently stated, forecasters are “often wrong, but never in doubt.”

Futures that are directly influenced by political dogma and whims, er policy, are especially problematic. The proposed House and Senate tax bills change the principal corporate income tax rate from 35% to 20%, the pass-through rate for subchapter S corps and partnerships drops to 25%.

Intuitively, we can readily realize that despite the Republicans’ unfounded declarations that all this additional corporate welfare will produce higher wages and higher growth (relationships that are not founded on past empirical data), we can understand that businesses and corporations will greatly benefit and most individuals won’t. To recognize these tax changes’ effects we don’t need to rely on complex macro models that involve hundreds of equations and scads of variables – variables in addition to the very necessary but never-talked-about add-factors and mul-factors. 

Nevertheless, such models show that the Republicans’ reforms likely will provide a stunning 67% of the deficit-financed tax benefits to corporations, not citizens, as a Vox article showed. Here’s a summary of that analysis:

Type of Tax Change	Dollar impact over 10 years	Percent of total tax cuts
Individual tax cuts	$3.3 trillion (T)
Individual tax increases	-$3.0 T
Net individual tax cuts	$0.3 T	20%
Business tax cuts	$2.2 T
Business tax increases	-$1.2 T
Net business tax cuts	$1.0 T	67%
Estate tax repeal	$0.17 T	11%
Total tax cuts	$1.5 T

Source: Committee for a Responsible Federal Budget via Vox.

Notice the $3.0 trillion of individual tax increases. Also noteworthy and thoroughly unsurprising is that of 47.5% of the total federal tax reduction will be directed to the top 1% of income-earners. This large share does not include the benefits of repealing the estate tax that will aid only the already-wealthy. The middle 20% of income-earners (aka, the middle class) will receive but 8.7% of federal tax changes (worth on average $320). The Top 0.1%ers will benefit from receiving a disproportionate 25.1% of tax reductions, worth a tidy $278,370. Is this in any way equitable? Not in the slightest.

The Senate bill offers beneficence to high-roller GOP contributors that the House bill does in spades. These dispiriting results are likely to persist when the ultimate legislation has been agreed to by the Congressional conference committee and signed by our deeply-uninformed, don’t-connect-any-dots president. 

There are interesting stories about which slice of the “middle class” will or won’t benefit from the latest version of the House and Senate tax bills; or how residents in high-tax mostly blue states, student-loan holders, future electric vehicle and solar panel purchasers and low-income housing developers will surely suffer. And distressingly, these precursor bills probably have all too much to do with the likely final legislation.

At this point, it’s the many potential losers who are understandably audible. Unfortunately, I remain cynical enough to doubt that individual citizens or worthy causes can motivate any Republican legislator to make reasoned, broadly-beneficial changes to these biased tax change proposals so they can produce more effective and efficient tax policy. Why? Because of flawed Republican dogma and the herds of corporate lobbyists who are now attempting to further twist legislators’ arms and minds.

The Congressional rules that dictate calculating a decade’s worth of impacts are absurd on their face. They’re mostly a cover for false legitimacy. After long-disparaging President Obama’s effective fiscal stimulus legislation in 2009, the Republicans now dismiss any and all concerns about adding at least $1.5T to the national debt. Yet another example of hypocritical political double-speak.

We’ve known since last November that Republican tax reform was unlikely to help many people who need assistance, including countless people who voted for the president. Nevertheless, as Tacitus mentioned several millennia ago, and perhaps reading into the 2017 collective Republican mind, the unknown always passes for the marvelous. The Republican tax reform legislation won't be marvelous for all too many people. 

AN ALMOND TREE, LUTHERAN HOPS AND GREEDY WEED BUREAUCRATS

A fool sees not the same tree that a wise man sees. ~ William Blake 

Here’s a belated trick or treat. These three related events occurred during the just-past Halloween. Each one features a plant that is grown in the Golden State.

A tree grows in Hughson, not just Brooklyn.  This is an all too rare, whole-hearted good news story about caring people and an almond tree planted near Hughson, a small town in California.

Last year, the millions and millions of California almond trees that cover about 800,000 acres of Central Valley farmland, produced total cash receipts of $5.16 billion (B). California almonds represent the entire US almond crop and 82% of the global crop. That’s a lot of almonds.

But here I’m talking about a single, unique almond tree, shown in the pictures below. The Modesto Bee discovered this tree’s marvelous story.

This particular almond tree stands in the corner of an orchard near Hughson. It’s decorated each year on Halloween, Christmas and Valentine’s Day in commemoration of Danielle Genzoli, who died in a car accident 12 years ago when she was 16.

The tree had failed to thrive, and David Genzoli, Danielle’s father, planned to rip it out. But Danielle objected. “She was a nature girl and just loved the trees,” Kimber Genzoli, Danielle’s mother, said. “So it became their project to save this little tree. Before her death Danielle and her dad started the tradition by hanging a single bulb on the tree during the holidays.

The year Danielle died, David Genzoli didn’t have the heart to continue the tradition. But one day, when he and Kimber went by the tree they found that someone had hung homemade ornaments on it. They never found out who did it, but suspect it might have been a neighbor. “And it kind of morphed from there; people coming by just started adding to her tree,” Kimber Genzoli said. “It’s became a community project, and we are grateful for the people who contribute to this tree.”

Kimber Genzoli said Halloween was Danielle’s favorite holiday, so a few years later she hung some small pumpkins from the tree. This also was adopted by the community, with people stopping by regularly to add decorations.

From a single bulb, the tree at Christmas is now covered in ornaments and lights and even has a star at its top, as you can see above in the right-side picture.

Friends and strangers alike add ornaments, some personalized with pictures or their family name and the year.

People have left letters to the Genzoli family about Danielle’s kind heart and how she affected them, like one from a fellow student at Hughson High School who said Danielle one day sang “Don’t Worry Be Happy” to her when she saw her crying at school.

One year, Danielle’s first-grade teacher had her students make paper Valentines that hung from the tree in February. The tradition, too, has continued with Valentines from a new class each year, as shown in the left-side picture.

After Halloween and Christmas, the Genzolis take down the decorations and store them until the following year, and every year the collection grows. Danielle’s wonder-filled tree and its spirit is one more reason I enjoy eating almonds.

Lutheran Hops.  This Oct. 31st marked the 500th anniversary of Martin Luther’s protest to the Catholic Church. That’s because Oct. 31st isn’t only Halloween, it’s also Reformation Day, which celebrates Luther’s nailing his 95 Theses to the door of the Wittenberg Castle church in Germany on Oct. 31, 1517. His theses challenged the authority of the Catholic Church, and inspired the historic split in Christianity known as the Protestant Reformation. Apparently, historians now question whether Luther actually nailed his theses to that door. They think he might have merely mailed them to the archbishop. But beyond quibbling about whether they were mailed or nailed, it started something momentous.

That something wasn’t limited to changes in religious precepts. Nope, it also had to do with changes in beer production.

Every trendy craft brewery today touting hoppy beers should tip a brew towards Luther and thank him and his followers for stimulating the use of hops. Luther did it as an act of insurrection against the Catholic Church. He and his disciples provided a reformation in the production of beer. For the record, California grows a tiny amount of hops; much of our domestic hops come from Washington State, Oregon and Idaho. Here’s the story of Lutheran hops.

In the 16th century, the Catholic Church had a near headlock on beer production. History is repeating itself. My previous blog, “Wither My Craft IPA,” mentioned the heady concerns I have about today’s beer market where a very small number of producers (e.g., two) now dominate almost 40% of global beer making and distribution.

But let’s get back to the 16th century. The church’s control of the beer market came from its monopoly on the herbs and spices (e.g., sweet gale, mug wort, heather, rosemary, juniper berries, ginger and cinnamon) used to flavor and most importantly preserve the beer. The church taxed these needed beer ingredients.  

In an age when you risked your health by drinking plain water, beer was drunk by everyone. This widespread use of much safer fermented beverages was the norm in Germany and beyond for centuries. In the New World, beer and hard apple cider, whether it was made by Johnny Appleseed or not, was consumed by virtually everyone for the same reason. Treatment of public water wasn’t common until the late 19th century. Paisley Scotland seems to be the first Western European city to filter its water in 1832.

Fortuitously for Luther and other early German beer-makers, hops were not taxed by the Church. The Church’s priestly brewers considered hops unworthy, nasty weeds. In addition, Middle-Ages folklore which the Catholic Church adopted held that hops might not be healthy or good for you. Little did the Church know.

 

       Hops flowers

Beyond its being untaxed, hops were a far better preservative than herbs. Hopped beer thus contributed to local public health. It also contributed to regional and international business as hops’ preservative qualities allowed hopped beer to be safely sold further away from its brewery. This is why high-hopped beers like what came to be known as India Pale Ale could be transported across several oceans without problems. So, if you were an early Protestant brewer and also wanted to scorn the Church, you used hops instead of herbs. Such brewers changed the world of beer.

These Protestant brewers included Luther’s wife, Katerina. She opened a successful brewery that produced large amounts of hopped beer. Luther was delighted. Lord Katie, as he kindly called her, had assured him a steady supply of his favorite drink. We should thank Martin Luther for his bravery in pushing hops into beer. I’ll drink to that.

Some folks consider Luther’s strong promotion of hopped beer his second Reformation, and perhaps the most important one that many benefit from every day, not just Sundays.  

Greedy Weed Bureaucrats.  This tale is a coda to my blog last month, “The High Price of Getting High,” about marijuana, which California grows plenty of. One knowledgeable policy analyst said that high marijuana tax rates "will prevent the minimization of the black market,” a clear policy goal of marijuana legalization. More information about the California marijuana taxes became available on Halloween.

The expected price of California’s recreational marijuana sold legally after January 1st keeps growing. Why? In large part because marijuana is California’s single biggest cash crop. Cannibas’ production value is roughly 50% greater than that of grapes, the state’s second most lucrative crop. Thus, local authorities see legalization as a big new revenue-enhancement opportunity. They are proposing multiple large taxes on marijuana consumers, distributors and growers. Revenue-hungry municipal and state agencies will, in effect, feed the black market by increasing the tax-inclusive price of legal, recreational marijuana. The price of getting high in the Golden State is getting higher.

The fundamental economic relationship that tax authorities may have forgotten is this: high prices of legal marijuana will reduce its sales and will allow California’s existing, large black market weed to prosper. This is in spite of the relatively price inelastic nature of the demand for cannibas.

A new study issued by Fitch Ratings and reported by CNN on Halloween notes the breadth and height of these expected taxes on California recreational marijuana. They are shown in the table below.

California’s Proposed Taxes and Costs for Recreational Marijuana

Tax Type	Tax Rate or Level
Consumer sales tax	22.25% to 24.25% (includes 15% state excise tax)
Local business/distributor tax	1% to 20% of gross receipts or $1 to $50 per square foot of plants
Grower’s tax	$9.25/oz. flowers and $2.75/oz. leaves
Grower’s cost for registration and environmental compliance	$100,000 (est.)

Source: Fitch Ratings and CNN

These proposed consumer and distributor tax rates may total 45%. Notice also the hefty potential costs of growers registering and complying with the state’s environmental regulations. Such substantial “entrance fees” for the thousands of California’s illegal growers will act as a large disincentive for them to enter the legal market.

These sizable tax rates have a familiar ring to them. My experience with public authorities in several states’ municipalities is few have any systematic sense about how consumers or businesses may respond to their tax increases. They seem to believe that if for example they increase a tax by 10%, then tax revenues will also increase by 10%. This is a naïve expectation, especially when there is a substitute good not subject to the tax, like Emerald Triangle cannibas.

The authorities appear to believe businesses and consumers have virtually no sensitivity to high taxes; they will supply and buy the same amount of marijuana regardless of the taxes’ rate. This is a mistaken belief.

The tax-induced high prices of legal recreational marijuana in California will be good news for growers of black market weed. There will certainly be new buyers of marijuana after the New Year who will pay the high legal price because it’s legal and a less risky transaction. However, it’s also likely that other consumers (including many existing buyers of Emerald Triangle marijuana) or price-sensitive shoppers will buy from black-market suppliers and doubtlessly enjoy lower prices, just like happened in Washington State.

California’s marijuana policy-makers should learn about and/or remember Washington State’s, Oregon’s and Colorado’s early legalization experiences that forced these states to lower their initial,-uncompetitive, high tax rates. Given their fiscal greediness, I’m not sanguine that California’s marijuana tax authorities will remember basic economics and other states’ experiences. Time will tell as January 1st approaches.