Tax Reform

Jones Act Protectionism Is Why Tax Reform Is Probably Doomed to Fail (UPDATE: It's Waived!)

If you can't change a single lousy law in the face of humanitarian crisis, how are you going to take on the tax code's thousands of special-interest blocs?

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Large image on homepages | Boeing
(Boeing)

(See the UPDATE at the bottom of this post for some welcome good news, and analysis thereof.)

You've heard of Economics in One Lesson? Well, here's economic policy in one quote:

It's hard to imagine a more vivid example of the notion of concentrated benefits and dispersed costs than the Jones Act, a 97-year-old Mercantilist garbage-law that requires all ships traveling between U.S. ports to be totally American, which in practice means everything on U.S. islands (including hurricane relief) is way more expensive than it should be. As free-trader Scott Lincicome quickly tabulated, "At best, it's 1400 workers in Jones Act shipping in/around PR (GAO 2013) vs 3.4 MILLION suffering Puerto Ricans." The moral calculus is hideous.

It's easy to blame Trump, because those words did tumble out of his protectionist mouth, and his Department of Homeland Security has already announced its opposition to waiving the Act after Hurricane Maria (though there are reports the White House is wavering). But the lure and/or sway of concentrated benefits does not require politicians to have 19th century notions of trade. Sen. Marco Rubio (R-Fla.), an ardent free-trader in rhetoric, is a grubby protectionist in practice when it comes to the all-powerful sugar lobby in Florida. Politicians are incentivized to please local constituents, and avoid getting on the wrong side of heavily motivated lobbies with deep pockets.

If Rubio can't stare down Big Sugar, and Trump can't translate his version of populism into helping an actual population of suffering people instead of a withering industry, how on earth will they locate the courage to overhaul the tax code?

"This is a revolutionary change," Trump crowed today, when unveiling the administration's framework for tax reform. I'll take the under.

As was the case in the White House's previous big heave on taxes, this reform proposal mixes 1981-style tax cuts with 1986-style simplification of the tax code. In other words, everyone would pay at lower rates, but most deductions for individuals and corporations would disappear. For instance, the state-and-local-tax deduction. Here's how I described that in April:

This idea, which makes intuitive sense, would nonetheless be heavily disruptive to those of us who live in high-tax states. And not just in those Democratic-bubble strongholds like New York, California, and Illinois—according to this WalletHub analysis, vying for worst American state/local tax burden are the deep red states of Nebraska and Iowa (ranked 50th and 43rd out of 51, respectively), plus the Trump swing states of Michigan (44th) and Ohio (45th). That's five Republican senators right there, at a time when the GOP advantage in the Senate is just 52-48. If this provision passes, I'll eat my baseball glove. (And then move to Nevada.)

The New York Post points out that A) "Manhattan leads the way nationally in taking the deduction, with residents writing off an average of $24,898 on their federal returns," B) "More than 3.2 million people in New York—or about 35 percent of the state's tax filers—claim their state and local taxes as deductions on their federal returns," and therefore C)

New York congressional Republicans had pleaded with Trump to retain the tax breakover concerns it would hit New Yorkers hard and amount to an unfair double tax.

Republicans from New Jersey and California have also cried foul, and together with New York Republicans like Reps. Dan Donovan and Peter King, they could amass enough opposition to sink the proposal in the House.

So much for that.

Those benefits, comparatively speaking, are dispersed; it's on the corporate side where concentrated blocs are going to fight like cornered wolverines to keep their special treatment intact. The New York Times reports that the White House plan "calls on the tax committees to eliminate most of the tax credits that businesses currently use." Here's a report from 2015 showing $68 billion in federal subsidies and tax breaks from the prior 15 years; let's pull a paragraph at random:

A small number of companies have obtained large subsidies at all levels of government. Eleven parent companies among the 50 largest recipients of federal grants and allocated tax credits are also among the top 50 recipients of state and local subsidies. Six of the 50 largest recipients of federal loans, loan guarantees and bailout assistance are also on that state/local list. Five companies appear on both federal lists and the state/local list: Boeing, Ford Motor, General Electric, General Motors and JPMorgan Chase.

So a Republican Party that can't even close down the crony-capitalist Export-Import Bank thinks it's going to take on that bank's biggest customer, as well as G.E. and G.M.?

Look, I hate to be a Matty Morose on this stuff—I would love-love-love to see the elimination of basically every subsidy and almost every tax break, including the untouchable mortgage interest-rate deduction, in return for a lot of across-the-board reductions and some of the stuff the Trump administration is advocating today (like no longer taxing the overseas profits of U.S. corporations). But this White House has not been very impressive on either policy detail or legislative wrangling, and this Congress has shown precious little in the way of courage, let alone results.

Stay tuned to this space for more analysis of the tax reform rollout!

UPDATE: Hey, some welcome good news from Donald Trump!

So, in addition to the much-needed relief this will provide for Puerto Ricans, what does Trump's reversal do to my tax reform thesis? It depends on what comes next. A temporary executive-branch waiver is a good deal better than nothing, but only a full congressional repeal, with votes on the record against a motivated industry, would be a comp for the many hundreds of fights that would break out over ending breaks and subsidies in the tax code.

Sen. John McCain (R-Arizona) is trying for a fourth time to at least partially repeal law that almost no honest analyst even tries to defend, and accordinng to this Lexology analysis from a month ago,

Like his prior attempts, the new McCain campaign seems unlikely to gather sufficient support to pass either the Senate or House, or to stir much debate leading to other legislation or policy changes….Despite strong support from much of corporate America and traditional Republican interests, including the oil majors and Heritage Foundation, and continuous pressure from U.S. jurisdictions heavily reliant upon ocean shipping trade with other states – such as Alaska, Hawaii and Puerto Rico – historical efforts to reduce the scope of the Jones Act materially have failed outright or been heavily diluted. The current political landscape is no more favorable. Weakening the Jones Act in any way would appear to run directly counter to the protectionist themes of the Trump Administration.

As with deregulation, the executive branch can only do so much. In a long season of congressional deference to executive action, you generally won't lose too much money betting against courage.

UPDATE 2: The waiver is good for all of 10 days.