Daily Deduction

from the Tax Policy Center

A Showdown, Some Backlash and Big Bets

By :: July 28th, 2014

The Highway Trust Fund is almost out of gas. Congress leaves for its month-long recess on Friday, but without legislative action the fund will run out in August. The Senate is expected to vote on the amended bill this week, though it needs 60 votes to pass. Senate Majority Leader Harry Reid had scheduled a vote late last week on a short-term $10.9 billion patch, but the Senate couldn’t agree on amendments related to pension smoothing, tax compliance, or the fate of the 18.4 cent per gallon gasoline tax. Raising that tax could close the fund’s annual $16 billion shortfall. If history is any guide that would be too easy, and therefore, impossible.

A Main Street drugstore chain makes a move to the corner of lower taxes and American dismay. Illinois-based Walgreens continues its pursuit of Swiss-based Alliance Boots, a drugstore chain with stores in Britain. Public reaction has been visceral, if virtual: Two citizen groups delivered 70,000 online signatures to Walgreens’ flagship store in Chicago late last week to protest the move. But bad press might not offset Walgreens’ projected tax savings of $4 billion over five years.

Speaking of Main Street dismay: Wall Street hedge funds are betting on inversion outcomes. Company stock can rise after an inversion, given the promise of its future tax benefits. According to the Wall Street Journal, (paywall) the Jana hedge fund has taken a $1 billion position in the Walgreens move. Right now, almost a dozen inversion transactions are in the works. Together the deals are worth over $100 billion. Deal-making seems to be accelerating given Congressional and Presidential attention. So much for corporate tax reform?

Maybe Congress will be able to come together for the ABLE Act. Bipartisan affection for the legislation seems apparent. The ABLE Act would allow individuals to set up  tax-exempt accounts to pay certain expenses for people with disabilities. These include  higher education, a primary residence, transportation, getting and keeping a job, and health and wellness. The accounts would be organized by states (much like 529 tuition savings) and not limit the beneficiary’s eligibility for Medicaid and most other means-tested federal programs. The House Ways & Means Committee may consider the bill this week. The Senate version, estimated to cost $19.2 billion over the next 10 years, was examined at a Finance panel Subcommittee hearing last week.

Would a balanced budget amendment help solve the nation’s debt problem? The answer is “No,” according to TPC’s Henry Aaron. In his testimony before the House Judiciary Committee late last week, he argues that “instituting a federal balanced budget amendment would negatively impact the economy and threaten the nation's financial stability.” The budget rule, Aaron argues, would likely be used for political leverage and changed in the interest of political expedience.

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  1. Michael Bindner  ::  6:04 pm on July 28th, 2014:

    Raising the tax would be the right thng to do, although I suspect the GOP would rather have the states front the money as if the solution will be found, or raise the taxes themselves. If that kind of “federalist” solution is resorted to, red states will have poorer roads while blue states, which will raise taxes, will have better ones. I hope someone raises this argument in debate, because that may be the only thing that gets the GOP to do the right thing and raise the gas tax.

    Online signatures are raised in relation to the mailing list of those gathering them. They are about as effective as those postcards that various groups used to send to Congress – in other words, not at all. A VAT will tax the profits and the wages at the point of sale, capturing all the income save that collected by the richest investors, who are still better taxed win an income levy. The Hedge Fund betting on stock prices for inverted firms or firms seeking inversions is about as useful a gauge on corporate health as those online signatures are. Its funny money that will leave whomever buys these shares will a built in future loss as reality returns.

    The ABLE Act will help rich disabled people and their families. The fast majority of the disabled are poor and while we struggle along, often with some family support, that support probably won’t be increased by these vehicles. I could see their utility if one is rich and has a brilliant child who may be bipolar (if you wait until there is a diagnosis, its too late), however you might only get to use one of the accounts. Of course, if these pass, I won’t refuse any account help from rich siblings – although that is what Social Security should be for. Maybe fixing this program to be both more generous and easier to take advantage of is the answer.

    Henry is right about the Balanced Budget Amendment as written. As many are already saying, there is no reason to do this if the Republicans did not have a demographically dismal future. I wonder what the Hedge Fund betting on that would be?