The Basics of State Tax Dollars

Which costs more, a dollar of private money or a dollar of state government tax money? While this question may provoke you to think of an age-old question like “Which weighs more, a pound of gold or a pound of chocolate?”, and subsequently you jump to the conclusion that a pound of gold weighs the same as a pound of chocolate and a dollar in the private sector is equivalent to a dollar of public sector money, that leap would be incorrect.

What’s the difference? A whole lot, actually. For the subject matter at hand, I am going to focus strictly on the state tax dollars since this is a discussion centered around what the state legislature does with state tax dollars (however, the same logic presented can be easily applied to county and school tax revenues with different tax rates).

The Georgia state sales tax rate is 4%. This means that for every taxable product purchased for delivery within the geographical boundaries of the State of Georgia, each dollar expended on buying those products requires an additional $0.04 of private sector capital money to be paid to the state of Georgia.

The state income tax rate is a sliding scale from 1% to 6% as a cap. For ease of calculation purposes, assume that the average income tax rate is 6% as a conservative number.

Though I know there is not a 50-50 split in revenue derived from sales taxes and revenue derived from income tax rate, let’s assume there is just to get this analysis going (Note: Yes, I know there are other taxes and fees, etc. but these are the two primary ones for state revenue tax dollar generation).

Taking the average of 4% sales tax and 6% income tax rate, we get an average rate of 5%. What does this mean? It means that for every dollar of economic activity generated by the private sector in Georgia, the state will collect 5 cents ($0.05) on top of each dollar spent for itself. ‘Economic activity’ being some form of purchase or earnings that occurred.

Which…means that in order for the state to receive just one dollar of tax revenue, there had to have been $20.00 of economic activity that took place within Georgia.

AND…in actuality, that extra dollar that goes to the state means that someone in the private sector actually had to spend $21.00 of their money to purchase $20.00 worth of goods/services/earnings, and also contribute $1.00 to the state in taxes.

What is the relevance of all this? It is to give you and, especially, the legislators, the meaning behind the numbers that appear on a budget sheet. It means that for every dollar you are asked to spend by some Chamber of Commerce lobbyist about some “great new idea that we need for economic development,” consider that in order for that idea to be a “great investment for Georgia,” it has to directly produce at least $21.00 of economic activity just to break-even on the deal.

And, if all the investment does is “break-even” on the economic investment, there might be a better, more profitable use for those funds that need to be explored. Here’s a thought I’m just going to, you know, put way out there: How about giving money BACK to the taxpayers???

Now, so you’ll have an easy way to figure-out what the breakeven point must be for every investment of “State-Dollars”, use this simple formula: 21 x State-Dollars = Absolute Minimum Economic Breakeven Point of State Dollar Investment.

Call this The Rule of 21®. Because it takes $21 of economic activity to just breakeven on each dollar invested in state tax dollars.

So, for the heck of it, let’s apply the Rule of 21 to some “real-world” examples.

Example #1: Go Fish!

In 2007, then-Governor Sonny Perdue sold the legislature on a deal to invest $19 million in state tax dollars to build an infrastructure of boat ramps and fishing museums to attract multi-million dollar fishing tournaments to the state.

Now, I recall a conversation at the time of this legislation I had with a member of the state house. As I recall, the number he told me that Go Fish! would generate for the state was the order of $250-$285 million of new economic activity over 10 years. Hmm…was that a good investment of state tax dollars?

Let’s use the formula (that would have applied then as it does today since the sales tax rate was 4% then, as was the maximum average income tax rate 6%) we now have: 21 (times) $19 million = $399 million in total new economic activity that would have to be generated just to breakeven.

Good, sound, “conservative” investment, eh? Doesn’t look like it to me. $399 million is $114 million more than the predicted maximum number of $285 million of economic activity this investment was supposed to generate.

Now, the economy tanking aside (which killed the ROI on Go Fish!), there’s the well-known Murphy’s Law of Government which needs to be taken into account before any decision is made by government: “If anything can go wrong, it will do so in triplicate.”

So, this is what we have with that $19 million investment into Go Fish!: 1) An investment that was never there with even a breakeven ROI. 2) Taxpayers who have to keep paying for the Legislature’s inadequate ability to properly apply basic sound principles of financial management.

Example #2: CAPCO

CAPCO is a newly reborn idea of legislation to enable insurance companies to receive tax credits for money they would be paying to the state revenue department, but instead they divert this money to some venture capital firms to use to invest to generate economic activity on behalf of the state. And, whatever profits derived from those ventures would be kept by the venture capital firms, and the ONLY benefit the state might see would be the resulting economic activity from which they would derive either sales tax revenue or income tax revenue from the jobs created, or a combination of both forms of tax revenue.

This news article written by James Salzer of the AJC in late December 2011 provides some good background info on the bill.

This is the legislation in question (it’s long to read, but if you read that first link above that is James Salzer’s AJC write-up, and then read the bill, you’ll understand it a little better.

If you go down to Section 3(d)(1), you’ll find this statement: “The aggregate amount of investment tax credits to be allocated to all participating investors of Georgia business investment companies under this Code section shall not exceed $125,000,000.00.”

What does this mean? Well, it means that if there is a cap on the total amount of tax credits granted to all participants of $125 million dollars, then that $125 million is, essentially, state revenue tax dollars being diverted into multiple venture capital funds with no oversight worth a crap (and any claims that there are are poppycock because we all KNOW from experience that this state’s legislature cannot see fit to supply the real State Ethics Commission with the amount of money they need to enforce compliance of ethics laws, so how will the state provide qualified oversight of a $125 million investment fund? They won’t, and anyone claiming they do will be exposing themselves to be a pathological liar.)

SO…oversight issues aside, what happens when the Rule of 21 is applied to this “economic investment?” Let’s see: 21 x $125 million means that the absolute minimum breakeven point in NEW economic activity that must be generated by this investment is $2,625,000,000. Or, to write it more simply $2.625 billion dollars in new activity.

State Rep Ben Harbin sponsored this legislation. Frankly, I am interpreting this legislation from Harbin to…basically be a cry for help…help in the form of someone performing an electoral intervention for him. Help in the form of someone (ANYONE) qualifying to run against him and kicking him out for trying to overtly set-up nothing but a crony-capital scheme to screw the taxpayers of Georgia.

Because with a breakeven point required of $2.625 billion, it would frankly be a better investment for the state to take those $125,000,000 and invest it in gold bullion because THAT has a higher chance of increasing in value than the generation of $2.625 billion in economic activity from the likes of whoever Harbin’s pals are with the Georgia Chamber of Commerce who convinced him that this would be a keen idea for the taxpayers of Georgia.

Hell, if the state had invested the $19,000,000 it wasted in Go Fish! in 2007 in gold when it was an average of $650 per ounce, it would have been a way better payoff than throwing it into an unprofitable venture like Go Fish!

Conclusion

Truly fiscal conservatives know there is always a cost to capital investment, whether it is private money or whether it is public tax dollars. Enough of the analysis and decision-making based on flowery language and promises of “job creation” by chamber of commerce snake-oil purveyors. Apply the Rule of 21 to every potential state government “investment for economic development” to see if the proposal is practical at all.

Leave the “job creation” to the private sector. Let the private sector KEEP more money, and we’ll create more products and more services that people will find useful enough to buy, and we’ll create jobs the old-fashioned way: by demand for useful goods and services.

This entry was posted by Bill Simon, on Wednesday, January 11th, 2012 at 9:44 pm and is filed under Political Boxers and Tagged: Cost of Capital, crony-capital, Georgia Legislature, Georgia Taxpayer, Rule of 21, State Tax Dollar
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