The Week in Public Finance: Battling Over Retirement, Gorsuch on Online Sales Taxes and Fiscal Irresponsiblity

A roundup of money (and other) news governments can use.
by | February 10, 2017

To read this regularly, subscribe to "The Week in Public Finance" newsletter for free.

A Curious Battle Over Retirement Security

Congressional Republicans this week made a move to block states’ efforts to expand access to retirement savings to all citizens. Michigan Rep. Tim Walberg and Florida Rep. Francis Rooney have introduced a resolution that would overturn a Department of Labor (DOL) rule last year that reaffirmed states’ legal right to help support private-sector savings programs for small businesses.

Walberg, chairman of the Subcommittee on Health, Employment, Labor, and Pensions, said the DOL rule created a “loophole” that undermined the retirement security of working families because it could discourage small businesses from setting up their own retirement program. “Our nation faces difficult retirement challenges," he said, "but more government isn’t the solution."

The resolution comes as seven states are in the midst of and more than a dozen states -- and even some cities -- are considering establishing such programs. Called Secure Choice, the programs require most employers that don’t currently offer a pre-tax retirement savings program to automatically enroll employees into one. The programs are run independently from the state and employees can opt out at any time.

The AARP issued a swift and harsh rebuke of the resolution, noting that 529 college savings programs give states precedent for creating independently managed, pre-tax savings accounts. Overturning “this rulemaking will have a significant chilling effect on states, sending the political message that state flexibility is not a priority,” wrote AARP Executive Vice President Nancy A. LeaMond.

The Takeaway: The facts upon which this political gamesmanship are based are, well, weak.

One of the claims Walberg and Rooney made in their joint statement on the resolution alleged that “working families may have less information about the management of their plans” and that “savers would have less control over their hard-earned dollars.” These statements imply that people are losing rights they have under their existing retirement plans. However, the Secure Choice programs apply to people who don’t have a workplace retirement savings plan to begin with.

The pair also falsely warn that these plans might somehow put taxpayers on the hook to foot the bill. “It’s no secret that state and city pension plans are severely underfunded,” they wrote. But the plans are independently managed and funded through fees so that states are not liable for the cost.

What's more, the two's stance is at odds with other resolutions they've introduced or applauded. Rooney and Walberg’s statement justifies a move that would limit state and local flexibility. Meanwhile, another press release from the committee issued the day prior heralds House Republicans for taking an “important step to make sure state, local leaders remain in charge of important education decisions.”

What Gorsuch Thinks About an Online Sales Tax

When it comes to their fight to be able to collect sales taxes from online purchases, states may have a new ally in the nation’s highest court. Earlier this month, President Trump announced Judge Neil Gorsuch as his nominee to fill the late Justice Antonin Scalia’s seat on the U.S. Supreme Court. As it turns out, one case in particular gives states and local governments a reason to be excited about the nomination.

“Last year Gorsuch implied that given the opportunity, the U.S. Supreme Court should overrule Quill Corp. v. North Dakota,” wrote National Conference of State Legislatures’ Lisa Soronen. “In Quill, the Supreme Court held that states cannot require retailers with no in-state physical presence to collect sales tax.”

The Takeaway: This bodes well for states. If Gorsuch’s nomination is approved by the Senate, that brings the count to two justices who likely feel that Quill is outdated. In 2015, Justice Anthony M. Kennedy invited a fresh challenge to Quill, which revolved around the mail-order catalogue industry and was made years before e-commerce took off.

The Supreme Court’s stance on this is important, given an effort by states over the past year to push the issue into the courts. After more than a decade of waiting for Congress to change the national law regarding sales tax collection, more than a dozen state legislatures have considered or passed laws letting the state collect taxes on remote sales with the goal of getting sued. Many think a case making its way through the South Dakota courts will end up being the test case for the Supreme Court.

The Illusion of Fiscal Responsibility?

As state lawmakers continue to contemplate tax cuts even while shoring up budget shortfalls, the idea of triggering those tax cuts only when the state hits a certain revenue target is tempting. But a set of policy papers from the Center on Budget and Policy Priorities (CBPP) warned that that kind of move only gives the illusion of fiscal responsibility.

Such a tactic, according to the papers, runs the risk that an unusual boom year could trigger the tax cut, thus setting up the government for very lean revenue years to follow. For example, in 1999 Massachusetts approved triggered income tax cuts at a time when the dot com boom was leaving the state flush with cash. The first rate cut took effect in January 2001 and three months later, the country went into a recession. After a second rate cut went into effect the following year, lawmakers halted them in the face of a $1 billion budget shortfall.

The Takeaway: Massachusetts’ experience shows that lawmakers can always halt these cuts in the face of shortfalls. But that requires political willpower, which isn’t always abundant.

West Virginia emerged in the report with a more moderate way of triggering tax cuts: It required rainy day reserves to equal at least 10 percent of the general fund budget for the three years in which the tax cuts took effect. Still, CBPP dinged West Virginia and a few other states for lower overall service funding -- particularly in public education.

To read this regularly, subscribe to "The Week in Public Finance" newsletter for free.