The Week in Public Finance: Controversy at the Consumer Protection Agency, Education Funding Still Lags and Tax Reform's Blow to Puerto Rico

A roundup of money (and other) news governments can use.
by | December 1, 2017
Richard Cordray resigned as director of the Consumer Financial Protection Bureau late last month. (TNS/Ron Sachs/CNP)

Who's in Charge of Consumer Protection?

The battle over who gets to appoint the federal Consumer Financial Protection Bureau's interim director could mean uncertainty for states targeting predatory lending.

Last week, President Trump appointed his budget director, Mick Mulvaney, to be the interim director of the bureau after Richard Cordray stepped down. The appointment immediately set off a firestorm of criticism from consumer watchdogs who question the legality of Mulvaney serving -- even temporarily -- in the dual role. For starters, the bureau is legally mandated to be independent. And in his resignation, Cordray had named his deputy director to serve on an interim basis until a new director was confirmed by the Senate.

But the biggest point of contention for consumer advocates is Mulvaney's lack of support for the bureau. In 2014, then-Congressman Mulvaney called the bureau “a joke [...] in a sick, sad kind of way.” Indeed one of Mulvaney’s first actions as interim director -- other than tweeting out a picture of him working behind his new desk -- was to freeze all new hiring and regulations.

The Takeaway: So why are some states so worried? Mulvaney could be at the helm for a year or longer and some are concerned that means state attorneys general have lost a partner in pursuing cases against predatory lenders. “Up until now, the CFPB did a number of joint actions with states in payday lending,” says Mike Calhoun, president of the Center for Responsible Lending. “This takes the [federal] cop off the beat.”

The bureau also recently released new federal rules that seek to curb potentially abusive practices of payday and other predatory lenders. Calhoun says that not only could Mulvaney choose not to enforce those rules -- he could even try to repeal them.

 

School Funding Still Recovering

The uphill battle to restore school funding has suffered a setback over the past year in the nation’s hardest-hit states. The Center on Budget and Policy Priorities (CBPP) released new data this week that looks at the 12 states that cut general education funding the most between the Great Recession and last year. Seven of those states --  Alabama, Arizona, Kentucky, Michigan, Mississippi, Texas, and West Virginia -- cut per-student funding even more for the current school year.

The other five increased funding this school year (Idaho, Kansas, North Carolina, Oklahoma and Utah). But all 12 states are all still far below their 2008 per-student funding levels. Oklahoma leads the pack in overall cuts, providing 28 percent fewer inflation-adjusted dollars per student this year than it did a decade ago.

The Takeaway: There are a few reasons why it’s been so difficult to restore funding in these states. For starters, there are 1.4 million more K-12 students nationwide than there were 10 years ago. So even if a state’s education spending was kept level, the per-pupil funding would decrease.

The other reasons are policy-related. Most states were woefully unprepared for the kind of revenue drops they experienced in 2008 and 2009, so they disproportionately relied on spending cuts to balance budgets. In this slash and burn environment, education funding lost the protected “third rail” status it had enjoyed in many states. Follow up that amount of cuts with what’s been a slower revenue growth environment, and it’s simply taken a long time for most state budgets in every area to return to what their levels were before the recession.

Lastly, some states have enacted policy changes that have exacerbated the slow revenue growth environment. Not surprisingly, a disproportionate number of the 12 states with the deepest education cuts fall into this category. Seven of these states -- Arizona, Idaho, Kansas, Michigan, Mississippi, North Carolina, and Oklahoma -- have also cut income tax rates in recent years.

 

Some Day, Congress Won't Have Puerto Rico to Kick Around Anymore

Two decades after Congress ended one tax perk that helped derail Puerto Rico’s economy, it’s contemplating another blow via federal tax reform: The provision in the federal tax overhaul passed by the House this month and under debate in the Senate this week that would place a 20 percent excise tax on certain corporate payments to related offshore affiliates.

While the tax is meant to encourage more job growth and investment stateside, it would slam Puerto Rico’s drug manufacturing industry with a higher cost of doing business. That’s because a U.S. drug company’s Puerto Rico plant doesn’t pay federal income taxes when its mainland parent company purchases products from it – as long as that cash is kept offshore.

Manufacturers in Puerto Rico have warned that losing that perk won’t have the intended effect of bringing their offshore jobs to the U.S. Instead, they’ll likely be exported to Ireland, which has been wooing companies with lower tax rates.

If the provision sticks, it would be the second time in 22 years that Congress got rid of a tax perk to the potential peril of Puerto Rico’s economy. In 1996, lawmakers voted a 10-year phase out of a perk that allowed corporations on the island to keep their profits tax-free. After the phase-out was complete, Puerto Rico entered a recession which continues today and is a big contributor to its bankruptcy.

The Takeaway: The territory’s limbo status as both a foreign and domestic government means it’s often a forgotten part of the country when discussing national tax policy. As Puerto Rico’s nonvoting member of Congress, Jenniffer González-Colón, said recently, “Congress and the administration ran on the platform of supporting American manufacturing. That’s exactly what the manufacturing sector in Puerto Rico is -- it’s American jobs.”

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