QUOTE OF THE DAY
Fortune: The California tax that terrifies tech
Entrepreneurs and investors in California can expect to receive a rude shock in the mail if they sold their company in the last four years. Not only did the state's Franchise Tax Board (FTB) eliminate a tax break on capital gains for small business owners and investors, it announced the tax would be reinstated retroactively. This means those who benefitted from the break can expect a bill for unpaid taxes, plus interest, stretching all the way back to 2008.
Since 1993, California entrepreneurs and early-stage investors have enjoyed a partial state income tax exclusion on sales of stock of a "qualified" small business. This was an incentive for people to start and keep businesses in California. If they sold their company, they would only have to pay half of the regular state tax rate on what they gained -- about 4.5% instead of 9%. That could include founders of companies such as Instagram and Yelp (YELP).
The FTB announced its decision last December, and the ruling went into effect earlier this year. Now, not only will stockholders have to pay the full tax rate on capital gains, which has risen to about 13%, but they'll also be billed retroactively for 50% of the taxes they excluded. The FTB says this will affect over 2,500 people and bring in about $120 million in revenue.
Not surprisingly, the changes have led to concern among entrepreneurs.
"A lot of people who are going to be very affected don't even know about it," says Brian Overstreet, entrepreneur and co-founder of AdverseEvents, a pharmaceutical data firm. "This is going to affect our decision to keep jobs and businesses in California." Overstreet had previously co-founded Sagient Research Systems, a company he sold last year. As a result of the transaction he says he will personally have to pay an additional six-figure amount in taxes and interest.
Reuters: Administration Issues Final Rule on Minimum Benefits Under Obamacare
The Obama administration on Wednesday issued its long-awaited final rule on what states and insurers must do to provide the essential health benefits required in the individual and small-group market beginning in 2014 under the healthcare reform law.
A cornerstone of President Barack Obama’s plan to enhance the breadth of healthcare coverage in the United States, the mandate allows the 50 states a role in identifying benefit requirements and grants insurers a phased-in accreditation process for plans sold on federal healthcare exchanges.
Wednesday’s rule included few changes from previous administration proposals, a fact that could help states and insurers as they prepare for new online state health insurance marketplaces, known as healthcare exchanges, scheduled to begin enrolling beneficiaries for federally subsidized coverage on Oct. 1.
“The administration has been consistent in its approach to essential health benefits for more than a year, and that continued today. It’s good news for states and insurers because it means they don’t have to make any changes,” said Ian Spatz, a senior healthcare adviser at the consulting firm Manatt Health Solutions.
The exchanges are expected to cover as many as 26 million people within 10 years and seem likely to dominate individual and small-group insurance markets. Another 12 million people are expected to receive healthcare coverage through an expansion of the Medicaid program for the poor, according to the nonpartisan Congressional Budget Office.
Obama’s Patient Protection and Affordable Care Act sets out 10 benefit categories that must be covered by most plans at the same level as a typical employer plan. The categories range from hospitalization, prescription drugs and maternity and newborn care.
The American Cancer Society Cancer Action Network was cautious in its praise, describing the rule’s prescription drug mandate as an improvement but warning that it was unclear whether patients would have timely access to drugs needed to treat and survive serious illnesses including cancer.
Governing: Red States May Take Advantage of Obamacare Loophole
Earlier this week, Governing detailed the backstory of the most important mistake in the Affordable Care Act (ACA), an oversight that led to Medicaid eligibility being set at 138 percent of the federal poverty level while eligibility for tax subsidies started at 100 percent, an error that had renewed significance in the wake of the Supreme Court’s decision to make the law’s Medicaid expansion optional for the states.
What we didn’t tell you was that one governor has already taken advantage of this loophole -- and more might follow.
Wisconsin Gov. Scott Walker, an outspoken GOP critic of Obamacare, made waves last week when he proposed a unique way of not expanding Medicaid while still expanding insurance coverage, a plan that explicitly exploited this oversight by the law’s authors. This is Walker’s plan: he wants to scale back his state’s Medicaid eligibility for low-income childless adults (the main population that benefits from the expansion) from 200 percent of the poverty line to 100 percent. That way, those under 100 percent are still covered by Medicaid, but those above 100 percent would buy private insurance on the state’s new health insurance marketplace with a federal tax subsidy.
Walker portrayed his plan as a triumph of the private sector over government-run insurance. According to estimates from his office, Medicaid enrollment would drop 37 percent, but nearly as many people would gain insurance as would have if Wisconsin had simply expanded Medicaid as the ACA prescribed (224,520 under Walker’s plan; 252,678 under the law).
“Government can provide a hand up, but should not provide a permanent handout,” Walker said in a statement. “We need to break cycles of generational dependence on the government."
Chicago Magazine: Illinois Budget Crisis: Residents Want to Cut Our Way to Solvency
SIU's Paul Simon Public Policy Institute just released a poll (600 respondents) about what Illinois should do about its $4 billion deficit. The answers were pretty clear: cut.
The first question gave three options:
1) "Illinois’ public programs and services have already been reduced significantly. We can only fix the problem by taking in more revenue, such as a tax increase."
2) "The state takes in plenty of money to pay for public services but wastes it on unnecessary programs. We can fix the problem by cutting waste and inefficiency in government."
3) "Illinois’ budget problem is so large it can only be solved by a combination of budget cuts and revenue increases."
Option two can be viewed as a bit leading, given that it allows the respondent to assume waste without identifying it; one man's waste is another's necessity (and while it certainly exists in one form or another, what it consists of and how much it adds up to is a difficult question). Either way, that was by far the most popular response—not just to that question, but to any question on the poll, the only one receiving more than 50 percent.
The second-most popular answer in the whole poll was regarding whether the temporary income tax increase should be made permanent, which deputy majority leader Lou Lang just floated. It's a bit surprising that "strongly oppose" wasn't as popular as "we should cut waste." Or not: people get more divided when solutions get more specific.
Coming in third: respondents strongly opposed expanding the sales tax, which has been identified as a possible solution, given that the state sales tax covers a comparatively narrow range of services.
Jim Pethokoukis: A brief defense of school vouchers
AEI’s Michael McShane ably defends vouchers from ill-informed attacks by Ember Reichgott Junge, the Democrat-Farm-Labor representative in the Minnesota State Legislature who authored America’s first charter school bill:
For someone who spent so much time excoriating her opponents for giving short shrift to the complexities of the arguments that she was making for charter schools, I was quite surprised to see such a glib denunciation of vouchers. It read like a politician trying to score points.
Moreover, her criticisms of voucher programs are often off the mark. Her claim that, “private schools neither abide by state regulations nor are required to commit to performance standards or outcomes” (pg. 201) is not true. The three largest non-special needs school voucher programs (Milwaukee, Indiana, and Louisiana) all require participating schools to take the same standardized tests as the public schools.
Similarly, when she says that charter schools are more “inclusive” because private school tuition is higher than most voucher amounts and “families receiving vouchers must still raise the remainder of the tuition” (pg. 202) she incorrectly characterizes almost every voucher program in America. Only the Milwaukee, Cleveland, and Ohio EdChoice scholarships require parents to meet the difference between the voucher amount and tuition, and that only applies to families with incomes more than 200% higher than the federal poverty line.
But beyond that, McShane recommends Reichgott Junge’s new book Zero Chance of Passage: The Pioneering Charter School Story.
MarketWatch: Why your boss is dumping your wife
By denying coverage to spouses, employers not only save the annual premiums, but also the new fees that went into effect as part of the Affordable Care Act. This year, companies have to pay $1 or $2 “per life” covered on their plans, a sum that jumps to $65 in 2014. And health law guidelines proposed recently mandate coverage of employees’ dependent children (up to age 26), but husbands and wives are optional. “The question about whether it’s obligatory to cover the family of the employee is being thought through more than ever before,” says Helen Darling, president of the National Business Group on Health. See: When your boss doesn’t trust your doctor.
While surcharges for spousal coverage are more common, last year, 6% of large employers excluded spouses, up from 5% in 2010, as did 4% of huge companies with at least 20,000 employees, twice as many as in 2010, according to human resources firm Mercer. These “spousal carve-outs,” or “working spouse provisions,” generally prohibit only people who could get coverage through their own job from enrolling in their spouse’s plan.
Such exclusions barely existed three years ago, but experts expect an increasing number of employers to adopt them: “That’s the next step,” Darling says. HMS, a company that audits plans for employers, estimates that nearly a third of companies might have such policies now. Holdouts say they feel under pressure to follow suit. “We’re the last domino,” says Duke Bennett, mayor of Terre Haute, Ind., which is instituting a spousal carve-out for the city’s health plan, effective July 2013, after nearly all major employers in the area dropped spouses.
But when employers drop spouses, they often lose more than just the one individual, when couples choose instead to seek coverage together under the other partner’s employer. Terre Haute, which pays $6 million annually to insure nearly 1,200 people including employees and their family members, received more than 20 new plan members when a local university, bank and county government stopped insuring spouses, according to Bennett. “We have a great plan, so they want to be on ours. All we’re trying to do is level the playing field here,” he says.
While couples generally prefer to be on the same health plan, companies often find that spouses are more expensive to insure than their own employees. That’s because, say benefits experts, covered spouses tend to be women, who as a group not only spend more on health care, but also have more free time to go to the doctor if they don’t work. Indeed, JetBlue’s covered spouses cost 50% more than crewmembers themselves, according to the airline’s online Q&A about its health plan, which this year extended wellness incentives to spouses for the first time.
About a fifth of companies had policies to discourage spouses from joining their health plan in 2012, according to Mercer, though most just charged extra—$100 a month, on average—to cover spouses who could get insurance elsewhere, rather than deny coverage entirely. Indeed, large firms including generics maker Teva and supply chain manager Intermec have spousal surcharges costing $100 a month, or $1,200 annually, while Xerox charges $1,000 for the year.
Forbes: Why Raising The Minimum Wage Kills Jobs
The minimum wage is a major anti-jobs policy. Ten states have announced an increase in their minimum wage effective January 1, mostly because their legislation requires an adjustment to the Consumer Price Index inflation measure. Some political jurisdictions take it further, San Francisco has a minimum over $10 per hour and the state of Washington is above $9 on average. Supporters hail this as a victory for “fairness” and a benefit for poor people. This, it is alleged, will provide more income to support spending and stimulate the economy. If it works that well, why not make the minimum $50? This would provide someone working 2,000 hours a year an income of $100,000, eliminating poverty and stimulating the economy. Obviously, $50/hour would be detrimental to employment as is $7/hour, it’s just a matter of degree.
The President of the Greater New York Chamber of Commerce suggested that the higher labor cost could be offset by eliminating waste in other aspects of the business. Really? So employers are wasting money that they could eliminate and add to the bottom line but they chose not to, to earn less than they could if waste was eliminated. But, with a higher minimum wage they will suddenly eliminate that waste to cover higher labor costs, adding nothing to the bottom line? This is the kind of absurd thinking that leads to bad policy.
As a poverty program, raising the minimum wage is like killing flies with a shotgun, not very well targeted. About 60% of the officially poor don’t work, so the only thing raising the minimum wage does for them is to make it harder for them to get a job if they ever decide they want one. Workers must bring at least as much value to the firm as they are paid or the firm will fail and all jobs will be lost (no GM bailouts are available to our 6 million small employers that employ half of our private sector workforce). Raising the minimum wage raises the hurdle a worker must cross to justify being hired.
It is estimated that less than 15% of the total increase in wages resulting from an increase in the minimum will go to people below the poverty line and less than a third of those receiving the minimum wage are families below the poverty line. Most minimum wage workers are from above median income families. So, most of the people benefiting from the minimum wage are not the intended targets of the “anti-poverty” aspect of raising the minimum wage.
As a jobs program, raising the minimum wage is a real loser. Congress raised the minimum wage 10.6% in July, 2009 (know of anyone else getting a raise then?). In the ensuring 6 months, nearly 600,000 teen jobs disappeared, even with nearly 4% growth in the economy, this compared to a loss of 250,000 jobs in the first half of the year as GDP growth declined by 4% Why? When you raise the price of anything, people take less of it, including labor. The unemployment rate for teens remains unacceptably high. Workers of all ages that are relatively unskilled are adversely impacted by this policy.
Forbes: Texas experiences meteoric rise of relocation inquiries from California companies
Lone Star State Governor Rick Perry seriously amped up his West Coast
recruiting efforts this month in response to California’s passage of
Proposition 30, a statewide vote that dramatically increased the
state’s personal income tax rate. Taxpayers there will be paying up to
3% more on earned income, and that increase is retroactive to January
1, 2012. More than a thousand miles away from Sacramento, a far more
positive outlook counters the frustration felt by many California
employees and business owners.
Just last week Governor Perry met with 200 Golden State business
owners, and two weeks ago he purchased $24,000 in radio ads intended to
lure entrepreneurs with lower individual taxes and a business-friendly
climate. The 30-second spots tout Texas’ “zero income tax, low overall
tax burden, sensible regulations and fair tax system.” The targeted
campaign and face-to-face marketing efforts appear to be paying off… in
According to the Greater Austin Chamber of Commerce, since the passage
of Prop 30 in the November election, California-based company
relocation inquiries have doubled, possibly tripled, in Central Texas.
West Coast entrepreneurs feeling the personal financial stress of an
out-of-control state budget and tax policy have heard Texas’ message,
and they’re responding.
Even California’s Democratic Lt. Governor, Gavin Newsom, has serious
concerns about the economic impact of his state’s tax policies.
According to John Fund of National Review, Newsom declared after
visiting with former California-based companies that now call Texas
their home, “I am impressed with the focus on job creation I’ve seen
here. We need to have a more balanced business climate in California.”
This sign of further working wealth migration from California into
Texas brings a more fiscally relevant meaning to George Strait’s
country classic, “All My Exes Live in Texas.”
Technori: So, What Really Happened with the Government vs. Uber?
It happens everywhere, and it’s all too common in Chicago and across Illinois: established players in an industry will lobby government to enact laws and regulations to keep new competitors out, protecting their profits while killing entrepreneurship.
Some technology startups may not face this problem. A company creating something altogether new in an industry still in its infancy may not have established players or protectionist laws in its way. On the other hand, a startup offering an innovative product that disrupts a well-established, politically privileged industry may find itself besieged by lawsuits and bureaucrats.
That is what has happened to Uber, the San Francisco-based company whose popular smartphone application allows users in Chicago and more than a dozen other U.S. cities to summon a black sedan with the push of a button. In some cities, including Chicago, users can also hail a taxi or an SUV. Uber has no cars of its own – it simply connects users with licensed drivers, who are either independent or affiliated with another company.
Uber came to Chicago in 2011 and quickly became popular with tens of thousands of users and more than 1,000 affiliated drivers. It faced little legal resistance until October 2012, when several taxi and vehicle-service companies filed a federal lawsuit containing dubious allegations that Uber’s business model violated city regulations as well as state and federal law. This move appears designed to intimidate Uber and make it costly for the company to remain in Chicago. Later that month, the city’s Department of Business Affairs and Consumer Protection proposed new regulations that would prohibit “public passenger vehicles,” which include most vehicles for hire other than taxis, from using any device that measures time or distance to determine fares. That would make Uber’s black cars, which measure time and distance using Uber’s GPS-enabled app, illegal. In fact, the proposed regulations’ wording is so broad that even clocks, maps and pocket calculators would be banned, too.
This onslaught against Uber is not motivated by concern for consumers, who tend to love Uber and have few complaints. And it’s not motivated by concern for drivers, who have in fact embraced the opportunity Uber provides them to earn extra money from new customers who previously would not have used a black car service. Rather, the attack is coming from the owners of big taxi companies who want government to protect them from competition. Chicago’s taxi laws and regulations—such as the medallion system that limits the number of taxis but does not apply to other vehicles for hire, like Uber’s black cars—have served that purpose for decades. But the old rules didn’t anticipate Uber’s new business model, so company owners are now scrambling to maintain their privileged position.
CARTOON OF THE DAY