Fiscal Peril

Lawmakers’ continued reluctance to tackle debt and the tax code has left corporate and individual taxpayers on the brink. At the state level, business leaders are more optimistic.

By
From the March 2013 issue of Columbus CEO

Trivia question:

What children’s game played a key element in a 1962 episode of “The Twilight Zone”?

Here’s a hint:

It resembles the one thing virtually everyone agrees that Washington is really good at when it comes to addressing the nation’s critical economic and budget issues.

Kick the can.

In the modern-day Twilight Zone where Congress and the president seem to operate, it’s kicking that poor dented can down the road—again and again and again—to avoid making the hard decisions needed to get America’s fiscal house in order on the budget, deficit, debt, health-care costs and entitlements.

“Our members are very frustrated with Washington,” says Roger Geiger, executive director of the National Federation of Independent Business in Ohio, which represents 25,000 small businesses in the state and 350,000 nationwide. “They see an awful lot of politics and not a lot of results, and I think that can be viewed in a bipartisan way.”

Linda Woggon, executive vice president of the Ohio Chamber of Commerce, says the toxic partisanship in the nation’s capital “makes it real difficult to tackle big problems.”

“It’s really frightening, our inability to do that,” she says. “I’d like to be optimistic but I can’t say that I am.”

Those whom Ohioans elected to represent them in Washington aren’t oblivious to the problems—or their consequences. U.S. Sen. Rob Portman says the continuing failure to deal with fiscal issues is diminishing the country’s leadership role in the world. “It just puts America on a really disturbing track, because we’re supposed to be that shining light on the hill, we’re supposed to be the beacon of hope and opportunity for the rest of the world,” says the Republican from Cincinnati, who was budget director and U.S. trade representative under President George W. Bush.

“We are losing our edge right now. I really think it’s that serious,” Portman says. “The alternative is one we don’t want for our kids and grandkids.”

Central Ohio’s newest member of Congress, Rep. Joyce Beatty, acknowledges, “We have to start having compromises.” And the Democrat from Columbus is one of the few expressing hope it will happen: “I believe Ohioans will see increased cooperation over the next few months because they are [or should be] demanding the stoppage of gridlock simply because of partisan politics. It is not in the best interest of the country and middle-class families for us to continually be on a fiscal cliff.”

Beatty adds, “We should work toward long-term solutions versus continually initiating short-term agreements that only postpone what we must eventually decide. An unbalanced federal budget and sequestration do not provide for a healthy economic future.” 

Ah, there’s one of those eye-glazing-but-important budget-speak words: sequestration. That’s the term given to prospective budget cuts—$1.1 trillion over the next 10 years, split between defense and non-defense programs—stemming from the inability of Congress to come up with a budget solution in late 2011. Those cuts originally were to kick in at the beginning of this year, but in a last-minute deal were delayed until March—meaning a battle over spending, alongside a possible shutdown of the federal government, is next on the horizon. A separate deal delayed consideration of raising the country’s debt ceiling to May.

Leaders of Ohio military installations and defense contractors have warned of dire consequences if the sequester takes effect. The Aerospace Industries Association says about 40,000 defense-related jobs would be lost in Ohio, although critics contend that figure is far too high.

What’s not in doubt is that large cutbacks could seriously impact the Dayton area, where Wright-Patterson Air Force Base generates an estimated $4.7 billion in business, 27,000 direct jobs and 35,000 off-base jobs from defense contractors and local businesses. Wright-Patt is the largest single-site employer in Ohio, making up almost 14 percent of the gross domestic product of the Dayton metropolitan area.

 

Solving Sequestration

“It is imperative that we avoid the dangerous cuts that will come with sequester and take aggressive action on a deficit reduction strategy,” says U.S. Sen. Sherrod Brown, a Democrat from Avon who began his second six-year term in January.

But Brown’s prescription is different than those of his Republican counterparts. “In the last election, the American people voted in favor of policies that reduce the deficit by closing tax loopholes, asking millionaires and billionaires to pay their fair share, and leveling the playing field for our nation’s working families while preventing dangerous cuts to Medicare and Social Security,” he says.

“Our top priority must be job growth and expanding the middle class. We can do this by investing in infrastructure, manufacturing and worker training. We must boost the economy in the short term, and put our nation on a sustainable financial path over the long term.”

Brown says deficit reduction efforts should be “based around shared sacrifice rather than balancing the budget on the backs of seniors, middle class families and working Americans.”

But Republican Rep. Pat Tiberi of Genoa Township, north of Westerville, chided the Senate for failing to pass a budget in more than 1,300 days (as of late January). “This is unacceptable,” says Tiberi, who is beginning his 13th year in Congress. “The House has passed a budget each fiscal year since we took the majority in the 112th Congress [in 2010], but the Senate has refused to even consider our work. It’s time the Senate ‘put its money where its mouth is’ so to speak and work with us to pass a budget.”

Tiberi supported the “No Budget, No Pay Act” in January, which requires approval of a federal budget by April 15 or else the pay for members of Congress would be impounded. “If Americans don’t do their job, they won’t get paid. Passing a budget is the first step toward reforming our mandatory spending and ultimately getting to a balanced budget,” he says.

House Speaker John Boehner put the emphasis on slashing government outlays, without mentioning specifics. “The federal government has a spending problem that has led to a $16 trillion national debt that threatens our nation’s future,” says the Republican from West Chester, a Cincinnati suburb. “Without major action, our debt will continue to grow, and our national economy will continue to stumble. My goal is to ensure we are taking the steps necessary to put America on a course to be free of the debt that threatens our children’s future.”

 

‘No Degree of Confidence’

Until Washington figures it out, many employers will sit on the sidelines—and the economy will continue to limp along.

“It was very clear that as 2012 came to an end, and therefore was approaching the fiscal cliff, that the tremendous degree of uncertainty was causing companies to kind of move to the sidelines,” says Ken Mayland, president of ClearView Economics, an economic forecasting firm in suburban Cleveland.

“I think that was kind of a rational response: Let’s wait until the dust clears and see where that leaves us. There was no question that things sort of softened up,” says Mayland, who makes frequent visits to companies and trade associations. “So here we are in 2013, and those uncertainties have been only partially resolved.”

Woggon says, “I think what was done at the end of last year was just a patch on a bigger problem. I think we still need to look at tax reform, we need to be able to have a tax strategy that encourages business investment, particularly small businesses.”

Geiger says employers need consistency and predictability. “Businesses can’t operate if they don’t know what the rules of the game are,” he says. “There is no degree of confidence in terms of tax policy and regulatory policy. The end result is business is not going to hire new people, open new plants, put on the market new products and services until they know what to expect. That’s probably the single biggest impediment to economic recovery right now.”

Geiger says those in Washington too often take their eye off the ball. “Our guys get frustrated with a Congress that seems to get lost in crazy social agendas and not be more focused on what’s most important in the country today, and that’s whether people have jobs,” he says.

Mayland notes that major decisions are at hand. “Part of the ongoing uncertainty is whether the federal government is going to shut down at the end of March, and whether there will be spending cuts from sequestration,” he says. “Uncertainties do exert a dampening force on the economy. They are deleterious to economic confidence.”

 

Tax Reform

Another uncertainty is the prospect of “tax reform”—a concept most legislators seem to agree with, but few offer specifics on what that would involve.

“I believe by creating a fairer, simpler, cleaner tax code—with fewer loopholes, and lower tax rates for all—we can give our country a stronger and healthier economy,” Boehner says.

The prescription of Tiberi, a member of the House Ways and Means Committee and chairman of the Select Revenue Measures Subcommittee, is along the same lines.

“I would like to see a simpler, more transparent tax code for both individuals and businesses with less loopholes,” he says. “I believe we can modify our corporate tax rates to become more competitive in the world marketplace. We currently have the highest corporate tax rate in the world. I believe we can lower corporate tax rates and remove deductions to create a more competitive environment for businesses to invest here at home, while continuing to be revenue neutral. I also believe we must move to a territorial tax system so multinational corporations can invest here in the U.S. rather than continuing to invest in other countries.”

Such a territorial tax system, recommended by the bipartisan Simpson-Bowles Commission, would permit companies based in the United States to bring back foreign-earned profits without paying U.S. taxes on them.

Tiberi also wants to reduce tax rates and pay for them by “eliminating areas of the tax code that provide special treatment for certain taxpayers. In some areas Congress may have intended the special treatment, such as with credits or deductions, while in other circumstances the special treatment is a result of an outdated and overly complex tax code.”

Beatty also wants to examine tax breaks. “I think we have to peruse the tax codes to identify those unnecessary tax loopholes and any benefits that help those companies or individuals who financially don’t warrant these benefits,” she says. “As a nation, we may all need to stretch a little more to ensure that we can meet our financial obligations and fund the systems that Americans built and will continue to build in the future. Congress and the administration need to look closely at loopholes that do not spur economic growth and make cuts to discretionary spending. Each tax deduction and exemption must be evaluated to determine if it meets its intended result.”

Brown says, “I would start by addressing the corporate tax structure. We can promote manufacturing—the bedrock of our state’s economy—and raise revenue by eliminating incentives to ship jobs overseas or take advantage of tax havens. I will also work to remove special interest loopholes that are in place for big oil and Wall Street megabanks. We can also protect working Americans and the middle class by asking the wealthiest to pay their fair share and ending tax giveaways like the carried interest loophole that lets Wall Street hedge fund managers pay a lower rate than sheet metal workers and teachers.”

Portman calls for all tax loopholes to be tested through economic models to see if they would spark growth, and thus additional revenue. He wants to explore putting a cap on the amount taxpayers can deduct from such sources as home mortgages, charitable contributions and the like. The lower the cap, the more the basic tax rate can be lowered, he says.

Portman labels the federal tax deduction for state and local taxes “questionable policy.”

“At the end of the day, you would get a lower rate, but you couldn’t make the larger deductions,” he says. “What you would have from an economic point of view is a tax code that would encourage that your resources are spent more efficiently … and that results in more job growth. Most businesses pay their taxes as individuals, so it definitely affects the business side.”

Portman says his idea of “broadening the base” while lowering tax rates does not necessarily mean more people would pay federal income taxes. “It’s basically using tax reform to get the economy moving, make us more competitive globally, and also, as an aside, generates more revenue.”

 

State Issues

The same people who express frustration over the federal government’s inability to solve fiscal issues have much kinder words for state government.

Business leaders are almost universal in their praise of Gov. John Kasich’s plan to revamp state taxes, centered on a reduction in the Ohio income tax. “My hat’s off to the governor and leaders of the legislature for being focused on jobs and economic issues,” Geiger says. “Without question, when you look at both local and state taxes, Ohio is a high-tax state.” Thus any attempt to create larger and lower state tax brackets “is going to be extremely helpful to small businesses as well as people who want to start businesses.”

Kasich spokesman Rob Nichols says taxes are being targeted because “that remains the biggest barrier to job growth in the state, and we will do everything we can to drive that down. Ohio remains a high-tax state, and it’s holding us back economically.”

Lowering the state income tax “gives a shot of adrenaline to small businesses in this state, to allow them to grow, hire more Ohioans, etc.”

Woggon says the real battle on Kasich’s budget in the legislature this spring will be over “whose ox gets gored in order to get to the bigger goal of reducing the income tax … Everybody’s going to fight as hard as they can for their best position in this.”

Kasich’s privatization of Ohio’s economic development efforts through the nonprofit JobsOhio, bankrolled by liquor profits, also gets a general thumbs up. Geiger points out it’s still early for a true assessment of the entity that replaced the Ohio Department of Development: “What are the huge benefits? I’ve got to be honest, I think those are yet to be determined.”

Kasich has expressed frustration with employers not providing enough information about their prospective job openings so that data can be used by higher education to tailor classes and training to the job market. The governor’s office has hired Accenture to gather the information. Beta testing in Cincinnati shows the new approach can work, but Nichols says “it is a huge challenge.”

One of the biggest roadblocks has come from the shale boom centered in eastern Ohio. “The governor says [to shale industry leaders] you’ve got to hire more Ohioans,” Nichols says. “We recognize that not every guy on a well can be an Ohioan. OK, if you can’t fill that job with an Ohioan right now, tell us what those jobs are and we will get two-year colleges to provide the necessary training.”

But that request is often denied. “Some of our oil and gas companies are not helpful,” Nichols says.

Kasich and Ohio State University President E. Gordon Gee have come up with a plan to tie 50 percent of state funding for four-year public universities to the rate of students who graduate with a degree. Money for two-year colleges will be based on how many students complete a course or credit.

Woggon applauds the intent of that effort, saying “it’s important to get a degree.” However, she wonders, “But is it a right degree?”

“We’ve tended to move our emphasis from some of the skilled-trades jobs, some of the tech jobs that may not require a four-year degree, to pushing students to universities to get a four-year degree.” Because jobs requiring less training—such as welding—have been devalued, Ohio is now seeing a void in those areas, Woggon says. “I think most business leaders would tell you that they’re still struggling to get the skills that they need,” she says.

Nichols touts the state’s job creation numbers—up 120,000 in Kasich’s first two years in office, compared with 400,000 lost in the previous four years. Ohio has ranked near the top of the nation in those figures, and the state’s unemployment rate has been running around a full point less than the nation’s.

Mayland acknowledges “the state is truly starting to perform better,” but he adds, “You should beware of the decline in the unemployment rate here in Ohio because it has gone down for a lot of the same reasons it has gone down nationally, that people have dropped out of the labor force.”

He says the state still faces big challenges. “We haven’t recovered all the jobs lost, not by a long shot. So don’t let anybody fool you,” Mayland says. “Most of the recovery has been due to the national business cycle. Gov. Kasich has caught the wave, the national cyclical recovery of the economy. So things very much have the appearance of being on the mend.”

Darrel Rowland is public affairs editor of The Columbus Dispatch. 

Reprinted from the March 2013 issue of Columbus C.E.O. Copyright © Columbus C.E.O.