As the calendar turns to March, the 2016 US Presidential election is entering into a key stretch of the primary schedule. March 1st is “Super Tuesday” when 15 primaries are held, many in the Southern states. With this in mind, this research piece will focus on the largest state in this grouping, Texas, and the impact that Democrat Bernie Sanders’ tax and economic plans could have on the state if these plans were to be enacted. Previously, we’ve covered the Trump, Cruz and Rubio plans in this column.
Given the weak global economy and the ineffectiveness of the central banks in stimulating the various global economies, many in business are pinning their hopes on more enlightened economic policies as the fuel for growth in upcoming years. Among the most pressing issues here are the US debt and deficit and the need for job growth. For our analysis, we will focus on four policy areas critical to creating the business conditions for more robust economic growth: tax reform, free trade, regulatory reform, and infrastructure spending. For Texas, we’re going to review the likely impact of Sanders’ economic platform on the state’s top 5 economic categories by GDP as well as its impact on exports.
For business in the state of Texas, the Sanders’ plan is potentially a major negative and could hurts firms in the oil and gas, manufacturing, pharmaceutical and export spaces.
Sanders Plan
Sen. Sanders has a widely different approach to the question of economic growth and government action versus the top 3 Republican candidates. Unlike Trump, Cruz and Rubio, Sanders has extraordinarily large social spending plans that need to be funded as a precondition to economic growth under his vision. Some of the programs include: a single-payer health care structure, free tuition for college and university students, expanding Social Security, and universal childcare and prekindergarten programs. Consequently, Sanders’ goals are strikingly different from those of his rivals, and he proposes alternative methods to achieve them. Again, our focus will be on the business sector and Sanders’ proposed policy changes.
For corporate and business tax and regulatory changes, Sanders’ approach contains these key components:
- Eliminate several business tax provisions involving oil, gas, and coal companies.
- End the deferral of income from controlled foreign subsidiaries and repatriate back to the U.S.
- Change several international tax rules to curb corporate inversions and limit use of the foreign tax credit.
- Create a financial transactions tax on the value of stocks, bonds, derivatives, and other financial assets traded by U.S. persons. The rate of the tax would range from 0.005 percent to 0.5 percent, depending on the type of asset.
- Create a new 6.2 percent employer-side payroll tax on all wages and salaries.
- Create a 0.2 percent employer-side payroll tax to fund a new family and medical leave trust fund.
- Institute employer mandate on vacation that would require employers to provide at least 12 weeks of paid family and medical leave; two weeks of paid vacation; and 7 days of paid sick days.
- Increase the federal minimum wage from $7.25 to $15 an hour by 2020.
For energy, Sanders wants to work toward a 100 percent clean energy system for electricity, heating, and transportation. He believes this will “create millions of good jobs, clean up our air and water and decrease our dependence on foreign oil.” He wants to:
- Invest in clean, sustainable energy sources powered by the sun, the wind and the Earth’s heat.
- Invest in advanced renewable fuels and keep our energy dollars at home.
- Emphasize new, clean technologies like cellulosic ethanol and algae-based fuels.
- Invest in energy efficiency technologies, like weatherization and efficient light bulbs
- Support the Weatherization Assistance Program (WAP), the Rural Energy for America Program (REAP), and the Low Income Home Energy Assistance Program (LIHEAP) to assist rural and low-income families make their homes more energy efficient and lower their energy bills.
Next, on infrastructure, Sanders wants to spend $1 trillion over five years on roads, bridges, railways, airports, public transit systems, ports, dams, wastewater plants, and other infrastructure needs. He states that he will put 13 million Americans to work implementing his plan.
Finally on trade, he wants to reverse trade policies like NAFTA, CAFTA, and PNTR. He is against the pending free trade pact Trans Pacific Partnership. His website states, “If corporate America wants us to buy their products they need to manufacture those products in this country, not in China or other low-wage countries.”
Texas Economy
At $1.645 trillion in 2014, the GDP of Texas is the second largest in the United States and is one of the fastest growing in the country. At the end of 2015, the Texas unemployment rate has been at or below the national rate for 108 consecutive months. By percentage of GDP, here are the top 5 sectors of the state’s economy:
- Trade, transportation, utilities 19.0%
- Manufacturing 14.4%
- Financial Activities 14.2%
- Mining (oil and gas) 11.5%
- Prof & Biz Services 11.1%
Trade
In 2014, Texas exported $288 billion in total merchandise according to the US International Trade Administration. The top five exports were: transportation equipment ($23.2B), machinery ($29.8B), chemicals ($46.1B), computer & electronic products ($46.6B) and petroleum & coal products ($58B). The top five export markets: Mexico ($102.5B), Canada ($31.3B), Brazil ($11.8B), China ($10.9B) and South Korea ($8.9B).
Export Jobs
In 2014, goods exports from the state of Texas supported more than 1.1 million jobs according to ITC. “A total of 41,558 companies exported from Texas locations in 2013. Of those, 38,735 (93.2 percent) were small and medium-sized enterprises with fewer than 500 employees. Small and medium-sized firms generated over one-third (34.9 percent) of Texas’s total exports of merchandise in 2013.”
Sanders’ Impact on Texas
Clearly, the elimination of all energy tax expenditures for oil and gas drilling and exploration would be a negative for Texas’ energy sector. This would directly impact 11.5% of GDP and likely has larger negative implications for a range of sectors tied to energy, such as real estate and retail sales. These changes would come at a particularly difficult time for the energy industry as the price of oil has plummeted and production is downshifting substantially. At present this amounts to firms struggling to stay in business and large, unscheduled layoffs of workers. It would seem that, should these policies be enacted, there would have to be a massive, sudden shift in resources and jobs into renewable energy simply to avoid additional damage to the Texas economy. The graph below illustrates the dramatic shift in annual employment growth in the mining and logging industry that is driven by oil and gas layoffs.
Under Sanders’ clean energy proposals, the renewable and clean tech sector in Texas would see a significant increase in investment for sustainable energy sources powered by the sun, the wind and the Earth’s heat. Sanders plans to use the dollars saved from the oil and gas tax credits to pay for the new spending. Winners would include clean energy companies like turbine and solar panel manufacturers.
The end of deferral of overseas assets would be a major negative for exporters, especially manufacturers, and technology and pharmaceutical companies who derive a large portion of their overall sales from foreign countries. On “Engage with Andy Busch” iTunes podcast, we asked Austin Chamber of Commerce SVP Drew Scheberle what issue the Chamber would like to see addressed by the 2016 US Presidential candidates. He stated tax reform and specifically international tax reform that would address repatriation. This part of the tax code impacts tech companies like Dell, EDS and IBM. As an example, the infograph below shows the top ten tech companies for Austin, a key tech center in Texas and indeed the U.S.
Currently, the tax on foreign income dividend repatriation is 35%, but most companies don’t bring the money home and therefore are perpetually not paying any tax on these profits to the US Treasury. However, they are usually taxed in the country of origin. These companies receive a deduction on these foreign taxes when they are repatriated to the US. (If they didn’t receive the deduction, they would be taxed twice on these earnings should they repatriate them back to the domestic parent company.) Therefore, an end to deferral would place a 35% tax on current earnings held overseas and on all such future earnings. This would be a major negative for any company that is exporting and holding foreign earnings. As mentioned above, these companies are not just large, multi-national firms, but potentially the 38,735 small to medium-size firms that export.
The financial transaction tax would initially hurt financial firms in Texas and in the United States. Remember, this is not a new idea as it was discussed in the 1930s, but never passed through Congress. The main argument against it is that it would likely be passed on to end-users of financial services like retail investors. Moreover, the initial negative impact to banks would be to raise administrative costs and to reduce revenues. In turn, this could negatively impact the banks’ capital reserves and ability to lend. While public anger towards the financial sector remains high after 2008, bank lending and capital formation are critical to a growing economy.
Next, the new employer payroll side taxes are simply another cost levied against businesses that reduces income and profits. The mandated vacation plan would be a regulatory cost imposed on businesses and would reduce productivity while raising the cost of creating goods and services.
On trade, Texas has $288 billion in exports or 17.5% of GDP.
By ending NAFTA, Sanders would negatively impact nearly half (46.5%) of all Texan exports. By mandating that US companies produce goods only in the US, the Sanders plan would ultimately raise production costs for any company that sources any part of its product overseas and potentially makes it uncompetitive. This could easily lead many companies to go out of business. Or the company would simply leave Texas and move overseas taking jobs and tax revenue with it. .
Lastly some good news: the Sanders plan on infrastructure would have major short-term positives for engineering and construction firms. The medium to long-term positives would include increased economic efficiency by reducing travel times for goods and services.
Commuters and transportation companies would benefit. While it’s difficult to estimate how much Texas will receive of the $1 trillion Sanders wants to spend here, it remains a formidable amount and would have positive impacts.
Summary
At the beginning of this research piece, we stated our focus would be on four policy areas critical to creating the business conditions for more robust economic growth: tax reform, free trade, regulatory reform and infrastructure spending. How did the Sanders’ plan stack up? On tax reform, Sanders would increase the complexity of the code by adding new taxes and has no reductions in tax rates for businesses or pass-through entities like LLCs or Sub-chapter S corps. On free trade, Sanders is against the current pacts and against future pacts like the TPP. On regulations, Sanders wants to increase regulations on businesses by increasing the minimum wage and implementing mandatory vacation schedules, among other burdensome measures. For infrastructure spending, Sanders has a massive program that would positively impact a range of businesses from transportation to construction and engineering firms. For business in the state of Texas, the Sanders’ plan would be a major negative and would hurt firms in the oil and gas, manufacturing, pharmaceutical and export spaces.
Bernie Sanders’ tax and economic plans have economic disaster written all over them. Texas which has a GDP that rivals many countries will suffer a GDP loss of over 11%. Additionally, Sanders belief of going to 100% clean energy will be more costly than one realizes. One has to look at the marginal costs and come to the realization that eliminating all pollution will be more costly than Sanders realizes. Plus, take into the fact that infrastructure costs to convert everything from oil based machinery and equipment would most likely be astronomical.
Finally, I believe that Sanders primarily caters to “The Entitlement Era” by providing free college, extended vacations, and free child care. These are all things that should be handled by the schools and businesses with minimal government intervention. And as for healthcare….a single payer system basically creates a government monopoly which will eliminate competition and can adversely affect the quality of care that would be received.