Considering Benefit Corporations as an Integral Part of Tax Reform and our Economic Future

by Ernie C. Jolly

At a shareholders’ meeting for the fictional corporation Teldar Paper, Wall Street (20^th Century Fox, Dec. 11, 1987) antagonist Gordon Gekko argued that “greed, for a lack of a better word, is good” and that “greed, in all its forms, greed for life, for money, for love, [for] knowledge, has marked the upward surge of mankind.” Although a fictional tale, the blockbuster hit may have foreshadowed what became the dominant culture among private corporations prior to the 2008 financial meltdown.  Since the crisis, financial analysts have identified greed as the impetus that encouraged Wall Street executives to amass unsustainable amounts of financial risks. Notwithstanding its negative impact, the crisis sparked a movement that has the potential of changing corporate culture for better. Through “benefit corporation” statutes, lawmakers in several states have modified their laws to encourage more altruistic behavior among entities. This movement may have been futile if the crisis had not challenged the notion that greed is essentially good. In that vein, the time may be ripe for federal policymakers to consider ways to encourage other states to enact similar legislation.

Corporations are creatures of state statutes that define the standards for incorporation. Despite differences among the states’ corporate codes, these laws are rather consistent in compelling corporate directors and managers to pursue the single goal of increasing profits for the benefit of shareholders. Accordingly, among many corporations, profit maximization usually trumps any desire to serve a public purpose.

In April of 2010, Maryland became the first state to enact a benefit corporation statute. Currently, Maryland has been followed by 11 other states. These statutes legally allow entities to pursue interests beyond simply increasing profits for investors. According to B Lab, a nonprofit whose mission is to use the power of business to solve social problems, benefit corporations:  “(1) have a corporate purpose to create a material positive impact on society and the environment; (2) are required to consider the impact of their decisions not only on shareholders but also on workers, community, and the environment; and (3) are required to make available to the public an annual benefit report that assesses their overall social and environmental performance against a third party standard.” After electing to become a benefit corporation, corporate directors and officers are legally protected if they consider the non-financial interests of their workforce, local communities, and the environment while making decisions, even if the decisions do not yield the most profit.

Despite the flexibility afforded to them on the state level, benefit corporations are treated by the Internal Revenue Service as any other for-profit entity, and donations to them are not deductible as they would be if given to a charity. Therefore, a benefit corporation’s income is fully taxable, and their investors and donors are not provided the same tax incentives as traditional charitable donors. As the House Committee on Ways and Means considers comprehensive tax reform, the Committee should also consider organizing hearings on benefit corporations. If this current tax treatment is eventually changed, there may be both more incentive for entities to adopt the new corporate form, and more pressure on state legislatures to jump on the bandwagon.

Ernie C. Jolly is a spring 2013 intern at the Joint Center for Political and Economic Studies and a second-year law student at American University’s Washington College of Law.

Implications of Strict Voter ID Legislation on African Americans in Virginia

by Marcus Coleman, Ph.D.

During Black History Month, the United States celebrates the life and history of African Americans.  In the midst of those celebrations, we commonly learn about African-American leaders who set forth to bravely face the perils of oppression, but we also honor those who set an example of perseverance and resilience in our own lives.

Yet, while we celebrate the social, economic, and political ascendance of African Americans, our fate, as a political voting bloc, is being legally truncated.  To illustrate, recently Virginia passed a strict photo voter ID law, further reigning in long-suffered voting rights.

In 2000 and 2004, Republican President Bush won Virginia’s Electoral College votes, but in 2008 and 2012 Democratic President Barack Obama won Virginia’s Electoral College votes.  Simultaneously, Republicans have a stronghold on the Virginia House of Representatives and Senate.  With that said, minority voter growth in Northern Virginia exceeds 20% since 2000, which has created pockets of reliable Democratic leaning voters in large metropolitan areas of Virginia, e.g. Fairfax, Loudon, Arlington, Alexandria, and Prince William.

Regarding voter turnout, research shows that voter ID laws may marginally depress African-American voter turnout, but it must also be said that growth in African-American voter turnout during Presidential elections in Virginia persists.  However, African-American voter turnouts for midterm elections in Virginia lack energy.  Thus, a strict photo voter ID law in Virginia may allow the state’s Republican lawmakers to maintain their governing majority in the Virginia House of Delegates, but it will do little to reroute the trajectory of Virginia’s Electoral College as a swing state that leans Democratic.

The passage of voter ID laws symbolizes an effort to disenfranchise those who do not possess a photo ID. A simplistic argument merely argues that those without a photo ID are irresponsible, but a more nuanced understanding of civic responsibility recognizes that the possession of a photo ID should not be the measure of citizenship.  Instead, a patriotic critique of the United States via civic engagement has always been at the heart of American citizenship.  That citizenship is what motivates African American communities to work toward political, social, and racial parity.

Nationally, approximately 35% of eligible voters do not to participate in our representative democracy. Locating those who are most at risk for being systematically excluded from voting will increase voter participation.  So, as we close another Black History Month, let us not forget those who toiled for recognition, respect, and enfranchisement.  Thus, African Americans must continue to display their strength as voters in national elections, but also in local and state elections.

Marcus Coleman is a Research Fellow for the Joint Center’s Civic Engagement and Governance Institute. For more information on Dr. Coleman and his work, please visit the Joint Center website.

Education Tax Incentives and Direct Expenditures – The Hard Choices

by Ernie C. Jolly

Federal student financial aid is an asset-building program that has proven its value in enabling young people from low-income families to find success and build wealth over time.  Although an intangible asset, a college degree quadruples a low-income student’s chances of entering the wealthiest income tax bracket, according to a Pew Economic Mobility study.  A college education also may enable a graduate to better weather economic downturns.  As the American Opportunity Tax Credit (“AOTC”), which provides tax credits and refunds for college costs, nears its expiration on January 1, 2013, it is time to consider its impact on college attendance among low-income students, as well as its efficiency when compared to targeted, direct expenditure programs such as Pell Grants.  When analyzed, it becomes clear that the AOTC is a beneficial tax credit for low-income individuals primarily because of its refund feature.  However, its expiration may be warranted if the tax expenditures saved as a result of its expiration are diverted directly to needs-based programs such as the Pell Grant program.

Authorized by the American Recovery and Reinvestment Act (“ARRA”), the AOTC supplanted the Hope Scholarship Credit.  The Hope Credit provided $1,800 in tax credits to individuals who incurred postsecondary education costs.  Since none of its benefits were refundable, the Hope Credit was highly regressive and favored students from wealthier families over low-income students.  The AOTC, on the other hand, provides as much as $2,500 in tax credits for individuals who incur various postsecondary education expenses and allows such individuals to receive a refund of as much as $1,000 for these costs.  If the AOTC expires, the less generous benefits of the Hope Credit would again be in effect.  With these less generous benefits, it will become more difficult for a low-income student to offset the price of textbooks alone, which in many cases can exceed $1,000.

In spite of its refund feature, the AOTC itself is somewhat regressive.  Although low-income individuals benefit more from the AOTC than from the Hope Credit, the AOTC also has shifted its tax benefits to students from higher income households.  This is not surprising since studies have shown that 93 percent of recipients of tax-based educational aid would attend college without receiving these incentives.  Therefore, it is understandable why the AOTC, which will cost 14 billion dollars if extended over 10 years, has become a topic of debate for lawmakers in the midst of budget talks.

On the other hand, the Pell Grant program targets students who are less likely to attend college.  Pell Grants are needs-based awards to undergraduate students, most of whom come from low-income households.  In 2008, more than 60 percent of Pell Grant funds were awarded to students from families with incomes less than $20,000.  Unfortunately, despite their efficiency at aiding low-income students, the portion of college costs covered by Pell Grants is at its lowest point in history.  Additionally, the cost of the Pell Grant program is slated to increase, partly due to a poor economy that has increased the number of eligible applicants.

President Obama’s FY2013 budget called on Congress to make the AOTC permanent, as well as to sustain funding for the Pell Grant program.  Congressional leadership is likely to take on the issue during the lame-duck session.  For low-income individuals aspiring to attend college, the AOTC’s extension would certainly be beneficial.  The troubling alternative would be a reversion to the Hope Scholarship Credit, deemed to be highly regressive due to its nonrefundable nature.  Nonetheless, talks of budget cuts and eliminating tax credits are imminent given the general desire in Washington to cut spending.  If the AOTC is allowed to expire as a matter political compromise, the outcome could be beneficial for low-income students, but only if  its expiration results in more support for targeted programs such as Pell Grants.

Ernie C. Jolly is a fall 2012 intern at the Joint Center for Political and Economic Studies and a second-year law student at American University’s Washington College of Law.

Federally Assisted Asset Building: For Whom and How?

By Melissa Wells

Assets and savings help families weather economic downturns and unexpected financial crises. The President’s budget continues a longstanding federal approach to asset building. According to the recent Assets Report released by New America Foundation, the President’s FY 2013 budget provides nearly $548 billion to support asset-building activities and policies. However, middle and upper-income families, rather than low-income families, reap the lion’s share in benefits from federal policies that support asset-building and savings, especially through tax subsidies.

Tax subsidies account for 92 percent of federal spending on asset-building in the President’s FY 2013 budget. Of the nearly $508 billion provided in tax spending, $478.5 billion is provided for policies that  primarily benefit upper-income households, such as the mortgage interest deduction,  deductions for  contributions to retirement accounts, and exclusions for capital gains.  For example, at least 89 percent of mortgage interest deductions and 77 percent of IRA tax subsidies accrue to households that earn more than $75,000 per year, while these households constitute only 31 percent of all households in the country. Low-income and poor households typically benefit from tax policies that receive considerably less funding, such as post-secondary education tax credits and deductions, which are allocated only $28.93 billion in funds in the budget.

Although low-income and poor households benefit less from tax subsidies than do middle- and upper- income households, they do benefit more from direct spending to support savings and investment, homeownership and post-secondary education. The largest portion of direct spending to build assets is for Pell Grants ($36 billion), a post-secondary education program that provides financial resources for low-income college students.  In addition, $1.19 billion is allocated to programs that prevent foreclosure and subsidize mortgage down payments for low-income households. An additional $602 million is provided to support entrepreneurship through microloan and small business lending, both of which contribute significantly to small business development and in turn can support job creation.  A meager $52 million supports savings and investment through the Assets for Independence program, the Bank On USA initiative and the Volunteer Income Tax Assistance (VITA) program. These programs provide direct services that link low-income and poor households to financial literacy and tax preparation resources. But, again, the sum total of these programs is only a small fraction of the sum total of direct and tax expenditures aimed at asset-building.

The disparity in access to federal asset-building resources limits economic opportunity for low-income populations.  Ensuring low-income households have access to asset-building programs is important because these programs can make it possible to purchase a home, retire with financial security, or send a child to college. As such, the Administration should consider not only how to make existing asset-building programs serve more low-income households but also how to develop new programs that can more effectively help them save and develop assets.

Melissa Wells is Policy Assistant, Asset-Building at the Civic Engagement and Governance Initiative of the Joint Center for Political and Economic Studies.

Will Santorum Be Easier to Defeat Than Romney?

by Michael R. Wenger, Senior Fellow

Beware of what you wish for is a line with which we are all familiar.  It seems that there always are unintended consequences.

Some Democrats who are now rejoicing over the ascendancy of Rick Santorum in the race for the Republican Presidential nomination have cited that he’ll be much easier for President Obama to defeat than Mitt Romney, whose reputed “turn-around” experience in the private sector is viewed, in a weak economy, as the greatest challenge to a second Obama term.

I’m not so sure.  Among the most important factors for voters in choosing a President are likeability and sincere commitment to principle.  Ronald Reagan projected both qualities.  Many Americans who had voted for John Kennedy in 1960 voted for Ronald Reagan 20 years later despite the fact that the philosophies of the two appeared to be at opposite ends of the political spectrum.  I would argue that the voters didn’t change their minds on the issues so much as they were influenced by the fact that both candidates appeared likeable, optimistic, and sincere, while their opponents, Richard Nixon and Jimmy Carter, respectively, did not project any of these qualities.  Bill Clinton in 1992 and George W. Bush in 2000 and 2004 also projected all three qualities.  Their opponents, George H.W. Bush, Al Gore, and John Kerry, respectively, were viewed as wishy-washy, somewhat humorless, and not committed to any core principles.  Similarly, in 2008 both President Obama and his family were personally engaging, and his message of hope and change resonated with the public.

Now consider Mitt Romney and Rick Santorum.  Romney, according to all polls, is viewed as relatively unlikable (remember “I’m not concerned about the very poor”) and straight-laced, and he has built a well-deserved reputation for insincerity (remember “I can’t have an illegal immigrant working for me, because, for gosh sakes, I’m running for office”) and for changing his positions on core issues.  Santorum, on the other hand, appears to be likable and relaxed, sort of like the guy next door, and he clearly is sincere about and committed to his core beliefs.  I believe it matters less to voters what these beliefs are than that they feel they can trust him to take the same stand on issues in the White House as he does on the campaign trail.  In these days when it seems that you can’t trust anything an elected official tells you, that’s a valuable attribute.

I believe that, barring an economic catastrophe or some other unforeseen disaster, President Obama will defeat either Romney or Santorum in the general election, perhaps easily.  But Democrats should not rejoice at the prospect of facing Santorum rather than Romney.

Michael R. Wenger is Senior Fellow at the Joint Center for Political and Economic Studies. More information on Mr. Wenger and his work can be found on the Joint Center website.

In the Interest of Social Security

by Wilhelmina Leigh, Ph.D.

In its deliberations to develop a plan to reduce the federal deficit by more than a trillion dollars over the next decade, the Joint Select Committee on Deficit Reduction considered a proposal to calculate cost-of-living adjustments (COLAs) in all government programs using the “chained” CPI-U (Consumer Price Index-Urban), rather than the CPI-U.  Implementing this proposal would dramatically reduce Social Security benefits for recipients.  Although reducing federal program benefits by changing the COLA computation is indeed one way to reduce the deficit, reducing benefits is not the only way to eliminate the 75-year projected shortfall (of 2.2 percent of taxable payroll) for the Social Security system.  The shortfall can be closed by holding benefit levels harmless and, instead, increasing revenue directed to the system.  A recent report of the Commission to Modernize Social Security (Plan for A New Future: The Impact of Social Security Reform on People of Color) offers recommendations for doing just that.

According to a brief by the National Academy of Social Insurance, over the first ten years after implementation of the chained CPI-U, two-thirds of the deficit reduction achieved would come from cuts in benefits that would be borne by elderly and disabled Americans.  The remaining third would come from revenue increases associated with adjustments to tax brackets and other parameters of the tax code.  After the first decade, deficit reduction due to revenue gains is projected to decrease, while benefit cuts are expected to remain indefinitely.  Reductions in Social Security benefits would be especially problematic for African Americans, among whom benefits (averaging only $1,035 per month for retirees in 2009) are the sole source of income for 40 percent of retiree households ages 65 and older.

The Commission to Modernize Social Security focused on proposals that would both eliminate the projected shortfall and increase benefits for selected vulnerable populations, rather than on proposals that would reduce benefits. Two of the proposals in its report—eliminating the $106,800 cap on wages taxed for Social Security, and extending Social Security coverage to all state and local government employees—would jointly generate enough revenue to eliminate the projected shortfall.  These two proposals along with a gradual increase in the payroll tax rate of one percentage point and taxing contributions to salary reduction plans (such as flexible spending accounts) would generate enough revenue to not only cover the shortfall but also fund benefit increases for the oldest recipients, students, caregivers, and widowed spouses.

It is in the nation’s interest to reduce its deficit.  It is also in the nation’s interest to provide a tune-up to the Social Security system so it will remain solvent over the next 75 years.  Achieving the first goal by reducing the modest benefits that provide a lifeline to so many Social Security recipients of color, however, is not the right way to go.

Wilhelmina A. Leigh is Senior Research Associate of the Economic Security Initiative of the Civic Engagement and Governance Institute at the Joint Center for Political and Economic Studies. More information on Dr. Leigh and her work can be found at the Joint Center website.