buyer beware

According to today's WSJ, state governments are going after unused gift cards, dormant bank accounts and safety deposit boxes:

Some states faced with sinking tax collections and rising debt are going after unused gift cards that bolster their revenue.

South Carolina is considering legislation that would give the state the right to collect unclaimed gift-card credit. A similar measure in Texas to allow the collection of unused credit even from cards that have no expiration date passed that state's House this spring and stalled in the Senate. Texas already collects unused gift cards with expiration dates.

Since the recession began, states have been aggressively tapping so-called abandoned property -- anything from gift cards to dormant bank accounts and safety-deposit boxes. About half the states collect unused gift cards after a period of two to five years.

States are "looking under every rock," said Mary Bernard, a tax expert at Kahn, Litwin, Renza & Co., an accounting and business-consulting firm based in New England.

Each year Americans spend about $65 billion in gift cards -- excluding bank-issued prepaid cards -- but don't redeem $6.8 billion, according to research by TowerGroup, a financial-consulting firm.

What happens to the unused amounts varies by state and company, but they often revert to retailers as income. States that collect abandoned gift cards require retailers and third-party gift-card processors to update a database keeping track of when a card is issued and when it is used.

The National Retail Federation said retailers have opposed efforts to extend states' reach into unredeemed gift cards.

"We've never understood why the state considers this money abandoned property," said Jim McGregor, director of government affairs at the Maine Merchants Association, a retail businesses advocate. Maine collects unused gift cards after two years.

Retailers are also unhappy about states' attempts to go after gift cards that have no expiration date.

"One of the benefits of offering gift cards which never expire is that it affords the guest the opportunity to use them at any time," said Target Corp. spokesman Eric Hausman. "The proposals under consideration would essentially impose an expiration date on our gift cards."

Meanwhile, consumers are also turning up at cash registers to trade in long-forgotten gift cards for anything from groceries to designer clothes, said Scott Krugman, a spokesman for the National Retail Federation. Between states' efforts and recession-strapped consumers, retailers are "getting squeezed," he said.

Many retailers shift unused gift-card credits from a liability account to an income account, or use them to reduce operating expenses based on the assumption that the cards -- even those that don't expire -- will never be used after a certain period of inactivity, according to TowerGroup's Brian Riley, a research director.

Some states faced with sinking tax collections and rising debt are going after unused gift cards that bolster their revenue.

Home Depot Inc. reported $37 million in revenue from unused gift-card credit in 2009, according to Securities and Exchange Commission filings. Last year, American Eagle Outfitters Inc. collected more than $12 million, according to annual financial statements.

States say the gift-card laws are intended to help consumers get their money back, not to line government coffers. They say they are better than companies at tracking down and contacting gift-card owners about their unused funds.

But most states are unable to attribute more than a small fraction of the abandoned property. Gift-card owners are particularly difficult to track because retailers usually sell them anonymously to protect consumer privacy.

The state of New York, which faces a $7.4 billion budget deficit, collected $9.6 million in unredeemed gift cards last year, according to data provided by the New York state comptroller.

At the close of the fiscal year ended in March, $691 million from the state's abandoned-property fund, which includes anything from uncashed payroll checks to forgotten bank accounts, was transferred to the state's general fund.

For many years, states cooperated with consumers to pressure retailers to eliminate so-called dormancy fees, amounts subtracted from unused gift cards. "Now the state is trying to capture those funds," said Joe Ridout, consumer-services manager at Consumer Action, a consumer-education and advocacy group in San Francisco.
New laws enabling states to tap into gift cards stretch unclaimed-property laws away from their original purpose of reuniting owners with their lost goods, according to Robert Peters, managing director at Duff and Phelps, a business consulting and investment-banking firm.

When the owner is unknown, "there's nothing much we can do," said Ron Schubin, director of reporting operations for the New York state comptroller. New York returned to their rightful owners around $2,150 in unredeemed gift cards last year.

prognosis negative

While New Jersey has a budget for the next FY, other states cannot resolve their budget differences and may shut down. California has run out of cash so it is issuing IOUs. In addition, some feel the US Congress will consider a VAT next year.

navigating the fiscal crisis

Click here to read a white paper prepared for local leaders.

State budget woes

What happens when you spend too much money in the good times? Click here to find out.

Stimulating stimulus

A Q&A about the stimulus:

1. Who/what is receiving stimulus dollars? Click here, here, here, and here to find out.
2. What is the stimulus stimulating? Click here.
   
3. How are we (or might be) paying for the stimulus [and the massive expansion of government]? Click here, here, and here to find out?
   

What happens when a town runs out of money?

Click here to find out.

A budget lesson

Budget lessons to be learned from Chile. From today's WSJ:

During the emerging economies' commodities boom a few years back, Chilean Finance Minister Andrés Velasco was a wet blanket at the fiesta. Chile, the world's largest copper producer, was reaping a bonanza from the quadrupling in the metal's price. Mr. Velasco insisted on squirreling away a large chunk in a rainy-day fund.

As the savings swelled above $20 billion -- more than 15% of Chile's economic output -- Mr. Velasco faced growing pressure to break open the piggy bank. In September, protesters barged into a presentation by Mr. Velasco, carrying an effigy of him and shouting, "The copper money is for the poor people."

The 48-year-old Mr. Velasco, wary that a flood of copper income could generate lending and consumption bubbles, stood his ground, even as the popularity of the center-left government withered. Latin American history, he cautioned, was full of "booms that had been mismanaged and ended badly."

Today Mr. Velasco looks like a prophet. Since the onset of the global economic crisis, copper prices have fallen by 50%, in line with the sharp decline in other commodities. Emerging economies that got too giddy in the good years are now coping with nasty hangovers. Soybean-dependent Argentina is facing a possible debt default while oil-rich Russia has been stuck bailing out banks and companies that got in over their heads in debt.

Thanks to Mr. Velasco's caution, Chile is now in a position to try to bootstrap its own recovery from the global recession. Mr. Velasco's preemptive moves have kept Chile's government from having to spend a single peso on bank bailouts. Having paid down foreign debt during the fat years, Chile is now a net creditor nation, with a debt rating that was upgraded by Moody's Investors Service in March.

And now Chile is pouring some of its copper savings into a massive stimulus plan, consisting of job-creating public-works projects, tax breaks for business, investments to keep mines operating and other goodies. Chile's plan is one of the largest stimulus packages in the world relative to the size of its economy. The Chilean program is the equivalent of 2.8% of gross domestic product, versus 2% in the U.S.

As a result, economists expect the nation's annual economic output to decline a very slight 0.5% this year, compared with much steeper declines elsewhere.

Juan Carlos Huaiquimil, who sells soft drinks from a pushcart, is the head of one of 1.7 million Chilean families, the poorest 40% of the population, which received cash stipends from the government in March. He says the money, equivalent to $70, was a godsend, helping pay for school supplies and uniforms for his three children. Last week, Chile announced another stipend will be paid in August.

"How many countries are in a position to give away money today?" he asks.

The answer in emerging-market countries is not many. During the boom in emerging economies that started in 2003, governments that were raking in export dollars from commodities or manufactured goods often paid lip service to the idea of husbanding wealth for leaner years. Countries from Bahrain to Brazil set up sovereign-wealth funds, investment vehicles designed to develop national nest eggs.

But today, when public spending is needed to pick up the slack from shell-shocked private investors, many emerging countries "have only limited ability to reflate their economies," says Claudio Loser, former chief for Latin America at the International Monetary Fund. That's why the recovery in emerging economies is likely to be halting, he says.

Governments in Brazil and India are constrained by high debt levels, which drain resources that might otherwise go to stimulus, says Mr. Loser. Indonesia's government is hamstrung by local capital markets that are too small to fund the government, he says.

Mexico hasn't much room to boost spending partly because the government funneled more income from the good years into current expenditures than into the country's sovereign-wealth fund, economists say.

For Chile's governing Concertación coalition, prudence is providing a belated political boost. The government is more popular today during the global recession than it ever was during the copper boom years. President Michelle Bachelet has a 67% approval rating, up 25 points since last August. Mr. Velasco, whose job appeared in danger a year or two ago, is as popular as she is.
Sebastián Piñera, a conservative business tycoon, had looked like a shoo-in to win presidential elections in December and end 20 years of rule by the Concertación. But the government's adroit management of the crisis has given new life to the center-left candidate, Sen. Eduardo Frei.

Chile, which has long been a laboratory for economic experiments, had its thrifty fiscal consciousness forged by a national tragedy in the 1970s. To finance his plan of turning Chile into a socialist state, then President Salvador Allende cranked up the money presses, leading to inflation of more than 500% and alienating the middle class.

The societal stresses came to head on the morning of Sept. 11, 1973, when Chilean air force planes bombed the presidential palace in a coup by Gen. Augusto Pinochet. Mr. Velasco was 13 years old. A few years later, Mr. Velasco's father, a law professor, was kicked out of the country by the Pinochet government for denouncing human-rights abuses.

Mr. Velasco studied economics at Columbia University, as part of what he calls a quest "to understand how did this happen [to Chile] and how do we make sure it will not happen again." The conclusion reached by Mr. Velasco and other economists of Chile's left was that runaway inflation had made Chile fertile ground for coup plots, and that political stability couldn't be ensured without financial stability.

Taking that lesson to heart, the Concertación administrations that governed Chile after the country returned to democracy in 1990 produced budget surpluses in all but four years over the next two decades, Mr. Velasco boasts. They also preserved the Pinochet government's pioneering free-market economic reforms, including personal social-security accounts and privatization of public companies.

When Mr. Velasco left a professorship at Harvard University to become Ms. Bachelet's finance minister in 2006, he took office amid a historic surge in copper prices.

It was a minefield for a policy maker. When commodities are high, Mr. Velasco says, "a country seems very creditworthy, everyone wants to lend to you, capital flows in and consumption booms."

But at such times bubbles in banking, real estate and consumer spending can easily inflate, he says. Meanwhile, dollar earnings from commodities can make the local currency grow too strong, hurting the competitiveness of manufactured exports. All of that makes the economy vulnerable to a crisis when the commodity falls, as Chile learned during the last copper crackup in the early 1980s.

To avoid repeating history, Mr. Velasco in 2006 pushed through a law requiring the annual budget to be based on an independent committee's estimate of the average copper price over the next 10 years -- not on the current market price. Any copper income above the budgeted price goes into a savings fund maintained outside the country.

In 2007, the copper price used in calculating the budget was $1.21 a pound, while the actual market price turned out to be $3.23 a pound. The windfall profits -- some $6 billion -- went into the savings fund, invested conservatively in government bonds or money-market instruments denominated in dollars, euros and yen.

The program is "exactly what any household would do," Mr. Velasco says. "If you get some extra money, you will ask, 'Will I have this again next year?' If not you say, 'Well, I'll save part of it.'"
But a poll taken in May of 2006 revealed that two-thirds of Chileans wanted to spend the copper windfall, not save it. The Bachelet government increased spending at an 8% annual rate, expanding pension coverage and the day-care system. That wasn't enough to satisfy a populace with rising expectations.

In mid-2006, tens of thousands of Chilean high-school students, seeking free school transportation and education reforms, launched disruptive demonstrations, known as the "March of the Penguins," because of the students' black-and-white uniforms. In August 2007, Chile's top union leader called a national strike, after accusing Mr. Velasco of "declaring war" on workers by resisting wage demands. Protests coinciding with the strike led to street fights with police and hundreds of arrests.

Mr. Velasco's policies came under fire from within his own coalition, which feared being voted out of office. "Are we going to hand over to the Right a government with $20 billion or $30 billion in the till?" said Sen. Frei, who served one term as president in the 1990s. "That is crazy."

Bloggers mocked the handsome and well-groomed finance minister as el metrosexual. Some politicians saw Mr. Velasco as an out-of-touch, Ivy League technocrat. "I was a friend of Velasco's father, but the son is arrogant and would not listen," says Sen. Adolfo Zaldívar, who was drummed out of the Concertación partly because of his attacks on Mr. Velasco.

On top of everything else, Chile's economic performance was lackluster. In mid-2008, Chile recorded its most anemic growth in six years, while inflation was picking up steam. Conservatives said that was part of a broader pattern of economic decline, in which Chile's annual economic growth had averaged around 3.7% during the prior 10 years, half of the level of the decade before. Mr. Velasco says the economy's performance over the past decade has been skewed by factors beyond the government's control, such as the Asian financial crisis.

Around the middle of last year the global financial crisis started racking Chile, and Mr. Velasco's warnings began to look prescient. After peaking at around $4 a pound last July, copper quickly plummeted to about half that level by the middle of October. Investors halted Chilean mining projects, while retail consumption and lending went into deep freeze.

Maligned for being passive during the boom, Mr. Velasco suddenly seemed to be everywhere all at once amid the bust. He flew to the U.S. in September to assess the financial damage first-hand. Then he began a series of meetings at home with leaders of big businesses and residents of small towns. And the tightfisted finance minister started singing a new tune about the copper savings. "The savings aren't to keep behind a window but to spend if necessary," he said.

Mr. Velasco, who had problems in Congress in the past, was able to get the $4 billion stimulus package through both houses of Congress, with unanimous approval, in just nine days in January. Chile will endure a mild recession this year, economists say. But the effects will be eased by a stimulus representing two to three times the amount most other Latin American governments are enacting, relative to GDP.

The package offers subsidies for businesses that hire younger workers, the group most hard-hit by unemployment.

To prod Chilean banks to lend money, Mr. Velasco pumped $500 million into state-owned BancoEstado, Chile's third-largest bank. Bulked up financially, BancoEstado nearly halved its consumer-lending rates and then broke with standard practice and stayed open for business one Saturday in March. The bank got so many customers that day its computer system was temporarily overwhelmed.

Chile is putting $700 million into a huge infrastructure program designed to create at least 60,000 jobs in road paving, airport upgrades and housing construction. The home-building plan, which features subsidies for middle- and low-income buyers, has prompted developers to start clearing land for a 400-unit development called Western Gardens not far from Santiago's airport.

One of the workers on the site is Roberto Urrutia. He had been unemployed since December, and had been so strapped for cash he'd had to cancel his telephone lines and borrow money for his children's schooling. "Putting my hard hat on is the greatest feeling in the world right now," he says.

A Fat Tax

Click here to read about another bad tax idea.

Good reads

Check out the following articles on taxes by clicking here, here, here, and here.

Arbitrary and capricious

"Soda is clearly one of the most harmful products in the food supply, and it's something government should discourage the consumption of," said Michael Jacobson, executive director of the Center for Science in the Public Interest. So, the brilliant social engineers in Washington are considering taxing soda pop, energy drinks, and certain fruit drinks to raise money to pay for the $1.2 trillion health care reform efforts. Diet soda pop will not be taxed (although the stuff in diet soda pop is probably even worse for humans than the corn syrup--sugar--in regular pop). The tax is estimated to raise $24 billion in 4 four years; covering less than one percent per year of the new program. [click here to read the article]

To be fair, does this mean they will tax orange juice -- an 8 oz serving of OJ has the same number of calories as 8 oz of soda pop (I know it is a different type of sugar, but the point is the same--high calorie)? What about apple juice? And the sugary cereals? What about anything that lists its first ingredient as sugar? And what about the promise not to raise taxes on those who make less than $250,000? In the end, a tax code that is arbitrary and capricious is inequitable and inefficient.

Irresponsible in a new era of responsibility

Ron Haskins says Obama's budget is irresponsible. Click here for video and transcript.

What a bunch of BCS

The Energy and Commerce Committee's Subcommittee on Commerce, Trade, and Consumer Protection recently held the hearing, "The Bowl Championship Series: Money and Other Issues of Fairness for Public Financed Universities." The purpose, according to the committee: This hearing will examine issues of competitive fairness and the extent to which public colleges and universities are adversely impacted by the inequitable distribution of revenue generated from the Bowl Championship Series system. Really Congress? Really? You cannot think of other more pressing issues like this one, or this one, or this one?

Abandon ship

What happens when a city can no longer manage itself well? Flint city officials say, tear down the city.

Effective tax rates

Is the income tax progressive? Yes, but the bottom 40% pay nothing. Does this mean it is still "progressive" when some pay nothing?"

Is social security tax progressive? No it's regressive, but benefits received are greater for the bottom 40% so the CBO says yes it is progressive when benefits are compared to costs. And most everyone in the bottom 40% qualifies for income tax credits to offset the higher tax burden of social security -- which is why the bottom 40% get back money or have a negative effective income tax rate.

Are excise taxes (gas, cigarettes, alcohol) progressive? No, they are slightly regressive. The bigger question becomes which excise tax is more regressive? The answer: cigarettes.

Time to rethink ethanol

From today's WSJ:

In September, ethanol giant VeraSun Energy opened a refinery on the outskirts of this eastern Iowa community. Among the largest biofuels facilities in the country, the Dyersville plant could process 39 million bushels of corn and produce 110 million gallons of ethanol annually. VeraSun boasted the plant could run 24 hours a day, seven days a week to meet the demand for home-grown energy.

But the only thing happening 24-7 at the Dyersville plant these days is nothing at all. Its doors are shut and corn deliveries are turned away. Touring the facility recently, I saw dozens of rail cars sitting idle. They've been there through the long, bleak winter. Two months after Dyersville opened, VeraSun filed for bankruptcy, closing many of its 14 plants and laying off hundreds of employees. VeraSun lost $476 million in the third quarter last year.

A town of 4,000, Dyersville is best known as the location of the 1989 film "Field of Dreams." In the film, a voice urges Kevin Costner to create a baseball diamond in a cornfield and the ghosts of baseball past emerge from the ether to play ball. Audiences suspended disbelief as they were charmed by a story that blurred the lines between fantasy and reality.

That's pretty much the story of ethanol. Consumers were asked to suspend disbelief as policy makers blurred the lines between economic reality and a business model built on fantasies of a better environment and energy independence through ethanol. Notwithstanding federal subsidies and mandates that force-feed the biofuel to the driving public, ethanol is proving to be a bust.

In the fourth quarter of 2008, Aventine Renewable Energy, a large ethanol producer, lost $37 million despite selling a company record 278 million gallons of the biofuel. Last week it filed for bankruptcy. California's Pacific Ethanol lost $146 million last year and has defaulted on $250 million in loans. It recently told regulators that it will likely run out of cash by April 30.

How could this be? The federal government gives ethanol producers a generous 51-cent-a-gallon tax credit and mandates that a massive amount of their fuel be blended into the nation's gasoline supplies. And those mandates increase every year. This year the mandate is 11 billion gallons and is on its way to 36 billion gallons in 2022.

To meet this political demand, VeraSun, Pacific Ethanol, Aventine Renewable Energy and others rushed to build ethanol mills. The industry produced just four billion gallons of ethanol in 2005, so it had to add a lot of capacity in a short period of time.

Three years ago, ethanol producers made $2.30 per gallon. But with the global economic slowdown, along with a glut of ethanol on the market, by the end of 2008 ethanol producers were making a mere 25 cents per gallon. That drop forced Dyersville and other facilities to be shuttered. The industry cut more than 20% of its capacity in a few months last year.

What's more, as ethanol producers sucked in a vast amount of corn, prices of milk, eggs and other foods soared. The price of corn shot up, as did the price of products from animals -- chickens and cows -- that eat feed corn.

Texas Gov. Rick Perry reacted by standing with the cattlemen in his state to ask the Environmental Protection Agency last year to suspend part of the ethanol mandates (which it has the power to do under the 2007 energy bill). The EPA turned him down flat. The Consumer Price Index later revealed that retail food prices in 2008 were up 10% over 2006. In Mexico, rising prices led to riots over the cost of tortillas in 2007. The United Nations Food and Agricultural Organization and other international organizations issued reports last year criticizing biofuels for a spike in food prices.

Ethanol is also bad for the environment. Science magazine published an article last year by Timothy Searchinger of Princeton University, among others, that concluded that biofuels cause deforestation, which speeds climate change. The National Oceanographic and Atmospheric Administration noted in July 2007 that the ethanol boom rapidly increased the amount of fertilizer polluting the Mississippi River. And this week, University of Minnesota researchers Yi-Wen Chiu, Sangwon Suh and Brian Walseth released a study showing that in California -- a state with a water shortage -- it can take more than 1,000 gallons of water to make one gallon of ethanol. They warned that "energy security is being secured at the expense of water security."

For all the pain ethanol has caused, it displaced a mere 3% of our oil usage last year. Even if we plowed under all other crops and dedicated the country's 300 million acres of cropland to ethanol, James Jordan and James Powell of the Polytechnic University of New York estimate we would displace just 15% of our oil demand with biofuels.

But President Barack Obama, an ethanol fan, is leaving current policy in place and has set $6 billion aside in his stimulus package for federal loan guarantees for companies developing innovative energy technologies, including biofuels. It's part of his push to create "green jobs." Archer Daniels Midland and oil refiner Valero are already scavenging the husks of shuttered ethanol plants, looking for facilities on the cheap. One such facility may be the plant in Dyersville, which is for sale. Before we're through, we'll likely see another ethanol bubble.

The seventh inning stretch

No more baseball and apple pie; now it's baseball and tax breaks. Here is my ode to this new American pastime (sing to the tune of "Take me out to the ballgame"):

Take my hard earn dollars
and give them to the Yankees

Buy me some peanuts and cracker jack
'cuz I can afford them no longer

So let's root root root for tax breaks
so players can be overpaid

For it's one, two, three breaks for George
to build his stadium.

Nickeled and dimed

The Child Welfare Improvement Task Force is proposing to Michigan lawmakers that the beer tax increase a nickle a bottle (12 oz) to help pay for the state's foster care system. The current rate is 2 cents per bottle.

What's a trillion dollars?

The CBO has released its monthly budget update. For March 2009, the federal government spent almost $200 billion more than it received in revenues. Imagine if the feds did this for 12 months straight? Oh, wait, there is not need to imagine...for the first half of FY2009, the budget deficit is $953,000,000,000. So I ask, why so much outrage over AIG, executive pay, and bonuses and none when it comes to budget deficits and debt, which by the way is now, $11,146,566,832,297.33. Click here to watch the debt change on a daily basis.

Decision making in Washington

Stan Marsh has uncovered the way financial policy is made in Washington:

Consultants say: "Turn off the lights"

Area schools have hired Energy Education, Inc. as consultants to help save money in energy costs. The consultants told the school districts to turn off the lights and computers and turn down the heat when school gets out at 230pm. Really? A paid consultant was necessary to point out the obvious?