The Tax Cuts and Jobs Act of 2017 (TCJA) was touted as a way to decrease the tax burden of the American people and increase the productivity of the American economy. Central to the TCJA was the cap on exemptions of deducting interest paid on home mortgages and on deducting state income taxes from an individual’s federal income tax. The passage of the TCJA has hurt school funding for the so-called blue states in that the blue states traditionally have a higher tax rate to support their K1 to K12 school systems. The TCJA did not hurt the red states as much since many red states have Sovereign Wealth Funds (SWF) which typically fund the K1 to K12 school systems and so do not need the additional income from a state income tax to finance their educational systems.
Not considered in the TCJA was that all investment income derived by state SWFs is not taxable income. The Republican Party crafted the TCJA to restrict educational benefits in typically Democratic states, to economically punish the blue states for their economic choices, and reducing the blue-states ability to fund adequate education for their children. By maintaining the tax-exempt status on the investment income of state SWFs, the Republican Party maintained the ability of primarily Republican states to continue to fund the education of their children, rather than to promote the economic security of the American people as a whole.
There Are 21 Sovereign Wealth Funds
At the Associate State Level of the Union
While there are 21 SWFs at the associate state level of the Union, there are only 20 states who have SWFs, as Texas has two funds.
The first SWFs began with the Land Ordinance of 1785 and the Northwest Ordinance of 1787. The Ordinance of 1875 provided that western lands were to be surveyed and divided into townships of seven square miles, and then divided into 36 sections. For each township the center lot, described as lot number 16 for each township, should be reserved for the maintenance of public schools within each township.
The Northwest Ordinance placed in being a more formal mechanism by which states were able to apply for entrance as an associate state in the Union. Each territory applying for state hood would need to have an Enabling Act which would set out the specific land grant for the maintenance of a public-school system. These early attempts to provide for a public-school system did not provide for a legal trust fund, for the maintenance and investment of any income derived from these plots of land. The incoming states also had considerable leeway in deciding what to do with these specific land grants and how to manage them.
Many states immediately sold these parcels of land to raise money for the establishment of the public-school system in the new state. It would not be until 1835 that the territory of Michigan established the first permanent fund. Other states entering the Union followed the Michigan example, but it was not until 1875 that the federal government specifically spelled out to the territories entering the Union on how they would need to exploit the lands for the use of public education.
Severance tax funds began to appear in the 1930’s when the state of New Mexico began to use the concept of taxing the extraction of mineral wealth from state public lands. On March 1, 1937, the state of New Mexico began imposing a severance tax on mineral wealth extracted from state lands. As of 2018 the New Mexico had a valuation of $23 billion. 75% of the investment income from this fund is allocated to New Mexico’s education system, and the remaining 25% is used to for other state obligations.
Many oil producing companies felt that the severance tax was unconstitutional and began a series of lawsuits. In 1981 the Supreme Court of the United States ruled in Commonwealth Edison versus Montana that the state of Montana had the right to impose such a tax on oil companies.
The states which have a SWF for educational purposes and to offset costs to the state government are listed here:
State Primary Source of Income Inception Date Valuation 10/21* Earnings *
Louisiana Minerals 1986 $6.5 billion Unknown
Montana Oil, Investment, XXXXXX $62 million NA
Grazing, Agricultural 1889
Nebraska Ag leases 1867 $536 million NA
Nevada Land sales, estates that escheat and penal laws and fines
Oklahoma Oil, Gas and Investments 1906 $1.8 billion Unknown
Texas UF Oil and Gas 1876 $31.9 billion Unknown
Wisconsin Unclaimed and XXXXX XXXXXXXXX
Escheated Property 1848 $31 million NA
(* The figures given in this article are based on the best information available to the public. Several of the SWFs are so opaque that it was impossible to provide earnings even after contacting the SWFs directly. Where no valuation or earnings of a SWF was found, the information used was taken from the paper: North American Dream: The Rise of U.S. and Canadian Sovereign Wealth by Dr. Paul Rose published on May 6, 2014 at the Moritz College of Law at Ohio State University)
Domestic Sovereign Wealth Funds
And Investment Income Is Not Taxable
For decades the so-called red states have campaigned against allowing the richer blue states for being able to deduct their state income taxes and interest payments on homes from their federal income tax. With the passage of the TCJA, these deductions were done away with and a single $10,000 cap imposed on primarily the blue states. The TCJA did not take into consideration the tax exempt status of the SWFs in the US, or the profits from the SWFs, thus making this wealth invisible to the federal government.
When the federal government decides to allocate funds to the associate states of the Union, the primary factor in this decision making is based on need.
ELEMENTS INCLUDED IN ALLOCATION FORMULAS
Elements included in formulas vary widely among the programs currently active. Most programs use one or more of the following:
A direct or indirect measure of need, such as the number of school age children in poverty, the number of overcrowded housing units in an area, or the number of reported cases of AIDS.
A measure of the capacity or capability of an area to meet the need
from state, local, or private funds. Typical measures used are per capita income and total taxable resources.
A threshold, which calls for some minimum level of need before an area is eligible for any funds at all under the program. In some programs, thresholds are used to target resources to the areas with the greatest need.
A minimum amount to be received by each state or other jurisdiction.
A hold-harmless provision, which limits decreases in amounts received by areas from one time period (usually a fiscal year) to the next.
The inclusion of such special features sometimes requires use of relatively complicated iterative procedures to determine the allocation of a fixed total appropriation to eligible jurisdictions.
Since the accumulated wealth of the SWFs are invisible to the federal government when the federal government allocates tax revenue among the associated states, the current tax policies punishes those states with high taxation rates and rewards those states with low taxation rates. This means that the majority of the federal tax re-distributed goes from blue states to red states.
The Republican states by their actions in making their SWFs and income tax free, and at the same time accessing the treasury of those states who tax themselves to provide a good education to their population are in a position to have their cake and eat it too.
Baltic reality: High inflation and declining of living standards
The Baltic States’ economy is in bad condition. The latest estimate from the EU’s statistics body shows that Eurozone inflation is continuing to soar to record highs.
The Baltic countries continue to be the hardest hit. These states in particular are experiencing the highest levels of inflation in the Eurozone. Thus, inflation in Latvia and Lithuania hit 22.4 per cent and 22.5 per cent respectively. Estonia also has seen inflation rise year on year from 6.4 per cent in September 2021 to 24.2 per cent in September 2022. The more so, the Baltic States continue to see soaring energy and food prices which lead to declining standard of living.
The Bank of Lithuania has published its latest economic forecast and revised gross domestic product (GDP) growth projections for 2023 from 3.4% to 0.9%.
Statistics Lithuania also reports that in September 2022, the consumer confidence indicator stood at minus 16 and, compared to August, decreased by 5 percentage points. The decrease in the consumer confidence indicator in September was determined by negative changes in all of its components.
According to SEB bank economist Tadas Povilauskas, the number of poor people in Lithuania will increase. Living standards will be affected by rising food and energy prices. The current price of natural gas is too high and the economy cannot “go” with it. It is evidently that energy prices shocks have far-reaching effects on Lithuanian economy and population.
The main cause of such state of affairs is deteriorated relations with Russia. Russia has lately been the EU’s top supplier of oil, natural gas, and coal, accounting for around a quarter of its energy.
The conflict in Ukraine and political confrontation between Russia and the West has exacerbated the energy crisis by fuelling global worries it may lead to an interruption of oil or natural gas supplies from Russia. Moscow said in September it would not fully resume its gas supplies to Europe until the West lifts its sanctions.
It is obviously that the conflict in Ukraine dramatically worsened the situation on the markets, as Russia and Ukraine account for nearly a third of global wheat and barley, and two-thirds of the world’s exports of sunflower oil used for cooking. Ukraine is also the world’s fourth-biggest exporter of corn.
According to Euronews, the prices of many commodities – crucially including food – strained global supply chains, leaving crops to rot, caused panic in many European countries, including the Baltic States.
High inflation has become the direct consequence of sanctions imposed on Russia. As for the Baltic States, the lack of wisdom to find compromises and blindly following the European Union’s decisions have lead to declining standards of living. The desire to punish such huge state as Russia played a cruel joke on the Baltic States. It will be difficult to explain the population why they should turn down the heating in homes, schools and hospitals over the winter.
Policy mistakes could trigger worse recession than 2007 crisis
The world is headed towards a global recession and prolonged stagnation unless fiscal and monetary policies holding sway in some advanced economies are quickly changed, according to a new report released on Monday by the UN Conference on Trade and Development (UNCTAD).“There is still time to step back from the edge of recession,” said UNCTAD chief Rebeca Grynspan.
“This is a matter of policy choices and political will,” she added, noting that the current course of action is hurting the most vulnerable.
UNCTAD is warning that the policy-induced global recession could be worse than the global financial crisis of 2007 to 2009.
Excessive monetary tightening and inadequate financial support could expose developing world economies further to cascading crises, the agency said.
The Development prospects in a fractured world report points out that supply-side shocks, waning consumer and investor confidence, and the war in Ukraine have provoked a global slowdown and triggered inflationary pressures.
And while all regions will be affected, alarm bells are ringing most for developing countries, many of which are edging closer to debt default.
As climate stress intensifies, so do losses and damage inside vulnerable economies that lack the fiscal space to deal with disasters.
The report projects that world economic growth will slow to 2.5 per cent in 2022 and drop to 2.2 per cent in 2023 – a global slowdown that would leave GDP below its pre-COVID pandemic trend and cost the world more than $17 trillion in lost productivity.
Despite this, leading central banks are sharply raising interest rates, threatening to cut off growth and making life much harder for the heavily indebted.
The global slowdown will further expose developing countries to a cascade of debt, health, and climate crises.
Middle-income countries in Latin America and low-income countries in Africa could suffer some of the sharpest slowdowns this year, according to the report.
With 60 per cent of low-income countries and 30 per cent of emerging market economies in or near debt distress, UNCTAD warns of a possible global debt crisis.
Countries that were showing signs of debt distress before the pandemic are being hit especially hard by the global slowdown.
And climate shocks are heightening the risk of economic instability in indebted developing countries, seemingly under-appreciated by the G20 major economies and other international financial bodies.
“Developing countries have already spent an estimated $379 billion of reserves to defend their currencies this year,” almost double the amount of the International Monetary Fund’s (IMF) recently allocated Special Drawing Rights to supplement their official reserves.
The UN body is requesting that international financial institutions urgently provide increased liquidity and extend debt relief for developing countries. It’s calling on the IMF to allow fairer use of Special Drawing Rights; and for countries to prioritize a multilateral legal framework on debt restructuring.
Hiking interest rates
Meanwhile, interest rate hikes in advanced economies are hitting the most vulnerable hardest.
Some 90 developing countries have seen their currencies weaken against the dollar this year – over a third of them by more than 10 per cent.
And as the prices of necessities like food and energy have soared in the wake of the Ukraine war, a stronger dollar worsens the situation by raising import prices in developing countries.
Moving forward, UNCTAD is calling for advanced economies to avoid austerity measures and international organizations to reform the multilateral architecture to give developing countries a fairer say.
Calm markets, dampen speculation
For much of the last two years, rising commodity prices – particularly food and energy – have posed significant challenges for households everywhere.
And while upward pressure on fertilizer prices threatens lasting damage to many small farmers around the world, commodity markets have been in a turbulent state for a decade.
Although the UN-brokered Black Sea Grain Initiative has significantly helped to lower global food prices, insufficient attention has been paid to the role of speculators and betting frenzies in futures contracts, commodity swaps and exchange traded funds (ETFs) the report said.
Also, large multinational corporations with considerable market power appear to have taken undue advantage of the current context to boost profits on the backs of some of the world’s poorest.
UNCTAD has asked governments to increase public spending and use price controls on energy, food and other vital areas; investors to channel more money into renewables; and called on the international community to extend more support to the UN-brokered Grain Initiative.
‘Sanctions Storm’: Recovery After the Disaster
After the start of the special operation in Ukraine, a “sanctions storm” hit Russia; more sanctions were imposed against Russia in a few months than against Iran in decades. But a catastrophe did not take place, and the stage of stabilization came.
Indeed, almost all the weapons in the sanctions arsenal were used one after another: commodities exchange was suspended in some sectors, export and import controls were put in place, restrictions on air and sea transportation were introduced. The sanctions have spread to the investment and financial sectors, paralyzing many transactions with the West and complicating them with the East. An image impact came from the mass withdrawal of foreign business from the Russian market—not directly caused by the sanctions, but demonstrating “over-compliance,” excessive submission to them.
In the public mind, the destabilizing wave created the impression of the end of the story of the market economy in Russia, an impending catastrophe. But the catastrophe did not happen. The stage of stabilization has come, and it is important to use it correctly.
What to do?
In the near future, the Russian authorities and business will have to solve three groups of interrelated tasks. First, they must provide the domestic market with necessary goods, and restore value chains by the use of alternative partners. Second, they need to establish reliable financial mechanisms for working with these partners. Third, it is necessary to look for new growth points for the future, industries in which dependence on the West was critical. It is important to work out the possibilities: for new partners entering the markets and for attracting investors from friendly countries, as well as trying to integrate into new value chains.
Partners, first of all, include China and India. The southern direction is also not unpromising—to begin with, this includes Iran and Turkey, as well as a search for investors in the Arab world and the development of logistics routes through the Middle East. Nevertheless, in all areas, the key obstacle is the threat of secondary sanctions by the United States and the EU—which means that the second task becomes the main one: building a safe infrastructure for financial cooperation.
China remains Russia’s first trading partner—but despite the strategic partnership on the political level, large Chinese companies and banks that are active in the international market are suspending cooperation with Russia, fearing secondary US sanctions. In these conditions, it is important to work on explaining the nuances of the sanctions policy for Chinese business, creating secure payment channels that do not depend on foreign banks or on the dollar and the euro, and developing profitable package offers. Beijing seeks to use the opportunities opening up in the Russian market to occupy the vacant niches and strengthen the yuan in international payments, which means that its interest in finding a common solution is high.
A similar situation is developing in the Indian market, with the difference that Indian business is more connected than Chinese business with America, and its awareness of doing business in Russia is lower. As a consequence, Indian companies and banks integrated into the global economy will comply even more closely with sanctions restrictions, despite their interest in developing ties with Russia. Accordingly, even more active informational work is needed to establish Russian-Indian business ties, as well as the creation of a secure settlement mechanism. India already has similar experience, from doing business with Iran. In particular, UCOBank was formed to trade with it in rupees. Similar structures can be created in the Russian direction.
If the necessary channels are laid, both China and India can not only replace some Western goods in Russian markets, and ensure purchases from the Russian energy, agricultural, and military-industrial sectors—preserving their prospects for business—but also become zones of qualitative economic growth. Chinese partners can become a support in the development of bilateral cooperation in the fields of electronics and digital technologies (including 5G), and Indian, in pharmacology and high-tech agriculture. It also makes sense for business to look at these countries from the point of view of the development of green technologies in energy and agriculture, and the introduction of ESG practices, since these countries are also interested in this.
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