Relevant and even prescient commentary on news, politics and the economy.

Texas, the jobs engine? Or Texas, the jobs-laundering engine?

by Beverly Mann

Update: Business journalist Merrill Goozner has a terrific in-depth deconstruction of the so-called Texas Miracle at TheFiscalTimes, at Perry’s Texas Miracle less than meets the eye, published last Friday.

Texas, the jobs engine? Or Texas, the jobs-laundering engine?

An op-ed piece mentioned by a reader two weekends ago in the LA Times, called Texas, the jobs engine? by Rick Wartzman, executive director of the Drucker Institute at Claremont Graduate University, begins:

For the last few weeks, I’ve been unable to get a startling statistic out of my head: Since the recession officially ended, Texas has created more than 4 of every 10 new jobs in America.

That’s right, Texas: the reddest of red states, home to gun lovers and school textbooks that openly question whether the Founding Fathers intended for the separation of church and state. I am no ideologue. Still, whenever I get political, I tend to tilt reflexively to the left, making the jobs figure a bit disconcerting at first.

But there’s no escaping it. The number is real. Which means that if you care about putting people back to work at a time when nearly 14 million in this country are unemployed, maybe Texas has something to teach us.

Wartzman goes on to say that according to the Dallas Fed, Texas, which he says accounts for about 8% of the nation’s economy, generated 43% of the net new jobs in the U.S. from June 2009 through May 2011. He then notes that aspects of Texas’s boom cannot be optionally replicated in other states. The booming energy industry and the high export demand for commodities such as beef and cotton.

He then cites some longstanding government policies—both conservative and liberal ones. Conservative: Low tax rates, the downside of which, he notes, is a smaller safety net, and “right-to-work” laws, resulting in Texas’s tying Mississippi as the states with the biggest percentage of workers paid at or below the minimum wage. Liberal: Strict lending guidelines enacted in the wake of the S&L crisis of the 1980s that require Texas financial institutions “to keep larger capital reserves and take on fewer problem mortgages than were seen elsewhere in the country,” and which spared the state from the real estate boom and bust that hit most of the rest of the country. And beginning 25 years ago, the state began significantly increasing its education funding and therefore the quality of its workforce.

Then the pay-off paragraph, so to speak:

At the same time — and this, of course, is the tough part for those on the left to swallow — it is clear that the state’s limits on taxes, regulations and lawsuits are contributing to the job machine. “The most important thing I think that’s happened to us is tort reform,” Fisher, the Dallas Fed president, has said. He added that when John Deere and other companies have decided to hire in Texas, they’ve been largely driven by steps the state has taken to cap non-economic damages in medical malpractice suits and to make it harder to bring product liability and class-action cases.

Okay. Are these folks claiming that the companies that are hiring in Texas decided to hire because of Texas’s low tax rates and its “tort reform” law? Or are they saying that these companies needed to hire more workers, and chose to expand in Texas rather than in, say, California or Michigan or Ohio, because of Texas’s low taxes and tort reform?

Setting aside for a moment the fact that Texas’s tort laws have little effect on lawsuits for injuries from their products in other states—injured plaintiffs can sue in the state where they purchased and used the product and were injured by it, and it’s that state’s tort laws that apply—and that physicians apparently aren’t flooding the Texas landscape by moving there from other states, what these people actually are saying is that Texas , as the lowest-common-denominator state for pro-business laws, is attracting businesses from other states and is spurring hiring there that otherwise would occur in another state.

Fine. But if the issue regarding job losses and job growth is an aggregate one for the country as a whole, rather than which states lost the most jobs to lower-common-denominator states, then why praise Texas as a national jobs creator? It’s not, at least not as a result of its government policies. The claim to the contrary is like saying that South Dakota and North Carolina “created” all those credit-card-company jobs in recent decades, as if those jobs wouldn’t have been created, albeit disbursed more throughout the country, if those two states hadn’t enacted such credit-card-company-friendly laws.

So when Rick Perry rolls out his presidential primary campaign and starts lauding all those Texas job gains, remember to ask what states those jobs otherwise would be in were it not for Texas’s chamber-of-commerce legislature’s largesse of recent years. I’m sure y’all will.

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Town Hall Meetings on the Ryan Budget Raise Concerns

Various congressional representatives held town hall meetings recently, and the news channels and print media were abuzz with the lively give-and-take, including shouting matches. See, e.g., House G.O.P. Members Face Voter Anger Over Budget, New York Times, Apr. 26, 2011; Republicans facing tough questions over Medicare overhaul in Budget Plan, Washington Post, Apr. 22, 2011.

The issue–the House’s adoption of the Ryan budget proposal and its clear agenda of overturning New Deal safety nets embodied in the current understanding of Medicaid, Social Security and Medicare.

Those at or near retirement are worried that the Ryan proposal will hurt everybody. The Ryan proposal comes with frequent disclaimers about protecting the already older population and needing to act now to protect our grandchildren, a clear effort to massage the message to appeal to current grandparents. See, e.g., House G.O.P. Members Face Voter Anger Over Budget, New York Times, Apr. 26, 2011 (noting Webster’s statement that “not one senior citizen is harmed by this budget” while implying that it is necessary to prevent grandchildren from “looking at a bankrupt country”); Congressional Republicans go home to mixed reveiws, CBS.com, Apr. 26, 2011 (noting North Carolina GOP Rep. Renee Ellmers’claim that “If you’re 55 and older, your Medicare and Social Security will not change”).

But the Ryan proposal clearly envisions mechanisms that would likely lead to decimation of these programs–either through turning them into limited vouchers (Medicare proposal); turning the funds over to the states to use as they see fit (Medicaid proposal) or limiting benefits (Social Security proposal) in ways that will –probably sooner rather than later– hurt everybody.

  • These proposals take place in a context of expansive, concerted attacks on these “entitlement” programs, often failing to acknowledge the historic support for these programs or their foundation in the recognition that federal support is required to protect against the abject poverty and humiliating degradation that accompanied the Great Depression;
  • Benefits for elderly and sick Americans are cut to provide savings to offset some of the loss of revenues from tax cuts for Big Business and the wealthy, both of whom already pay relatively low taxes, in what hardly seems a bargain to the working poor, the elderly or in fact the overwhelming majority of Americans who are not in the top 15% income or wealth distribution. (This in spite of Ryan’s claim that there is no huge tax cut for big corporations and the wealthy–he asserts that the proposed 25% rate is “in exchange for losing their tax shelters”. See, e.g., CBS.com Evening News coverage of Paul Ryan holding Wis. town meetings, at http://www.cbsnews.com/video/watch/?id=7363939n&tag=related;photovideo )
  • In spite of the high cost for the vulnerable poor and elderly of these budget proposals, they don’t appear likely to achieve their proffered rationale of reducing debt and deficits–in fact, the CBO has said that the Ryan budget proposal will result in higher deficits and bigger debt burdens over the next decade.
  • It appears shortsighted to wring one’s hands about a “bankrupt country” while considering only one potential solution, especially when that solution is highly detrimental to the most vulnerable populations, and without considering the full facts regarding the amount of debt, the ability of the U.S. to weaken the dollar further to aid unemployment and debt payment, the ability of the U.S. to raise taxes judiciously rather then merely cutting spending, or the ability of the U.S. to let the tax law play out as it is currently slated to do (with the Bush tax cuts that were extended 2 more years over their originally intended short life due to sunset in 2012). As Jim Johnson, a former Ryan supporter who has “grown increasingly disgusted” with Ryan noted, “[Ryan] says Medicare is unsustainable. I’m thinking, ‘Yeah, it’s because medical costs are out of control.’ …Why isn’t he attacking it at that level?” Congressional Republicans go home to mixed reviews, CBS News.com
  • Any voucher system for health care will inevitably fail to cover increasing health care costs, resulting in rationing even the most basic health care by socio-economic class–the very problem that Medicare, Medicaid, and the limited health care reforms undertaken by the last Congress were intended to address. The Center for Budget and Policy Priorities concluded that out-of-pocket medical costs would skyrocket for low-income seniors; the Washington Post’s Fact Checker Glenn Kessler (in GOP Lawmakers tout Medicare reform by stretching a comparison to the health benefits they receive, Apr. 29, 2011) notes that the CBO analysis concluded that the Ryan Medicare system would pay only 32% of health care costs by 2030, compared to 70-75% if traditional Medicare remained in place.
  • Addressing the problems in the U.S. health care system solely by market means that put the onus on health care recipients to seek cost-savings has failed miserably over the last forty years and cannot help but fail more spectacularly when the Medicaid backup is weakened and the nature of health care needs is such that one of the best antidotes to market problems (the only one permitted in radical market thinking that objects to regulatory safeguards)–informed consumers who can review options and select among competing providers–is simply not applicable. Car accident victims don’t shop for surgeons; cancer victims don’t know enough to select based on price; etc.
  • The Ryan proposal appears one-sided in its decision to cut spending on potentially vulnerable populations rather than to address the means through which health care is provided or to consider ways to control profit-taking in the health care system. The market ideology of the proposers leaves many options that might work better off the table (single payer; tax on excessive compensation; revamping the non-profit hospital system; attaching strings to the R&D and other tax expenditures in the tax code; using the clout of a national system to negotiate better doctor and drug pricing for Medicare and Medicaid, etc.);
  • Many of those states that would acquire more control over the use of Medicaid funds are controlled now, as is the House, by people who have announced their intent to cut taxes on the wealthy and business while cutting or taxing pensions and health benefits for public employees and cutting funds available for Medicaid and other poverty-directed programs; it is not a difficult leap to see the interrelationship of these trends;
  • Plans to cut benefits for those who may enjoy them in the future pave the way in at least two ways for decisions shortly thereafter to cut benefits for those who currently enjoy them: first, by creating lowered expectations; second, by creating an unfair disparity that supports an “us against them” attitude between the current elderly and those who will get lesser benefits in the future. (Note that this resembles the way the right has encouraged an “us against them” attitude of private workers, who have been deprived of union benefits through the harsh anti-union tactics used by Big Business, against public employees, who have generally benefited in the past from more reasonable attitudes towards unions fostered in legislative bodies that have, in the past, understood the nature of the bargain that public employees make (which might be summarized as ‘work hard, get paid less than you could in the private sector, and accept later benefits in pensions and health care for lesser salary/percs now).

Is is surprising that left-leaning activist groups like Move-On point to the Ryan budget proposal as a “naked, unapologetic attack on working Americans for the sake of Big Insurance and the riches of the rich” (quote from Move-On email on this matter)?

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MA Teacher Retirement System (and WI a bit)

H35 provides for these amendments to the MA teachers retirement system by Gov. Duval Patrick:

An Act Providing for Additional Pension Reform and Benefits Modernization
This legislation filed by Governor Patrick proposes further pension reforms to achieve the following objectives:

  • Update the system to reflect demographic changes, such as the fact that people are living and working longer;
  • Eliminate abuses, through anti-spiking measures, extending the number of years used to calculate pension benefits, and increasing scrutiny of legislation benefiting individual employees; and,
  • Address fairness issues, through updating purchase of creditable service and buyback provisions, eliminating early retirement incentives, pro-rating benefits based on employment history, eliminating the right to receive a pension while receiving compensation for service in an elected position, and allowing retirees who married a person of the same sex within the first year after it became legal to change their retirement option in order to provide a benefit to their spouse.

Most of the provisions in the bill would apply to new members of the retirement system.

H1 (section 37):Governor Patrick recommends a 3% cost of living adjustment (COLA) for retired members of the state and teachers’ retirement system as part of his FY2012 state budget. The COLA will be applied to the first $12,000 of the retirement benefit, for a maximum increase of $360 per year or $30 per month.

From the annual report of the Mass. Teachers Retirment System finacial report: MTRS statement demonstrates the heavy use of equity and other non-fixed income assets to generate returns, which make for volatility.

image

New teacher’s pay in approximately 10% of salary.

I believe in 2008 the MTRS reported a 29% drop in ‘value’ of its assets:
$ 25,318,713,892 2007

$ 17,177,957,406 2008

$ 19,311,587,953 2009

$21,262,462,000 2010

Via Andrew Leonard at Salon comes this quote from the CEPR and Dean Baker

On July 1, 2010, the S&P 500 was already more than 11 percent higher than its July 1, 2009 level (from 987 on July 1, 2009 to 1101 on July 1, 2010). Most funds use the stock market’s closing value at the end of the fiscal year as the basis for determining the valuation of their assets. Of course they also use an average, so the valuation would not simply reflect the market value at the end of the fiscal year. However, with the market having already risen substantially from its low (the S&P 500 had risen another 19 percent to 1293 by January 10, 2011), it is likely that pension valuations based on current and future market levels will show smaller shortfalls. In other words, a substantial portion of the shortfalls that were reported based on 2009 valuations have likely already been eliminated by the rise in the market.

MA Massachusetts Teachers 0.12% (unfunded liabilities as a per cent of expected revenues) 1/1/2010

WI Wisconsin Retirement 0.00% (unfunded liabilities as a percent of expected revenues) 12/31/2009

Of course projected revenues can be argued at another time.

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Where is the Budget Crisis?

Brendan Fischer via PR Watch writes on the budget process in Wisconsin, with links here: Where is the Budget Crisis?.

Wisconsin Governor Scott Walker alleges that dismantling public sector collective bargaining rights is made necessary by a $3.6 billion deficit in the next budget, and a $137 million shortfall this year. Setting aside the fact that the ability to negotiate shifts, seniority, benefits and conditions of employment would have a negligible impact on the deficit, and looking beyond Walker’s deceptive claim that the alternative to union-busting is to kick 200,000 children off Medicaid (called “false” by Politifact), how deep is the state’s economic crisis?

Representative Mark Pocan (D- Madison) has looked more closely at the numbers and writes that the $3.6 billion deficit is bogus. The alleged deficit is based on $3.9 billion in new agency requests for the 2011-2013 budget, a 7.2% spending increase. However, these are merely requests, not dollars actually allocated or spent, and Pocan writes that the legislature never votes to grant 100% of agency requests: “I don’t think there is a member in the legislature that would vote for [the requested budget increase]. In fact, I asked [Legislative Fiscal Bureau] Director [Robert] Lang when was the last time we gave agencies exactly what they requested and was told he couldn’t think of one and he’s been here decades.”

For example, the state’s non-partisan Legislative Fiscal Bureau reports

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More on Illinois’ income tax increase –thinking about globalization

by Linda Beale

More on Illinois’ income tax increase –thinking about globalization
crossposted with Ataxingmatter

As states continue to face difficult times and vulnerable residents unemployed by the Great Recession come to the end of their ropes with the last of their unemployment support checks (those unemployed for 99 weeks don’t get any more help under the latest extension), the rhetoric continues to escalate.

As I noted in my last post on Illinois’ decision to increase its personal and corporate income tax rates (See Illinois Senate Bill 2505, signed into law by Gov. Quinn on Jan. 13), tax increases–especially those that require people and companies of wealth and power to kick in a fairer share of the tax burden–may well make sense even as the country deals with the continuing fallout of the banksters’s binge of casino speculation.  Governor Quinn noted when signing the Illinois legislation that the tax increase was need to stave off fiscal insolvency.   The 5% individual income tax rate applies until January 2015, at which time the rate reverts to 3.75% for ten years and then 3.25% after 2025.

The right wing’s preferred solution– to see the states fire public employees or at the least reneg on their earlier commitments to fund pensions (which generally permitted them to hire highly skilled employees at lower wages than would otherwise have been possible)– would only make grave matters much worse. There are important programs to be funded in the states, and ultimately a higher tax burden that is allocated to those who can best pay it may be the best solution.  Management efficiencies need to be undertaken, and wasteful spending and corruption stifled, but in many cases those savings are relatively small.  The “no new taxes” mantra that has dominated public discourse under the Chicago School thinking has kept states from dealing forthrightly with these issues for decades.

Wisconsin’s new governor, right-winger Scott Walker, is a perfect illustration of the zany rhetoric and gamesmanship being played about tax matters all across this country.  He has said he would spurn federal stimulus money and ditch a planned high-speed rail line between Madison and Milwaulkee.  See James warren, Wisconsin Sounds Off, but Misses the Point, New York Times, Jan 15, 2011.  High speed rail is the wave of the future, and the US needs to catch that wave soon or be left behind.   Walker’s rhetoric here seems designed to please wealth and power (and the kooks in the “tea party” who are foolish enough to think that federal monies for infrastructure is a waste of “their” tax money), but move the state in the opposite direction from where it needs to go.  Walker has also gone on the air in a campaign intended to take advantage of corporate dislike of the Illinois tax hike, inviting corporations to “escape to Wisconsin.”

James Warren’s piece in the Friday New York Times challenges that sentiment.  Seems that the Illinois personal rate (5%) is probably less than taxation under the progressive scale of 4.6% to 7.75% in Wisconsin.  And if Caterpillar or some other big corporation were to move to Wisconsin, it would face a higher rate of 7.9% compared to the 7% rate passed for Illinois.    So Walker’s rhetoric is just that–trying to make hay out of the mere fact that Illinois increased its tax rates.  As Warren points out, politicians need to start thinking about what is good for the region and “not just poach others’ enterprises”.  

We need to think strategically, as globalization has made it much easier for companies to move to greener pastures–not just other states, but out of the states.  Congress could help that by eliminating the provision in the Code that permits companies to move active business assets abroad without paying tax on the built-in gain.  In fact, Congress ought really to consider revamping the entire reorganization provisions in the Code.  We have seen that too big to fail banks are costly for us.  Rather than aiding consolidation of companies through nonrecognition provisions, what if we made reorganizations more difficult and costly?  Combine that with a renewed anti-trust vigor, and encourage smaller businesses to stay in this country.  Localvore could take on a new meaning.

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The Data Shows that State "Beggar Thy Neighbor" Policies Don’t Work.

by Mike Kimel

The Data Shows that State “Beggar Thy Neighbor” Policies Don’t Work.
Cross posted at the Presimetrics blog.

Many states seem to believe a “beggar thy neighbor” approach to taxes works best. That is, the state with the lowest taxes will “steal” business from other states and produce the fastest economic growth. A lot of people seem to believe it works. The data stands in opposition to them.

States raise revenues through a variety of means – state income taxes, property taxes, fines on overdue books, etc. The Tax Foundation , which bills itself as “a nonpartisan tax research group based in Washington, D.C” and which I believe can be fairly described as generally advocating lower taxes in general, provides a file showing the the overall state tax burden and per capita income for every state for each year from 1977 to 2008.

So here’s what I did after the fold.

I took the per capita income, adjusted by the CPI-U, and got the real per capita income, which I then used to compute the percentage growth (or shrinkage) in real per capita from one year to the next for every state and every year from 1977 to 2007. I did the same thing for the US, getting the US average growth in real per capita income from t to t+1 for every year from 1977 to 2007, and subtracted that amount from the state growth rates. This provided the amount by which each state grew (or shrunk) faster (or not) than average, each and every year from 1977 to 2007.

The next step was to take the state tax burden for each state for each year, and subtract from that the average state tax burden for that year. Result: 1,550 combinations of (tax burden for a state in a year less average tax burden for all states for the same year) on one hand, and (growth in real per capita income from one year to the next for a state in a year less the average growth in real per capita income over the same period). In other words, a comparison between being above or below average on tax burdens and being above or below average on real per capita income growth.

Here’s a histogram:

Figure 1

The graph is a bit busy, but let me interpret it. The first bar is for observations for which the tax burden was between 4.25% and 3.75% below (i.e., more 4.25% below, or less than or equal to 3.75% below) the average state tax burden for that year.(sentence updated….dan)
There are 7 observations (figure in purple at the bottom), and the median growth rate for those 7observations was 1.65% slower than the average for that year.

What the graph tells us is that there seem to be two maxima; going the beggar thy neighbor route can lead to faster than average growth, and there is a sweet spot: keeping tax burdens at about 2.5% below average has, historically tended to be associated with growth rates in real per capita income 0.47% above average. However, get too far away from that sweet spot and the doo-doo really hits the fan. The states that keep the tax burdens the lowest also produce the slowest growth, on average.

For states that don’t take the beggar thy neighbor route (i.e., they take a tax and spend approach), things generally go a little better. The sweet spot there – keeping tax burdens about 2% above average – produces growth rates about 0.67% above average. And getting too far away from that sweet spot doesn’t seem to lead to catastrophic outcomes either.

This post continues the “Kimel curve” theme I’ve been following for the past few weeks, namely that there is a top that maximizes the growth of real GDP. This post has an analogous histogram showing the relationship between top marginal tax rates and growth in real GDP for the US from 1929 to the present. This one – the first of several to do so – computes the growth maximizing tax rate for the US economy. I plan to go back to work on the national data analysis in the coming posts, but everyone needs a break now and then.

As always, my spreadsheets are available to anyone who wants them. Drop me a line at my first name, period my last name, at gmail period com. And note my first name in the e-mail address is mike. An “m” gets you someone else whose patience is starting wear thin. Also, on the subject of “m”s – my last name has only one. Because a lot of people have been asking for my spreadsheets as of late, to make things easier please tell me the the name of this post, the date it appeared, and where it appeared.

Thanks.

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Illinois’ deficit reduction scheme

by Linda Beale

Illinois’ deficit reduction scheme
crossposted with Ataxingmatter

States have generally suffered during this economic crisis much the way most people have–there’s been less money coming in as sales receipts slowed during the recession, more services needed as many become homeless, insuranceless and generally more vulnerable during the recession, and bills have continued to pile up (including for mundane things like utilities and print jobs and more long-term commitments like pension promises made to state employees to secure competent workers often at lower-than-market wages for those competencies).

States have a number of options for dealing with the demands.  They can layoff employees and freeze salary increases, taking the brunt of the recession out of the hide of state services and state employees and at the same time likely making the recession worse as the state is unable to provide the kinds of assistance to its most vulnerable populations that it otherwise would have been able to do.  They can utilize accounting gimmicks to delay a few bills and accelerate a few revenue items, making this year look better at the cost of next year.  They can use reserve funds that they’ve set aside for a rainy day, though when such funds are used for basic operating expenses, it guarantees that a truly rainy day will come and there will be no funds to meet the unexpected needs.  Or they can raise taxes–either sales taxes, which will fall primarily on the most vulnerable, since consumption taxes are a kind of flat, across-the-board tax that is regressive since the poor spend all of their income (and pay taxes on all of it) while the rich spend a small share of their income (and hence pay minimal taxes in proportion to their ability to pay).

Some states have dealt with the problem with the perennial accounting gimmickry.  All  that does is paper over the problem and pass it along to the next budget year.  That’s what Schwartzeneggar did in part in California, meaning that Jerry Brown has a huge budget gap to face that will require a mix of cuts and tax increases.  Treating accounting gimmicks as a real solution is sort of like George W. Bush saying that the $1.3 Trillion of tax revenue losses created by his 2001 tax cut bill  wouldn’t really ever materialize, because of the “laffer effect” that tax cuts would be so conducive to economic growth that the government would actually get as much revenue as before or even more! Laugable, of course, since any serious economist will tell you that tax cuts do not pay for themselves.  Even more laughable now after the experience of the 8 years of the Bush regime when a new tax cut bill passed every year and we had at best an anemic job creation record  and no sharing of productivity gains with workers.  Tax cuts that just leave more money in the pockets of overly compensated managers and already wealthy shareholders do just about nothing towards creating jobs.  Mainly that give more money to people that already have a lot of it, and those people are more likely to put it in emerging economies or some other kind of vehicle that does nothing to support entrepreneurship or create jobs here in the USA.

Some states seem to be dealing with the fiscal crises by cutting workers pay and cutting workers.  That is likely merely to make the crisis worse over the long run.  It increases unemployment–thrusting a number of former public employees on the dole.  It leaves businesses facing less purchasing power–especially in and around the state capitol.  It creates an atmosphere of austerity which breeds its own consumer pessimism that feeds negatively into the recession cycle.  It leaves state services shorthanded, with a likely result that accidents and crimes will increase (as state parks and large public events are understaffed), and other indicators of a good quality of life will go down (long lines at the department that issues drivers’ licenses, etc.).

So that leaves thinking about tax increases.  Even those who think state taxes should increase–especially in ways that make them more progressive (think Michigan–where a very low income tax rate that is constitutionally capped means that the wealthy benefit hugely from the state’s expenditures but pay very little in taxes)–may hesitate to recommend large tax hikes during recessions, in part because of the psychological impact of a tax hike, on top of all the other “bad” economic news.  If people have a choice, they might just move to a state that doesn’t have such a tax hike.  And since tax increases are most likely to impact people with higher incomes who have a choice, it is possible (though certainly not inevitable) that a tax increase on higher incomes will lead to some exodus from the state of those high income earners who are mobile.  But there are reasons that a tax increase might make the most sense out of the various unpleasant options.  The fears about exodus are probably exaggerated–people have any number of reasons for choosing where to live, and a business that has established ties (customers, vendors, workers) cannot so easily just move lock stock and barrel to another state.  Tax money in state coffers will be spent as it comes in–it really isn’t taking that money out of the economy, but just reallocating it to preferential uses.  To the extent that the money is used to support vulnerable populations who would otherwise create a burden on local and state government anyway, it is clearly a win-win proposition.  And of course if the state funds are used in ways that encourage business startups or new types of businesses to move to the state (and use supplies, hire workers, etc.), the state expenditures will give greater bang for the buck than leaving them in the hands of weathier state residents who would have invested them abroad.  When tax increases permit a state to satisfy the various obligations it has entered into, that fosters a climate of business certainty and trust–state employees know that the contract they have entered will be honored, businesses in the state agree to contract with the state because they will be paid, and the state and its municipalities can successfully borrow in the muni market to meet those capital expansion needs that require longer term financing.

All in all, it seems that reasonable tax increases should be a win-win proposition, even during difficult economic times.  What is reasonable?  A tax increase that will be paid by people and businesses that can afford it and that will be used to support worthy state endeavors.

At any rate, that is the decision that Illinois Democrats reached today, as an income tax increase “squeaked through” the Illinois House (60-57 vote Tuesday) and Senate (30-29 vote Wednesday) before the new legislative session began this afternoon.  See Karen Pierog, Illinois Lawmakers Pass Big Tax Hike to Aid Budget, Reuters, Jan 12, 2011.  The bill temporarily increases the individual and corporate income tax rates, and sets a spending limit through fiscal 2015.    For a description of the proposal put together by the Governor and Speaker and Senate President, whichapparently had stiffer rate increases and other provisions than the bill actually passed last night (which is not yet available on the Illinois website), see here (Phil Milsk legislative update on January 7 for Illinois Association of School Social Workers).

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State budgets and finances

The National Association of State Budget Officers reports on the growing concern for state budgets. (hat tip MG)

Spending Remains Lower than Pre-Recession Levels State general fund spending is forecast to rise 5.3 percent in fiscal 2011 as 35 states enacted a fiscal 2011 budget with general fund spending levels above those of fiscal 2010. However, declines of 7.3 percent and 3.8 percent in state general fund spending in fiscal 2010 and fiscal 2009 respectively mean that state general fund spending remains nearly $42 billion, or 6.2 percent below its fiscal 2008 level. The fiscal 2010 general fund spending decline of 7.3 percent is the largest decline in state spending in the history of this report. See chart below.



Rainy day funds a quite low:

Additionally, in fiscal 2012 a significant amount of state funding made available by the American Recovery and Reinvestment Act of 2009 will no longer be available. The end of this support will result in a continuation of extremely tight fiscal conditions for states and could lead to further state spending cuts.

James Pethokoukis with a hat tip to Naked Capitalism suggests this thought:

Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011.

That’s why the most intriguing aspect of President Barack Obama’s tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds program. BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds. The subsidy program ends on Dec. 31. And my Reuters colleagues report that a GOP congressional aide said Republicans “have a very firm line on BABS — we are not going to allow them to be included.”

In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year, as estimated by the Center for Budget and Policy Priorities.

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I Take No Joy in Raping and Pillaging

Chris Christie moves New Jersey into the 17th century:

Christie is cutting $475 million in aid to school districts, $62 million in aid to colleges and $12 million to hospital charity care. He is pulling all funding from the department of Public Advocate….He is cutting state subsidies for NJ Transit, a move Christie said could lead to higher fares or reduced services but would force the agency to become “more efficient and effective.”…

“I take no joy in having to make these decisions. I know these judgments will affect fellow New Jerseyans and will hurt,” Christie said. “This is not a happy moment. However, what choices do we have left?”…

Senate budget chairman Paul Sarlo (D-Bergen) said cutting funding for schools was not the same as cutting state spending, and would simply raise property taxes.

Chris Christie reprising the plan Christie Whitman used to “balance” the budget: the one created by Cokehead that has led to property taxes rising by 50% in the first seven years of this decade alone.

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Tax Gimmicks then and now–sunsetting tax cuts; temporary tax hikes

by Linda Beale

When the Republicans wanted to enact huge tax cuts for individuals and businesses in 2001 and 2003 (as well asadditional cuts in other years), they realized that it would result in long-term deficits of unforgiving amounts. So they scaled back their package with a gimmick–a sunsetting tax provision that, like Cinderella’s fairy godmother, caused everything to go back to its former (natural) state on the stroke of midnight–midnight 2010, that is. Thus, they were able to claim that their package of cuts was much less costly than it would be if their plan to make the cuts permanent before 2010 rolled around materialized. It was smoke and mirrors–“we’ll do this and claim our cuts are cheap; once the cuts are enacted, we can accuse anyone opposed to making them permanent of raising taxes and no one will remember it was our gimmick to cover the real cost of the cuts. ”

The gimmick succeeded in many ways.

  • First, Barack Obama felt his chances of election were threatened enough by the status quo devotion to the current rates that he promised, in an election that was his to lose, that he would not raise taxes on anyone making less than $250,000 a year. That was nuts, for several reasons. For one, the economic crisis: By the time of the election, we were in the midst of a calamitous crisis brought on by the reckless Reaganomics of deregulation, privatization, militarization and tax cuts, with programs already underway of huge outlays from the federal treasury to compensate for the credit crisis and expectations on every side of a need for a gigantic stimulus package to re-start the economy. For two, the problem of appearing to engage in class warfare. While I think the wealthy should be targeted for much higher taxation after years of preferential treatment for their income, it would have been simpler just to argue for letting the Bush tax cuts die their natural death and then instituting in finely targeted tax cuts that would be much more beneficial to economic growth, along with finely targeted tax increases to do the same (such as elimination of the capital gains preference). Didn’t happen.
  • Second, once rates are in place, the right-wing propaganda machine starts churning and repeating a twisted version of reality. Americans aren’t very well trained in economics or finance, and we are too easily swayed by people that come across as genuine–we still buy snake oil from the traveling salesmen. So Beck and Hannity and their ilk have been pedaling the snake oil that letting the Bush cuts lapse is a tax increase, that government is evil and all taxes are theft, that it’s the Democrats who’ve caved to the Wall STreet millionaires (rather than the Bush regime, with its talk of its constituents being the “haves and the have-mores”). So people are primed to think they are overtaxed and get nothing for it.

As a result, there’s a good chance that most of the tax cuts–including the low capital gains rates and treating dividends as capital gains and all the tax breaks for multinationals– will be made permanent, or at least extended from year to year.

Will it work the same for the reverse application of the gimmick? Bill Richardson, governor of New Mexico, is trying to find a way to balance the state’s budget. States are suffering especially now during the crisis, as tax receipts are down at a time when folks are struggling with foreclosures and loss of jobs and need more in social services, not less. Richardson, who will propose a new executive budget to the Legislature on Jan. 19, plans to ask for a temporary $200 million tax increase as part of the means of meeting a $300 million budget gap for fiscal year 2011. The governor isn’t proposing specific tax hikes, but leaving it up to negotiations with the Legislature. Regretably, he has said that he is opposed to increasing capital gains taxes or personal income taxes or decreasing business tax credits and incentives, so he hasn’t left room for much other than the “sin” taxes that tend to be exceedingly regressived or other types of excise taxes (gas production has been mentioned).

Governor’s should remember that what they do now has long term effects. Naming something temporary doesn’t mean it will actually be temporary. States might do well to think about their long-term needs, and whether a change to the way they tax capital gains or a more progressive personal income tax or an addition of a VAT tax might be the best way to increase revenues for now and for the future.

crossposted at ataxingmatter

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