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How Changes in State & Local Tax Burdens Affect Growth in Per Capita Income

by Mike Kimel

How Changes in State & Local Tax Burdens Affect Growth in Per Capita Income

Cross posted at the Presimetrics Blog.

I’ve had a number of posts recently looking at the effect of reductions in the tax burden during Presidential administrations or during (or just following) recessions and how those affected subsequent growth. In each case, cutting the tax burden did not lead to faster growth. In fact, the data shows that, contrary to theory, real economic growth tends to be slower following cuts in the tax burden than following hikes in the tax burden.

As noted in my last post , one common criticism, that there aren’t enough observations, is mooted by the fact that state and local level data seems to show the same thing. But it occurs to me that I haven’t done this sort of an analysis at the state and local data in a while, so that’s what I’m going to do in this post.

The data I’m going to use in this post comes from the Tax Foundation. Here’s how the Tax Foundation describes itself:

The mission of the Tax Foundation is to educate taxpayers about sound tax policy and the size of the tax burden borne by Americans at all levels of government. From its founding in 1937, the Tax Foundation has been grounded in the belief that the dissemination of basic information about government finance is the foundation of sound policy in a free society.

I would add to that – from what I can tell, their primary goal seems to be to convince people that lower taxes produce faster economic growth, which is something that contradicts all the data I’ve looked at so far. Thus, though I don’t normally use data from advocacy groups, I figure it adds an interesting dimension to the analysis in this case.

Anyway, the data I will use comes from this file , and it shows the state & local tax burdens and the per capita income for every state plus the District of Columbia for every year from 1977 to 2008. Despite my trepidation, I’m going to trust the data.

Now, showing results that involve three decades of data for all 50 states and the D of C (henceforth “the states”) graphically – which is what Michael Kanell and I tried to do in Presimetrics – isn’t easy. Here is what I did in this case. For every year for every state, I computed the change in the state & local burden for the two subsequent years, and the growth rate in per capita income for the six years after that. (Per capita income is not adjusted for inflation, but for the purposes I’m using it, that doesn’t matter.) Thus, in 1977, I computed the change in the state & tax burden for Alabama between 1977 and 1979, and the annualized change in per capita income from 1979 to 1985. The same thing was done for every state, and for each state, it was performed for every year for which data was available. Regular readers will recognize that I’ve used the 2 years of tax changes followed by 6 years of growth in the past when looking at data at the Presidential level.

Now, in some years, tax cutting was the norm. In other years, most states hiked taxes. So the trick is to compare relative performances. If the tax cutting proponents are right, in general, the states that reduced tax burdens the most (or increased them by the least) in any given two year period should have the fastest growth in per capita income in the next six year period. To check that, in each year, I divided states into three buckets with 17 states each. The 17 biggest tax cutters over the next two years are placed in one bucket, the next 17 appear in the next bucket, and the last 17 are placed in the next bucket. Obviously, a state won’t be in the same bucket every year. The median growth rate in per capita income in the subsequent six years is computed for each bucket, and buckets are ranked according to whether they produced the fastest, second fastest, or third fastest growth rates in per capita income.

For example… from 1977 to 1979, most states were in tax cutting mode. The 17 states that cut taxes the most are placed in the “biggest tax cutters” group, the next 17 states are placed in the “medium tax cutters” group, and the 17 remaining states (including the D of C) are placed in the “smallest tax cutting” group. Now, the biggest tax cutters produced a median annualized growth rate in per capita income from 1979 to 1985 of 7.8%. By contrast, the median tax cutters from 1977 to 1979 enjoyed a median annualized growth of per capita income from 1979 to 1985 of 7.9%. On the other hand, the smallest tax cutters produced a median growth in per capita income of 8.3% from 1979 to 1985. Thus, for the 1977 year, we rank the smallest tax cutters as first, the median tax cutters as second, and the biggest tax cutters as third.

The following graph summarizes our results for all the years available:

Figure 1

The table is interpreted as follows: the smallest tax cutters (i.e., those who cut taxes the least or raised them the most in any given year) produced the fastest economic growth about 42% of the time, second about 29% of the time, and third 29% of the time. By contrast, the middle group came in first in one third of all occasions. The ”tax cuttingest” group came in first place a mere quarter of the time; in half of all years, it came in last place.

Many conclusions are reasonable from this. However, concluding that states that cut taxes have produced the fastest growth rate in per capita income is not one of them. After all, in general, the states that cut tax burdens in a two year period have, as often as not, turned in the worst performance when it comes to growth in per capita income in the following six years.

Tying everything back to the work I’ve been showing in recent months (and which supports our findings in Presimetrics) – looking at data over the length of Presidential administrations since 1929 (when national accounts data became available), those Presidents that cut tax burdens in the early years tended to have worse real economic performance in later years than those that raised tax burdens. Similarly cutting tax burdens during or just following a recession produces slower, shorter recoveries. Now we find that cutting tax burdens isn’t the prescription at the state level either.

I’ll repeat something I’ve noted before – any economic theory for which just about every observation is a special case is wrong.

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Election thinking

Mark Thoma hosted Robert Kuttner at Firedoglake, the introduction begins with these words:

It’s possible to give two very different interpretations of the Obama presidency so far. The first is a relatively positive interpretation. Proponents of this view argue that even though Obama has faced a united GOP willing and able to use filibusters to thwart initiatives, and even though he has had opposition within his own party to progressive initiatives, he has still managed to rack up an impressive list of achievements. Take health care as an example. The health care legislation wasn’t all that progressives wanted, not by a long shot. But the legislation is an impressive start and, importantly, it leaves the door open to further change. Though people forget, programs such as Social Security or Medicare weren’t perfect at first, but were improved substantially over time.

Rdan here…I think two interpretations makes for a framing of the issue which is okay for a limited format and begins a conversation. The HCA example was an early effort that does not quite define the problem, however, in that a case could be made for HCA as a reasonable first step, but still does not address the political methods used. Eventhough the result might be defensible at least to some, how does that accrue to the process and message that was also produced, which appeared to be more closely aligned to Pres. Obama’s policy stance to start?

Proponents of this view also argue that a more aggressive posture would not have done any good, and it may have even been harmful…

Rdan..Some might argue this, but I think many held their concern in check more in confusion over the strategy and hopeful expectation in the beginning.

Obama doesn’t have FDR’s filibuster proof majority…

Rdan…Hmmmm…don’t buy this at all if it is indeed an argument…I believe it is an impression that is encouraged by DC, but choices were made. There were early indications of the direction Pres. Obama had in mind by his choices for advisors.

The negative view, and this is the view taken in Robert Kuttner’s book, sees the last year and half very differently.

But … this hopeful scenario is not the way Barack Obama’s first year unfolded. Instead of making a radical break with Wall Street…This book is an exploration of why Obama did not rise to seize a Roosevelt moment.

Mark Thoma notes:

There doesn’t seem to be an urge to fight toe to toe and to take the case directly to the public in Reganesque style as a means of putting pressure on legislators to support the administration’s policy intitiatives. Instead, we get backroom deals that compromise away core principles. And all of this in the search of bipartisanship that turns out, in the end, to be nothing but Lucy and the football.

Comments at Firedoglake were more varied than I expected, and comments at Economist View are worth a read. However, the comments indicate a need to come to terms not only with issues but how to proceed with the situation as it stands.

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Increasing internal demand in China for goods needs more thoughtful analysis

A shift to more internal demand for China might not benefit the US in ways we think it will. One such area is the impact of increased demand for resources and energy. And another is where the jobs are.

China Puts Up More Money to Build Solar Capacity

The government-owned China Development Bank has just made its third massive loan to one of the country’s solar energy makers, bringing its total commitment about $17 billion. The combined size of the loans is large enough to allow China to double the global manufacturing capability for solar wafers and cells. The latest recipient of the government’s largess is Yingli Green Energy Holding Co. Ltd. (NYSE:YGE), which today announced that had received an aggregate line of credit from the China Development Bank worth about $5.3 billion. In April, Suntech Power Holdings (NYSE:STP) and Trina Solar Ltd. (NYSE:TSL) received loans of $7.3 billion and $4.4 billion, respectively.

The NYT points to energy use, efficiency, and China (Rdan…the emphasis is on global warming but needn’t be):

Already, in the last three years, China has shut down more than a thousand older coal-fired power plants that used technology of the sort still common in the United States. China has also surpassed the rest of the world as the biggest investor in wind turbines and other clean energy technology. And it has dictated tough new energy standards for lighting and gas mileage for cars.

But even as Beijing imposes the world’s most rigorous national energy campaign, the effort is being overwhelmed by the billionfold demands of Chinese consumers.

Aspiring to a more Western standard of living, in many cases with the government’s encouragement, China’s population, 1.3 billion strong, is clamoring for more and bigger cars, for electricity-dependent home appliances and for more creature comforts like air-conditioned shopping malls.

Chinese cars get 40 percent better gas mileage on average than American cars because they tend to be much smaller and have weaker engines. And China is drafting regulations that would require cars within each size category to improve their mileage by 18 percent over the next five years. But China’s auto market soared 48 percent in 2009, surpassing the American market for the first time, and car sales are rising almost as rapidly again this year.

An older generation of low-wage migrant workers accepted hot dormitories and factories with barely a fan to keep them cool, one of many reasons Chinese emissions per person are still a third of American emissions per person. Besides higher pay, young Chinese are now demanding their own 100-square-foot studio apartments, with air-conditioning at home and in factories. Indeed, one of the demands by workers who went on strike in May at a Honda transmission factory in Foshan was that the air-conditioning thermostats be set lower. [Rdan…the mandate is 79 degrees F.]

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Procurement of big ticket items

Follow up to the US military ‘procurement and research’ increases post:

$25 billion for the first new aircraft carrier, $9 billion for per for another one or two each.

Aircraft Builders Compete for Air Force Tanker Contract Again 24/7 Wall St.:

Maybe the third time will be the charm. Today marks the closing date for bids to build a new refueling tanker for the US Air Force. Boeing Co. (NYSE: BA) submitted its 8,000 page bid on the deadline day, following a submission yesterday from the European Aeronautic, Defence & Space Co., known as EADS and makers of the Airbus family of planes. The bid from EADS did not include participation by its former partner, Northrup Grumman Corp. (NYSE: NOC).

The Pentagon’s first try at getting a new tanker began in 2000 and the contract was awarded to Boeing in 2004. The $35 billion award would have replaced 179 Boeing 707-based tankers built from the original contract awarded during the Eisenhower administration. A bribery scandal involving Boeing executives resulted in cancellation of the contract and a new round of bidding.
The contract was re-awarded in 2008, this time to Northrup, which had partnered with EADS to build the planes at the European maker’s Alabama plant on a modified version of the Airbus 330 passenger plane. That contract too was cancelled when the Government Accountability Office found irregularities in the way the decision was made.

The bidding was opened again last year, with a decision now due in November. A third bid, from U.S. Aerospace Inc. (OTC: USAE) and Ukranian partner Antonov Co., is also expected today…

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Relative employment is shifting

Today Statistics Canada released impressive June employment figures from its Labour Force Survey (LFS). In case you missed it, the April gains, +109,000 new jobs, set a record. And the June gains, +93,000, were nearly as spectacular. (Note: the unemployment rate for Canada in the chart to the left is through May, not June)

Canada’s labor market bounced back fully and then some. Spanning May 2008, when job loss became the norm as the global credit crunch started to take hold, to December 2009, 259k jobs were lost. However, this year through June 2010, the labour market added back 308k jobs, which is +50k new jobs during the expansion or roughly +500k in “US”.

I’m afraid that the US labour market is a far different story. To regain employment lost since June 2008, 6.9 MILLION jobs need to be added back to the employment figures of the current population survey.

I digress. Every time I hear the Canadian statistics, I immediately multiply the statistic by 10 to control for the population differential; thus, +109,000 new jobs in Canada would be equivalent to roughly +1,090,000 in the US, all else equal. In translating the job gains into “U.S”, I understand the magnitude with more clarity – not very different form learning a new language by translating the words in your head.

Is +50k Canadian still equivalent (roughly) to +500k US? The short answer is pretty much – the 2009 US/CAN relative population was just over 9; but in thinking about relative population figures, I stumbled upon a rather remarkable relative employment figure between the US and Canada. The Canadian employment picture has become much much brighter than that in the US over the last decade.

The chart illustrates US employment relative to that in Canada, Germany, and Japan (Germany and Japan are there for comparison). As you can see, employment in the US relative to our neighbor to the North has dropped markedly. There is a secular downward trend in US employment relative to that in Canada.

And it’s not just a population issue. On a population-adjusted basis, the employment figures in Germany, Canada, and Japan are trending upward relative to that in the US – and for Canada, this is a secular trend rather than a cyclical phenomenon.

The US employment picture is fading compared to other developed nations. And remember, Japan and Germany saw near-zero annual population growth spanning the years 2000-2009.

Rebecca Wilder

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…and thereby improving our exports.

by Stormy
lifted from an e-mail

–and thereby improving our exports.

Some background:

Presently, Colombia enjoys a healthy trade surplus with the U.S.

“Colombia’s biggest surpluses in the January-April period were with the U.S., at $2.325 billion, and with the Netherlands, at $425 million.”

Colombia also is actively promoting its sourcing capabilities:

“Colombia’s IT sector already includes several of the world largest outsourcing companies. IBM, Accenture and EDS are riding the crest of the wave along with world giants such as Oracle, Microsoft, Sun, Dell and many others. All these companies have already discovered the advantages of outsourcing and doing business in Colombia”

What I am curious about is what will we be exporting to Colombia? Of course, NAFTA did not create jobs in the U.S., but it did bring about a healthy Mexican trade surplus with the U.S.

Wheat and livestock are what might be going to Colombia from the U.S. In short, agriculture and livestock farmers are pushing the deal….not too many jobs created there.

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I am late to the news, but so far reported on healthcare law implementation:

1., a new online portal where anyone can go to find insurance options in their state, went live. It’s a very handy resource for information that used to be difficult to find. It’s available to help millions who need insurance find it, and as a resource for those who want to shop around for new options or find out their new benefits under the new law.

2. States are starting to create new insurance pools for hundreds of thousands of people with serious medical conditions who had previously been unable to get insurance. Federal grants to help with setup are on their way to states right now.

3. In June, 80,000 checks were mailed to seniors to help with prescription drug costs not covered by Medicare.

And of course, many of the key insurance reforms—allowing young adults to stay on their parents’ insurance until age 26, and making it illegal to deny a child or baby insurance because of a “pre-existing condition”—have already started to take effect.

Now, many of the major reforms—the new health insurance exchanges, an end to pre-existing condition discrimination for adults, and more—have yet to go into effect.

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Recently there has been a claim that corporations are holding large sums of cash rather than investing it because they are fearful of Obama’s “socialist policies”.

But if you compare corporate retained earnings to the GDP GAP lagged one year it looks like the debate should be over why corporations are investing so much. This determinate of corporate retained earnings implies that corporations are actually holding much less cash than the traditional relationship implies they should be.

Commenters are saying this analysis should use cash flow rather than retained earnings.
OK, here is a chart comparing corporate cash flow to retained earnings.

The net cash flow data shows essentially the same pattern as the retained earnings data. It
does not make any difference except at the last couple of observations where the cash flow data is turning down. So the only difference really contradicts the argument that Obama is scaring corporations into hording cash even more than the retained earnings data does. It shows net cash flow as a % of profits falling over the last two quarters — just the opposite of what would be the case if Obama was scaring corporate decision makers.

Both series show that corporate decision makers appear to be much less concerned than they were at a very comparable point in the Reagan administration when the GDP GAP was about the same.

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Nursing Home Regulatory Fiasco – PART I

by Tom aka Rusty


Nursing homes are subject to a two part interactive regulatory system (plus several others) used to calculate certain reimbursement levels.

The Minimum Data Set 2.0 (MDS) is a clinical reporting system that is supposed to improve care by having nurses do more paperwork (more on this in Part II).

Resource Utilization Groups III categorizes residents into 44 acuity groups. The two systems interact to calculate facility acuity levels (very oversimplified explanation).

On October 1, 2010 MDS 3.0 and RUGs IV are supposed to be put into place. Problem is, MDS 3.0 is ready for roll out, but RUGs IV is not. If no solution is found soon, the feds will have to rig some sort of half-assed patch to keep the system working. RUGs IV should be done in another year.

The feds now face writing tens of thousands of pages of regulations to implement Obamacare, yet cannot finish work started with several years of lead time. Ugly, very ugly.

Rdan: The major question is: Does Rusty still have any hair left?

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