May 28, 2015

You Cannot Be Serious!

You gotta love Los Angeles, but when I read stories about what officials there might be planning with their minimum wage increase, my blood really starts boiling. Below is the key portion of the story:

Labor leaders, who were among the strongest supporters of the citywide minimum wage increase approved last week by the Los Angeles City Council, are advocating last-minute changes to the law that could create an exemption for companies with unionized workforces.

L.A.’s unions want to be able to offer lower wages for potential employers yet force non-union workers to be paid the higher “minimum wage.” That means if employers want to avoid L.A.’s planned wage hike, they would be forced to do business with organized labor.

minimumwageFor unions, the “exemption” seems to have another selling point—to get jobs with these cost-conscious employers, non-union workers would be forced to join the union.

Naturally, many L.A. labor leaders love the idea.

“With a collective bargaining agreement, a business owner and the employees negotiate an agreement that works for them both. The agreement allows each party to prioritize what is important to them,” [Rusty Hicks, a labor leader in Los Angeles,] said in a statement. “This provision gives the parties the option, the freedom, to negotiate that agreement. And that is a good thing.”

In fact, minimum wages go directly against this concept. With minimum wages, the government gets to decide whether mutually beneficial agreements between businesses and employees are in fact good enough. And in the case of the exemption proposal, the labor union essentially is inserting itself between employees and employers, undermining both parties’ “freedom . . . to negotiate that agreement.”

Employees don’t necessarily want or need labor unions acting as a middleman and negotiating on their behalf. Usually, individual employees are their own negotiators.

Raising the minimum wage brings with it some negative consequences, like lost jobs and damaged earnings potential. But if jurisdictions do increase the minimum wage, everybody should be forced to abide by them, and that includes labor unions.

May 20, 2015

Medicaid and Why We Can’t Have Nice Things

Have you ever been in Best Buy (or, for you millennials, on Amazon) and looked at a nice 70-inch 4K Ultra HD television that made you desperate to buy one? I know I have, but the thing that stops me from splurging is the knowledge that I would like to eat this month, pay rent, and heat my home. Now, a lot of government spending isn’t like buying a nice television, but the analogy holds. It’s like what people tell their kids: Sometimes you face a choice of either buying what you want or what you really need. Wonder why we aren’t fully funding the foundation formula or why spending for corrections is relatively flat (after adjusting for inflation)? The explosive growth in Medicaid might not be the sole reason why, but it’s probably playing a big part.

For this upcoming fiscal year (which begins on July 1), the state has appropriated close to $9.4 billion to Medicaid. This includes more than $1.86 billion in general revenue (state funds that include your income taxes and most of your sales taxes). This is an increase of close to $200 million ($110 million in general revenue) over this year. That sounds like a lot of money, and it is, especially considering that Medicaid continues to take up a larger portion of the state’s budget.

The two charts below show the effects of Medicaid growth on state general revenue expenditures:

Inflation3 Inflation5

 

As you can see, as Medicaid grows, other programs like higher education and the foundation formula shrink as a portion of the budget. That isn’t to say that such shrinking is good or bad, but since the state has a balanced budget amendment, appropriators don’t have much choice in the matter either way.

With Medicaid costs growing, one would understand a desire to get costs under control. However, there is a concerted effort in this state to actually expand Medicaid. My colleague Patrick Ishmael has highlighted several reasons why this would be a bad idea, but solely from a budget perspective, expanding the program would be disastrous.

We need to reform Medicaid, not expand it. Ishmael has laid out ways to improve our Medicaid system. If the state can save more on Medicaid or at least stop its growth, it would grant financial flexibility to policymakers to either spend on other important items or return more money to the people who pay the bills, taxpayers.

May 11, 2015

Shocking Support for Taxing Bed and Breakfasts

Bed & breakfasts (B&Bs) have a long history in this country. To many they are associated with comfort and an antique ambiance. To the taxman they are a prime opportunity to raise revenue.

bb-signLast week, the St. Louis Post-Dispatch reported that Saint Louis bed & breakfast owners are upset over the city assessor’s decision to assess their property (or at least the part used as B&Bs) as commercial properties. I can understand why these owners would be upset. According to the way properties are assessed for property tax purposes, if B&Bs were even partially assessed as commercial properties, the owners’ property tax bills would go up substantially.

I sympathize with any business owner that is facing a higher tax bill. However, I do not oppose this change. Saint Louis is doing the right thing here. If a property is engaged in commercial activity, the city should assess it as a commercial property. The situation is trickier with people renting rooms through airbnb. These lodgings are not necessarily full-time establishments, and so some mechanism needs to be in place to make sure they don’t get a tax advantage compared to traditional B&Bs.

Having a large property tax base is important. It’s especially important in Saint Louis because it can serve as a way to reduce (or even eliminate) the earnings tax. The Show-Me Institute released a paper arguing that the earnings tax could be replaced by a two-tier property tax (this differs from a traditional property tax in that the two-tier approach taxes the land more heavily than any improvements on the land). Even if the city sticks with a traditional property tax system, a wider base can generate more revenue to offset any reductions in the earnings tax.

Paying more in taxes is never fun, but low taxes for some shouldn’t come at the cost of a hollowed-out property tax base.

May 6, 2015

I “Think” We Have a Problem Here

When I read about the state’s decision to suspend one of its tax incentives to IBM because of low employment numbers at their service center, I felt it was closing the barn door after the horse had bolted. The state had already awarded IBM $10 million in incentives, so the fact that it was revoking the BUILD credits—one of many incentives IBM was receiving—leaves a sour taste in my mouth.

IBM_signIn 2010, the state and city combined to give IBM a sweetheart deal in order to lure them to Columbia. The BUILD incentives were just one of many carrots IBM received. The others included:

  • $14.7 million through the Missouri Quality Jobs program
  • $4.2 million in new jobs training
  • $300,000 for customized job training
  • $412,500 in recruitment assistance
  • Sales tax exemptions and tax abatements for personal property

The cherry on top of this deal was when Columbia leased a $3 million building on LeMone Industrial Blvd. to IBM for one dollar a year. IBM was supposed to create 600 jobs at this call center by 2013. As of March 2015, the center only has 453 employees. Hence the BUILD incentives, which required a minimum of 500 employees at the center, were suspended.

We wrote that these incentives to IBM were not a good idea back when they were originally awarded. Tax credits are not a good economic investment for the state to be making, and cities, including Columbia, should not be hollowing out their property tax base by buying buildings so they can lease them to favored businesses. If the state and its cities really want to help businesses, they should keep taxes low for everybody.

The failure of tax credits to deliver promised economic benefits is not isolated to Columbia. I hope policymakers can learn from these examples and stop trying to pick winners and losers with subsidies, but I won’t hold my breath.

May 4, 2015

Updated Reports: Missouri Fast Facts 2015

Fast Facts Banner

The Show-Me Institute is proud to present Missouri Fast Facts for 2015. These Fast Facts booklets cover a variety of topics and contain useful information that people can reference without having to scan through 100-page reports (that’s our job). Want to know by how much Missouri’s public pensions are underfunded? Just check the Pension Fast Facts for an answer. Want to know how Missouri highways are funded? Take a look at our Transportation Fast Facts.

These booklets are packed with information, but if you want to know more about any of the topics they cover, please visit our main website, showmeinstitute.org.

April 27, 2015

Power Play: State to Give Special Electricity Deal to Favorite Business

Have you ever taken a look at something and thought to yourself, “Wait a minute, I don’t think you’re using that right”? Kinda like that scene in Tin Cup when Kevin Costner uses a shovel instead of a 3 wood when golfing. Well, it appears that the Public Service Commission (PSC) has decided to get in the economic development game.

The PSC serves to regulate utilities in the state so that Missourians receive safe and reliable services while the utility companies charge rates that allow them to earn a reasonable rate of return on their investments after they recoup project costs.

winnersHowever, the PSC recently instructed its staff to prepare an order granting Noranda (an aluminum company in Southeast Missouri) a reduced rate on the electricity it consumes. The reasoning behind this decision is to allow Noranda to save on costs so that it can improve its financial position and avoid financial difficulties in the future.

This is yet another attempt by the state to help improve Noranda’s bottom line. Noranda already pays the lowest electricity rates in Missouri. Since it is the largest consumer of electricity, I can understand why that would be the case (bulk discounts for large purchases aren’t uncommon). However, the state also specifically passed legislation that allows Noranda to shop for its electricity provider. No other person or business in the state has such a privilege.

Now the state wants to lower Noranda’s rates even further. Why? That’s simple: to save jobs, which is a noble sentiment, but this is not the role of the PSC. This order amounts to the government picking winners and losers, just through a different means than what we’re typically used to seeing.

I want Noranda to stay in business, but it’s not the PSC’s job in order to guarantee that. If we work to keep the cost of doing business low in Missouri, everybody, including Noranda, will benefit.

April 21, 2015

Getting the True Value of Farmland

farm

It’s interesting when there are two wildly different takes on the same thing. For example, take me vs. the general public on Dances With Smurfs or Michael Burry vs. the rest of Wall Street on the value (or lack thereof) of sub-prime mortgage bonds. Another instance—one that is costing all of us—is the State Tax Commission vs. everyone else on the value of farmland. This difference can affect many our tax rates.

In a recent paper (H/T David Nicklaus), David Larson of the Bureau of Economic Analysis performed a valuation on all land in each of the lower 48 states for 2009. Based on his calculations, Missouri farmland is worth $64.236 billion. Based on my calculations, using data contained in the State Tax Commission’s 2009 Annual Report, the total value of Missouri agricultural property in 2009 would come out to $13.3 billion. That’s a gap of more than $50 billion!

A reason for this big difference is that, instead of assessing all agricultural land at a flat 12 percent rate, actively farmed land receives a different assessment rate depending on its productive capacity. This practice results in an effective assessment rate of around 2-3 percent.

Such low assessments erode the property tax base. Even if the true value of farmland in Missouri was half of Larson’s estimate, if it were assessed at a flat 12 percent rate, the state would have an agricultural property tax base nearly two-and-a-half times the size of its current base. This larger tax base either could allow property tax rates in some areas to be cut or some localities could see an influx of new revenue.

I don’t want farmers’ property tax bills to skyrocket. However, the truth is their property is under assessed to such an extent that governments are forced to rely on other more destructive forms of taxation (i.e., income taxes), which the rest of us have to pay, in order to fund essential services. We should value farmers for the work they do, but we should also properly value the land they work on lest we pay more than we should.

April 18, 2015

No, Post-Dispatch, the Rams Don’t Pay Their Way

StadiumEarlier this week, the St. Louis Post-Dispatch published an editorial discussing whether the tax revenue brought in by the Rams is enough to cover the costs associated with building the Edward Jones Dome. Their answer: probably yes. My colleague Joe Miller and I have looked at this issue, and our answer: probably no.

Why the discrepancy? Well, let’s look at the Post-Dispatch‘s “back-of-the-envelope” calculations:

  • They assume roughly $1 million a year from taxes on the Rams’ profits. We have no problem with that.
  • The Post-Dispatch counts the total $151 million of player payroll as taxable, when it isn’t. Rams players play half of their games in other states/cities, so they pay income taxes to those states. This is double counting, since they also count visiting teams’ income taxes too. Taking this into account, Joe and I estimated the income taxes generated by players’ salaries—along with those generated by the coaches, staff, and other employees of the Rams—comes to roughly $11 million.
  • Taxes from sales of merchandise and food and beverages have to be balanced against what would have been received from local businesses had the Rams been absent. The Post-Dispatch gave no indication that they took this into account. According to our calculations, the net sales tax revenue along with ticket tax revenue amounts to roughly $3 million.
  • Add in the Rams’ rent, and you get another $250,000 in revenue.
  • Like the Post-Dispatch, we found it difficult to determine how much the city, county, and state would receive in additional hotel tax revenue.
  • Overall, we estimate the Rams generate between $15-16 million in tax revenue ($10-11 million for the state, $3-4 million to the city, and the remainder to the county). That’s a far cry from the $24 million the city, state, and county put in to finance the dome. Plus, the Post-Dispatch makes no mention of the annual maintenance costs of the dome, which totaled $7 million last year and are projected to run between $5-9 million going forward.

I like football and want the Rams to stay in Saint Louis, but the only way I want to pay for them is by buying a ticket on game day. Giving further subsidies to the Rams will not be a boon to the local economy (which the editorial board, to its credit, recognizes), and it probably will end up being a net loss for taxpayers.

April 14, 2015

Alcohol Tax Rates Are Low . . . and They Should Stay That Way

I think we can all agree that drinking in excess is not good for you. Not only is it bad for your health, but if you’re not smart, such a habit could end up destroying the lives of others as well. That’s why I applaud the intentions behind Christopher Ingraham’s recent op-ed, if not his prescription.

wineIn his article, Ingraham calls for raising alcohol taxes, stating: “Higher taxes make alcohol more expensive. More expensive alcohol makes people drink less of it. And when people are drinking less, they’re less likely to suffer costly health problems or do stupid things like drive drunk.”

If Ingraham’s ultimate objective is to make people drink less alcohol, why not just ban it? Wouldn’t prohibition really reduce the health problems associated with alcohol consumption? However, we’ve already tried Prohibition, and it didn’t work out too well. So Ingraham’s alternative is to raise taxes to cut down on consumption. Except, there are problems with that approach as well. Increase taxes too much and people will resort to smuggling. It’s happening in New York with cigarettes. What’s to say it wouldn’t happen with alcohol?

Both Ingraham and I want to cut down on drunk driving. Thankfully, drunk driving is already on the decline. Since 1986, alcohol-related fatalities have seen a 54 percent decline! Why solve a problem that is already fixing itself?

There are negative side effects to raising alcohol taxes as well. Because of our low taxes on alcohol, cigarettes, and gasoline, commuters from out of state make it a point to purchase these products in Missouri. If we raise taxes on alcohol we are removing an incentive for people to shop in Missouri. If less people shop here, Missouri businesses will suffer and the state will see less tax revenue. How will that help anybody?

I can sympathize with Ingraham’s efforts to curb the more negative effects of heavy alcohol consumption, but the biggest problem, drunk driving, is becoming less of one over time. Coupled with the fact that increased alcohol taxes can hurt Missouri businesses, we should leave tax rates alone and focus on other ways to improve public health and safety.

April 3, 2015

Paying for the Privilege . . . to Stay in Bridgeton

After staying overnight in Jefferson City last week, I awoke to find my hotel bill laying on the floor in front of the door. For those who travel frequently, this is not an unusual sight. It also isn’t unusual to spot a line item that tells you how much you have to pay because of the city or county’s hotel tax. Sometimes that amount is relatively miniscule, other times it can be quite large. If the Bridgeton City Council gets its way, for guests of Bridgeton, it will be the latter.

Hotel ExteriorHotel taxes are not an uncommon occurrence in Missouri. In fact, the Show-Me Institute’s Sales Tax Fast Facts pamphlet has 17 entries for cities/counties with a hotel/occupancy tax, and that list is by no means exhaustive. As you can see, hotel tax rates can range from 3 percent in Hermann to 12.25 percent in Hazelwood. In most cases, visitors to Saint Louis County pay the same hotel tax rate (7.25 percent) because of the countywide pool which, among other things, goes to pay off construction costs for the Edward Jones Dome.

The Bridgeton City Council, however, wants more hotel taxes to go directly to them. The council placed a proposal on the April ballot that will raise its hotel tax from 85 cents a night to three dollars a night. I can see why this would be an attractive option. Many people who stay in hotels are not residents of the city/county where the tax is imposed. For politicians and residents alike, getting others to pay for city services sounds like a good idea. However, just because a city can extract revenue from visitors, doesn’t mean it should.

Hotels already pay commercial property taxes and the Saint Louis County property tax surcharge (the highest in the state). They have to pay business licensing fees, and guests already have to pay the city and county sales tax. Why does Bridgeton need to levy even more taxes? Is it because it keeps relying on TIFs? Maybe Bridgeton should stop giving away special handouts and broaden their tax base instead of shrinking it and relying on higher rates to make up for lost revenue.

I highly doubt I will ever stay in a Bridgeton hotel, so when I wake up in the morning, the effects of this proposal won’t be staring me in the face. However, city residents should ask themselves whether they want to approve a tax increase, no matter who it may hurt.

April 1, 2015

The 411 on a CID in the B70

Some business leaders in Columbia want more attention for their slice of town. To do that they are getting together to create a new community improvement district (CID) for the Business 70 Loop. This sounds innocent enough. However, CIDs are just another example of the alphabet-soup taxing districts that increase tax rates to fund new services for a questionable public purpose.

CIDs are independent taxing districts created to collect sales and property taxes and spend money to improve an area in a variety of ways, including beautification and infrastructure. There are two primary problems with CIDs. The first problem is transparency. The auditor’s office has consistently found deficiencies in reporting and documentation for these districts.

The other issue with CIDs is their lack of a cap on property taxes. Under the current proposal, the CID would levy an additional 47 cents per $100 of assessed value of property taxes on top of what people/businesses already pay. However, there is no statutory language preventing the CID from increasing property taxes further. An extreme example is when a CID in the Lake of the Ozarks levied an additional $4 per $100 of assessed value. I’m not saying this proposed CID will have taxes go up that high, but there is nothing stopping such an increase from happening except the restraint of the CID board.

Given these problems, what is the compelling reason for establishing a CID, especially since the area is already seeing redevelopment? As the Columbia Tribune states:

He also cited Miller’s 2012 purchase of the old Commerce Bank building at 500 Business Loop 70 W., Head Motor Company’s recent upgrades and his own redevelopment of the Parkade Center as examples of the type of redevelopment he would like to see along the corridor. Further east, Business Loop 70 boasts a newly remodeled Burger King and renovated McDonald’s.

“We’re starting to see redevelopment occur, and we want to make sure we have pro-redevelopment policies in place,” Burnam said.

If this article tells us anything, it appears that legal restrictions on renovating existing lots are the problem. Maybe proponents should work on fixing the regulatory environment instead of raising taxes.

CIDs have serious issues and should only be undertaken without serious safeguards in place, if at all. The Business Loop in Columbia might not be a paradise, but is it so blighted that the only thing left to do is establish a CID? Color me skeptical.

March 31, 2015

Show-Me Institute Presents: Pension Reform in Missouri

Hawley

It’s not news that Missouri’s pensions are underfunded. In fact, they’re an economic ticking time bomb that could leave taxpayers on the hook for billions. Unless we want taxpayers to get stuck with the bill, these pensions need to be reformed. However, there are legal barriers that might stand in the way of any reform effort. These barriers have been difficult to determine . . . until now.

Yesterday, the Show-Me Institute released a new policy study titled, “Pension Reform in Missouri.” The study’s author, Erin Morrow Hawley, sets out the legal framework that will govern pension reform in Missouri. In analyzing the statutory provisions related to Missouri’s public pensions, questions arise:

  • What interests are protected?
  • May the general assembly modify pension benefits retroactively? Prospectively?
  • What about contribution increases or decreases?

This study analyzes the statutory provisions related to these inquiries and sets forth a variety of pension reform measures that may be possible under Missouri law.

With the need to reform pensions becoming more acute every year, it is vital that any reform effort be able to successfully address the legal issues that might arise. With this new study, doing so has become much easier.

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