April 15, 2014

Hazelwood Tax Increases And Places To Cut Spending

City officials in Hazelwood, a suburb of Saint Louis, are considering a proposal to implement a 6 percent utility tax in order to raise revenue to offset decreasing funds coming from sales taxes. The proposal is expected to raise $1.3 million in revenue. Now, I’m not opposed to raising revenue in all cases. However, I only favor revenue increases when it is absolutely necessary. If there are places in the budget to cut, do that first, before asking taxpayers for more money.

Case in point. In the course of my research regarding public pensions, I found that the city of Hazelwood maintains a pension for just its mayor and city council. It isn’t a very large pension. As of 2012, it had $96,000 in assets. But I question why such a pension exists in the first place. Is it really necessary for the council of a small municipality that meets only once or twice a month on average to have its own pension? No other municipality has a separate pension plan for its city council. Despite its size, the city still spends money on the plan. For fiscal year 2014, the city plans to spend $17,000 on the city council pension plan. That is $17,000 too much.

I’ll be the first to say that there is a large difference between $17,000 and $1.3 million. However, before asking for more taxpayer money, I would look at ways to trim the fat. As much as the law allows, I would phase out Hazelwood’s pension for the city council and save the city some money. It is not nearly enough to offset this proposed tax increase, but every little bit helps.

April 8, 2014

New On Show-Me Sunshine: School District Collective Bargaining Agreements

In 2007, the Missouri Supreme Court overruled 60 years of case law and determined that teachers have the right to organize and collectively bargain. At the Show-Me Institute, we wanted to determine how many districts have entered into collective bargaining agreements (CBA), so we requested CBAs from every public school district in Missouri with more than 1,000 students. Approximately one-fifth of the districts we contacted have a formal CBA. In the interest of transparency, we have posted those agreements online here.

March 25, 2014

Does An Underfunded Formula Really Hurt Schools?

Does “underfunding” have a detrimental impact on Missouri school districts? The people at the Missouri Budget Project think so. According to their recent study examining Missouri school district funding, “The vast majority of school districts throughout Missouri have been significantly hurt by Missouri’s inability to fully fund the state’s education funding formula, which is the key to our kids receiving the world-class education they need to compete in today’s global economy.” However, Show-Me Institute Director of Education Policy James Shuls and I find that there is no correlation between how much a school district is “underfunded” and its actual performance.

I agree with Shuls when he says that, on principle, the foundation formula (which is the state’s method of determining how much of its annual appropriation to district aid goes to each school district) should be fully funded. The people at the Missouri Budget Project would have you believe that the more underfunded the school, the worse its performance will be. Shuls and I were skeptical that this was actually the case so we tested the Missouri Budget Project’s claim.

In our analysis, we used the Missouri Budget Project’s numbers for the amount each district was underfunded per student. In the past, I have raised issues with the Missouri’s Budget Project’s methodology (or lack thereof) in their work. However, for the sake of argument, Shuls and I decided to accept their results at face value. To measure a district’s performance, we used each district’s English and math MAP (Missouri Assessment Program) test scores and the percentage of students who scored proficient or advanced. We then ran the numbers through STATA to determine if any correlation existed between a school’s academic performance and their level of “underfundedness.” We found none (for more on our results, please see the comments section).

The underfunding of Missouri’s school districts “hurts” school districts if you define hurt as not getting money. If, however, you define hurt as having a negative impact on performance, these results indicate that is not the case. Even if these schools were fully funded, it would not guarantee that their performance would improve. A growing body of evidence suggests that increasing funding for schools will not necessarily lead to an improvement in educational outcomes. We believe in adequately funding our schools, but the state should first make sure that taxpayer money is spent wisely before asking taxpayers for even more.

March 7, 2014

The Effects Of A Minimum Wage Increase

On Tuesday, the St. Louis Post-Dispatch published a letter from scholars at the Show-Me Institute arguing that raising the minimum wage to $10 would hurt Missouri. They write that by unilaterally raising the minimum wage, Missouri would lose jobs to other states.

Except for Illinois, where the minimum wage is $8.25 an hour, the states surrounding Missouri have a minimum wage of $7.25 an hour. Many current and future businesses in Missouri, especially those near the state’s borders, would have a large incentive to relocate to surrounding states if Missouri raises its minimum wage all the way up to $10 an hour.

One reader who responded to the letter on the Post-Dispatch website asked what the effect on jobs was when Missouri increased its minimum wage in January from $7.35 to $7.50 an hour. First, it is too early to start making judgments about the effect of the recent minimum wage hike because it is only early March. Second, even if there isn’t much of an impact with this minimum wage hike, we must consider the degree of the increase. Going from $7.35 to $7.50 an hour represents a 2 percent increase in the minimum wage. A business might be able to absorb that increased cost and not feel compelled to move. However, the proposal in question would raise the minimum wage by 33 percent.

There are only so many additional costs a business can absorb before going out of business. Do we really want to risk these businesses leaving the state and taking the jobs they provide with them for something that even proponents say is a “blunt instrument” for helping poor people?

We all want to help the poor and truly disadvantaged, but there are better ways to do it. One thing to consider would be to follow the lead of 20 other states and establish a state Earned Income Tax Credit (EITC) to supplement the federal one. Both David Neumark, in his Show-Me Institute policy study examining the effects of the minimum wage, and the Congressional Budget Office’s analysis of federal minimum wage proposals acknowledge the EITC as a more cost-efficient way to help the working poor.

February 27, 2014

Marking-Up And The Funky Bunch

In last Saturday’s blog post regarding the disagreement between the Missouri governor and the legislature about state revenue estimates, I mentioned marking-up legislation. Marking-up basically means that members of a Missouri House committee are taking an introduced piece of legislation and amending it to fit their preferences (e.g., the Budget Committee and the Budget).

Usually, when crafting the budget, the House Budget Committee starts with the governor’s executive budget as introduced legislation. It then assigns these introduced bills to different appropriations committees depending on the department being funded. However, due to the disagreements about expected state revenues, the House is not doing that this year. Instead, the House is working off of last year’s budget and making changes based on that.

The House is doing this mainly for the sake of appearances. Representatives don’t want to be seen as cutting spending in popular areas such as education when compared to what the governor introduced in his budget. That’s understandable, but unnecessary. The House should fund education at the levels it believes are proper given the constraints that limited state revenues impose. If that happens to be less than what the governor suggests, then so be it. If it’s less than what was spent last year, that is fine as well. Don’t spend more just because you want to be seen as spending more.

The chairman of the House Budget Committee, Rep. Rick Stream, has asked appropriators to go line-by-line through the budget and find items to cut in order to free money for other, more important programs. The Show-Me Institute has highlighted several areas which appropriators could cut, such as ethanol subsidies. Hopefully, we can see some cuts to non-essential areas.

Creating a budget is arguably the most important task the legislature has every year. Being informed of how that process works is something worth knowing. The House really wants you to know that it plans to increase spending, just less than the governor does. Hopefully, representatives will get to a point where they can justify the spending levels they set, whether it is more or less than last year.

February 22, 2014

Budget Battle Breakdown

When entering into an argument, it is necessary to have a common ground from which to argue. For example, in arguing about whether the Cardinals or Royals will have a better season, it is necessary to agree that Major League Baseball will actually be played this year. If you can’t agree on that, it pretty much makes any further discussion useless. A similar (but by no means exactly the same) situation is occurring in Jefferson City this year, but instead of arguing about baseball, there is an argument about the state budget.

Every year there are arguments about the budget. Every department wants everything on its wish list and there is only a finite amount of money. Some (like yours truly) argue that certain programs shouldn’t even exist. However, things have started to degenerate. Now it seems that the governor and the legislature cannot agree about how much money there even is to dole out. Missouri Gov. Jay Nixon is much more bullish about the future of the state’s revenue collection. He expects revenues to grow by 5.2 percent this year. Conversely, the legislature believes the state’s revenues will grow by only 4.2 percent. That seems like small potatoes but the difference in terms of actual dollars is in the hundreds of millions.

The fact that the legislature and the governor haven’t settled on a consensus revenue estimate is newsworthy because these types of disagreements are rare. However, this disagreement isn’t a cause to panic. The House will mark up its own appropriations bills and the budgeting process will continue. It’s just disappointing to see that governor and legislature can’t seem to agree on a revenue estimate, which is probably one of the more straightforward, less partisan issues. Hopefully, next year, both sides can agree on a number. Then the real fighting can begin.

February 19, 2014

Raising The Minimum Wage Will Cost 500,000 Jobs

The Show-Me Institute has talked a lot about the negative effects of raising the minimum wage. In his two policy studies for the Show-Me Institute, David Neumark found that an increase in the minimum wage likely would reduce employment among low-skilled workers. Yesterday, the non-partisan Congressional Budget Office (CBO) released a study detailing the estimated economic impact of the federal government raising the minimum wage. The CBO found that raising the minimum wage to $9 an hour would eliminate 100,000 jobs by 2016. If the minimum wage is raised to $10.10 an hour, 500,000 jobs would be lost. On the other hand, the report also found that overall real income would increase by $2 billion and between 300,000 and 900,000 people (a huge range) could be lifted out of poverty.

Helping people get out of poverty is a good thing and if these estimates are correct, an increase in the minimum wage could help do that. However, the question is, does this fact compensate for the large number of people who would lose their jobs? Possibly, but raising the minimum wage is not the only way to help combat poverty. In fact, while it might help some poor families, it also would give a pay increase to many suburban teenagers and students while costing jobs for the very people it is designed to help.

In his 2012 policy study, Neumark mentioned the Earned Income Tax Credit (EITC) as a possible tool to increase the incomes of low-wage workers. The CBO report found that, “To achieve any given increase in the resources of lower-income families would require a greater shift of resources in the economy if done by increasing the minimum wage than if done by increasing the EITC.” In other words, the costs associated with raising the minimum wage greatly exceed the costs of expanding the EITC. This is true because many minimum wage workers are not from low-income families. On the other hand, the EITC only goes to low-income families. Even proponents of raising the minimum wage admit that the minimum wage is a “blunt instrument” for helping low-income families. Missouri should consider establishing a state EITC alongside the federal one.

The new CBO report projects that raising the minimum wage could help some people get out of poverty at the cost of hundreds of thousands of people losing their jobs. If policymakers want a way to combat poverty, there are more effective means to doing so, including expanding the EITC.

February 17, 2014

Show-Me Institute Presents: Missouri Transition Costs And Public Pension Reform

The Show-Me Institute has talked about the need to reform public employee pension plans so they are financially secure and more attractive to potential hires. However, some public pension reform opponents believe that closing these plans would be risky and result in added transition costs.

In our new policy study, “Missouri Transition Costs and Public Pension Reform,” Andrew Biggs, a resident scholar at the American Enterprise Institute, addresses these concerns. Biggs argues that “claims of transition costs are at some times, overstated and, at other times, entirely mistaken.” After reading the study, you will find that fears about supposed transition costs are no reason to stop efforts to move public employees into an improved pension system. Please give it a look.

February 13, 2014

Taking The Missouri Budget Project Seriously

The St. Louis Post Dispatch recently published an article criticizing a bill that would create a 50 percent tax deduction for businesses whose earnings are taxed on the individual owners’ returns. The article quotes Amy Blouin, of the Missouri Budget Project. Blouin claims that enacting such a measure “would reduce state revenue by more than $500 million when fully implemented.” However, if you actually read the Missouri Budget Project’s (MBP) “analysis,” you won’t find how MBP actually came up with this number. I guess we just have to take their word for it.

This isn’t the only time the Missouri Budget Project has come up with revenue estimates out of whole cloth. In one of its write-ups about a Senate tax cut bill last year, the Missouri Budget Project stated that the bill would “slash Missouri’s general revenue budget by nearly $1 billion when fully implemented.” Page two of the report shows the year-by-year breakdown of estimated revenue losses, but you won’t see anything explaining how MBP came up with these numbers. There isn’t even an endnote.

Compare that to some of the analysis we do at the Show-Me Institute. When my colleague Policy Analyst Patrick Ishmael and I wrote “Passing Through Missouri: Left Behind On Taxes,” we included an entire section of the Appendix detailing our methodology and on what we based our estimates. The Missouri Budget Project’s tax analyses don’t contain anything like that. Yet when MBP officials are quoted in news articles, their numbers are accepted, seemingly without question.

The Missouri Budget Project is free to come up with any numbers it wants, but why aren’t those numbers backed up with explanations? As Wendy’s (and Walter Mondale) used to ask, “Where’s the beef?”

January 23, 2014

Having It Both Ways

In his State of the State address, Missouri Gov. Jay Nixon offered profuse thanks to the General Assembly for passing a massive tax break for one company (Boeing) in their December 2013 special session. This is the same governor who spent much of last year railing against a broad-based income tax cut. The governor continues to argue that Missouri is one of the least-taxed states in the country. “Missouri is a low-tax state — sixth lowest in the nation — and we like it that way,” he said on Tuesday night. So Missouri is a low-tax state, but our taxes are too high for Boeing? Or are taxes too high for Boeing, but just fine for everybody else?

Missouri, in fact, is not a low-tax state, not in the taxes that matter most for a state’s economy.

The governor also laments that our taxpayers are forced to pay for health reform in other states through our federal taxes. He says that by expanding Medicaid, we could get some of that money back. This is a strange argument for a governor of Missouri to make considering that over a 20-year period, Missouri received more in federal spending than it paid in taxes. That means Michiganders and New Yorkers have been paying to improve our schools and our health care. Does the governor think they are entitled to a refund?

The truth is that there isn’t much evidence showing that Medicaid actually improves the health of poor people.

The legislature is in a new session and the state is facing serious challenges. But instead of spending more money (and the governor wants to spend a lot more), the state should focus on significant reform.

January 15, 2014

Reforming Missouri’s Tax Structure: New Testimony From The Show-Me Institute

Tax reform is a key issue in the current session of the Missouri Legislature. It also is an issue that can have a profound impact on Missouri’s economy. I will submit testimony (Missouri’s Taxing Environment: Some Ideas For Reform) to the Missouri Senate Ways and Means Committee that discusses the necessity of tax reform in our state. The testimony illustrates how the revenue impact of any tax cut can be reduced by eliminating economic development tax credits. Please take a look.

When A Tax Break Isn’t

Democrats in the Missouri House of Representatives recently unveiled their tax reform plan. Here are some of the highlights:

  • Starting in 2016, Missouri would have just three tax brackets: A 4 percent tax rate on annual incomes of $30,000 or less; 6 percent on incomes between $30,000 and $300,000; and 8 percent on incomes higher than $300,000.
  • There would be an additional tax deduction for those making less than $15,000.
  • The limit for the total amount of federal taxes a taxpayer can deduct from his/her income would be lowered, from $5,000 to $2,000 for singles and from $10,000 to $4,000 for combined returns.

I am glad there is growing recognition that Missouri is not a low-tax state (at least for most people). I like the fact that this proposed plan shrinks the number of tax brackets from 10 to three. I also like that many Missourians would receive some tax relief. However, raising taxes on those making more than $300,000 a year is not a good idea.

Now, it’s easy for some people who make significantly less than $300,000 to shrug their shoulders about taxes increasing on Missourians with higher incomes. “I’m getting more money, so what if some rich guy has to pay a little more. He can afford it.” The reality is that many of these “rich” people are business owners who report their business income at the individual level. If the state starts taking even more money from these business owners, that’s less money for payroll, which means less money for new workers and less money for raises. Is that going to stimulate economic activity in Missouri? I don’t think so.

If I lived in Kansas, I would love this bill. Unlike Missouri, Kansas business owners face a tax rate of zero. If this bill actually became law, Kansas businesses would have a significant tax advantage over those in Missouri, which would make Kansas an even more alluring destination for Missouri businesses. That isn’t an attractive prospect for Missouri’s economy.

Also, I don’t like this bill limiting the amount of federal taxes someone can deduct from his/her state taxes. The money I pay out in federal taxes isn’t income. I can’t go out and buy a new phone or television with it. I can’t save or invest it, either. So why would the state treat it as if it is income? Limiting this deduction without reductions elsewhere is a form of double taxation.

The sponsors of this bill are to be commended for wanting to bring tax relief to a significant number of Missourians. However, this positive does not outweigh the negatives of increased income taxes on other residents (through higher rates and limited deductions), including many business owners.

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