April 18, 2014

Here We Go Again . . .

One of the biggest fights out of last year’s Missouri legislative session was about Missouri House Bill 253, which cut individual and business income taxes. Missouri Gov. Jay Nixon vetoed the bill and the legislature failed to override his veto. This failure didn’t stop the legislature from passing a new tax cut bill, Senate Bill 509. Below are some highlights of the bill:

  • The top tax rate is cut by .1 percent per year if state revenues increase by $150 million. Once fully phased in, the new top tax rate will be 5.5 percent.
  • Tax brackets are to be adjusted for inflation.
  • Business owners who pay their company’s taxes at the individual level will be able to deduct 5 percent of their business’s income. This deduction will increase by 5 percent every year until it reaches 25 percent.
  • Creates an additional $500 personal exemption for people with incomes less than $20,000.

Nixon already denounced the legislation and will likely veto the bill. He has trotted out the same talking points he used when he vetoed last year’s tax cut. “Once again, members of the legislature have chosen to ignore evidence that Missouri is already a low-tax state — sixth lowest in the nation,” Nixon said. I guess the governor felt that Missouri’s taxes weren’t low enough for Boeing when he signed a $150 million incentive package for the company to move manufacturing jobs here. Also, Missouri is not a low-tax state, particularly when it comes to income taxes.

You probably also will hear progressive groups complain that passing this bill will blow a hole in our budget and seriously harm state revenues. That’s what the Missouri Budget Project is doing. However, the group doesn’t show its arithmetic in its report. This is par for the course for the Missouri Budget Project and the “report” isn’t very useful for actually discussing the bill’s merits.

I’m glad the legislature is trying to cut taxes. I prefer more significant cuts (such as fully eliminating the individual and corporate income taxes). However, I’ll take any forward progress in cutting taxes. Hopefully, this time, the cuts will get enacted.

March 12, 2014

State Audit Recommends Sunset Of Low-Income Housing Tax Credit

A new state audit recommends a sunset of the state’s low-income housing tax credit. It’s a great recommendation that we have supported in the past. You can find the full audit here and the “citizen summary” here. The audit highlights a broad set of problems with the current program — not the least of which being that nearly $1.5 billion worth of Low-Income Housing Tax Credits (LIHTC) are outstanding and have not been redeemed. This paragraph from the auditor’s press release is indispensable (emphasis mine):

Currently, only 42 cents of every dollar issued actually goes toward the construction of low income housing; the remainder goes to the federal government in the form of increased federal income taxes, to syndication firms, and to investors. State law allows claiming the same project costs under two or more tax credit programs. This “stacking” of tax credits can be lucrative for developers, but it generates no additional economic activity or state benefit.

To reiterate: Less than half of the money spent through the LIHTC program… actually goes toward the building of low-income housing. Page 16 of the audit goes through all of the auditor’s recommendations, including the idea of adding substantive spending caps to the LIHTC. That’s an excellent idea. When you have a billion-dollar budget-buster like this sitting out there, a strong cap is an obvious and common sense reform, though the Missouri House’s track record on tax credit reform issues has been abysmal.

Either way, the auditor’s report recognizes the need for reform to the LIHTC. It’s an open question whether the legislature will also recognize the problem.

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 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?”

October 29, 2013

Governor Nixon And Higher Education

Missouri Gov. Jay Nixon recently stated that “education is the best economic development tool available.” He is correct: an educated work force is an important ingredient to economic growth. Sadly, it also helps explain why Missouri’s record of economic growth gets a failing grade.

In a recent Saint Louis Beacon editorial, I noted that budget decisions have reduced funding for higher education. Spending on higher education has declined in real terms since 1990. This has had several effects, including forcing Missouri universities and colleges to raise tuition. It also has affected the educational accomplishment of the average Missourian.

How does Missouri stack up when compared to other states in educational achievement by its citizens? In 2008, Missouri ranked 33rd out of the 50 states using the statistic “percent of adults having a bachelor’s degree or more.” Don’t like “number of degrees” as a measure of what you have learned? Using standardized test scores (the National Assessment of Educational Progress, or NAEP) as a measure of educational attainment, Stanford University professor Eric Hanushek recently reported that since 1992, the gain in NAEP test scores for Missouri relative to other states is unimpressive.  On this score, Missouri ranks 27th out of 41 states for which data are available.

Missouri’s lackluster educational record is one of several factors that has negatively affected our economic standard of living. In a 2012 Show-Me Institute study, SMI economists Joseph Haslag and Michael Podgursky reported that Missouri’s economy expanded at a slower pace than any of its neighbors since 1997. Compared to all 50 states, Missouri ranked 48th in terms of economic growth. Even in a world of social promotion, this is not a passing record of achievement.

Nixon has called for additional funds for higher education in the fiscal year 2015 budget. Whether these funds survive the political battlefield and find their way to colleges and universities is a dubious proposition. Nor do I mean to suggest that simply throwing more dollars at education is the answer to improving the situation. One thing is certain, however: Unless Missouri’s educational report card improves in the coming years, do not expect to experience an economic boom any time soon.

October 28, 2013

It Begins: Missouri Officials Already Planning To Spend More Of Your Money In 2014

Late last week, Missouri Gov. Jay Nixon backed off a plan that would have returned some food stamp work requirements to their pre-recession levels. “With greater certainty about what the federal funding level for the food stamp program will be after last week’s budget agreement,” he wrote, “we have made a determination that the appropriate course of action is to maintain the policy that is currently in place.”

In other words: we could have spent less on the program, but … we won’t.

That episode should have been the first clue of what the Missouri Legislature and the governor have in store for their constituents in 2014: big-time government spending. We are two months away from the next legislative session, but right on schedule, we are already seeing news percolate that Jefferson City bureaucrats are expecting even more money to be dumped into the fiscal sinkhole that is Missouri government. [Emphasis mine.]

In a subtle shift from years past, some Missouri budget officials now are openly talking about the potential to spend more – as opposed to emphasizing the need to pare back.

“Revenue is certainly looking better,” said Linda Luebbering, the budget director for Democratic Gov. Jay Nixon. “We don’t have as much of that hole to fill up as we have other years. Hopefully there will be some room to do a few more things” in the next budget.

Sad and predictable. For once, it would be nice to see state officials in Jefferson City plan to spend less of your money, not more.

August 29, 2013

Texas And Taxes: Time To Set The Record Straight

Texas Gov. Rick Perry released an ad (paid for by TexasOne, a public-private partnership aimed at economic development outreach) in Missouri touting Texas’ business-friendly climate and criticizing Missouri Gov. Jay Nixon for vetoing a tax cut. In some quarters, this has not been well received. Missouri Secretary of State Jason Kander criticized Perry for trying to entice Missouri companies to move to Texas. However, if all Missouri can do to respond to Texas is write strongly worded letters, then we’ve already lost the economic development battle. It is time for real reform, and mirroring Texas isn’t a bad way to go about it.

It’s true that Texas faced a serious budget shortfall after a recession hit. So did many states. However, Texas has managed to climb out of the hole it was in. Now, according to the Texas comptroller, Texas is looking at an $8.8 billion surplus. Even after making up for much of the cuts imposed by earlier budgets, Texas is still looking at a surplus. Texas also has significant assets in its “Rainy Day” fund. According to the Tax Foundation, Texas’ “Rainy Day” fund is 18.58 percent of general spending compared to 3.28 percent for Missouri.

Nixon and liberal advocacy groups such as the Missouri Budget Project worry about effects an income tax cut will have on education. Yet Texas, without an income tax, performs just as well as Missouri on a variety of education metrics.

Income taxes are among the most economically damaging taxes a state can impose. The Show-Me Institute has published research on how Missouri could eliminate the state income tax, or for the less bold, eliminate just the corporate income tax. Maybe instead of letters, Missouri can try real reform.

August 20, 2013

That Sucking Sound Is Your Money Being Taken From Missouri’s Private Economy

Whose money is it?

Supporters of higher taxes have spilled a lot of ink suggesting that Missouri House Bill 253 will decimate the state’s budget, the bill’s revenue triggers notwithstanding. Taking their figures as gospel only for the sake of argument, I wonder, do tax hike supporters recognize that all that tax money is actually the taxpayers’ money first and foremost? By sustaining the governor’s veto, tax cut opponents are actually taking every dollar it “costs” the state or a political subdivision from the private economy to grow the size of government. Put another way: Does taking more money out of taxpayers’ hands and letting the state spend it — a state that, under the present status quo, ranks 48th in the country in GDP growth since 1997 — sound like a recipe for economic success to you? Sounds like business as usual, and here in Missouri, business has been too bad for too long.

The implication at the core of the veto supporters’ argument is that the state knows how to spend that money better than we do. I disagree. If you support smaller government, you support tax cuts. If you support bigger government, you make excuses.

August 2, 2013

The Mystery $600 Million

In their push to construct a new $1.2 billion terminal at Kansas City International Airport (MCI), officials with the Kansas City Aviation Department (KCAD) appear to be exaggerating the costs of terminal renovation and downplaying the costs of a new terminal.

According to KCAD, keeping MCI’s current configuration will require a $600 million renovation project in the next few years. This $600 million figure breaks down into $440 million for the terminal and $160 million for airside improvements (runways, aprons, drainage, etc.) and centralized de-icing pads. These airside costs are necessary under any plan, but the de-icing plan that KCAD lays out is expensive and assumes a new centralized terminal. In addition, it is unclear when and where these improvements will take place, as KCAD’s five-year capital improvement plan only calls for $144 million.

KCAD has yet to release an independent analysis of the supposed $600 million improvement costs. But if history is any guide, it is inflating costs. The last renovation of MCI’s terminals took place from 2000 to 2004, and cost the airport $183.4 million. It may be that construction costs have exceeded inflation, but the Aviation Department should explain why the new renovation would cost more than double the adjusted expense of the last.

KCAD may be downplaying the relative cost of a new airport by inaccurately comparing the costs of new construction versus maintaining its terminal. To put it simply, the costs of maintaining the current terminals are long-term and include incremental improvements over a number of years while the price tag of a new terminal is just the cost of its construction. These two prices cannot be accurately compared, as a new terminal would also require upgrades and refurbishment.

To fairly compare the costs of a new terminal with continuing upgrades, the KCAD must compare like to like. We need to see all the costs over the same period of time for any option. Although the origins of KCAD’s calculations are opaque, with a fair analysis, the relative expense of a new terminal may be greater than advertised.

Officials for KCAD and the Kansas City government have not demonstrated to the public why the current plan is the most cost-effective. Given the expenses of this new terminal, the Aviation Department would do well to seriously consider a whole slate of options. If KCAD has already done so, it should fairly and exhaustively explain why alternatives are not feasible.

Let Detroit’s Pension Problems Be An Example

People’s eyes often start to glaze over when we at the Show-Me Institute start talking about public employee pensions. Actuarial tables, discount rates, pension obligations . . . boring. Sure, pensions may not be as exciting as predicting the royal baby’s name (George Alexander Louis, in case you missed it), but the impact public pensions can have on our lives are much more pronounced. A clear example of this is coming out of the now-defunct Detroit, a once mighty city that recently filed bankruptcy.

Many things led to Detroit’s decline, but pension obligations are almost certainly what broke the bank in recent years. Policymakers in Saint Louis, Kansas City, and Jefferson City would be wise to heed Detroit’s warning. As Mary Williams Walsh recently wrote in an article titled “Detroit Gap Reveals Industry Dispute on Pension Math”:

It may sound arcane, but the stakes for the country run into the trillions of dollars. Depending on which side ultimately wins the argument, every state, city, county and school district may find out that, like Detroit, it has promised more to its retirees than it ever intended or disclosed. That does not mean all those places will declare bankruptcy, but many have more than likely promised their workers more than they can reasonably expect to deliver.

This is something we have been saying for some time. In a recent policy study, we noted that when an appropriate discount rate is used, Missouri’s big five public pension systems have more than $53.9 billion in unfunded liabilities. Pension fund managers downplayed our findings and said we were using unrealistic expectations. As Walsh notes, however, it may be the pension managers who are using the unrealistic expectations:

Much of the theoretical argument for retaining current methods is based on the belief that states and cities, unlike companies, cannot go out of business. That means public pension systems have an infinite investment horizon and can pull out of down markets if given enough time.

As Detroit has shown, that time can run out.

We need to learn from Detroit’s example and act before time runs out on our pension systems.

July 29, 2013

The Show-Me Spend-O-Meter For A New Year

New Year? It’s the end of July! Yes, it is, but for the state, it actually is a new year. Missouri’s fiscal year (FY) 2014 began on July 1, and as a part of our mission to keep you informed about the state spending money, we have updated the Show-Me Spend-O-Meter.

Compared to last year, the state is set to spend almost a billion dollars more. For those who like these things broken down (as the Spend-o-meter does), that amounts to nearly $30 more every second ($766.53 per second in FY 13 vs. $796.40 per second in FY 2014). A huge chunk (nearly 40 percent) of that comes from increased spending on Medicaid. Medicaid has continued to take up a larger share of the state budget. Just 10 years ago, Medicaid took up a little more than 29 percent of the budget; now, it is more than 36 percent. And this is a program that the governor wants to expand.

Other Show-Me oldies are in the new budget. The Wine & Grape Board gets a cool $1.8 million. Biodiesel incentives are still seeing a nice $5.5 million, and the Missouri Agricultural and Small Business Development Authority gets $130,000. Eliminating these won’t lead to a massive windfall, but every little bit helps.

The goal of the Spend-o-Meter is to help break down state spending in order to make it more comprehensible. When people realize that the state is spending close to $800 a second, it could put things into perspective and hopefully make taxpayers care about how the state is spending their money.

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