Because of increased revenue, the state of Missouri looks like it is on track for a surplus by the end of the current fiscal year. Great! Now the question is, what to do with it? The House and Senate are going back and forth on what to do with any projected surplus. Hopefully it is not plugged into the operating budget, but anything is possible. Of course, I have a modest suggestion.

How about using some of that surplus to pay off the state’s pension liabilities? The Missouri State Employees Retirement System (MOSERS), for example, has an unfunded liability of more than $3 billion (it is really much larger than that, but for the sake of argument, let’s go with the official numbers). Even if the state moved to a defined contribution (DC) plan immediately, the current liabilities in the pension remain.

Unless there is some kind of economic miracle between now and June 30, the surplus will not be $3 billion. However, a little money invested now can yield large savings in the future. Even using a 4 percent discount rate, a $100 million investment today will be worth more than three times as much in 30 years. It is the same principle as putting a larger down payment on a house. The larger up-front payment will mean lower total spending on the mortgage as a whole. That is a savings for future taxpayers.

A state surplus would be a good thing, but the state has an obligation to use any surplus responsibly. Helping to make sure our pensions are funded is a worthy goal and one worth pursuing.

In the high-stakes arena of legislating, the Missouri Senate and House are going heads up. In March, the Senate drew a pair of fives with Senate Bill 26, its version of substantive tax reform. It is a decent hand, but the House just one-upped the upper chamber.

House Bill 253, “The Broad-Based Tax Relief Act of 2013,” would eventually create a 50 percent deduction for pass-through entity income and cut the corporate income tax rate in half. Moreover, HB 253 ends up costing less in revenue. According to the Committee on Legislative Research-Oversight Division, the estimated revenue shortfall that would occur once HB 253 is fully implemented comes to $364 million. That is less than the $438 million in lost revenue that the state expects to occur if SB 26 were to be fully implemented.

I think HB 253 is a superior tax proposal to SB 26. Importantly, HB 253 cuts more in the areas that will produce the biggest immediate and long-term growth benefits. For its part, SB 26 creates a 50 percent deduction for pass-through income and reduces both the corporate income tax by .75 percentage points and the individual income tax rate by two-thirds of a percentage point over five  years.

Business income, i.e., profits, are the returns to capital owners after labor is paid. There is a strong academic basis for believing that taxes on capital, which business income is, are among the most economically damaging a taxing entity can impose. It is good that both SB 26 and HB 253 seek to enact cuts in these taxes. However, from a growth perspective, bigger business income tax cuts would better enhance the returns to capital owners and should be preferred to considerably smaller across-the-board cuts. HB 253 does this.

If legislators want to pursue a more ambitious proposal, they could also leverage the state’s tax credit liabilities against the tax that is left over after HB 253’s cuts. Combining HB 253 with the provisions of SB 120, which passed the Senate in March, the state could set out a course to enact further reductions in business income tax rates. Something to consider.

Today, the St. Louis Post-Dispatch published a commentary by Stephen Acree, president and CEO of the Regional Housing and Community Development Alliance (RHCDA). The editorial extolled the virtues of the historic preservation tax credit under the headline “St. Louis: Rebuilt with the historic tax credit.” Setting aside the demonstrable absurdity of that proposition, I think it is worthwhile to highlight an important fact-nugget that did not find its way into Acree’s piece — namely, that the RHCDA acts as a consultant for the historic preservation tax credit, as well as other tax credits. From the organization’s website (emphasis mine):

We provide Residential Development Consulting services to both non-profit and for-profit organizations. We provide expertise in structuring developments utilizing a variety of public and private resources, including federal CDBG and HOME funds; tax-exempt bond financing; and low income housing tax credit, historic tax credit and new markets tax credit transactions.

That probably should have come up at least in the author’s bio. Unfortunately, it did not.

While we are discussing the RHCDA’s portfolio of tax credit expertise, it should be noted that the Associated Press made this revelation about the New Markets tax credit program just this weekend (emphasis mine):

Missouri has authorized more than $120 million of tax credits through a program intended to entice wealthy investors to pour money into businesses in low-income areas, but the initiative has yet to produce even half the jobs that were anticipated, according to state figures provided to The Associated Press….

At the request of the AP, the state Department of Economic Development compiled a spreadsheet documenting every New Markets tax credit that has been authorized. The 9,679 “anticipated jobs” associated with the tax credits far exceeds the 823 “actual new jobs” and 3,141 “jobs retained” under the program, though those numbers could continue to rise.

This “tax credit job-shortfall” storyline is not unique. Indeed, the AP report on the New Markets program follows earlier, similar revelations about the Quality Jobs tax credit program, which I testified about earlier this year. In the case of the Quality Jobs program, 45,000 jobs were promised; according to state records, only about 7,000 jobs were created in reality. As I said then (emphasis mine):

In practice, there is no particular consequence to the state and its public officials claiming that new jobs will be coming, even if the jobs never materialize. That may explain the difference between the number of jobs state officials promise when a tax credit project is announced and the number of jobs actually created when the project winds down. To some officials, big tax credit promises look better than small tax credit promises, even if those promises do not pan out.

The same can be said of the consultants who go to bat for these credits. Acree even has the audacity to claim that the historic preservation tax credit is “Missouri’s most useful economy-boosting program.” A program that returns 23 cents on the dollar is our “most useful economy-boosting program”?! Does this suggestion horrify anyone else?

I have a better idea: Cut taxes with the money instead and let taxpayers invest their money themselves in their own businesses. Better yet, eliminate a tax or two instead of underwriting the projects of the politically well-connected. Missouri’s most useful economy-boosting program is the hard work and innovation of its taxpayers, not some bloated, special-interest government handout.

As story after tax credit story bears out, tax credit proponents/consultants have a terrible track record of substantive, sustainable, and enduring successes. The historic preservation tax credit is a central player in this ongoing, budget-busting, decade-long state development debacle. Suffice to say, I am looking forward to the findings of the state audit of the program, due to come out later this year.

The Show-Me Institute recently released a study that I authored about Missouri public employee pensions. The study argued that pensions should value their future benefit liabilities using a low “discount rate” to account for the fact that retirees’ benefits are legally guaranteed, regardless of how the plans’ investments turn out. The study cites numerous sources, such as the Federal Reserve, the Congressional Budget Office, and others arguing for so-called “fair market valuation.” If you value guaranteed public pension liabilities using a safe 4 percent interest rate, rather than the 8 percent rate that is common for public plans, Missouri’s unfunded pension liabilities rise from about $11 billion to $54 billion.

The St. Louis Post-Dispatch’s David Nicklaus brought these results to Gary Findlay, executive director of the Missouri State Employees Retirement System (MOSERS) and an outspoken opponent of fair market valuation. “Using a risk-free discount rate, Findlay says, is about as sensible as arguing that the state should take a zero-risk approach to traffic accidents — by banning cars.”

In fact, fair market valuation does not say that pensions cannot take investment risk. Nor does it argue that investment risk cannot pay off. Rather, it merely says that we cannot assume that investments always pay off and ignore the risks those investments pose to the budget and the taxpayer. Under current pension accounting rules, a plan that takes more investment risk — say, by shifting into stocks, private equity, or hedge funds — automatically becomes “better funded” because the plan then assumes a higher investment return. But high-risk investments do not make pensions better funded. Yes, they reduce contributions for current taxpayers — but shift an equal and opposite contingent liability onto future generations to pay full benefits should the assumed rates of return fail to materialize.

And, as recent experience has shown, riskier investments do not always pay off, even over the long run. In fact, MOSERS’s own investment consultants told them that the plan has a less than 50 percent chance of achieving its stated returns. But full benefits must be paid 100 percent of the time. Fair market valuation catches the cost of guaranteeing full benefits. Current accounting standards ignore it.

Findlay’s traffic accident analogy is not the most apt, but think about it this way: Automobiles come with obvious benefits but also costs, including the risk of traffic accidents. But we cannot weigh the costs and benefits if we refuse to count the number of accidents each year. Similarly, we cannot refuse to consider the possibility that our bets on high-risk pension investments will not pay off, particularly when billions of taxpayer dollars are on the line.

On Wednesday, the Missouri Hospital Association (MHA) and the Missouri Chamber of Commerce held a press conference touting a report which portrays the expansion of Medicaid under the Affordable Care Act as a “reform.” It is not, as I have reiterated time and time again. It is not “a jobs program.” Other states will not “get Missouri’s money.” It is a fiscal sinkhole that is not funded, but the MHA and Chamber are OK saddling taxpayers with the cost.

Let me briefly set the rhetorical stage on the Missouri Medicaid news of the last couple weeks that these two groups, in large part, have driven. First, hospital groups favored the enactment of the Affordable Care Act in 2010, and the Missouri Hospital Association even went so far as to oppose Proposition C, the Health Care Freedom Act, later that summer. Hospitals want, and have wanted, the Affordable Care Act for some time; it is not surprising that they would demand that the state expand Medicaid under that program.

Second, the Missouri Chamber of Commerce has supported pricey government programs in the past, and the Medicaid expansion is a doozy. Readers may remember that the Missouri Chamber was a key supporter of one of the biggest proposed boondoggles of the last decade, the Aerotropolis project, and that project was “only” a half billion dollars. The Medicaid expansion? The cost is upwards of $3 billion to the state, and billions more to the federal government (a government which we, of course, also fund.)

Lastly — and tying this all together — that MHA poll from last week was “reviewed” for an organization I cannot find by a lobbyist for a Medicaid managed-care provider, a lobbyist who worked side-by-side with the Chamber two years ago on . . . the Aerotropolis legislation.

We have seen this all before, and around we go yet again.

Stated simply: expansion is not reform. The tactics being used to re-package and re-message the issue are about as predictable as those used to promote Aerotropolis. Indeed, some of the same parties involved in Aerotropolis are involved in the Medicaid expansion. That fact should give us all some pause.

Missouri’s public pensions are in trouble. However, you might not have known that if you just reviewed official reports. Andrew Biggs’ new policy study for the Show-Me Institute illustrates just how much the state’s public pensions are truly in the hole. According to Biggs, Missouri’s total unfunded liabilities for its five largest public pensions is nearly $54 billion. This amount is close to five times higher than the officially reported sum of $11.1 billion.

The reason for the large discrepancy between Biggs’ numbers and those of the state’s pensions is the discount rate. A discount rate is basically compound interest working in reverse. If, for instance, I owed someone $10,000 five years from now, the discount rate tells me how much I would need to invest to ensure I can make that payment. The higher the rate, the lower the amount I need to invest.

The state’s public pension plans use discount rates between 7.25-8.25 percent. This enables them to assume their current assets will be worth more in order to pay off their liabilities. Biggs uses a lower rate that better accounts for the risks inherent in a portfolio with risky assets and guaranteed liabilities.

We, as taxpayers, are responsible for these obligations. If the state does not have enough money in these pensions to make the necessary payments to beneficiaries, it will have to resort to massive tax increases and/or deep cuts to services. The first thing the state should do to prevent this from happening is shift our public pensions to a defined contribution plan. This would prevent any new liabilities from accruing and give the state breathing room so that it can deal with its existing liabilities.

Missouri’s public pensions might appear to be relatively healthy to the casual observer. However, there is something rotten in the state of Missouri. Its public pensions are seriously underfunded and changes need to be made today. We cannot afford to wait.

The Show-Me Institute has detailed many times what pro-growth tax policy looks like. In short, tax structures that let all taxpayers retain their money rather than just the favored few are superior to those that pick winners and losers. Unfortunately in Missouri, we spend more in economic development tax credits than we take in with the corporate income tax (CIT). Cronyism in this state has gotten so bad that you could completely eliminate the CIT by not handing out these special interest tax breaks, and you would still have tax credits remaining.

That extraordinary liability provides the state with a great opportunity — to pursue deep, substantive, and pro-growth tax cuts while mitigating their budgetary impact. I trust Missourians to invest their money more than the state to invest it on their behalf. Unfortunately, some in the Missouri House of Representatives appear to disagree (emphasis mine):

A Missouri House committee has approved a tax-credit reduction plan, but it stops short of the significant cuts passed by the Senate.

The legislation endorsed Thursday by a House panel would impose a $135 million annual cap on tax credits for historic renovation projects. That could essentially allow the program to continue as is, since it issued a total of $134 million of tax credits last year.

A Senate bill passed last week would impose a $50 million annual cap on historic tax credits.

The Historic Preservation Tax Credit (HPTC) returns 23 cents for every dollar the state plows into it. This, like so many other “development” tax credits, is a special interest money pit, not an investment. It is an affront to good governance that the House would impose a “reform” that fails to reform anything. That the House appears prepared to continue this destructive status quo by also creating new tax credits and maintaining others is beyond disappointing.

Missouri needs tax reform. It needs it now. Tax credits are central to that conversation, but it seems the House may want to talk about something else. That is very, very unfortunate.

Facing a potential stampede of businesses heading across our western border, the Missouri Senate came one step closer to lassoing some of them back. The Senate Ways and Means Committee recently approved proposed legislation that would reduce individual and corporate income taxes by 1.5 percentage points. This is great to see. If a major tax cut bill can get out of committee, it has cleared a major obstacle toward becoming law.

My colleague Patrick Ishmael and I have written about the benefits for Missouri if corporate income taxes are cut. Considering that Senate Bill 26 (SB26) proposes reducing the corporate income tax, it seems the Senate Ways and Means Committee agrees with our assessment. Allowing businesses to keep more of their money will enable them to reinvest their earnings into expanding their facilities, hiring employees, or lowering their prices to consumers.

Patrick and I have also talked about the need for Missouri to respond to the Kansas tax cut. Lowering our tax rates will minimize the  advantage that Kansas has over us and potentially keep Missouri businesses from moving across the border. With other states moving toward serious tax reform, it is encouraging to see Missouri move in that direction as well.

SB26 is not a perfect piece of legislation. Like the Kansas law, it does not include any alternatives to offset the lost revenue from the tax cut. A previous version of the bill included a hike to the state sales tax. Capping or eliminating economic development tax credits would also serve to offset some of the lost revenue. However, the perfect should not be the enemy of the good.  The fact that the Senate has come this far in getting tax reform passed is encouraging and I hope some kind of tax cuts are enacted. Missouri cannot afford to wait.

I have related my concerns about a Medicaid expansion in Missouri many times. Not only does Medicaid provide low-quality care to patients, but expanding the program without establishing a plan to pay for the services is simply short-sighted and irresponsible. Here are a few of my specific concerns and criticisms:

• The expansion is not a “jobs program.” It is a mortgage imposed on the future incomes of our children and grandchildren to provide services today that we cannot afford. If the creation or expansion of an entitlement is important enough to pursue, it should be paid out of today’s dollars, not tomorrow’s.
• The expansion is not funded. The expansion alone would add nearly $3 billion in new costs to Missouri’s annual budgets over the next decade. I have not seen a plan to address that cost. If the absence of a payment plan is not enough of a reason for concern, what happens if future federal budgets, already bathed in the red ink of debt, cause the Feds to dial back their funding on the expansion — raising the state costs further by effectively forcing states to pick up that slack?
• No, other states would not “get Missouri’s money.” This is among the more remarkable, and incorrect, claims. Expansion funds are distributed based on enrollment, not on how much Medicaid money is “in the pot” and how many states are drawing on it. If only one state adopted the Medicaid expansion, that state would not receive the funding of the other 49 states. Nor would two states split the Medicaid expansion funding of the other 48 states. And so on.
• Is Missouri a government that sometimes provides health services, or a health service provider that sometimes governs? If the state expands Medicaid, Missouri’s Medicaid program is projected to eat up 38 percent of the state’s entire budget. Is this what we want the Show-Me State to be reduced to? A mere vessel of the federal government through which federal Medicaid prerogatives are promoted and administered?
• The expansion would reinforce an emerging subsidiary relationship between the state and the federal government. Moody’s has already downgraded Missouri’s credit outlook because the state already relies heavily on federal funding, and will rely even more heavily on it if the state expands Medicaid. Is that the sort of relationship the state wants to promote? Shouldn’t the state want to inoculate itself from the consequences of the federal government’s spending binge?

While supporters of the Medicaid expansion blithely send legislators Beyoncé Knowles Valentine’s Day cards in an attempt to coax policymakers into blowing a multi-billion dollar hole in the state’s budgets, it is time for serious policymakers to get serious about this issue. If the Missouri Legislature is going to engage Medicaid this session, it should be to fix what we already have rather than to spend what we do not.

Former Missouri Sen. Jeff Smith wrote in an op/ed published in the St. Louis Post-Dispatch last week that the “conventional wisdom” about the Low Income Housing Tax Credit (LIHTC) is wrong — that the LIHTC is not in fact a wasteful state boondoggle, but a “solid investment for taxpayers.” I have written about the LIHTC, and suffice to say, I disagree with him.

Of course, as the executive director of the Missouri Workforce Housing Association, Smith certainly has an interest in pumping up the program. According to the MOWHA website (emphasis mine):

The mission of the Missouri Workforce Housing Association (MOWHA) is to have a sustained effort influencing positive workforce housing policy at the federal, state, and local levels. We work with the Missouri Housing Development Commission (MHDC), the Affordable Housing Assistance Program (AHAP), Low Income Housing Tax Credits (LIHTC) . . .

The concern about tax credits such as the LIHTC is not just their potential for growth, but their costs and benefits. The LIHTC regularly clears more than $100 million from the state’s budget each year. The taxpayer benefit? Eleven cents on the dollar — a massive net loss to the state with every LIHTC project it subsidizes. If that is a “solid investment,” what isn’t?

Missourians would be better served with state policies that benefit all businesses through low, stable tax rates. It would be best served by the elimination of taxes on businesses entirely, a reform other states are already pursuing. That is a solid investment worth pursuing.

It was no surprise that Missouri Gov. Jay Nixon expressed his support for expanding the state’s Medicaid program during his State of the State Address last night. When he introduced the idea in November, he called expanding Medicaid “the smart thing to do” and “the right thing to do.” At the time, I noted a glaring omission from his announcement: how he would pay for the expansion over the long haul.

He did not even bother to pay lip service to the weighty question of how he would fund it in his nearly 6,000-word address. He argued that the federal government — you and me — would pick up the entire tab until 2017, as if splitting the expansion across public credit cards mitigates the cost. That is some creative accounting that conceals an awful reality — that we would be expanding an entitlement today out of debt imposed on our children and grandchildren tomorrow. Simply inexcusable, and not addressed in his speech.

The governor cited the fact that the Missouri Chamber of Commerce supports his Medicaid expansion plans, but just because the Chamber of Commerce supports expanding Medicaid it does not make it the “right thing to do.” The Chamber’s imprimatur does not imply that the conscience of good government has been satisfied; in fact, it sometimes expresses the opposite. Lest we forget, the Chamber also endorsed Aerotropolis and later savaged legislators who have vehemently opposed corporate welfare in the state. The Chamber endorses bad policy all the time, and make no mistake, it has done so yet again with the Medicaid expansion.

Let’s be clear here:

• According to Missouri’s Office of Administration, services for newly eligible Medicaid enrollees would cost the state $54 million in fiscal year 2017, $124 million in fiscal year 2018, $155 million in fiscal year 2019, $212 million in fiscal year 2020, and $258 million in fiscal year 2021.
• In a report released last November, the Kaiser Family Foundation (KFF) found that Missouri could expect to spend more than $1.15 billion between 2013 and 2022 just on these newly eligible enrollees.
• Moreover, those figures do not account for growth in the current Medicaid population and the attendant costs of that growth. As a result of the Patient Protection and Affordable Care Act (PPACA), states can expect to see increased enrollment in their current Medicaid programs as federal promotion of the expansion ratchets up and potential enrollees find out they qualify for state assistance. KFF found that between 2013 and 2022, Missouri could expect to pay an additional $1.6 billion for those enrollees.

If the state expands its Medicaid program, from now through 2022, Missouri would have nearly $3 billion in new Medicaid expenses — the cost of services for newly eligible enrollees plus the cost of services for currently eligible enrollees joining the program. Unfortunately, the governor chose not to address this reality.

You can read the governor’s speech here. Your thoughts are welcome in the comments.

When thinking of Nebraska, what immediately comes to mind? Some people would say football and some would say corn(husking). Cardinals fans would say it is the birthplace of Bob Gibson. But for policy-focused people such as me, it is an ambitious tax cut proposal.

Recently, Nebraska Gov. Dave Heineman proposed eliminating Nebraska’s individual and corporate income taxes. He also proposed eliminating $2.4 billion in sales tax exemptions (hat tip: Hot Air). This follows on the heels of Gov. Bobby Jindal’s proposal to eliminate Louisiana’s personal and corporate income taxes.

Not all proposals actually become law (case in point: Aerotropolis, thank heaven), but can Missouri really afford to sit back and hope these states, along with Wisconsin and Oklahoma, do not join Kansas in gaining a competitive advantage over us? Last year, my colleague Patrick Ishmael and I released an essay proposing that the state eliminate its corporate income tax. Considering the plethora of states looking at not only axing the corporate income tax, but the personal income tax as well, eliminating the corporate income tax might not be just desirable. It might be necessary.

Missouri is in a border war. It might not have chosen this fight, but it is in it nonetheless. It can respond by doing what it has been doing, issuing development tax credits and hoping for the best, or it can engage in serious reform to help make the state more competitive with its neighbors. The gauntlet(s) has been thrown down, how will Missouri respond?