July 15, 2014

Breaking: Another Study Backs Up The Show-Me Institute

The Competitive Enterprise Institute grabbed our attention when it released a new report comparing the unfunded pension liabilities of all 50 states. Spoiler alert: Missouri ranks in the middle third (more on this later).

An interesting point raised in the report was that, “…the discount rate used in the valuation of liabilities should be a low-risk rate, ideally as low as the rate on Treasury bonds.” In a Show-Me Institute Policy Study, Andrew Biggs also urged state pensions to use a low-discount rate in valuing their liabilities (the discount rate is the interest rate that pension plans use to translate future liabilities into current dollars). It’s encouraging to know that other institutes are reaching similar conclusions.

However, it isn’t encouraging that this report found that after using a more appropriate discount rate, the amount of Missouri’s unfunded pension liabilities totaled more than 4 percent of Missouri’s entire economy. As of the end of last year, Missouri’s economy was $258 billion; 4.2 percent of that is $10.8 billion. If the state cannot make up that amount, then you, the taxpayer, are on the hook to make up the difference. Table7.1There are other states whose pensions are in much worse shape than Missouri’s, but our state still faces an economic ticking time bomb. Whether dealing with a grenade (Missouri) or a daisy cutter (Illinois), taxpayers will not be happy to be caught in the blast. The Show-Me Institute has written extensively about how Missouri can start to address its pension problems by shifting to more efficient plans such as defined contribution or cash balance plans. Hopefully, this new report can serve as a wake-up call to policymakers that change is needed.

June 3, 2014

Show-Me Institute Presents: Missouri’s Economic Record In The 21st Century

During good times and bad, Missouri is failing to keep up economically with its neighbors. In the Show-Me Institute’s new essay, “Missouri’s Economic Record In The 21st Century,” by Rik Hafer and me, see why we give Missouri’s economic performance during the current century a grade of “D” and how such a record could mean serious trouble for future Missouri residents. Please give it a look.

May 7, 2014

It’s Difficult To Compete With Free

If it were your decision and you could select any type of school, what type of school would you select in order to obtain the best education for your child? This question was posed to 660 Missourians in a poll that the Show-Me Institute and the Friedman Foundation for Educational Choice released this week. In their responses, Missouri voters overwhelmingly demonstrated that it is difficult to compete with free.

Only one-third of respondents indicated they would select the regular public school system. Thirty-nine percent indicated they would select a private school, making it the most common response. Another 21 percent indicated they would choose to homeschool their children or send them to a public charter school.

Q7 Friedman Missouri Poll

These responses stand in stark contrast to reality – nearly nine out of 10 students in Missouri attend public schools. Why this mismatch between preferences and actual choices? Cost and access.

Public charter schools are only located in Saint Louis and Kansas City and are limited on where they can expand. Private schools cost additional money. As anyone with a cursory knowledge of basic economics knows, demand decreases when cost rises. In other words, many parents are more likely to choose a free public school than they are to pay for a private school – regardless of preference.

But public schools do not have to be the only option for parents. Currently, 24 states and Washington, D.C., have school choice programs. Kansas became the most recent state to adopt a private school choice program with the creation of a tax credit scholarship program.

There is a clear desire for expanded educational options in Missouri. Yet, there is entrenched opposition to school choice from education establishment groups. These groups claim to oppose choice because they want to protect students. It seems obvious, they actually oppose school choice because they want to protect their advantage over the costly private competition. That is why economist Milton Friedman once said:

There is no doubt what the key obstacle is to the introduction of market competition into schooling: the perceived self-interest of the educational bureaucracy.

Opposition to school choice stands in the face of clear support among Missouri voters (including rural voters) and in the face of evidence that school choice works.

Paul DiPerna, the research director at the Friedman Foundation, and I discuss the new poll on this segment of Choice Media’s Reform School.

April 30, 2014

We Get Results

An April 23 post titled Kansas City Streetcar Economic Development Claims Don’t Add Up . . . Literally pointed out that a NextRailKC document detailing the economic development that resulted from the streetcar was poorly considered and even mis-tabulated.

Not only does the information provide no detail on how it was collected, but the table attached isn’t even properly tabulated. Simple arithmetic (we used a calculator) indicates that their table yields $791 million in development and 1,984 housing units. (The summary they provide is $879 million and 1,997, respectively. They even mis-tabulate the numbers provided in their legend. What did Kansas City pay for this?)

We noticed this morning that the link on NextRailKC has been taken down. So we’ve edited our post and provided the original flawed NextRailKC document here. We’re glad that streetcar supporters read this blog, and we hope that the corrections they make to the original document not only include correct tabulation but sound economic analysis as well.

March 18, 2014

More Than 500 Economists Oppose Minimum Wage Hike

In an open letter released March 12, 2014, more than 500 economists voiced their agreement that increasing the federal minimum wage to $10.10 would not reduce poverty. The letter’s release coincided with hearings in the U.S. Senate’s Health, Education, Labor and Pensions (HELP) Committee to debate raising the federal minimum wage. The letter notes that poverty is a complex issue and simply raising the minimum wage is not “a silver bullet solution.” The letter’s signatories include Nobel laureates Eugene Fama, Edward Prescott, and Vernon Smith along with a number of previous administration officials, among them Glenn Hubbard, Greg Mankiw, and Harvey Rosen, all past chairs of the Council of Economic Advisors. (The full letter and list of signatories is available here.)

Raising the minimum wage costs jobs for the very workers it is supposed to help. A recent study by the Congressional Budget Office (CBO) found that the proposed increase would cost the economy 500,000 jobs by 2016. This outcome from raising the minimum wage agrees with previous work, including analysis that David Neumark and I wrote for the Show-Me Institute.

Missouri policymakers must consider the full impact of raising the minimum wage. It simply is not good public policy to raise wages for some individuals at the expense of other workers who are made even worse off than they are now. The minimum wage simply is not a viable policy tool to fight poverty.

February 25, 2014

Why Would Unions And Some Big Businesses Support Raising the Minimum Wage? Some Reasons

Last week’s Congressional Budget Office (CBO) report brought the negative effects of a proposed minimum wage hike into sharp focus. The CBO found that while wages would, by definition, increase for some employees, up to a million of our most vulnerable workers could lose their jobs. For all the bluster about free-market advocates being “anti-worker,” I can’t imagine a more anti-worker effect to a policy than the one you would see with a minimum wage increase. After all, what could be worse for a laborer than having his or her job taken away?

That’s what makes support for a minimum wage increase from unions and big business seem so odd at first glance. Why would unions such as the American Federation of State, County and Municipal Employees (AFSCME) support a change of policy that would hurt hundreds of thousands of Americans? Why would some businesses want to increase the cost of labor?

A few reasons stand out.

For starters, artificially raising the cost of non-union labor can make union labor more attractive. As the Cato Institute noted more than a decade ago:

Unions are labor cartels that attempt to restrict the supply of workers entering given occupations. Since non-union labor is priced below the cartelized price of union labor, it is an attractive substitute for union workers. Because unionization of all potential competition to the cartel is impossible due to the high policing costs that would be involved, unions resort to the minimum wage. By artificially increasing the wage rate of lower skilled workers — who could substitute for union workers — the minimum wage increase the demand for union workers and hence their wage rates.

Hypothetically speaking, if the labor of an entry-level employee with no experience is worth $7.50 per hour in the open market but the law requires he be paid $15 per hour, trained union labor costing $20 per hour looks considerably more attractive. By harming non-union labor, unions are able to help themselves.

Moreover, some large businesses have supported increasing the minimum wage because it would harm their competition. Costco, for instance, supports raising the minimum wage today at least in part because the entry-level wage for a Costco employee is $11.50, more than $4 per hour above the federal minimum. At a minimum wage of $10.10 per hour, Costco’s business model would remain largely unaffected.

But you know who would be affected by the change in the law? Businesses, large and small, whose profit margins are far narrower. That’s especially true of small businesses in our communities already suffering under a mountain of tax and regulatory burdens in a difficult economy.

Yes, there are, no doubt, some in both the business and labor camps who in good faith might think a minimum wage increase won’t hurt our vulnerable poor. But labor and business leadership know better, and the economics are as clear as the incentives.

February 20, 2014

Left Wages War On Poor With Minimum Wage Push

Over the last few months, the push has been on to raise the minimum wage. While increasing the wage sounds altruistic, in reality, it harms many of the people it should be helping. Tuesday’s Congressional Budget Office (CBO) report — which showed that up to a million people could lose their jobs if the wage was hiked to $10.10 — serves to hammer that point home.

I discussed those policy problems in a KCPT interview broadcast last week, which can be viewed below.

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.

January 28, 2014

Do You Know The Pay In San Jose?

In late December 2013 and early January 2014, the Employment Policies Institute (EPI) in Washington, D.C., conducted a telephone survey of restaurants in San Jose, Calif. San Jose was chosen because in March 2013, the city leaders enacted an immediate 25 percent increase in its minimum wage, from $8 to $10 per hour. EPI wanted to see how one group of affected businesses — fast food and table-service restaurants — respond to such a wage hike.

As always, we caution against putting too much weight on the outcome of one survey of one industry in one town. With that caveat in mind, what did the survey say?

In response to the higher minimum wage, two-thirds of the responding firms, the majority of which fall in the 10-49 employee size, will (or have) increase prices. More than 40 percent of the establishments plan to reduce employee hours and staffing levels. While 7 percent of the firms are now considering closing locations in San Jose, 30 percent are, after the wage increase, not likely to expand operations.

The EPI survey of food establishments in San Jose offers one observation supporting the predictions of basic economic theory; namely, that a higher minimum wage will lead to undesirable consequences, including higher product prices for consumers and, especially for those workers on the lower rungs of the job market, reduced income.

September 26, 2013

Federalist Society To Explore Dodd-Frank On Oct. 14 In Clayton

The Dodd–Frank Wall Street Reform and Consumer Protection Act is probably one of the more contentious pieces of legislation to become law in the last decade. Often referred to only as “Dodd-Frank,” the bill passed in response to the Great Recession to help the country avert another economic meltdown, in part by reforming the financial services industry. Yet critics argue that the bill did very little to protect the United States against the issues that made the recession so deep and damaging.

What do the experts think? Did the law protect Americans? Did it leave the U.S. economy exposed? The St. Louis Federalist Society sponsors a panel event featuring U.S. Rep. Blaine Luetkemeyer (R-Dist. 3-Mo.), Saint Louis University Law professor Ann Scarlett, and attorney Gregory Jacob. The panel will discuss those issues from 5 to 6:30 p.m. on Mon., Oct. 14 at the Crowne Plaza Hotel in Clayton.

Reservations, which close on Oct. 11, can be made here. Should be a very interesting event.

September 11, 2013

Is Kansas City A ‘Low Tax’ City?

The conventional wisdom seems to be that Missouri is a “low tax state,” but to come to that conclusion, you almost have to ignore how taxes are actually levied and collected in practice here. Indeed, I believe that a closer examination of Missouri taxes produces a very different conclusion. Consider, for instance, Kansas City:

  • Kansas City has a top marginal income tax rate of 7 percent — the state’s 6 percent income tax, plus the city’s 1 percent earnings tax. Kansas has an income tax of 4.9 percent. In 2018, it will be 3.9 percent. No earnings tax. We’ve said it before and we’ll say it again: Income taxes hurt growth, penalizing productivity and deterring greater investment. And this is to say nothing, of course, of the 100 percent deduction Kansans get for non-wage pass-through income. For Kansas businesses organized as LLCs, S-corporations, and sole proprietorships, the tax rate is effectively 0 percent. (And as we all know, 0 percent is also a lower tax rate than 7 percent.)
  • Not counting its special taxing districts (TDDs, CIDs, etc.), Kansas City’s sales tax ranges from 8.1 percent to 8.85 percent, depending on the county. Those are pretty comparable to the rates charged on the Kansas side of the metro area — generally between 8 percent and 9 percent on sales, also not including special taxing districts. Not a huge difference. But what if we include special districts? Kansas City’s “1200 Main/South Loop TDD and DT Streetcar (KC Live!)” area — in other words, the Power & Light District — has the top sales tax in the bi-state area, with a whopping 12.35 percent tax on the sale of prepared food. (Click that last link to see the rates not only of the city, but also of the special districts. I found them startling.) One special tax costing a fraction of a cent may not seem like much, but put a few together and — as we’re seeing across the city — it adds up to real money. And the new, and bad, sales tax ideas keep coming.
  • As our own David Stokes would note, apples-to-apples property tax calculations are tough to come by because property valuation norms can vary wildly from jurisdiction to jurisdiction. If I’m charged a 5 percent tax on a property valued at $100,000 by one set of assessing criteria, or a 6 percent tax on the same property valued instead at $83,333 using different criteria, I’m still paying the same amount in taxes ($5,000) regardless of the legislated property tax rates. Kansas property taxes, driven in Johnson County by taxes for schools, generally sit at higher rates, yet that doesn’t say a great deal on its own. What is notable on this front is that both Kansas and Kansas City have a bad habit of concentrating their property taxes on fewer and fewer taxpayers with special incentives. Check out the latest example on the Kansas City side; I’ll have more to say about that project later.

And we won’t even go into the city’s hotel taxes, rental car taxes, water and sewer fees, which are all high. Kansas City is one of the highest-taxed cities in the region, and Kansas Citians are the first to tell you as much. Especially after Kansas’ tax reforms, is it credible for Kansas City, Mo., policymakers to suggest the region has been or is tax competitive with its Jayhawk neighbors? Do they really believe the city’s businesses, particularly its small businesses, don’t know what’s happening in Kansas and won’t consider moving under these circumstances?

September 9, 2013

On Tax Policy And Iocane Powder

Last week, our friend and fellow blogger Dave Helling at the Kansas City Star wrote a critique of my post about how much accumulated income has left Kansas City and Saint Louis since 1992. Missouri’s urban out-migration, he argues, has less to do with economic environments than it does macro trends of suburbanization and warm-weather retirement. “Inconceivable” assertions on his part? Not at all. But that doesn’t really address the actual policy problems — past and present — that have led people to leave Saint Louis and Kansas City.

Suburbanization, whether between or within states, doesn’t happen in a vacuum. Lots of factors are considered when people decide to move, and among those considerations is taxes. And to be clear, tax policy matters not just when taxes are reduced or repealed, but also when bad tax policies persist. And a bad, bad tax that both Kansas City and Saint Louis have had for a long time is the earnings tax. As our own Joe Haslag concluded in a policy study way back in 2006:

[T]he growth rate in [the modeled] economy where there is no city earnings tax is 1.72 percent, while the growth rate in the economy with a city earnings tax is 1.66 percent. Thus, a city earnings tax results in the growth rate falling by 0.06 percentage points on an annual basis.

That might seem small, but it can result in large differences in the size of the economy. Suppose that the initial value of the economy’s income is $78 billion. (This is the 2002 personal income level in the Missouri part of the St. Louis metropolitan area). After a generation (25 years), the no-tax economy would be $1.78 billion larger than the economy with a one percent tax rate. That is a difference of 1.5 percent.

Indeed, tax policy can be a contributing (rather than motivating) factor in where people live and grow their businesses. Even small tax policy mistakes can be economically destructive for a city — just more quietly and over a longer horizon. If you hurt your city’s capacity to grow economically, you truly hurt your city’s future.

Alas, unlike Iocane powder, it’s very difficult to build up an immunity to destructive taxes over time. And obviously, suburbs developed around Kansas City on the Missouri side as they did on the Kansas side. But the fact that Jackson County lost “only” a half billion dollars of Missouri income to Johnson County before Kansas enacted significant tax cuts in 2012 (and 2013) should be cold, cold comfort to Missouri tax cut opponents. Tax policy was a factor considered in moving from Missouri to Kansas before; it may be the preeminent factor considered today. Where people retire is a thornier proposition bound up with both economic and non-economic considerations, but one thing is certain — Kansas Citians haven’t moved, and won’t be moving, en masse to Olathe, Kan., for its sun-kissed shores. Will they move there for its tax climate? Quite possibly. And that’s the problem.

On a more personal note: I have heard from businessmen and businesswomen across Kansas City about the pressure longtime-Missouri businesses are under to consider a move to Kansas — motivated almost entirely by the new taxing environment there. Businesses already are asking the question, “Is it time to leave Kansas City?” I cannot stress enough how serious their concerns are. How long can Kansas City and the state of Missouri afford to ignore them before risking a plunge off the Cliffs of Insanity?

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