I am a big fan of Jack Cashill’s writing over at Ingram’s, “Kansas City’s Business Magazine.” We just got our monthly edition today, and I highly recommend his editorial about the absurdity of modern urban planning. Here is one great line about his recent vacation to a decidedly unplanned New Jersey locale:

City planners would hock their first-born to create this kind of pedestrian traffic, but they don’t know how. They can no more plan “fun” than they could anticipate a popular demand for a fried Oreo. This hodgepodge of stuff was driven by the consumers as gauged and tweaked by savvy, on-site merchants over decades.

The entire article is well worth a read, as is the article on the water and sewer infrastructure in Kansas City.

Today the Saint Louis Business Journal published a letter to the editor by John Payne and me (link added):

Editor:

The editorial board recently oversimplified our views on rural broadband access (“It’s a wired world, after all,” Aug. 20 issue). We do not oppose the proliferation of broadband into rural areas, merely the government subsidization of such expansion. Greater broadband penetration in rural areas indeed provides social benefits, but we remain skeptical that those benefits will outweigh cost of millions in taxpayer dollars.

Solutions for extending broadband exist in the private sector. I-Land Internet Services, for example, is expanding broadband into rural western Missouri at no cost to taxpayers. Fifty percent of people living in rural areas already have home broadband Internet service, according to a Pew Internet study released earlier this month. Furthermore, of the people who do not have high-speed Internet, only 6 percent cited a lack of access as the primary reason for not subscribing, compared with 48 percent who find the Internet irrelevant and 18 percent who have usability issues. Eighty million dollars is a very high cost to benefit such a small subset of people.

Christine Harbin, research analyst, Show-Me Institute
John Payne, research assistant, Show-Me Institute

Of additional note, contributors to Show-Me Daily have discussed this issue before.

On July 31, the Post-Dispatch ran the following letter I had written to the editor:

Society makes a promise to children that no matter their race, ethnicity, or socioeconomic status, every child should have the education necessary to realize his potential. For many children in Saint Louis, however, that promise has been broken.

Saint Louis Public Schools maintains a handful of excellent institutions, but for three years now, the state has deemed the district as a whole to be unworthy of accreditation. State law requires that if a school district fails to maintain accreditation, the students living in that district must be given the opportunity to escape their troubled schools and attend accredited public schools in nearby districts. Just as SLPS was about to lose accreditation in May 2007, however, the elected school board formally urged county school districts to deny admission to any students seeking transfer under this law — and the county districts complied. For three years, many students from Saint Louis have been denied the educational lifeline provided by state law, trapped in failing schools for years they won’t get back.

Thanks to the Missouri Supreme Court, that now seems likely to change. With a 4-3 decision in Turner v. School District of Clayton, the judges ruled that the school districts in Saint Louis County cannot turn away Saint Louis residents seeking admission to their schools.

It also ruled that SLPS must bear the expense of their students’ education and provide transportation.

The court said that when a Missouri school district has clearly failed its students, that district is required to provide access to alternatives.

Many in the county will worry about the potential challenges of integrating kids from Saint Louis into their classrooms. Elected leaders and school officials in the city will complain about the expense of sending students to other school districts. SLPS will argue that without the money those students represent, the district cannot be expected to make the changes necessary to regain accreditation, and that this decision represents the death of public education in Saint Louis.

These arguments overlook what the law and the Missouri Supreme Court did not: Public schools exist to serve the children, not the other way around. Children in Saint Louis have already had their educational progress delayed for too long. Access to better schools cannot wait until the adults straighten out the mess they created. The welcome impact of the Turner decision is that after years of hollow promises that someday all of the students in Saint Louis would enjoy access to high-quality educational opportunities, someday has finally arrived.

Today, another letter to the Post-Dispatch (predictably) responded that the real problem with SLPS is a lack of funding — which the writer attributes to Missouri school districts’ failed attempts to persuade the courts that taxpayers should be spending billions more in school funding. There are, of course, two massive failures of logic in this letter. The first is the notion that students’ academic performance is linked to the amount of money spent by their school district, a point debunked not only by the research of Dr. Michael Podgursky (who happens to be a Show-Me Institute board member), but also by the fact that SLPS maintains some of the very best schools in the state with the same per-student funding it provides to some of the very worst schools in the state.

The second failure is linked to the first. The letter complains about school funding at the state level, but the question at issue is the failing of Saint Louis city’s unaccredited school district. Last year, SLPS spent more than $15,600 per student — far, far above the state average, and on par with the best-performing districts in Saint Louis County. SLPS also maintains a student-to-classroom-teacher ratio of 18 to 1. This means that SLPS has roughly $281,000 to spend for every active classroom in the district. That’s $281,000 per classroom! Even if, say, 40 percent of that money (more than $110,000 per classroom) went to administrative costs, that would leave nearly $170,000 to pay a teacher’s salary (let’s say $60,000) and to properly equip and maintain just that one classroom.

SLPS suffers from a number of ills, but lack of funding is not one of them.

Over at Cafe Hayek, Donald Boudreaux writes a letter to the editor that impugns an editorial in the Wall Street Journal for ignoring the unseen costs of the auto bailout. He argues (emphasis mine):

[T]he heart of the case against the bailout is that it saps the life-blood of entrepreneurial capitalism. The bailout reinforces the debilitating precedent of protecting firms deemed ‘too big to fail.’ Capital and other resources are thus kept glued by politics to familiar lines of production, thus impeding entrepreneurial initiative that would have otherwise redeployed these resources into newer, more-dynamic, and more productive industries.

The ‘success’ of the bailout is all too easy to engineer and to see. The cost of the bailout – the industries, the jobs, and the outputs that are never created – is impossible to see, but nevertheless real.

This is particularly relevant to Missouri, because the $150,000 tax credit package that Missouri decided to give to Ford is Missouri’s version of the auto bailout, and is also associated with unseen costs. Although it is easy to see the benefits of the policy, it is impossible to see the economic activity that would have otherwise occurred (Merci, Frédéric Bastiat!). When the state government provides financial assistance to specific companies or industries, it crowds out private investment and entrepreneurial initiative. In addition to many other negative consequences, it incites the producers to invest their resources in an activity for which the state does not have a competitive advantage, at the expense of investing in activities that are “newer, more-dynamic, and more productive.”

An editorial in the Kansas City Star argues that Missouri should stop training companies to expect subsidies. It describes the phenomenon as a “subsidies-for-development disease [that] has become dangerously pervasive” in Missouri. This is something that contributors to Show-Me Daily have been arguing all along, and I am glad that others are beginning to assess tax credit programs critically.

Here’s one of the editorial’s major points:

It’s understandable that lawmakers would want to do something to protect the Claycomo jobs in the face of competing offers from other states that are equally shameless. Yet the whole process, despite the studied silence of Ford, had the feel of extortion. Ford never had to say a thing, but everyone knew the company was expecting something.

Ford expects handouts from other states too, despite the fact that it’s a profitable, private company. Ford is playing a game, and it is one that a state like Missouri can’t win. Unfortunately for taxpayers, Ford is not the only company playing — many other companies in other industries also pit states against each other in search of the biggest handout.

Additionally, from the editorial (emphasis mine):

“[Offering incentives] always has an unsavory feel,” said economist Chris Kuehl of Kansas City-based Armada Corporate Intelligence. “It’s not unlike the sports guy, dangling six different teams.” Kuehl said he actually heard someone compare the Ford deal to the bidding war over NBA star LeBron James.

Is Kuehl a Show-Me Daily reader? Perhaps the someone he refers to was Joseph Steelman, who made that exact comparison in a recent blog post. Or perhaps that person was myself, because I also previously discussed how the bidding war over James is an example of how taxes can incite people and businesses to change their behavior.

If you happen to be in the St. Louis area and near a radio (or at a computer pretty much anywhere) today around 11:00 a.m., please consider tuning in to KWMU 90.7 FM, where I’ll be a guest on Don Marsh’s Legal Roundtable. We’re planning to discuss a wide range of topics, including recent U.S. Supreme Court decisions, the ruling in the NorthSide redevelopment case here in St. Louis, and some other fascinating and timely legal issues.

I was pleased to see that the Post-Dispatch ran a letter to the editor today that I wrote in response to its recent editorial calling for St. Louis officials to renew efforts to subsidize the NorthSide redevelopment plan. This is the text of the letter:

Developer Should Bear Risk of Failure

In responding to Judge Robert Dierker’s ruling that St. Louis officials lacked authority to offer hundreds of millions of dollars to subsidize the NorthSide redevelopment plan, the editorial board, in the editorial “Celebrating Decline” (July 12), implies that the plan can proceed only if the city provides the anticipated subsidies. The developer’s own estimates indicate a belief that he will realize a profit of at least $251 million even without those subsidies.

Nothing in the ruling prevents the developer from pursuing his quixotic vision or from enjoying any profits that might result from its success; rather, it requires that, like all other entrepreneurs, the developer must personally bear the risks of failure instead of pushing them onto the taxpaying public.

Dave Roland — St. Louis

Policy Analyst, Show-Me Institute

[NOTE, 6/28/10: According to officials at the Department of Economic Development (DED), the DED did undertake a review of NorthSide Regeneration LLC's tax credit application, and fixed the discrepancies it found in the company's application before formal application submission. Show-Me Institute research found discrepancies in approximately 20 percent of the reported property values in the initial submitted application. The DED did not send some of the documentation surrounding the application process after a Show-Me Institute Sunshine Law request, because DED officials say it was part of the issuance process, rather than the review process. We are engaging in further research to verify these claims and will post more as we learn more. Stay tuned.]

Today, I appeared on the Charlie Brennan Show to talk about the discrepancies in NorthSide Regeneration LLC’s tax credit application filed in late 2009 (you can read more about that, and the discrepancies, here).

A lawyer for NorthSide, Irvin Ness, called in to explain the discrepancies, which appear to total more than $500,000. Ness said that the tax credit application we used to conduct our review was outdated — that NorthSide had submitted an updated application in December 2009 to update the reported property prices in a way that would correctly reflect the certificates of value on file with the city of Saint Louis.

Although this explanation could prove to be true, there are at least two reasons to doubt it:

1. I based my review on a copy of NorthSide’s tax credit application, which was provided to me by the Department of Economic Development (DED) in response to a Sunshine Law request submitted on Jan. 13, 2010. If an updated version had been filed before that time, the DED should have sent it rather than an out-of-date version.
2. My request specified that I wanted to receive “Copies of documents and emails regarding the review of NorthSide Regeneration LLC’s application for DALA tax credits in 2009.” I have made the documents they provided available online (in six parts, here, here, here, here, here, and here). They include no mention of property price discrepancies, or that the application had been resubmitted to reflect new property prices. If the application had been updated to reflect different prices than those that were initially submitted, and the DED had any correspondence about such an updated application, the DED failed to fulfill my request adequately.

At least until NorthSide can produce an updated version of its tax credit application that was actually submitted to the DED in 2009, it’s difficult to determine which error was committed — errors on the application, or errors in fulfilling my requests.

In any case, Charlie Brennan has invited me to appear again on his show, along with Ness, on Tuesday morning. Tune in then to hear more!

Thanks to everybody who listened to Audrey Spalding’s segment on KMOX this morning about discrepancies in the tax credit application filed late last year by NorthSide Regeneration LLC.

Audrey’s report is now available on the Show-Me Institute website, detailing how the property value amounts that NorthSide reported to the state appear to be overvalued by more than half a million dollars in comparison to the certificate of value amounts filed with the city of St. Louis.

For more of Audrey’s work covering the north side redevelopment project in St. Louis, follow the article links on her staff bio page.

Audrey Spalding, the Show-Me Institute’s public information specialist, will appear on The Charlie Brennan Show tomorrow, Friday morning, at 10:20 on KMOX in the St. Louis area. If you don’t live near St. Louis, you can also listen in online.

Audrey will be talking about the use of state tax credits for redevelopment in the north side of the city of St. Louis, and about how the tax credit application formally submitted by redevelopment company NorthSide Regeneration LLC appears to have overstated the value of its properties by more than half a million dollars. We’ll be posting much more about these topics in the near future, but in the meantime be sure to listen to Audrey address them on the radio tomorrow morning.

Show-Me Institute Research Analyst Christine Harbin will be on the Mike Ferguson show on Columbia’s 93.9 FM “The Eagle” at 5:00 p.m. this evening! She’ll be talking about the proposed tax credits for a Ford plant in Claycomo, in the Kansas City area. Tune in!

Because I’m a masochist, I have actually read through some of the comments to this op-ed on mandating autism insurance by the Show-Me Institute’s own Caitlin Hartsell. Unsurprisingly, they are mostly unfavorable. Most of the comments don’t attack Hartsell’s reasoning or even her conclusions, but seem to assume that because there is a problem (children with autism need treatment) that government action (a mandate forcing health insurance to cover autism treatments) will solve the problem and not cause any negative unintended consequences. These are just further examples of the government-as-magic school of thought. That’s certainly distressing, but I see it so often that I’ve come to take it for granted.

What I do find shocking in the comments is that some people don’t seem to be even remotely familiar with how insurance is supposed to work. The best example comes from commenter bogie90:

And do you buy autism insurance before your child is born just in case they have autism? Who would do that? And the insurance companies aren’t going to cover after the fact, remember pre-existing conditions?

Yes, of course you buy it before the child is born in case they have autism. That’s what insurance is for: to protect you against tragic but unlikely outcomes. You buy fire insurance for your house just in case you have a fire. However, you can’t insure your house against fire once it has the pre-existing condition of being on fire. At that point, insurance is just dollar trading to repair the damage from the fire. This might be one of the big problems with the debate over health care: people do not actually know what health insurance is.

According to an editorial in the News & Record in Greensboro, N.C., American Express chose that state’s Guilford County as the location for its new $600 million data center. This is a big deal for the following reason:

The financial services giant [...] never asked for millions of dollars in incentives that the Greensboro City Council and Guilford County Board of Commissioners were prepared to consider.

This is advantageous for taxpayers in North Carolina and in Guilford County. Not only will they experience job growth and productive economic activity, they don’t have to subsidize those jobs.

Furthermore, their tax money can be diverted to programs that have a higher priority, such as education or infrastructure, or returned to them to save or to spend in the private sector.

Additionally, because AmEx remains in the tax base, the state and local government in North Carolina can assess a tax rate that’s lower and more equal for all taxpayers. Unlike the new IBM service center in Columbia, Mo., AmEx will contribute property tax revenues, which will benefit public schools in the area.

The News & Record editorial also says:

[American Express] operates on an ethic of giving to the community, not taking from it, and now it has enhanced that reputation many times over.

I applaud the restraint that American Express has shown, and I hope that other corporations follow this example in their own expansion efforts. According to the editorial, a computer distribution center has also opened in the area without government incentives.

North Carolina is fortunate because profitable, confident businesses like American Express are moving to the state on their own volition, and without the financial assistance of the government. (If only Missouri were so lucky!)

Hat tip to John Payne.

Forbes recently published an article that praises Gov. Jay Nixon, and describes him as “cutter-in-chief”:

Nixon proposed to “right-size” government by merging agencies, eliminating state holidays, laying off more employees, getting rid of state vehicles, scaling back employee pension and health benefits, privatizing child support collections and curtailing Missouri’s expansive tax credit programs.

He may talk the talk, but he doesn’t consistently walk the walk — he has continued to support giving tax credits to specific businesses. Here, I reference the $28 million in state incentives that the Missouri government is giving to IBM to locate in Columbia, Mo., or the proposed $15 million in tax credits to support the Ford plant in Claycomo, Mo.

Even though the incentive package for Ford’s Claycomo plant didn’t pass the state legislature, the governor strongly supported the proposal. According to the Kansas City Star:

The bills’ failure was a disappointment to Democratic Gov. Jay Nixon, who had pushed hard for both the jobs bill and retirement reform, and worked through the day Thursday and Friday to make a deal on their passage.

“Unfortunately, the General Assembly missed a critical opportunity by failing to pass this package,” Nixon said.

The recession has provided a new opportunity to evaluate the appropriateness and the effectiveness of specific government programs. I do give credit to the governor for communicating his commitment to reduce state expenditures. However, I wish that he would advance a consistent message regarding tax credits.

I’ll be guesting on the McGraw Show with McGraw Milhaven on The Big 550 at 9 a.m. on Monday morning. We’ll be talking about water, water, and more water, which is appropriate given that it is supposed to rain all weekend. Please listen in, if you can.

If you don’t have any other plans tonight, come out to the Plaza Frontenac Cinema to see The Cartel, a new documentary discussing the troubles facing public schools in New Jersey. The main showing will begin at 6:45 p.m., after which yours truly will open up the floor for a brief Q&A session about the ideas contained in the film and how they might make a difference for Missouri. Hope to see you there!

I’ll be appearing on the Mike Ferguson Show on The Eagle, 93.9 FM in Columbia, this afternoon to discuss ethanol. Everyone can listen live online, and I hope you will tune in.

Later today, I will be a guest on Mike Ferguson’s talk show on 93.9 “The Eagle” in Columbia, talking about how Missouri’s green tax rebate program is wasteful and how its intended environmental impact is negated by the way the program is constructed.

The show lasts from 4:00 to 6:00 p.m., and I’m scheduled to speak at 4:30. The show is also available online, so if you are around a radio or an Internet connection, you should listen in!

Today, I spoke with Maria Keena of KMOX about my editorial, published today, arguing that Missouri’s green tax rebates are a wasteful use of state funds. The interview is scheduled to air on KMOX radio in St. Louis around 6:00 p.m. and tomorrow during the morning drive-time show. I encourage our blog readers to tune in!

In yesterday’s “Political Eye” column in the St. Louis American, the author welcomed the Show-Me Institute to the city of St. Louis:

A recent email sent to drive traffic to Slay’s campaign site with one of its inane polls referred blithely to “your tea party friends.” Slay’s team seems to want to send the message that government-hating right wingers are welcome here. No wonder the Show-Me Institute set up shop in the city.

There is, of course, only one legitimate reply to this, and, not surprisingly, it was said by Homer Simpson. From the fourth season, episode 14 — you’ll find the video here. The line comes at about the 0:48 mark. Definitely one of the best lines in one of the single best episodes of the best TV series ever.

Thanks to St. Louis’ own Bart Simpson for the article link.

Dr. Arthur B. Laffer, Stephen Moore, and Jonathan Williams recently published the third edition of Rich States Poor States: ALEC-Laffer State Economic Competitiveness Index. In this edition, they devoted an entire chapter to a case study on Missouri, “The Missouri Compromise” (PDF), in which they applaud the effort to eliminate state income taxes. From the publication:

As unlikely as it may seem, this middle-aged, middle-income, Midwestern state is pushing the envelope on its way toward fundamental tax reform. [...]

[A]lthough Missouri’s revenue replacement could prove difficult politically, the benefits from reform could be enormous if the process is administered well and the constitutional amendment is carefully crafted.

In their discussion, the authors cite Prof. Joseph Haslag and Abhi Sivasailam’s recent Show-Me Institute policy study, “Previous Estimates Overstate ‘Fair Tax’ Rates, Harms,” in the appendix.

Laffer, et al., also include a comparison of Missouri and Tennessee, and they provide evidence that Missouri would experience additional growth if it eliminated its personal income tax. From chapter 2:

During the past 10 years, if Missouri had just caught up with the average of the states with no income tax, the average Missouri resident’s income would be more than $12,000 higher. That is amazing. Taxes really do matter. [...]

The evidence is clear: States without an income tax outperform in every conceivable fashion than their higher-taxed brethren and have more tax revenues.

Given the data at hand, it is hard to imagine any more conclusive results from a cross-section time series of states that could be obtained in favor of Missouri’s tax proposal. Like many states in our current economic climate, Missouri needs help, and from the looks of it, a switch from onerous income taxes to broad-based sales taxes is exactly what the doctor ordered.

This echoes what Jenifer Roland and Dave Roland concluded in their 2009 policy study for the Show-Me Institute, “All Caught Up: How Tax Policy May Have Allowed Tennessee to Outgrow Missouri.”

The state snapshot for Missouri contains some good news and bad news. In 2008, Missouri’s personal income per capita cumulative growth is higher than the national average, but the state experienced negative net migration for the first time in a decade. This indicates that, when voting with their feet, people are choosing to locate outside of Missouri. On the 2010 ALEC-Laffer State Competitiveness Index, where 1 is the best and 50 is the worst, Missouri has an economic performance rank of 35 and an economic outlook rank of 15.

In a recent Kansas City Star commentary, Saint Louis University economics professors Lisa Gladson and Jack Strauss criticized my Show-Me Institute study of the earnings tax, They claim that there is no statistically significant relationship between earnings taxes and the growth of metropolitan statistical areas (MSAs). They also imply that I made such a claim in my study. In fact, I made no such claim and these authors are mischaracterizing my study. The purpose of this note is to set the record straight on my research. I will here demonstrate that my findings are perfectly consistent with theirs.

Let me briefly review my empirical evidence. I looked at more than 100 MSAs in the United States. The dependent variable I studied was the ratio of aggregate income reported by the U.S. Census for each primary city in that MSA to the aggregate income for the entire MSA. Basically, I measured the size of the city economy relative to the suburban economy. I then estimated a regression in which the city-to-MSA income ratio was the dependent variable and the earnings tax rate was the independent variable. The result was a significant negative correlation; in other words, cities with higher earnings tax rates tend to have smaller economies relative to their suburbs than cities with lower earnings tax rates. This result held both when using the 1990 Census as the data source and the 2000 Census as the data source.

In the article, I argued that this empirical finding was entirely consistent with sophisticated models of business and household locations within local economies. My analysis was grounded in a widely cited paper by Haughwout and Inman (2001). In it, they analyzed a model economy in which people living in a city took the tax structure as given and made consequent location decisions. When dealing with aggregate economic data, even at the city level, economists do not have a laboratory to run their experiments. Facts are extracted from the data — these are the economists’ observations — and economic theory is employed to account for these facts. Other models exist, but the Haughwout and Inman model can account for the many empirical regularities observed in city growth around the country.

Professor Strauss took an alternative approach and asked a different question. He estimated a regression in which the dependent variable is the growth rate of income in an MSA. The growth rate was computed for the period 1969 through 2007. His regression uses at least two independent variables. One is a dummy variable set equal to one for an MSA in which the primary city has an earnings tax, and set equal to zero otherwise. The other independent variable is the income level for the MSA in 1969, the so-called initial income level. The basis for Prof Strauss’ inquiry was the notion of economic convergence. If the coefficient on the initial income level is negative and statistically significant, the evidence indicates that cities with higher initial income levels tend to grow slower than cities with lower initial income levels. The convergence hypothesis follows, because the evidence suggests that cities starting off poor tend to catch up to the initially richer cities. The convergence hypothesis has been applied to cross-country datasets, and is useful for explaining why Japan and Korea — and, more recently, China — grow so fast. The return to capital is higher in these poor countries, and provides an opportunity for them to catch up to those already-rich countries. The convergence hypothesis cannot explain why Sub-Saharan Africa remains so poor. For our purposes, it is not obvious why convergence should apply to MSAs, but I will blog about this lesson more fully in the future.

In Prof. Strauss’ results, the coefficient on the earnings tax dummy is not significantly different from zero after one includes the MSA’s initial income level as an explanatory variable. He concludes that the earnings tax does not explain economic growth. He interprets these findings as indicating that cities across the United States are catching up and not affected by earnings taxes. I would proffer a slightly different interpretation. Metro areas that started off with lower incomes in 1969 are, on average, catching up to cities that started off with higher incomes. His unit of measurement is the MSA, not the city. This is kind of interesting. At first pass, convergence can characterize MSAs across the United States. The more difficult part is why rural areas are not catching up. If convergence can be attributed to low capital in the low-income metro areas, then it seems that rural areas — ones with low capital accumulation — would catch up to high-income urban areas. For me, the nagging problem about the convergence hypothesis is that Rocheport should start looking like Columbia in terms of capital. But Rocheport’s economy does not look like the Columbia economy. Agglomeration, or increasing returns, probably has something to do with this. As I said, I will save this digression for a future blog.

I do not dispute Strauss’s findings; however, he did mischaracterize my research. He asked a different question than I did. I contend that my question is more relevant for the question of earnings taxes. People can avoid the earnings tax by eschewing the political jurisdiction in which the tax is implemented. Insofar as the suburban area is not a perfect substitute for the city area, economic efficiency is lost and the earnings tax is distorting people’s behavior.

Consider the following situation for illustrative purposes. Suppose there are two cities. In City A, the metro area’s income increased at a 1-percent annual rate between 1969 and 2007. However, all the businesses moved out of a city and into the suburbs in 2000. In City B, the metro area’s income increased at a 1-percent annual rate between 1969 and 2007. In both City A and City B, Prof. Strauss’ measure of income growth would be 1 percent. If I further told you that City A had a 1-percent earnings tax and City B had no earnings tax, then according to Prof. Strauss’ unit of measure — the growth rate of income in the MSA — would indicate no statistical relationship between the earnings tax dummy and the growth rate of MSA income.

In contrast, I estimate the regression for city income to MSA income in 2000 and find a negative relationship between the earnings tax rate and the city-to-MSA income. The purpose of this illustration is to point out that his results do not contradict mine. His findings do not render my interpretation of the evidence as faulty. He asked a different question and got a different answer. Thus, a reasonable person could walk away believing both results are accurately depicted. Because we have different units of measurement for the city economy, we are clearly asking (and answering) different questions.

My results were mischaracterized in the Kansas City Star’s recent op-ed by Prof. Strauss. My goal is to properly characterize both sets of results. I am sure that more “teachable” moments will be forthcoming. Let’s proceed with skepticism before we accept any economic interpretation of the results.

Tomorrow (Tuesday), I’ll be a special guest for the Legal Roundtable segment on Don Marsh’s “St. Louis On The Air” radio show. The show will run from 11:00 a.m. to 12:00 noon on 90.7 KWMU — with live streaming over the Internet available here.

Our primary topic will be the constitutional issue swirling around the new federal health care reform law and Missouri’s Health Care Freedom Act, which would prohibit punishment for individual citizens who decline to purchase a product they may not want.

In an op-ed published today, the editorial board at the St. Joseph News-Press encourages Missouri’s legislators and leaders in economic development to “consider the competing needs” when deciding whether to continue financially supporting the Tour of Missouri. (Link via Combest).

Taxpayers understand you don’t add to your stock investments when you are struggling to buy food and pay for college tuition. Business owners rarely add a second location, no matter the potential, when times are tough and they have payrolls to meet.

So, too, the state’s legislators and economic-development leaders must choose between funding the cycling competition or fully funding such things as teachers and early-childhood education.

This is an example of the “hard choices” that Sarah Brodsky described earlier on this blog. Before they spend money on any program — be it a cycling competition, a light-rail expansion, or anything else — state and local governments should perform this kind of cost-benefit analysis to determine whether the money can be spent more wisely elsewhere.

As you may already know, Missouri is running a large budget deficit, despite several rounds of budget cuts recently made by Gov. Jay Nixon. According to the Post-Dispatch, Missouri may have to cut an additional $500 million from its budget.

Some Show-Me Institute staff members are considering a set of suggestions for additional cuts that the state could make without hurting its core programs. Hopefully, we can find line items within the state budget that can be cut without negatively impacting other areas of state spending. But this is a time-sensitive issue, and researchers combing through the state budget might not see an area of spending that others know through experience to be ineffective.

So, if you happen to know offhand of certain programs that could easily be cut, let us know. The comment section is open. Or, if you’d like to take a closer look at state spending, you can use our Show-Me: The Books tool, which lets you create graphs, tables, and charts of state spending, with data that’s updated every week. You can see the most current version of the state budget here.

As Caitlin pointed out last night here on Show-Me Daily, the Saint Louis blogosphere has been criticizing the Show-Me Institute for moving from Clayton to the Central West End, claiming that it is ironic that we moved to the land of the earnings tax, when the institute’s publications have argued that the earnings tax drives people and businesses away from St. Louis city. This assertion reminds me of that old Alanis Morissette song, “Ironic,” which described situations of mere coincidence, not irony. (Indeed, the only thing ironic about the song was that it contained no irony.)

Apparently, these authors understand neither the marginal nature of economic incentives, nor the fallacy of insufficient sampling.

Moving to a new area has advantages and disadvantages, and an individual or firm considers both in their decision process. The earnings tax is a cost that is associated with living and working in the city — not unlike higher crime rates and street parking — and it serves as an incentive to businesses and residents to locate in an area not subject to the tax. Individuals and firms weigh the sum of these costs against the benefits of living and working in Saint Louis City, such as proximity to other businesses, shorter commutes, and nightlife.

In its cost-benefit analysis, the Show-Me Institute determined that the benefits of being located within the city outweighed the costs. An increasing number of other firms, in their cost-benefit analyses, have concluded the opposite, and they go elsewhere. This is demonstrated by the overall exodus of businesses and individuals, and restricted economic growth for the city.

It should also be noted that the majority of people who work at the Show-Me Institute already live in Saint Louis city, and therefore were paying the earnings tax even when our office was located in Clayton. This group includes me.

Furthermore, these authors are using a sampling size of one to make a hasty generalization about how the earnings tax affects the movements of individuals and businesses. In no way does this move contradict the scholarly work that the Show-Me Institute has done on the earnings tax.

A few articles and blogs have recently criticized the Show-Me Institute for moving to our lovely new location in the Central West End. (One article erroneously cites another blog as having broken the news, when it was actually David Stokes here at Show-Me Daily who reported it first. We’ve also been planning the move for the better part of a year, and it wasn’t a secret.)

Collectively, these pieces suggest that there is some irony in the fact that the Show-Me Institute has long pointed out that the earnings tax creates marginal disincentives for economic growth and location within city boundaries, and yet we moved into the city anyway.

There is a useful economics concept at work here: marginalism. A 1-percent earnings tax is not enough enough of a disincentive to determine the location of all businesses or residents, but all disincentives are marginal to varying degrees. Some number of people at the margin, who would otherwise be near an equilibrium point between the positive and negative aspects of living in the city, will find that the earnings tax tips the balance so that the negatives outweigh the positives, and they move away — or never move to the city at all, despite having considered it as a possibility. For others, the positives will continue to outweigh the negatives. This is something we’ve discussed before here at Show-Me Daily. Work published by the Show-Me Institute has always been careful to note that the earnings tax is only one factor among many in the locational decisions of St. Louis–area individuals and businesses. It serves as a disincentive for nearly everybody, but becomes an actual deterrent only for some.

Taxes on income and production are counterproductive. They diminish the incentive to work (even if only slightly) and encourage business owners to find alternatives for their labor costs, like increasing mechanization. The earnings tax, like an income tax, establishes a marginal incentive for businesses and individuals to find ways around this higher cost for labor and wages in the city, whether that entails moving to a suburb, investing in new machinery, cutting corners in production or service, etc. This all distorts the market to varying degrees. Specific types of taxes on property, on the other hand, are much less distortionary. They encourage development of land and maximization of the property value, bringing (again, marginal) new economic growth to the city.

The earnings tax does not keep everyone out of the city, but it does keep away some. Why this is true is one of the most important insights of the marginal revolution. At any rate, incentives are constantly in flux, and equilibrium points between them change frequently. Right now, it makes sense for the Show-Me Institute to work out of the city. But if the earnings tax hadn’t been in place, who knows? The Show-Me Institute might have moved here five years ago.

I stole the title for this blog entry from Gov. Jay Nixon’s speech the other day. I haven’t discussed it sooner, because I wanted to give it the full think tank treatment, not like the usual ephemera I post on this blog. So, I warn you, this will be a long post.

I strongly recommend everyone watch the video. Speaking as someone who would normally rather take a dart to my eardrum than watch an online video of a political speech, you can trust me that this one is worth it. After you watch it, read the Post-Dispatch’s take on it and try and decide where you stand. Needless to say, I support the governor here. I think that cuts to the size and scope of government in our state, along with consolidations for greater efficiency, are long overdue, and I give great credit to any elected official of either party who is willing to make the tough choices and hard decisions, as the governor is doing here.

I have not fisked a Post editorial or column in a while — probably not since Eric Mink left. But I think that both this topic and article deserve a point-by-point analysis: Continue reading "“Rightsizing State Government”" »

Show-Me Institute research assistant John Payne, who has been spreading free-market wisdom all over the television and radio as of late, is hitting the airwaves again this afternoon! This time, he will be talking about the Missouri state legislature’s imminent ban of K2, the synthetic marijuana substitute.

Listen to him today at 4:30 p.m. on Columbia’s 93.9 FM, The Eagle. If you aren’t close enough to Columbia to pick it up on your radio, you can listen live on the web!

This notice may be too late for those of you who read our blog to tune in, but for those of you Columbia readers who encounter this blog entry right after I post it and find yourselves near a radio, be sure to tune in to The Eagle 93.9 FM at 4:33 p.m. to hear research assistant John Payne talk about unemployment and possibly our new study of the relationship between taxes and economic growth.