Back in April, I noted that the Foundry Art Centre in St. Charles exercised “good fiscal planning” by asking the city (which the head of the Foundry’s board referred to as “daddy”) to give the Centre $100,000 to help them meet their budget of $645,000. It seems that this effort paid off, at least to an extent, as seven members of the City Council have advanced legislation that would donate $30,000 to the centre. This payment would be on top of the $2 million of taxpayers’ money that the city has already dedicated to the development of this organization. The city government is also planning to pay up to $10,000 to hire a consulting firm that would “recommend ways to improve the 4-year-old artist studio and exhibition facility’s operations.”

St. Charles has about 63,000 residents. Assuming that the city approves the $30,000 subsidy and the $10,000 consultation fee, it would mean that, on average, the city government has forced local taxpayers to contribute more than $32 for every man, woman, and child in the city in order to subsidize the Foundry’s presence in their community. In the meantime, the Foundry claims to draw more than 90,000 visitors per year, charging an admission fee of $2 per adult and $1 per student or senior citizen. It also hosts events, for which it charges rental and use fees. The rest of its operating budget seems to be drawn from private donations.

To be sure, I am all in favor of the fine arts. But it is exceedingly poor policy for a local government to force taxpayers to support businesses — even non-profit businesses — that otherwise could not support themselves. If an organization’s presence in the community is truly valuable, the market will provide the means for it to sustain itself. If the visitors to the centre are really impressed with what the Foundry has to offer, they should be willing to pay an additional dollar each in order to make sure that the organization can meet its budget.

Similarly, if the 90,000 annual visitors to the Foundry bring additional customers to nearby businesses, the benefited businesses should be willing to make donations that will keep the centre viable. But if the Foundry’s presence isn’t valuable enough to patrons or nearby businesses to warrant an additional dollar in admission price or additional donations, why in the world should taxpayers be forced to pick up the slack?

The Commission that was charged with reviewing the capital needs of the county and recommending solutions has issued its final report. (My testimony about it begins on page 226.) The recommendations are a little long on tax increases, but I also recognize that, in the end, it is up to the voters of the county to decide. I like the commission’s recommendations to consider resources outside of central Clayton in certain situations (nobody wants to move the bulk of county facilities from Clayton), and, of course, I really like the support for public-private partnerships to meet some of these needs.

The list of final recommendations on page 14 is the key part of the report (aside from page 226, obviously). It is interesting that the County Council acted against the recommendations of the commission, and placed this use tax on the November, 2008, ballot instead of waiting for April 2009. No further comments — it’s just interesting.

As of right now, it appears that county voters will get to vote on three tax/bond issues this Novermber. As it stands right now, I am in favor of the bond issue, against the use tax, and undecided (leaning in favor) on the Metro tax increase. I live near MetroLink and use it, so a very careful cost-benefit analysis of the service probably benefits me. I have to doubt it would work out that way for most people.

Briefly back to the commission report: Every member of the volunteer commission deserves thanks for dedicating their time to it. Especially Skip Mange, the chairman, who took time away from his grandkids to once again serve the people of the county.

Not content with the Missouri Municipal League putting the good of government over the good of the people by trying to block much-needed reforms to our eminent domain laws (yeah, yeah, I know that the “government” is “us” — would somebody please tell the muny league that?), the St. Louis County Municipal League is attempting to pass a use tax on county citizens and businesses. From the article in the Post-Dispatch:

Dooley said he was acting on behalf of the St. Louis County Municipal League, which wrote to Dooley last week seeking his support of the tax.

Here is my testimony on the subject, which I gave in June to the county commission considering these issues. The imposition of a use tax on county businesses will wipe out one of the competitive advantages that St. Louis County has, and just add incentives for businesses to move to St. Charles. Perhaps I shouldn’t care. The county (and, even more so, the cities within it) can always just give away more tax breaks to favored businesses once they pass the higher taxes on to all of them. That certainly sounds like the basis for good policy …

Before I depart for a semester in London, I plan on replacing a portion of my seasoned wardrobe. I’ll be shopping in the States because (thanks, in no small part, to monetary distortions on a much larger level) the value of my wealth will roughly halve when the “fasten seatbelt” sign illuminates.

As my fellow bloggers have noted, with differing degrees of enthusiasm, we are in the midst of a tax “holiday.” My consternation about this practice is mostly explainable by the theory-driven gripe I’m about to offer. However, I’m also upset that the holiday has landed on one of the few weekends where I have better things to do than draw funds out of savings.

The tax holiday is a feel-good gimmick. Many people, maybe even some needy parents gearing up for another costly school year, will return home from the store with a few more bucks than they otherwise might have. The state budget won’t really suffer, either. What’s the harm? If you don’t find yourself frequently daydreaming about monetary policy, there really isn’t any; enjoy your shopping spree.

Still with me? Then you’ll agree that the tax holiday tarnishes the price system’s fidelity as an indicator of value. This distortion is based on the fact that, at least for the foreseeable future, state and local revenues draw heavily from sales tax. In fact, I think it’s reasonable to say that a good’s price after tax is more faithful than its pretax price at representing that good’s real cost. By this reasoning, the expenditures of state and local governments are inputs partially included in the price of a good. This makes sense, considering who builds the roads on which inventories and customers travel. When this input is discounted, the resulting price could (and will) motivate consumers to buy more than they otherwise would in an efficient market. Sarah’s example of a hypothetical shopper driving far away to cash in on tax-free shopping is a great example of how price distortions can affect individual behavior in negative ways.

I also feel shorted because of the arbitrary nature of the holiday. In general, I’m enthusiastic about reducing taxes and regulation in hopes of bettering economic freedom. However, this instance of a tax break slightly benefits those who shop during this weekend at a tiny cost to those who make purchases on the other 362 days. In order to retain the tax revenue that would be available without a holiday, Missouri officials will have to marginally increase the sales tax rate. If they choose not to do so, the state will have less revenue than it otherwise would. Although it’s certainly not the case that tax revenue necessarily benefits me or any other voter effectively, it does so to at least some extent. The holiday also unnecessarily benefits those who spend relatively more money during these three days. There’s just no good reason for rewarding people who shop this weekend rather than any other.

So, is the tax holiday highly damaging? Absolutely not. However, any humanitarian advocate for it should research more direct methods to promote their desired outcomes. In the end, we are only billing ourselves to indulge in a weekend of slightly less expensive shopping. I think the only really unfortunate outcome of this event is that we further distance public sentiment from good economic thought by allowing shoppers to get excited about a gimmick.

This policy is egregious enough to warrant another reference to Judith Viorst.

When I argue with people about tax holidays, I usually say something abstract about “economic distortion” and their eyes glaze over. But now I have a concrete example of the harm that tax holidays do:

This will be the 5th time the Show me state has participated in the holiday although nearly 200 cities and over 50 counties have decided not to participate in the event.

The people in the counties that aren’t participating can still buy school supplies without paying taxes — if they drive far enough. Parents decide whether the extra gas costs will be lower than the retail savings — and, if the answer is yes, they make an extra-long trip. They’re going out of their way and using lots of gas in response to arbitrary rules, not because school supplies are naturally more plentiful in the participating counties. If a legislator gave a speech encouraging his constituents to drive far away to buy something they could easily get close to home, everyone would think he (or she) was crazy. But when you call it a “holiday,” it sounds more legitimate, when in fact it’s just a state mandate to waste gasoline. It’s sort of like an ethanol mandate, except not even the corn growers benefit from this one.

For those in Missouri, it’s that time of year again. The Cardinals are fighting for the playoffs, the Royals are fighting to stay out of last place, the temperature and humidity are becoming too high, and it’s a tax holiday weekend! Yes, this is the weekend where all parents with school aged children will flock to the nearest big box store, desperate to cash in on the no-sales-tax weekend during which they will probably end up spending more money then they intended. But who cares? NO TAXES!

The validity of these types of tax holidays has long been debated on this blog, with both sides offering convincing arguments. Personally, I don’t mind the tax holidays. I don’t like taxes in any form, and any time I can get rid of them, I am happy. I know some people will take a more complicated viewpoint that the tax holiday is just distorting regular consumer behavior, and I agree, but I just don’t mind it happening this weekend. The net effects, one way or another, will probably be so minuscule that there will be no real impact on the economy.

Of course, I would favor lower taxes year-round, but for now, I will take what I can get. This argument has sparked uproar in the office, and I suspect several related blog posts will follow this one. I realize that this sales tax holiday is really nothing more than a gimmick conjured up by legislatures, and I guess they found a sucker.

According to the Post-Dispatch, St. Louis County is considering a $120 million bond issue to address infrastructure needs. This comes as the county’s Blue Ribbon Capitol Investment Commission is supposed to wrap up its findings and issue a report shortly. My main question is whether or not another shoe will drop. Sure, it is a big bond issue, but St. Louis County has a great deal of bond capacity capable of being used — it is currently just using about 3 percent of its allowable bonding. If this bond issue is the primary way they are going to address these infrastructure issues — like a new Family Courts building, for instance — then this should be a good plan. If an additional tax hike proposal comes down the chute in a few months (on top of the Metro tax proposal), I won’t necessarily feel this way.

For your reading pleasure, here is a copy of the testimony I provided to the Blue Ribbon Commission about these issues last month (ignore the date on the page, that’s just when we finally got around to putting it online).

In 1982, the state of Missouri decided to give more money to schools, and to lower each school district’s property tax levy.

The first part, giving more money to schools, is working well enough. For the 2005–06 school year, the state handed out about $839.5 million from the designated-for-schools one-cent sales tax. That’s up from the $634 million it gave to schools in 1983–84 (both figures adjusted for inflation to 2008 dollars).

But school districts have, through local elections, bypassed the state’s effort to keep property taxes down. While local property taxes are lower than they were before 1982, they have crept up from a little more than $2 to about $4.

To give schools more money, the state levied a one-cent sales tax, in legislation known as Propsition C. Each year, revenues from that tax are collected and divvied up among each public school student.* Very roughly, that comes to about $845 per student, according to Roger Dorson, director of finance for the Missouri Department of Elementary and Secondary Education.

The money is then sent out to schools, but it comes with strings. Half of the Prop. C money is new money for schools — a gift, if you will. But the other half is more complicated.

When a school district takes the second half of the Prop. C money, it must “roll back” the local school property tax levy. By how much? Well, enough to lower its tax revenues by the amount that the state gave it. For example, if a school district were given $1 million from the state, it would have to lower its levy so that it took in $500,000 less in property tax revenues.

Effectively, the state was trying to move some of the burden of funding schools from property owners to the people who spend more.

But school districts have gone to the ballot box to get more money, on top of what the state began to give them in 1982. Since Prop. C took effect, school districts have been asking voters give up the state-mandated reduction in local property taxes.

Voters have said yes. As of this year, 430 school districts (of 524) have full waivers, according to Dorson. That means those districts do not — and, unless their voters asked for it, will never — have to reduce their property taxes because of Prop. C revenues.

I won’t say that Prop. C rollbacks are unfair. After all, district voters are the ones who approve them (though which voters vote is something to watch out for). But it is apparent that the state’s goal to keep local property taxes low is slowly eroding. And that a statewide sales tax now helps foot the ever-growing cost for schools.

* In determining state aid, each school calculates its average daily attendance. Students are weighted differently if they come from low-income families, are not native English speakers, or are special needs students. After those factors are taken into account, the state awards aid based on each school district’s “Weighted Average Daily Attendance.”

Steelman fields another question of interest over at the Post-Dispatch:

Brian R.: Urban decay and poverty is a problem that has been ignored in Missouri for far too long. As governor, what will you do to stimulate positive economic activity and lift people out of homelesness and poverty in North St. Louis and Kansas City? Additionally, how do you plan to address rural poverty?

Sarah Steelman: That is a very good question. I believe that any economy, including local economies, have to be allowed to grow themselves. One of the main problems in both Kansas City and St. Louis is the earnings tax. This 1% tax is levied nowhere else in Missouri. In St. Louis, you need look no further than the hole next to Busch Stadium to know that the status quo is not working. In addition, no major corporate headquarters has moved to downtown St. Louis in 50 years. The state should support economic growth in our cities.

She is just on fire this afternoon, isn’t she? The earnings tax is a terrible idea, and should be eliminated in both Kansas City and St. Louis. As Steelman notes, the earnings tax deters businesses, as well as people, from moving into affected areas. If tax revenue is needed, there are much less distortionary means to raise it, such as through a tax on sales or on the value of land.

Clayton, apparently, isn’t following my advice. According to the Post-Dispatch, the municipality is currently looking at an incentive plan for Centene Plaza. Yes, that Centene. Something tells me that tax incentives would be completely unnecessary in a town growing as quickly as Clayton. Robert Wislow, chairman and CEO of U.S. Equities of Chicago, the developer of Centene Plaza, confirms my suspicions:

Asked about the private financing, Wislow said, “We don’t think that we will have a problem with a project as well pre-leased and well-located as this.”

So, why are the tax incentives necessary again?

Kansas City’s mayor, Mark Funkhouser, is likely to appoint a new task force to help develop the urban core, the Kansas City Star reports. A number of ideas have already been tossed around, including:

• Create a private investment funding source, with the help of financiers and foundations, to assist small businesses with loans or in other ways.
• Provide college or vocational opportunities for needy high school students.
• Create work force training centers in distressed areas.
• Improve transportation and child care offerings to assist people in getting to work.
• Provide specific incentives to employers who hire people living in distressed communities.

Kansas City could follow a simple recipe for growth: low taxes, lax regulations, and strong property rights. Implementing this isn’t necessarily easy, however. To start, the city could repeal the earnings tax, because it provides strong incentives for productive people and businesses to locate elsewhere. A sales tax or a tax on the value of land could raise the same amount of revenue without having as much of a negative effect on growth. A general rule of thumb would be to avoid TIFs, tax abatements, tax credits, and other special tax exemptions. Consumers and businesses will take notice and move in … perhaps with the help of our handy tax estimator.

The Show-Me Institute appeared in two major newspapers this past weekend. The Kansas City Star carried an op-ed by Dr. Joe Haslag, which johncombest.com also linked. To review the full op-ed (the Star had to do some length editing) you can check on the version hosted by the Missouri Political News Service.

The Springfield News-Leader also ran a very detailed article on ethanol use in Missouri, written by Chad Livengood. I was quoted a few times in it, and wish to make one correction. The article says that our study did not count the decrease in fuel efficiency that results from using E-10 fuel instead of ordinary gasoline, as part of the additional cost to Missouri drivers. Actually, our study does include it as part of the additional cost. I may have misspoke in my phone interview, or perhaps was unclear somehow, but it’s not a big deal — these things happen, and blogs are a quick and convenient way to make a brief correction. While our study was a very focused piece, this News-Leader article takes a wide look at ethanol in Missouri and I recommend it highly.

A story in the St. Louis Business Journal (the first few paragraphs of which are available for free online) reports that two of the area’s largest law firms, Thompson Coburn LLP and Armstrong Teasdale LLP, are considering moving from downtown St. Louis to Clayton. These considerations will potentially move more than 1,000 jobs from the city to the county. Despite the fact that comparable office space costs 23 percent less downtown than in Clayton, those involved in the decision suggest that “employee satisfaction and location” are enough motivation to move.

Although Clayton is probably closer to home for many St. Louis lawyers, there are relevant costs that certainly factor into any moving decision. The most obvious disincentive for high-earnings professionals, like lawyers, to work in St. Louis city is the earnings tax. A detailed case against the earnings tax can be found on the Show-Me Institutes’s website. In short, the earnings tax imposes costs on being productive and promotes this westward migration that the city ardently fights. If either of these firms moves, the earnings tax will continue its distortionary effects without yielding some of the revenues it was engineered to extract.

One potentially disastrous fix to retaining economic activity in the city would be the use of tax incentives. Others have articulated the negative effects of using tax credits, especially as they pertained to the recent “mega-project” proposal in Kansas City. These same arguments hold true in St. Louis.

If St. Louis officials intervene in the law firms’ decision making, they will have two readily available options. Potentially, they could see instant results and help the city’s long-term prospects by eliminating the earnings tax. Hopefully, they won’t settle for preferential tax treatments that leave local business owners and taxpayers worse off for benefits that they don’t have access to.

The economic health of state government is good — maybe even too good. The Kansas City Star has a story about the state’s substantial budget surplus. Gov. Blunt and the General Assembly deserve a lot of credit for this. They don’t deserve credit for creating a good economy; the people of Missouri do that (although passing and signing tort reform helped greatly). But the governor and the legislature do deserve credit for holding the line on spending, to allow economic growth to overtake spending increases and grow both the state’s economy and the state budget surplus.

The size of the surplus is huge. The state begins its year with a balance of $833 million over and above the legally required reserve of $557 million. I’m no math genuis, but that equals $1.39 billion, with a “b.” The state should do two things with this surplus, and holding it back for a rainy day is only for the $557 million. The $833 million should be used for infrastructure and cutting taxes. One legislator sees that clearly:

Senate Appropriations Committee Chairman Gary Nodler said it makes sense to spend some of the surplus on one-time projects, such as building construction and maintenance and computer equipment and software.

There are also some comments in the article from cradle-to-grave socialists who give the standard talking points about not spending enough on health care and education, and that this whole surplus was built up on the backs of the poor. These are the type of people who consider dependency on the government by large segments of the population to be a good thing, rather than a bad thing.

With the $833 million, I would also recommend helping MoDOT meet the state’s transportation needs in allowable capacities (I am fully aware of the legal funding differences there). I would also cut taxes. It would be wonderful to see the state reduce its income tax from 6 percent to 5 percent, to see the effect it would have. The net effect would not be a 17-percent reduction in income tax revenues, although that would be fine with me. More money in Missouri taxpayer pocketbooks would also lead to more sales tax collections, aside from helping improve the climate for economic growth. I won’t go so far as to predict an immediate increase in tax revenues if Missouri did the above, but it would be good for taxpayers and the economy, in both the long and short terms.

An alternative idea would be to increase the extremely low amount of earnings for which income taxes kick in, the increase the level at which the highest rate (6 percent) kicks in. That would benefit everyone, but particularly the poor who would see less of their income get taxed. Of course, we could also just get rid of Missouri’s income tax entirely.

There have been a few articles recently about state and local governments intercepting federal stimulus payments in order to take out taxes owed. Missourinet has one of those stories about our own state. I hate to sound like a defender of tax scofflaws, but it makes no sense to intercept the money. If the point of the stimulus plan was to stimulate our economy (we’ll leave aside for now what a stupid idea it is) then how does it do any good to have that money go from one government to another? There is no stimulus effect or consumer spending in that transfer (assuming those things exist in the first place).

The stimulus plan is deficit spending, nothing more. If the feds send $600 to a Missourian, and the state takes half of it, federal taxpayers (all of us) are still out the $600 the feds sent, but now there is $300 less to be used to stimulate the economy. So, basically, it’s a shell game in which the feds increase deficit spending while the states add it to their collections. It might make more sense for the federal government to withhold their own back taxes, but in this case you would be essentially giving a gift to a tax scofflaw without any stimulus effect at all.

I want to be clear that taking out money for back child support — which makes up a lot of what Missouri is doing — is a different matter, and should clearly be continued. Money collected in this way will be transferred to other people, not just to the government, and those people will be able to spend the money in ways that might stimulate the economy. (Again, this whole post is based on an assumption that the feds should “stimulate” the economy, which I don’t necessarily agree with.) Although just taking out back taxes alone from the stimulus money might make a state’s bottom line look better, it misses the supposed point of the entire program in the first place.

Last week, I was introduced to the Tax Foundation’s Tax Freedom Day report. Aside from being an educational visualization of the confusing tax structure in this country, the report gives a breakdown of total tax burdens by state. A quick look at the map shows that, generally, wealthier states pay more taxes than poorer states. Looking into this relationship, I produced the following chart, comparing the per-capita personal income of each state with the number of days its average resident spends working to pay taxes (click to enlarge):

The relationship between the two inputs is strong, but with a considerable amount of variance and a few outliers. Also, the data itself says nothing of causality. I speculate that richer states are more willing and able to pay higher taxes, although this simplistic chart alone could just as easily suggest (I think incorrectly) that rich states are prosperous because of their higher taxes.

Regardless, the numbers show Missouri’s standing when compared with neighboring states. Residing barely underneath the trend line, Missouri taxpayers make slightly more money than they pay in taxes when compared to all 50 states. Although we spend relatively more in taxes than neighbors Oklahoma and Tennessee, the chart shows healthier proportions than many other nearby states. Missourians should continue striving for a low-tax environment, perhaps looking no further than across state borders for role models.

Sources: Tax Foundation, U.S. Bureau of Economic Analysis and Bureau of the Census
Please note that all data is for 2007. Image created with Microsoft Excel.

The Post-Dispatch reports that Chrysler is closing its minivan plant in Fenton, laying off 2,400 workers. Political Fix has the responses of several prominent politicians, including this from Missouri Rep. Sam Page:

My sympathies go out to the employees who lost jobs today and their families. These men and women were hard workers, who made a good product. But they, like many Americans, have fallen victim to higher gas prices and a bad economy. They have suffered because of a government unable or unwilling to fix this problem.

We must now look forward at bringing new industry to our state. Missouri has given Chrysler $32 million in tax incentives to keep its plants operating here. After the loss of up to 2,800 good-paying, benefit-providing jobs, it is clear that that investment has not been returned. Instead, we need to be welcoming companies committed to investing in Missouri’s economy.

I have to commend Page for admitting that the government is perhaps incapable of fixing a problem. All too often, this lesson seems to be lost in political matters. In this particular case, it is very unlikely that the government can fix the problems posed by the increasing scarcity of energy. In fact, the cure is likely worse than the disease. Any incentives that the government can muster to spur innovation in energy provision are likely to be minuscule in comparison to the incentives already in the marketplace for such innovations, and the marketplace doesn’t discriminate based on politics.

Another lesson is to be learned from Page’s quote: Tax incentives for individual businesses are a bad idea. There is no guarantee that the business will stay in the area once the tax incentives are granted and no guarantee that the state will pick the best candidate for the incentive. Furthermore, a lower tax rate for everyone is a much more effective means of stimulating growth because it encourages greater productivity and attracts entrepreneurs that the state might not have even been aware of, let alone tried to pursue. Rather than handing out tax incentives, lowering taxes would be a great way to “welcome companies committed to investing in Missouri’s economy.” Hopefully, this is what Page has in mind.

In November, St. Louis County voters likely will decide whether to enact a half-cent sales tax increase for the expansion and upkeep of Metro. Passage of this increase will also result in a one-fourth-cent tax hike in St. Louis city, which was approved several years ago, but never actually implemented in the city because county voters rejected the same proposal. Now, with Metro wanting to expand and increase
its budget, it’s again under consideration.

Those who support the increase cite its relatively low cost, while those who oppose it label it as unfair. Other revenue-generating possibilities are also being discussed, such as a transit ticket price increase and a crackdown on free riders — both of which may be viable options. For the purpose of this post, I will only focus on the proposed tax increase and its expected revenue.

As a disclaimer, I am not a frequent MetroLink rider, only using it when attending various events downtown. I grew up in a rural area where there was no public transportation, so I am not accustomed to using MetroLink as a primary mode of transportation. With that said, my own experience has no bearing on my conclusions about the tax increase.

The proposed increase, assuming that the demand for goods is completely inelastic, would generate around $87 million annually in additional funding for the expansion and operation of Metro. The majority of this funding, around $78 million, will come from St. Louis County because of its larger half-cent increase, and because of its much larger tax base. St. Louis city would generate around $9 million from its one-fourth-cent increase. While it is true that demand is most likely not completely inelastic, these numbers give us a general idea of how much revenue could be generated.

As I said earlier, I’m not a frequent MetroLink rider and I don’t know whether a tax increase is the best way to fund an expansion. Some people are advocating a use tax (taking the form of increased ticket prices), while some of my coworkers have suggested a sales tax specifically for business areas that benefit from mass transit. One point of contention about increasing ticket prices is that those who use mass transit the most have no other means of transportation. They depend on transit for their everyday travel and have no other alternatives. Also, higher ticket prices may decrease the number of riders, negating the need for an expansion in the first place. However, a sales tax increase has its own faults — not everyone who shops in targeted areas uses mass transit, so why should they have to pay for something they don’t use? This is a valid point, worthy of consideration.

Mass transit is a useful tool that can further enhance a city’s development. There is little doubt that public transportation is a key component to boosting growth, but the best means of funding that transportation is open to debate.

If you blinked you could have missed yesterday’s elections in St. Louis County. Countywide, there were three elections, two of which were for filling vacant alderman positions in small cities. One of the elections, though, was interesting, as Creve Coeur voters were deciding on a sales tax increase to fund economic deleopment. The tax was defeated soundly. I don’t have much to say about the vote, other than it is good to know the sales tax will remain low the next time my wife goes to Lewis of London to buy baby gifts. If you want some very good discussion of the vote, I suggest you visit CreveCoeurVoter.com for some insightful commentary on the vote and surrounding issues.

To piggyback on Patrick’s earlier post, I stumbled across this interesting chart from the Wall Street Journal last night.

We forget how low fuel taxes are in the United States (particularly in Missouri). The recent rise in energy prices have had a much smaller impact on European wallets, where taxes account for a much larger share of total fuel prices.

This only underscores the need for significant transportation reform as cars become more fuel-efficient and gas tax revenues level off. 

Devotees will remember my reservations about the passage of the property tax reform bill (which prevents backdoor tax increases through reassessment). Well it turns out that compliance with the new legislation is going to cost St. Louis County more than $700,000.

And it may not just cost the county government, but the state government as well. Eugene Leung, St. Louis County’s revenue director, argues that the property tax bill’s requirements amount to an unfunded mandate, in violation of the Missouri Constitution, and therefore the state may have to pony up the bill anyway.

So not only will the bill subsidize existing homeowners at the expense of new homeowners (as I’ve argued), but it also will require taxpayers across the state to pay for the bill’s compliance costs.

No, thanks.

Perhaps there is no finer crucible with which to test criticisms of the earnings tax than a general economic downturn. Nationwide, material costs and unease over the economy have slowed the construction industry. An article by the Post-Dispatch claims that St. Louis is no exception.

The same piece concedes that there is a lone exception, office construction in St. Louis County. Although there are certainly more variables behind a developer’s decision than just the earnings tax, examples like these demonstrate the practical insight behind academic musings. As commercial buildings continue to flee city limits despite their heightened desirability in somewhat uncertain times, lawmakers would be well-served to heed suggested solutions.

Justin’s excellent post earlier today touching on the distortionary effects of the earnings tax was particularly timely. Also today, The Pitch published a piece that mentions our 2007 study about this very issue, "How to Replace the Earnings Tax in Kansas City," written by University of Missouri–Columbia economics professor Joseph Haslag (also now serving as the Show-Me Institute’s executive vice president). Haslag wrote a companion piece that makes the same case for the other side of the state, "How to Replace the Earnings Tax in Saint Louis."

The Pitch’s piece isn’t uniformly great; for instance, the author, David Martin, mentions at one point that despite some misgivings, "relics such as the old Greyhound station make me thankful that the TIF Commission and other inscrutable quasi-government agencies have the power of eminent domain." But Martin picks up on something that many other people omit when they discuss eliminating the earnings tax — the Show-Me Institute’s suggestion that lost earnings tax revenues could be replaced with a much less distortionary land tax:

[T]he Show-Me Institute released a study on January 25, 2007, urging Kansas City to phase out the 1 percent tax on income and put in its place a tax on land. The author, Joseph Haslag, an economics professor at the University of Missouri-Columbia, calls the land tax a "slam dunk" in terms of promoting growth. [...]

The beauty of the land tax is that it essentially makes available to everyone the tax abatements that big-shot developers are always getting at City Hall. It would also save the city from having to go to court to pry valuable real estate from the bony fingers of people like Barber. When the land tax works as intended, speculators are forced to develop their holdings or sell them to somebody who will.

This is indeed one of the advantages of levying taxes on land value. Owners of land would have more of an incentive to either use their land in productive ways, so that they can recoup the value of the taxes the must pay, or avoid paying the tax at all by selling the land to somebody else who believes they can use it profitably. Although Henry George is most famous for promoting this idea, one of the earliest free-market economists, Adam Smith, also observed the value of a land tax as an alternative to other potential forms of taxation.

Of course, a more optimal outcome would be for government officials simply to find ways to cut unnecessary programs and spend much less of the taxpayers’ money. But nobody’s holding their breath for that to happen.

There are all kinds of fun number-crunching stories to talk about today. But I’ll concentrate on just one.

Chicago currently has the dubious honor of having the highest consumer gasoline prices in the country. In large part, this is because of its very high gas taxes. People are up in arms. In fact, the local CBS-affiliate of “Chicagoland” reports today that long lines await Indiana suburban commuters hoping to fill up before the Illinois border. One commuter summarizes the current tax incentive best:

"It was $4.20 [in Illinois]. I can come over here and get it for $3.93," said Tikvah Wadley, one of the many fleeing Illinois taxes.

What does this tell us? It tells us that economic incentives matter, particularly when they are distortionary taxes. When consumers feel the effects of high taxes, they vote with their feet and flee to lower tax areas (in this case, choosing to fill up their gas tanks on the Indiana side of the Chicago metropolitan area).

But how does this relate to Missouri? Well, we have our own equally pernicious tax in the Kansas City and St. Louis metropolitan areas. The earnings tax is a 1 percent income tax on gross earnings levied on those who live and/or work in Missouri’s two largest cities. But if you happen to live and work in the metro areas outside of the city limits, you don’t have to pay it. We’ve written about this topic extensively.

If Chicago’s high gas taxes are having an impact on consumer behavior in Illinois, then imagine what the earnings tax might be doing to consumer behavior in Missouri Think of it this way: Combined federal and state gasoline taxes are 57.9 cents per gallon in Illinois (compared to 36 cents in Missouri). Chicago levies an additional 12.75 cents per gallon on top of that, for a whopping total of 70.7 cents per gallon. Indiana’s gas tax is 50.1 cents per gallon.

Ok, so here’s where the numbers get fun (and exciting!). Say that you live in Chicago and decide you’re fed up with high gas taxes, and want to fill up your car in Indiana instead. If you drive 12,000 miles per year and get about 25 miles per gallon on average (which seems reasonable), then you’d pay only $240.48 in gas taxes in Indiana this year instead of $338.88 in Chicago, for a total annual savings of $98.40. This $100 savings has been enough to promote long gas lines and impact Illinois gas stations. Apparently small incentives matter. I mean, think how hard it is to drive out of your way just to save a few cents.

OK, back to Missouri. Imagine you’re working in Clayton but that you live in St. Louis. If you make $35,000 year (the current per-capita Missouri household income), then you can save an extra $350 per year just by living a couple of blocks down the road. This is 3.5 times more in tax savings than the Chicago drivers are saving by filling up in Indiana! Wouldn’t you think this might be having an effect on urban growth?

Let’s take it a step further. The marginal income tax rate in Missouri is 5.91 percent. In Illinois, it’s only 3 percent. Do you think that might have an impact, also? Perhaps we can provide a pretty good answer to the question David Nicklaus poses in today’s Post-Dispatch as to why the St. Louis-area lost 5,000 jobs over the past year. Maybe taxes matter.

Of course, I’d be remiss if I didn’t throw in a plug for our new Missouri tax estimator, too. See how outraged you can get. Or read here about how small tax payments can affect your lifetime wealth.

OK, now that I have your attention with that eye-popping (yet accurate) title, let’s discuss the issue reasonably. The Kansas City Council decided not to put a tax increase for the city’s museum on the August ballot. The Star has the story. The Council was considering an expansion of the number of beneficiaries of the tax so that it would include other civic entities, and that is why the tax was going to increase from 2 cents to 10 per $100 assessed valuation, blah, blah, blah. Supporters of the tax would probably label it as an "8-cent tax increase" as opposed to "400 percent," but both are accurate.

I don’t think this is a bad idea. The zoo-museum-garden tax works well in Saint Louis city and county, and I feel it should be expanded to other neighboring counties, whose residents now get to go to the zoo for free on my tax dollar. A similar taxing district might work well for Kansas City, provided that the entities funded by the tax dollars were required to then keep their fees low — or, in some cases, zero — so that people didn’t get hit both ways. I also think the tax should be levied on more than just residents of the city of Kansas City. Spread the tax wide, keep it very low, use it for a defined purpose, and let the voters have the ultimate say. That is the basis of good special tax district policy, in my opinion.

There is a terrific editorial in the Post-Dispatch today about how local communities use tax incentives to lure businesses. I recommend it highly. The focus is on Clayton, the home of the Show-Me Institute, which held out against tax giveaways longer than most other communities. Unfortunately, Clayton now feels it must compete better with other municipalities that are giving away the store, and it would be hard to prove them wrong.

The Post’s editorial touches on many of the same issues we have been writing about here at SMI, and I hope — without sounding as if I ate too much hubris — that some of our work may have influenced the Post’s thinking. Some of the key points that SMI has extensively made include: tax incentive decisions should be made regionally, lower tax rates for everyone are preferable to tax incentives for the chosen few, and some areas have still managed to succeed without using these types of incentives.

At least Clayton has chosen to use partial tax abatements as the primary incentive. In my opinion, that option is the best-of-the-worst in this game, with full abatement and TIF being worse — and TIF with the use of eminent domain the worst of all. So I give credit to them for that, for what it’s worth.

That’s right, your traditional May 19 deadline is approching. Because of the floods, procrastinators were given an extra month to procrastinate even further. While the Missouri Budget Project would have us believe that taxes pay for all sorts of wonderful things, and only some selfish bastards would like to keep more of their own money, I would like to take this opportunity to remind you that taxes also pay for crap like this.

Dave and I have debated tax holidays before, but even he thinks the gas tax holiday is a bad idea (and so does Judy Blume, apparently). Now Cato has just published an article about the gas tax holiday. The authors, Peter Van Doren and Thomas A. Firey, show that the savings from the holiday could go to consumers rather than producers if certain conditions are met. They argue that to determine whether a gas tax holiday would be appropriate, one should simply weigh the benefit to consumers against the loss of tax revenue.

The article does a good job of showing how the burden of the tax could fall on consumers, but evaluating a gas tax holiday proposal is more complicated than they make it out to be. Basically, Van Doren and Firey analyze the holiday as if it were a permanent repeal of the tax. In fact, the holiday would offer a reprieve for only a few months. And when you get rid of a tax for a short amount of time, you have to consider the economic distortion that would result — not just the lost tax revenue. When people change their behavior in response to the arbitrary dates of the tax holiday — for example, by going on a car trip in July instead of in May — they make worse choices than they would have without the holiday. That causes economic waste. In order for the economy is function optimally, consumers must be responding to real price changes that reflect supply and demand, not government fiat.

Now, any tax changes price levels and results in some distortion. We accept this because the government needs to collect revenue. But legislators should avoid unneccesarily magnifying that distortion, which means resisting the temptation to create lots of holidays.

Well, this is news that is sure to make David Stokes happy.

Of course, there was a nice little useless addendum (that I’m sure we both oppose) added to it (from the Kansas City Star):

The House committee also added a provision that would provide tax breaks for development of a business park on 6,000 acres owned by Kansas City near the airport. A 500,000-square-foot warehouse slated for development by Trammel Crow, a Dallas real estate developer, is the first of 11 buildings planned for the park.

The tax break would set the building’s tax assessment at the fair market value minus the cost of erecting the building on city-owned land. The Park Hill and Platte County R-3 school districts had protested the tax break, saying it would cripple their ability to generate tax revenue to pay for the additional students that the developments would attract.

It still seems to me that if your house goes up in value, you should pay more in taxes. Unless this bill increases your tax rate when the value of your house declines, it only serves to protect existing homeowners at the expense of new homeowners.

The South County Journal poses this question without (in my opinion) the right answer. In 1980, Missouri lost its first Congressional seat when its population growth began to stagnate. Preliminary estimates suggest that Missouri will lose a second seat after the 2010 census.

John Stoeffler, the co-founder of a constitutional think tank, argues that the reason Missouri is missing out is because the Census doesn’t apportion representatives based on citizenship. In other words, he argues that the gain in congressional seats in border states is based on an influx of immigrants without voting rights.

But I wonder if something else could be going on, too? Maybe the reason why “border state” representation has been growing while Missouri representation has been declining is indicative of fundamental economic growth shifts. Could it be that Missouri is stagnating while other states are growing?

In 1900, Missouri had a larger population than California, Texas, Arizona, and New Mexico. Today, only New Mexico lags behind Missouri. An even more interesting picture emerges if we look at the compound annual growth rates of those states’ populations versus that of their household incomes since the 1980 Census.

Since 1980, Missouri’s population and household income growth has lagged behind those of all four southern U.S. border states. Could it be that declining congressional representation has more to do with shifting economic importance?

Missouri is stagnating. This is why it is so important that Missourians petition their state representatives for better legislation. Lower taxes, better education, and more secure property rights will make Missouri a more competitive place to do business. For example, Missouri has a higher marginal income tax rate than any of the states listed above (except for California). Missouri’s education system continues to decline and remains below the national average. If we fix these things, Missouri will become more attractive and people will flock to the state once again.

Missouri needs better laws. That’s why it’s losing congressional seats.