THE SOLUTION: Transition toward the Earned Income Tax Credit (EITC).

An EITC is a credit that may be used to offset a worker’s state income tax liability. Proper use of EITCs could slow the growth of public welfare spending while providing material benefits to working families.

WHO ELSE DOES IT? Twenty-five states and the District of Columbia offer EITCs at either the state or local level, although the amounts and refundability of the credits vary.

THE OPPORTUNITY: Moving current public welfare dollars to an EITC will encourage self-reliance among the state’s poor while also restricting growth in public welfare spending. Not only does the EITC help working families make ends meet, but it also encourages recipients and families to find jobs and increase hours worked. Missourians can move up the economic ladder with the aid of the EITC—which can help people get off state assistance entirely, thus bringing down the cost of the credit.

KEY POINTS

• Aid to our most vulnerable citizens will be better targeted, while still providing the help they need.
• EITC recipients can build the self-esteem that comes from work.
• Public money will go toward helping families rise from poverty and escape dependence on government.

SHOW-ME INSTITUTE RESOURCES

Blog Post: Moving Missourians from Welfare to Work

Blog Post: Making Strides toward Welfare Reform

For a printable version of this article, click on the link below. You can also view the entire 2018 Missouri Blueprint online.

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With the increasing prevalence of online retailers, Colorado’s use-tax revenues have become more volatile, and Colorado’s brick-and-mortar stores have been getting an increasingly unfair shake because they have had to collect and remit sales tax, whereas out-of-state stores have not. Why not?

A simple way of understanding the difference is that vendors located in Colorado have a legal duty to collect sales tax from purchasers on sales in Colorado. The average sales tax in Colorado is 7.52%. But what happens if a person in Colorado makes a purchase from out of state? If the person does not pay any sales tax to another state, the person may owe use tax to Colorado for that purchase. While the use tax is complementary to the sales tax, Colorado cannot require a vendor who has no presence in Colorado (or no “nexus”) to collect the use tax from the purchaser. Instead, the purchaser is supposed to self-report and remit the use tax if purchases exceed $500. Compliance with this law is not believed to be strong.

In fact, Colorado state officials estimate that Colorado is losing as much as $172.7 million a year in unreported/unpaid use taxes. Obviously, stores located in Colorado are at a competitive disadvantage if purchasers can buy the same product for 7.5% less simply by ordering the products from out of state

The Colorado law recently upheld by the U.S. 10th Circuit Court may be a model other states follow as they consider the revenues lost because of the different collection obligations for sales versus use taxes. The 2010 Colorado law imposed three obligations on out-of-state retailers that do not collect sales taxes.

1. Send a “transactional notice” to purchasers informing them that they may be subject to Colorado’s use tax.
2. Send Colorado purchasers who buy goods from the retailer totaling more than $500 an “annual purchase summary” with the dates, categories, and amounts of purchases, reminding them of their obligation to pay use taxes on those purchases.
3. Send the Colorado Department of Revenue an annual “customer information report” listing their customers’ names, addresses, and total amounts spent.

As in Colorado, Missouri’s brick-and-mortar stores are likely at a disadvantage against online retailers because many Missourians are probably unaware of their use tax responsibility. If noncompliance is widespread, then the issue is whether Missouri has a sensible and fair tax policy. At a minimum it would seem that the state should not have a tax system that is honored more in the breach than in the observance.

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Sure enough, my mom started on the first knot, then the second and third, and once done, she started to knit. A pattern soon formed – a big, beautiful sweater with a daisy in the middle. At that point my grandmother turned to her and said “That sweater was in there the entire time—you just didn’t know where to look.”

Show-Me Institute writers regularly advocate eliminating or reducing the tangle of economic development credits that so often waste taxpayer money without providing the promised benefits. However, we also understand that such an endeavor can seem overwhelming, and that problems can easily become knotted together. To simplify such a convoluted mess, it can help to break the work into small chunks and work on it a bit at a time.

The Missouri Department of Economic Development’s 2015 Annual Report lists the amounts issued for every incentive issued in Missouri. Instead of looking at ways to eliminate such incentives or even cap the total amount issued, another option could be to tackle these incentives one at a time. Policymakers can start with the incentive with the smallest amount issued and work up, or they can tackle the largest ones, like the Historic Preservation Credit, and work their way down. The important thing is to focus on each issue separately before moving on to the next one.

In 2010, a state tax credit review commission considered ways to create greater efficiency and return on investment through tax credit programs. In its report, the commission listed 28 programs that do not create “a justifiable benefit in relation to their cost to taxpayers.” This recommendation could mark a good place to start unraveling. The state tax revenue recovered by eliminating ill-advised credits could allow for a proven economic growth plan: a broad and fair tax cut.

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For most states, education remains as the biggest slice of pie for general expenditures, and for Missouri this is still the case. However, education is no longer the strong magnet of state dollars it once was.

The table below, from the U.S. Census Bureau, shows that while education still commands the largest share of Missouri’s general expenditures, spending on public welfare has increased at a faster pace than spending on education since the 2008 recession.

Some takeaways from this table:

• Education expenses are almost 35% of total expenditures, but only grew (on average) by 0.3 percentage points annually from 2009 to 2014.
• Public welfare expenses make up nearly 30 percent of total expenditures, but are the biggest culprit in the growth of total spending, with expenses rising at an annual rate of 0.9%.
• If we combine public welfare spending with Hospitals and Health spending, then spending on healthcare and social assistance would account for 42 percent of general expenditures.

As we approach the 2017 legislative session, these trends in spending can inform policy decisions. If public welfare spending growth continues unabated, other services—like education, transportation, and public safety—might find dollars increasingly hard to obtain.

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Kansas’ $80 million contribution to the project is about double what American Royal was publicly trying to get out of Kansas City, Mo., officials just two years ago to keep the Royal in the city’s West Bottoms.

But did Kansas even have to “build it” with taxpayer money to entice the American Royal to move?

Read more at: http://www.kansas.com/opinion/opn-columns-blogs/article112668553.html#storylink=cpy

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Hathaway and Litan found that the more population growth an area experiences, the more likely the area is to see startup activity. Tax migration flows show that Missouri has seen a net outflow of people since 2011, driven by larger outflows from Kansas City and Saint Louis. While it is still possible for Missouri, Kansas City, and Saint Louis to grow in entrepreneurial activity despite a net migration loss, Hathaway and Litan find that those areas with fast and positive migration have more entrepreneurial activity. Unfortunately, that migration isn't really happening in the Show-Me State.

The business consolidation rate that Hathaway and Litan use is calculated by dividing the number of firms (e.g., Home Depot) by the number of establishments (individual Home Depot stores) within an area. Business consolidation can be a good indicator of business cost pressures, because as the costs of maintaining a firm’s establishments increase, business owners may decide to close or consolidate establishments. Therefore, a falling business consolidation ratio (i.e., each firm operates more establishments) indicates that overall, firms are expanding. On the other hand, a rising ratio indicates that firms are contracting their business operations.

The business consolidation ratio for older firms in Missouri seems to be declining over time, which may suggest that, on aggregate, these businesses are able to manage their costs of doing business and are expanding. For startups, however, business consolidation has remained flat, suggesting cost pressures may continue to be a problem for these new or relatively new companies. The chart below captures these trends.

Remember: the downward slope of a line is a good thing, and reflects better conditions for a firm’s expansion. Policymakers should take a closer look into the startup environment, because review of Missouri, Kansas City, and Saint Louis shows that startups aren’t doing nearly as well as older and more established firms in terms of expansion. Over the last 10 years or so, the gap between established firms and startups has grown without pause.

How can Missouri policy help foster an environment in which entrepreneurs not only want to operate here, but also enjoy enough success that they are able to expand their operations? My first post in this series outlined how Kansas City businesses are enticed to move to lower-tax environments, indicating that tax policy might be a good place for policymakers to start. In addition, with Missouri ranked 29th in least-burdensome regulations for startups, (see page 49)., regulatory reform is another area where improvement would be welcome. 

The post Entrepreneurship in Missouri, Part 3: The Startup Environment appeared first on Show-Me Institute.

The Royal is a Kansas City institution, one whose fall catalog of rodeos, barbeque, and livestock competitions herald the start of winter and the region’s holiday season. Thanks to tens of millions in sales tax revenue STAR Bonds, those traditions will soon move away from the Royal’s current digs in Kansas City, Missouri, to nearby Kansas City, Kansas. Kansas’s $80 million contribution to the project is about double what American Royal was publicly trying to get out of Kansas City, Missouri, officials just two years ago to keep the Royal in the city’s West Bottoms.

But did Kansas even have to “build it” with taxpayer money to entice the American Royal to move? The Royal’s brand is defined by its history in the Kansas City area—even Kansas City’s baseball team is named after the organization—so it’s safe to say that American Royal wasn’t going to move its operations to Texas or Florida.

But setting aside for now the important question of whether this is an appropriate role of government (it isn’t), Wyandotte County has been seeing significant economic growth that would have made it an attractive landing spot for the Royal anyway. More families are moving there today than were coming 10 years ago. In 2004, 1,871 tax filers—bringing more than $57.6 million dollars of income—moved to Wyandotte; fast-forward to 2014, and tax filers were pouring in 25% faster, bringing in around $74 million with them.

Wyandotte County was “building it”—a functioning economy that has, in contrast to its basket-case reputation, attracted investments from Google, Amazon and others in recent years—before Kansas’s $80 million incentive was ever put on the table.

But Wyandotte’s recent successes don’t justify Kansas’s decision to subsidize the American Royal move. Indeed, the state’s $80 million giveaway has all the hallmarks of bad policy and poor judgement from Kansas’s political class. The American Royal was already getting cheaper land and a prime location close to its support bases in Johnson County, Kansas, and Kansas City, Missouri. The tens of millions in taxpayer support is just the KC Strip on top of this gravy train sundae.

Kansas? Sure, it gets a talking point in the battle for the economic soul of the region, but it’s a point that is likely to be eclipsed by the next round of billion-dollar business-poaching that’s certain to come.

While the Royal’s decision could be seen as a slap in the face of its historical roots, Kansas City, Missouri isn’t exactly a victim in the matter, either. The city has a terrible track record of poaching Kansas businesses in precisely the same way and is an equally bad actor in the billion-dollar tax-incentive border war that has bedeviled the region, creating no strategic advantages on either side of the border.

To put it delicately, the bull manure is blowing onto taxpayers from both sides of State Line Road. It’s time to end this tax incentive rodeo and finally pursue a mature economic development policy—one that doesn’t force taxpayers to build the fields of their politicians’ dreams.

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If you have a high-skill occupation, you’re probably doing better than the BEA data indicate at first glance. The largest contributor to growth came from professional, scientific, and technical jobs; management of companies; and health care and social assistance jobs. On the other hand, moderate- to low skilled jobs showed little or no growth (see Table 3a and Table 3b on the “Tables Only” link here). While it is understandable that every state can have an unimpressive quarter, those with a vested interest in the state’s economic environment shouldn’t be satisfied with a consistent mediocre performance.

The post Missouri and the Lukewarm, Tepid, So-So, Unexceptional Personal Income Growth appeared first on Show-Me Institute.

Why are there a smaller percentage of workers in startups, considering the state is at a new record high level for the number of non-farm jobs? Data suggest that Missouri startups are taking less of that job growth pie than they did before. Since 1995 to 2015, job growth from startups was near 72% of all job growth in the state of Missouri. If we look at this 20-year performance as a “normal” share of job growth from startups, then seeing a startup share at 62.5% should come as a disappointment. Of course, growing shares of workers in large, established firms can also spur growth. However, there are specific advantages that startups bring to a region that can be more difficult for established firms to provide. For example, research has shown that increased prevalence of startups can bring more innovation through increased competition (pp. 2–3) , allow for better adoption of new information, can create new industries (pp. 328–330), and improve labor productivity.  The graph below lists the share of startup job growth of Missouri, its metropolitan statistical areas (MSAs), and non-MSA portion relative to its 20-year average.

From the graph, we observe that Missouri currently runs below its 20-year average by more than 9 percentage points. Unfortunately, this statewide drop comes from underperformance in nearly every population center; with strongest losses coming from Kansas City, Joplin, and Saint Joseph. 

Interestingly, two of those three MSAs include areas in both Missouri and Kansas, a state that improved its tax climate by lowering individual income taxes by 30% for its residents and eliminating income taxes for personal businesses. The Saint Louis metro area shares a border with Illinois, a state suffering from population loss and which hiked corporate income taxe levels from 2011 to 2015 to more than 3 percentage points above Missouri’s.  A look at the Kansas side of the KC Area shows that it also underperformed its long-run growth, albeit by a smaller margin. In the Saint Joseph area, the Kansas side is currently exceeding its long-run trend and is seeing exceptional growth. There is good news however; the Missouri side of the Saint Louis area is outperforming the Illinois side.

What factors entice entrepreneurs to move or start their business in a new area? Could it be overall migration flows, or how cheap it is in an area to start and grow a business? Part 3 of my “Entrepreneurship in Missouri” will review a study published by the Brookings Institution that may shed some light on reasons as to why entrepreneurship is falling. 

The post Entrepreneurship in Missouri, Part 2: Where Is the Job Growth? appeared first on Show-Me Institute.

Unfortunately, during the other 51 weeks of the year, Kansas City (like the rest of Missouri) seems to be struggling in this regard. Since at least 2013, businesses in Kansas City have been taking a long look at whether they should remain in Missouri or move, in many cases across the border into Kansas. Greg Allen, President of Allen Financial Corporation in Kansas City, summed up the concerns facing these businesses nicely:

. . . one of the problems in the central city is we have an escalation of costs. . . . We need to be smarter about resources in the central city. We don’t need to be building more Power and Light districts.

Happily, as of this writing Allen’s company is still located in KC-MO, but as I show below, the data indicates that entrepreneurial activity is down in Kansas City and across the state since the recession ended.

A good way to measure the vitality of the entrepreneurial sector is to look at startups. Startups are the backbone of the economy, and they are the businesses we deal with every day in our local communities.

At the national level, the share of workers in firms less than 5 years old is now at 10.9%, the lowest it has been on record. The trend prevails in Missouri as well—the state now sits at 9.3%. A look at the table below shows that Missouri and its two largest population centers were growing with the U.S. average share until 2001. Since then, Missouri, has lost a larger percentage of its startup workers than the nation, and Kansas City and St. Louis have lost a larger percentage than Missouri. 

(Data from U.S. Census Bureau)

Startup firms aren’t necessarily the key to our economy—growth in long-established companies could conceivably make up for less-impressive results among startups. But if we aren’t comfortable relying on older businesses to revive our economy, it’s time to ask some questions about the environment in which Missouri’s startups operate.

We can start with an attempt to locate the problem geographically. Where in the state are we seeing the starkest drop in startup growth? Is it tied to one particular region, or are startups struggling across the state? Next week, I’ll examine entrepreneurism across Missouri’s major population centers in Part 2 of my “Entrepreneurship in Missouri” series. 

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Kind of.

At a certain point the grill gets cramped and workers elbow for space. The fourth or fifth flipper might increase burger output, but at a decreasing rate relative to the gain in burger production from the first or second hire. This is what is known in economics as the “Law of Diminishing Returns.”

Unfortunately, when it comes to education, this is a law that many don’t believe exists.

Last week, the Kansas Association of School Boards (KASB) released the State Education Report Card for 2016. In it, KASB ranks states, including Kansas and Missouri, on fifteen performance measures. It then compares that ranking to state spending per pupil. The Executive Director for KASB speaks to Kansas coming in at 29th for spending per pupil in 2014 and then elaborates,

In the long run, this threatens our ability to compete with other states economically for not just high-paying jobs, but almost any job.

Really? If the state doesn’t spend a few hundred more dollars per pupil it will set the entire economy back? This argument suggests that the more you spend, the better you’ll be—or the more flippers on the grill, the more burgers you’ll make.

As it turns out, the data they present offer a great example of the law of diminishing returns.

 In the chart below, I plotted funding per pupil on the horizontal axis and educational ranking on the vertical axis. Each point on this chart represents a state. I noted Missouri, Kansas, and states that KASB “aspire to be” on this chart. If the KASB’s diagnosis is accurate, then we would see a steep downward sloping line (or trend), because that would mean that an increase in education spending comes with a significant improvement in outcome rankings (lower-ranking numbers are better). The flatter the line/trend, the weaker the relationship between funding and outcome rank. This is a concept in statistics known as the coefficient of determination.

The line is pretty darn flat. In fact, education funding per pupil only explains about 10% of a state’s improvement in educational outcome rank.

So, what does this mean? Well, since 90% of the variation in state performance is determined by factors other than spending (a good example of which might be how that money is spent), we need to look beyond simply pumping more money into our schools if we want to improve those schools’ performance. School funding is subject to the law of diminishing returns. And I think now is a good time to go get a cheeseburger.

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In 2014, Missouri saw record dollars in exports of goods. In addition, the state has enjoyed high levels of exports since 2012. Growth like this shows a strengthening ability of Missouri businesses to provide goods to consumers outside of the state. In return, it brings new money and investment to Missouri that can foster more private sector growth. On the net, Missouri saw a trade deficit of goods to the tune of 4.2 billion dollars. However, this is also a positive, because if Missourians buy more goods and services than they sell, then Missourians are promoting more outside investment in Missouri.

OK, so have you had time to reflect? Missouri’s most valuable export is . . . people. According to the IRS, Missouri is also seeing near-record exports of people. In 2014, nearly 65,000 tax filers left Missouri to live somewhere else. In fact, Missouri has been exporting more than 60,000 persons a year since 2011. Moreover, unlike exporting goods, exporting people could restrict Missouri’s economic performance.

If exports of people were counted and ranked among Missouri’s total exports, it would be the largest-valued loss in the state. This is because when people leave, they take their income with them.

(Source: Internal Revenue Service and U.S. Department of Commerce International Trade Administration).

In 2014, exports of people took a potential 3.4 billion dollars out of the economy. That amounts to about 24% of the benefit Missouri gets from exporting goods. In terms of net migration, the number and income of those fleeing residents is strong enough to eclipse what we get from incoming residents by around 4,700 returns, or 309 million dollars of income.

Missouri’s economic environment, whether it’s tied to taxes or regulations, is costing us the very thing that their growing goods exports are supposed to reel in: people and their income. While strong exports of goods is a positive sign, Missouri exporting too many people can become a drag on the economy if not addressed.

The post Missouri’s Most Valuable Export Continues to Grow. . . . and That’s Not a Good Thing appeared first on Show-Me Institute.