The Better Angels Of Our Tax Code

Posted on by Michael Rathbone

As a free-market proponent, I often talk of the wonders of entrepreneurship. Yet, when Missouri tries to encourage entrepreneurship, it seems, more often than not, it goes about it the wrong way.

Case in point: The Missouri Angel Investment Incentive Act, which is aimed at encouraging individuals to provide seed-capital financing to certain Missouri start-up businesses. This encouragement takes the form of a tax credit, with an annual cap of $6 million. Now, as far as tax credits go, encouraging start-ups is not as bad as say, subsidizing wine and grape growers. But this project is just a symptom of the same development mindset that the state has been on for a while.

Considering what Kansas has done in terms of fostering a healthy business environment, and looking at what Nebraska and Louisiana are aiming to do, a tax credit aimed at angel investments is kind of a feeble response.

How about Missouri completely eliminates its tax on business income instead? My colleague Patrick Ishmael and I have illustrated how Missouri could eliminate its corporate income tax by capping and eliminating economic development tax credits. We also have highlighted how Missouri would be better served if the income tax on pass-through entities is eliminated.

Encouraging individuals to invest in start-ups is not the worst way to encourage economic development, but fundamental tax reform will allow all businesses — those just starting and those decades old — to expand and grow. Missouri needs to take bold steps to keep up in the development game. A $6 million tax credit is not the way to go.

The Medicaid Expansion Issue, Bullet-Pointed

Posted on by Patrick Ishmael

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

  • The expansion is not a “jobs program.” It is a mortgage imposed on the future incomes of our children and grandchildren to provide services today that we cannot afford. If the creation or expansion of an entitlement is important enough to pursue, it should be paid out of today’s dollars, not tomorrow’s.

  • The expansion is not funded. The expansion alone would add nearly $3 billion in new costs to Missouri’s annual budgets over the next decade. I have not seen a plan to address that cost. If the absence of a payment plan is not enough of a reason for concern, what happens if future federal budgets, already bathed in the red ink of debt, cause the Feds to dial back their funding on the expansion — raising the state costs further by effectively forcing states to pick up that slack?

  • No, other states would not “get Missouri’s money.” This is among the more remarkable, and incorrect, claims. Expansion funds are distributed based on enrollment, not on how much Medicaid money is “in the pot” and how many states are drawing on it. If only one state adopted the Medicaid expansion, that state would not receive the funding of the other 49 states. Nor would two states split the Medicaid expansion funding of the other 48 states. And so on.

  • Is Missouri a government that sometimes provides health services, or a health service provider that sometimes governs? If the state expands Medicaid, Missouri’s Medicaid program is projected to eat up 38 percent of the state’s entire budget. Is this what we want the Show-Me State to be reduced to? A mere vessel of the federal government through which federal Medicaid prerogatives are promoted and administered?

  • The expansion would reinforce an emerging subsidiary relationship between the state and the federal government. Moody’s has already downgraded Missouri’s credit outlook because the state already relies heavily on federal funding, and will rely even more heavily on it if the state expands Medicaid. Is that the sort of relationship the state wants to promote? Shouldn’t the state want to inoculate itself from the consequences of the federal government’s spending binge?

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

Regarding The Renewed Voter ID Conversation

Posted on by Patrick Ishmael

It might not be an election year, but it looks like the vote protection debate has been jump-started with a new proposal that would require photo identification to vote in Missouri. That makes this a pretty good time to re-post video of the event we held last year titled “Suppressing the Vote or Stopping Fraud: The Voter ID Debate,” which dealt with these vote protection issues. I have argued that voter fraud is a serious issue and that voter ID matters. It is good to see that the state is willing to grapple with this problem.

Can A School Transform A Community?

Posted on by James V. Shuls

One criticism I often hear when I talk about holding schools accountable and empowering parents is that schools can do little when they are facing obstacles such as student poverty and parents who are not involved. These critics suggest that attempts to grade schools or evaluate teachers somehow denigrate the teaching profession and unfairly point fingers at educators for poor student achievement. In short, it is a poverty and parenting problem. This refrain sounds a bit like James Carville: “It’s the [parents], stupid.”

I completely agree that poverty and family life have a tremendous impact on a student’s success in the classroom, but this does not mean that a school cannot improve a child’s circumstances. Across the country, and even here in our state, we are seeing examples of schools that are changing lives in spite of overwhelming obstacles.

IFF, a nonprofit that helps many charter schools in Saint Louis acquire facilities, recently released this video on KIPP Inspire Academy (KIA).

IFF- KIPP Inspire Academy from IFF CDFI on Vimeo.

IFF argues that KIA is having a positive impact, not just on kids, but on the community. In the video, Saint Louis Mayor Francis Slay says that he is seeing the benefits of KIA spilling over into the Fox Park neighborhood.

KIA certainly has a long way to go to reach the level of achievement of some Saint Louis County schools, but they are making great strides. Their success illustrates that we should not downplay the impact a great school or a great teacher can have. In fact, rather than denigrate them, evaluating teachers and schools based on their ability to improve student achievement recognizes their important role in protecting the future of this country.

We cannot put education reform on hold and wait to fix the issues of poverty and society, issues that have flummoxed mankind for literally thousands of years. Instead of waiting, we need to recognize schools that are making a difference and increase quality options for parents.

Here We Go Again . . . Raising The Minimum Wage

Posted on by Michael Rathbone

President Barack Obama delivered his State of the Union address last night and in it, he called for raising the federal minimum wage to $9 an hour. “This single step would raise the incomes of millions of working families,” he said.

This an appealing sentiment, but Prof. David Neumark’s 2012 study for the Show-Me Institute, “Should Missouri Raise Its Minimum Wage?” found that “research for the United States on state minimum wage increases generally fails to find evidence that minimum wages help the poor.” This is because the minimum wage targets low-wage workers and not low-wage families.

In 2008, 12.7 percent of all workers earning the federal minimum wage ($7.25) were in poor families, while 44.6 percent of workers earning less than $7.25 were in families that earned more than three times the poverty line. In their book “Myth and Measurement: The New Economics of the Minimum Wage,” authors David Card and Alan B. Krueger admit that the minimum wage is a “blunt instrument” for reducing poverty.

Not only would raising the minimum wage be ineffective in helping poor families, it would also mean that many businesses will hire fewer workers because of increased labor costs.

On the surface, increasing the minimum wage is an attractive idea. However, doing so does not help those who need it. The market should set wages, not the government.

More Handouts For McKee?

Posted on by Kacie Barnes (Galbraith)

What we need is the death of state tax credits; but tonight, developer Paul McKee will fight to keep the budget-draining practice alive to benefit his St. Louis NorthSide Regeneration project.

According to the St. Louis Post-Dispatch, McKee will appear before the Missouri House Economic Development Committee this evening to explain why he needs $50 million more from the state. As we have discussed, McKee has already received more than $40 million in state tax credits. He claims he has made a net investment of $63 million on the project already ($103 million minus $40 million tax credits) — but do not go thinking that his investment validates additional taxpayer money.

McKee is waiting on a $390 million Tax Increment Financing (TIF) package from the City of Saint Louis. If the court decision goes in his favor, I doubt he will have much skin in the game with this project. Add on another $50 million from the state and his total government aid will approach half a billion dollars.

Do we think that NorthSide Regeneration will have a benefit for the state that is worth half a billion dollars? I do not. One of McKee’s supporters claims that the project will save Missouri money in the future. He says NorthSide will reduce problems such as unemployment, high school dropouts, out-of-wedlock births, and murders. But the social problems in Saint Louis will not be solved with large-scale government planning. Just like when the government uses eminent domain to remove neighborhood blight, the problems of the neighborhood do not just evaporate, they move to a new location.

McKee has an army of 21 lobbyists to help him squeeze every last penny out of the state that he can. I would argue that you do not need 21 lobbyists for good ideas, only bad ones.  I am sure the state could find a better use for $50 million than giving it to McKee.

Prospect Of Medicaid Expansion Appears To Have Turned Missouri’s Credit Outlook Negative

Posted on by Patrick Ishmael

Is federal spending “free money”? Of course not — as I have said many times, we are the federal government, which means one way or another, we will have to pay the bill it racks up. But can federal over-spending actually affect state finances negatively on its own? It sure can. Behold:

Moody’s Investors Service has changed the rating outlook to negative from stable on nine state and local governments, including the State of Missouri, and two state housing finance agency programs, in conjunction with an updated analysis of which Aaa-rated issuers have indirect linkages to the federal government.

KBIA, Columbia’s NPR affiliate, had a very interesting story this weekend that more closely examined Moody’s decision. In a story that quotes Show-Me’s own Joe Haslag, the reason for the change in outlook is pretty clear: Medicaid. Indeed, the Medicaid expansion under the Affordable Care Act will cost Missouri (us) nearly $3 billion over the next decade, and that does not include the cost to the federal government (again, also us.) How will we pay for all of this spending? Those plans do not appear to be forthcoming, unless “rack up a bunch of debt” constitutes a plan these days.

And increasingly, Missouri legislators are getting more vocal about their concerns regarding Medicaid:

“We’re faced right now with making a pretty darn big decision on Medicaid, and that is if we’re going to basically hitch our wagon a lot tighter to the federal government,” said Senate Appropriations Committee Chairman Kurt Schaefer, R-Columbia. “What does that mean for long-term economic stability for the state of Missouri?

“It appears to me that what got us the negative outlook, we are simply going to double down on that now if we do Medicaid expansion,” Schaeffer [sic] added.

Schaefer and Moody’s are correct in questioning the financial position of the state in the context of potentially massive new state spending that is heavily reliant on federal dollars. We should all be so concerned.

Taxes Do Harm Growth

Posted on by Joseph Haslag

The St. Louis Post-Dispatch, in its Sat., Feb. 2, 2013, editorial, attacked Rex Sinquefield, the Show-Me Institute, legislators, and anyone who believes that income tax cuts in Kansas will have negative consequences for Missouri. The basic thesis was that by reducing the income tax rate on individuals and eliminating the tax on small businesses, Kansas will experience devastating losses in state revenue. State services, especially K-12 education, will suffer. In short, Kansas is walking off a fiscal cliff and Missouri should not follow.

So what exactly is the reckless Kansas policy that the Post-Dispatch editors tell us must be avoided at all cost? First, Kansas lowered its income tax rate from 6.45 percent to 4.9 percent on individual income. For small businesses, namely those organized as S-Corporations, LLCs, Partnerships, and Sole Proprietorships, cases in which business income that is passed through to owners, Kansas eliminated the income tax altogether.

What does economics tell us about the likely effect of such a policy? For simplicity, assume that there are two main sources of income: labor and capital. The former is the payment for supplying work effort to a firm. The latter is the payment for resources that you provide to companies and is usually returned to you after the risk you face is realized. So income from loans and other assets, along with returns to entrepreneurial activity, are deemed capital income. Given that government has to raise revenues for public needs, which should be taxed more — capital or labor? In research that Christophe Chamley and Kenneth Judd conducted independently, the conclusion is unambiguous: tax rates on capital income are very detrimental. Chamley’s and Judd’s work is in line with the analysis that two Nobel Laureates put forward: Peter Diamond and James Mirrlees, who argued that taxes should be applied to the most inelastically supplied goods. Because capital is so mobile, its supply is very elastic and the optimal tax rate on capital income is zero.

Ironically, the editors at the Post-Dispatch accept that people on the Kansas border are very mobile, just not in response to taxes. They argue that people move from Missouri to Johnson County, Kan., because of school quality. The unstated premise is that these people still work in Missouri. Will a substantial tax nudge not lead to even more people seeking out those Johnson County schools? Or, more importantly, induce employers to plant businesses where their employees want to live?

The issue for policymakers is this: for a given level of state revenue, what set of tax policies will yield the revenues while doing the least economic damage? Kansas is trying an experiment. There is an economic rationale for this experiment. If you have to tax income, there is good reason to try to separate out taxes on labor income from taxes on capital income, because capital is highly mobile. In spite of the editorial board’s heated rhetoric, the economic fundamentals favor Kansas on this one.

Joseph Haslag is chief economist and Michael Podgursky is a co-founder and director of the Show-Me Institute, which promotes market solutions for Missouri public policy.

Great New Resource For Missouri Health Care News

Posted on by Patrick Ishmael

For those who closely follow our health care posts at Show-Me, I wanted to quickly note that Anne and Dr. Chuck Willey have started the Missouri Healthcare Solutions Initiative (MHSI,) a new website that curates the best and most interesting local and national health care news stories of the day. Interested in following what MHSI is following? You can find the website at MissouriHSI.org.

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