Tax Rates DO Matter

Posted on by Michael Rathbone

Driving to work today, I was listening to 101Espn (the station I listen to when I am not listening to Show-Me Institute Policy Analyst David Stokes on McGraw) and heard an ad about the tax advantages of buying cars in Illinois versus Missouri. The ad even urged the listeners to go online and check the tax savings available if they buy their new car in Illinois.

This ad exists because of a loophole allowing Missouri drivers to buy cars out-of-state without paying a local sales tax.  Now, I am not really a fan of tax loopholes. My displeasure borders on rage. However, the key point here is that taxes affect people’s decisions. We have seen that low excise taxes on gas, cigarettes, and alcohol in Missouri encourage people to buy these products in Missouri.

If it is worth buying ads to promote the fact that you will not pay a local sales tax if you buy a car in Illinois, then the tax advantages of moving an entire business to a new jurisdiction can be even more pronounced. That is why the Kansas tax cuts matter. By eliminating its tax on pass-through entities, Kansas made itself more attractive to businesses looking to gain any advantage it can in a competitive marketplace.

Missouri does not have to stand idly by while its neighbors continue to make themselves more attractive to businesses. In a forthcoming essay, Patrick Ishmael and I lay out the need for the state to eliminate the tax on pass-through entities.

A zero local sales tax liability matters so much that a car dealership believes that it is worth purchasing ads. How much are competitive tax rates worth to the entire state? If Missouri wants to compete, it should have a tax structure that allows it to do so.

It Is Time to Reform Medicaid, Not Expand It

Posted on by Andrew B. Wilson

If someone who is sinking deeper and deeper into debt comes to you with an offer of “free money,” you would be best advised to:

A. take the money and run,
B. say thanks, but no thanks, or
C. call the police.

Confronted with the question of whether to accept a multi-billion dollar offer of “free money” from Uncle Sam to expand the state’s Medicaid program, Missouri Gov. Jay Nixon, a Democrat, has advocated the take-the-money-and-run approach. He called it “the smart thing to do,” and “the right thing to do.”

According to Nixon, it would be “dumb” for Missouri, or any other state, to turn down a use-it-or-lose-it infusion of federal cash, and it would be “wrong” for state officials to wave aside money for extending health insurance to the uninsured. On the first point, the Obama administration has agreed to pay a very high share (90-plus percent) of new Medicaid costs in all states. And on the second, it acts as if cost were no object.

This is an unsound argument — and bad public policy. Let’s hope that most states reject it — as Missouri, with large Republican majorities in both houses of the state legislature, almost certainly will.

It is astounding that the administration is contemplating a major expansion in a troubled entitlement program when the nation faces the threat (with the so-called fiscal cliff) of a financial panic and another deep recession.

According to a new study from the Kaiser Commission on Medicaid and the Uninsured, the loosened eligibility for Medicaid under the Affordable Care Act (a.k.a. ObamaCare) will cost in the neighborhood of $1 trillion over the next decade.

For the past several years, the federal government has been borrowing about 40 cents out of every dollar it spends. That is like adding $400 of credit card debt for every $1,000 you spend. So where is the new money coming from to expand Medicaid coverage to a projected 17 million people?

Like a spendthrift who refuses to mend his ways, the Obama administration wants to go on spending money it does not have: If necessary, taking out new credit cards to pay off the old. This is the same tactic that has brought Greece and several other European nations to the brink of bankruptcy.

Instead of acting as enablers of fiscal profligacy, Missouri and other states should say “no” to the Medicaid expansion. They should also say “no” to the creation of state health insurance exchanges to implement ObamaCare. These exchanges would require the states to accept costly mandates and complicated rules restricting competition and choice in health care.

Finally, Medicaid should be reformed, not expanded.

Medicaid costs have been the fastest-growing part of state budgets for more than a decade. In Missouri, Medicaid expenditures jumped from $3.4 billion, or 22 percent, of the state’s total expenditures in fiscal 2000, to 36 percent, or $8.2 billion, in fiscal 2012. Despite the increased outlays, complaints are growing on the part of patients and doctors. Poor patients often have a hard time finding doctors. And doctors say they have little incentive to stay in the program because of reduced reimbursement rates and administrative headaches.

The states should explore better ways of providing catastrophic health insurance for those without coverage. And they should be smart enough to know that the offer of “free money” usually means a one-way ticket to financial ruin.

Andrew B. Wilson is a resident fellow and senior writer at the Show-Me Institute, which promotes market solutions for Missouri public policy.

Checking the Books: Safeguarding Missouri’s Money

Posted on by Tom Schweich

On December 6, Missouri State Auditor Tom Schweich stopped by the Show-Me Institute’s office in the Central West End of Saint Louis to discuss his work and his office for a packed-house crowd. Among the topics Schweich discussed: how his office has saved taxpayer money, and how much; the state auditor’s office’s new rapid response team; Auditor Schweich’s personal bio and how he came from practicing law, to international law enforcement, to returning to Missouri to become State Auditor; and Auditor Schweich’s favorite part of his current position — helping small towns throughout the state find their financial footing.

The Name’s Bond . . . Building Bond

Posted on by Michael Rathbone

After paying off the mortgage on your house, would you then take out another mortgage as part of a jobs program? The St. Louis Post Dispatch recently published an editorial calling for the state to do something just like that. Legislators are discussing a bond issue and the Post-Dispatch is urging the state to issue another series of bonds in order to create more jobs. For those not in the know, a bond is simply a loan from investors to a company or state. Like any loan, it must be repaid with interest.

I am not categorically against a state or other governing entity issuing bonds for worthwhile spending on infrastructure, but putting the state in debt just to launch a public works program looks like a mini version of the American Recovery and Reinvestment Act of 2009 (i.e., the Stimulus), which really covered itself in glory. To be fair, the Stimulus was not entirely composed of infrastructure spending, but infrastructure spending was a significant part of it.

There are other reasons to be wary of a state issuing debt, as Chris Edwards from the Cato Institute explains:

  • . . . debt financing is more costly than current tax financing because of the interest expenses and related charges.

  • The most important reason that voters should hesitate to approve bonds is that the country already faces huge government liabilities. At the state level, pension and health benefit plans for retired workers have funding shortfalls of about $2 trillion.

Again, there may be good reasons for the state to issue bonds. Transportation and higher education infrastructure are both legitimate uses of public dollars. However, before putting the state further into debt, it is important that these potential bond issuances are thoroughly examined to see which projects they would be financing.

I will write more about these potential bonds in future posts. I can see myself and others at the Show-Me Institute supporting some type of bond issuance, but I hope the primary plan is not that they will serve as some sort of jobs program.

As Expected, Kansas City’s Mail-In Streetcar Vote Wins

Posted on by Patrick Ishmael

We knew this was going to happen, but let’s put this in perspective. About 550 people voted by mail on a measure to raise taxes by at least $100 million in Kansas City’s newly created streetcar district. Of those 550 people, about 350 voted for the taxes. The vote means that each “yes” vote essentially imposed about $300,000 in new taxes on property owners and shoppers along the streetcar’s route over the next couple decades, and that is a low estimate.

So, “Merry Christmas,” shop owners. You will be paying for a giant boondoggle of a toy train for the foreseeable future.

Downtown Kansas City voters gave an “all aboard” OK to streetcars in election results announced Wednesday.

Voters approved, 351 to 198, a 1-cent sales tax increase, and 344 to 206 property tax increases to help pay for a $100 million, two-mile streetcar system. It will run from River Market to Union Station, primarily on Main Street.

The tax increases, authorized for 25 years, will apply only within the defined boundaries of a downtown streetcar district. That covers roughly River Market, the Central Business District, the Crossroads and Crown Center.

Show-Me Institute Chairman Crosby Kemper was interviewed on Fox 4 last week, and his concerns about the manner of the vote and the potential for cost overruns are very much warranted here.

The outcome of the vote is an unfortunate, but expected, result. Regardless, there is reason to believe this story is not over quite yet. Stay tuned.

Celebrating Mediocrity

Posted on by James V. Shuls

The 2011 results of the National Assessment of Educational Progress for vocabulary were recently released. Missouri once again ranked near the middle of the pack: 24th for fourth grade and 27th for eighth grade. In a press release from the Missouri Department of Elementary and Secondary Education (DESE), Commissioner of Education Chris Nicastro said, “”We are pleased to see that students in Missouri are maintaining their overall level of achievement on the vocabulary test.”

I have two problems with this statement.

First, I am not sure Missouri students are “maintaining their overall level of achievement.” In both fourth and eighth grades, the average scale score for Missouri students declined from 2009 to 2012. The decline in fourth grade was a noticeable 3-point drop.

Secondly, we should not be pleased with maintaining our level of achievement; our goal is to improve. Moreover, we should not simply look at national rankings because our students will have to compete for jobs in a global economy.

The George W. Bush Institute has made it easy for us to compare the performance of our local school district with the performance of students around the world with its Global Report Card, which was recently updated. Here you can visit the website and see how the average student in your local school district compares to students across the globe. You may be surprised at what you find.

The average student in the Kansas City School District outperforms only 15 percent of students in other countries in math. In the Saint Louis Public School District, it is a paltry 12 percent. But do not make the mistake of thinking only students in the “big cities” are falling behind. Here is how the average student in a few other school districts compares:

Hume: 40 percent in reading, 26 percent in math

Cape Girardeau: 48 percent in reading, 29 percent in math

Springfield: 57 percent in reading, 48 percent in math

If students in Springfield were transported to Singapore, the district would only outperform 34 percent of Singapore students while students in the high-ranking Clayton School District would be at the 46th percentile.

It is time to stop celebrating mediocrity and expect more for our children.

An Ode to Caps

Posted on by Kacie Barnes (Galbraith)

Last week, a committee of the Missouri Tax Credit Review Commission reviewed the Historic Preservation Tax Credit and the Low Income Housing  Tax Credit. If your eyes have not totally glazed over after that sentence, I thank you for your dedication.

The commission agreed on reducing historic tax credit spending. Unfortunately, the power to make changes does not lay with the commission members. And, to twist the knife a little more, the suggested cut is not really much of a cut.

Policy Analyst Patrick Ishmael wrote about the revival of the Tax Credit Review Commission and questioned how it will be different this time. It is great for policymakers to suggest that the state reduce or eliminate failing credits, but after the 2010 review, there was no reform. Why should we believe that recommendations will be acted upon this time?

To be honest, tax credits make me feel like Homer Simpson when he cried that he is a rageaholic (cannot live without ‘rageahol’). We need major reform here. But if the historic credit reduction is actually enacted, I will take it as a step in the right direction. Currently, there is a $140 million cap on historic credits (with some exceptions for smaller projects). The suggested cap would reduce it to $90 million.

It appears to be a $50 million cut, but like I mentioned before, it is not. Actual issuances have averaged $111 million the past four years, which is admittedly preferable to $140 million. But what is the point of a cap if it does not help limit spending? If the cap is lowered to $90 million now, there would be a real limit imposed for the first time.

Missouri Gov. Jay Nixon claims he is committed to fiscal responsibility and wants to reduce spending on tax credits so we can focus our resources on critical priorities. We need to see real changes that are consistent with this message. There are other solutions that would help the state more effectively than issuing tax credits.

A Smaller and Smaller Piece of the (Tax) Pie, Part II

Posted on by Michael Rathbone

Missouri’s general revenue collections are above what they were at the same time last year ($3.04 billion vs. $2.82 billion). The state can be thankful for the increase in personal income tax collections for that. However, corporate/franchise tax receipts are lower than they were at the same time last year ($137 million this year vs. $146 million last year).

This is not the first time I have written about how the corporate income tax makes up a small part of net general revenue receipts. According to my calculations, at no time over the past 10 years have net corporate income tax receipts comprised more than 5 percent of total net general revenue. Last year (fiscal year 2012), net corporate income tax receipts made up just 3.75 percent of total net general revenue.

Corporate/franchise taxes are small and keep decreasing, in part because the franchise tax is being phased out. We can pay for a corporate income tax reduction by eliminating so-called economic development tax credits. My colleague Patrick Ishmael and I recently released an essay that demonstrates how this cut would work.

Corporate income taxes are among the most economically harmful taxes that can be levied. Considering that net corporate tax receipts make up just 3.75 percent of general revenues, it should not be too difficult to eliminate the corporate income tax without seriously affecting state services.

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