Taking Issue With the Post-Dispatch on Taxes and Growth

Last week, the St. Louis Post-Dispatch published a staff editorial doubting the idea that the dynamic effects of reducing taxes encourage economic growth, suggesting that “simple solutions” like tax cuts do not always bear fruit.

Investors can, and often do, choose to invest their tax savings elsewhere, either overseas or in financial products that churn money but don’t create many jobs. Individuals amass great fortunes without becoming great industrialists. Companies today are sitting on $2 trillion in cash, which is a lot of oats.

The literature is mixed on the extent to which tax rates alone affect economic growth, but it is bizarre for the Post-Dispatch to assert later in its editorial that “[i]f cutting taxes doesn’t yield growth, increasing them is not likely to do so, either.”  That is an understatement. Ask those in Illinois whether raising taxes is helping that state’s economic growth. The Post-Dispatch suggests that the effect of the government cutting or raising taxes is comparable in effect but ultimately immaterial to whether an economy grows, which any business owner will tell you is absurd. Tax competition affects where capital pools and where businesses set up shop.

What the Post-Dispatch mistakes as a problem of tax rates is in fact a problem of tax structures. Companies do not hold onto money because they like taking the savings they gain from lower taxes to a Scrooge McDuck-style vault. If companies are sitting on money, they are probably doing it for a good reason. One reason might be that the economic environment is so uncertain that companies simply do not want to expose their capital to the risks inherent in the market at that time.

But another reason companies may sit on money is that the costs the tax structure imposes may outstrip the benefit of spending that money. If a company is going to get taxed one, on money that could otherwise be productive in the market place and two, at a confiscatory or otherwise burdensome rate, the company will probably try to protect that capital from taxation for as long as possible.

Therein lies the problem. Taxes on capital are among the most destructive in terms of growth. Among them, taxes on corporate income are possibly the worst. They remove from the economy money that otherwise could have been productive and siphon it away to pay for government programs that oftentimes grow nothing other than themselves. That is a tax structure problem, not a greedy business problem. To grow, an economy needs low, stable rates that do not punish productivity. The Post-Dispatch’s editorial fails to even briefly address this reality.

But maybe that was not the point. As I have noted before, it seems that the Post-Dispatch is always looking for ways of generating new revenues to the government. For example, from earlier this year:

A lot of folks purchased Mega Millions lottery tickets last week dreaming about what they could do with $640 million. Imagine what $4 billion would do for Missouri.

The point is that the way to pay for government services is not to try to more vigorously shake cash free from the money trees of free enterprise. The solution is to not punish the planting of new trees — to encourage productivity, not chop it down in a quest for revenue. Tax hikes are not the answer; fundamental reform to the structure of taxes is.

Show-Me Institute In The News

We had a very busy first week of October for op-eds at the Show-Me Institute. The Missouri Record ran a piece on lessons for Missouri from the Chicago Teacher’s Strike by James Shuls and Andrew Wilson. The Sedalia Democrat and the Southeast Missourian both ran a commentary by Mike Rathbone about tax incentives for Ballpark Village. Finally, Lake News Online carried an op-ed by David Stokes (a.k.a., me) on the controversial Transportation Development District (TDD) and parking dispute near the Shady Gators and Camden on the Lake.

Listen in at 9:30 a.m. this Wednesday when I discuss the Ozark TDD on the Morning Magazine with Manny Haley on KRMS radio in Osage Beach.

Virtual Education, Real Opportunity

Recently, the Kansas City Star ran a piece on a little-known and underutilized option for Missouri students, the Missouri Virtual Instruction Program (MOVIP). The article focuses on Kansas City, which — as an unaccredited district — is required to pay for courses when students enroll in the program. The Star reports only eight students in the Kansas City School District are currently enrolled in a MOVIP course. Why? Probably because families do not know about MOVIP.

The kicker here is that this is not an isolated incident — all unaccredited districts and districts with provisional accreditation for two years are required to pay for these courses for their students. Unfortunately, few districts make this readily known. What is more, all school districts have the option to offer MOVIP courses to their students.

As Show-Me policy analysts have noted (here and here), virtual education has tremendous potential to improve and broaden the quality of education for Missouri students. Schools should be lining up to partner with MOVIP.

Imagine a classroom full of students on computers, each taking a different virtual course. One student is making up English I, which he previously failed, while another is taking a course on web design. Other students are taking foreign language courses that the school could not offer, perhaps Chinese, German, Japanese, or Latin.

We are in a tremendous age, where technology is transforming how we operate in our daily lives. Now, technology has the potential to change how we educate our students. By partnering with MOVIP, schools can expand options for students. More students in Kansas City — or even Appleton City — should enjoy greater educational options. It is time we demand more.

The DED Gets Audited . . . Hilarity Does Not Ensue (Part 2)

When the Missouri state auditor’s office released it audit of the Department of Economic Development’s (DED) Division of Business and Community Services (BCS), problems with the Mamtek deal was not the only item of interest it found. The findings also showed that the state could have saved money if it prevented companies from claiming project costs under more than one program.

According to the audit, “the state issued tax credits totaling over $134 million related to project costs included in the basis of more than one tax credit program during the 11 years ended June 30, 2011.”

The Show-Me Institute is no stranger to criticizing the state’s economic development tax credit system. This report reinforces the notion that the state needs to take a new direction to ensure economic growth. Instead of picking winners and losers through the tax code, the state should make the overall economic environment more favorable for all businesses.

If the state eliminated the corporate income tax and made up for the lost income by capping or eliminating economic development tax credit programs, not only would the state benefit economically, but the it would cut down on the type of double-counting mentioned in the audit.

When one discovers government waste, it is natural to immediately call for tighter controls and more oversight. That is why politicians always say they will cut “waste, fraud, and abuse” when talking about cutting spending. It is a position unlikely to cost votes. However, no matter how tight the controls, it is impossible to guarantee that something will not slip through the cracks. That is why, if  non-essential programs are eliminated, such as development tax credits, problems like the one found in the audit are less likely to occur.

Principles Or Politics?

What does your elected official or candidate for public office believe? The Show-Me Institute developed a questionnaire to help you evaluate where politicians stand on key issues in education, the economy, health care, and good government practices.

If you are curious to learn more about free-market solutions to the problems facing our state, click the link for each question to see relevant research and analysis on each topic.

A few questions from the list:

Click here for the full questionnaire.

Lessons For Kansas City From The Chicago Teachers Strike

Who “won” the just-ended Chicago school strike and what are the implications for other large urban districts, including Kansas City Public Schools, where thousands of students are similarly trapped in failing schools?

The Chicago school strike came down to a bruising battle between two flamboyant and abrasive public figures: Mayor Rahm Emanuel and Chicago Teachers Union (CTU) President Karen Lewis.

With Chicago’s 26,000 public school teachers returning to work on Sept. 19, it is clear that there is no real winner in this dispute — not the union, not the mayor, and, most especially, not the students and their parents.

There were concessions on both sides in the battle between the mayor and the Chicago teachers’ union, with a final agreement on watered-down changes in teacher evaluation that may make it somewhat easier to remove low-performing teachers. While winning another round of pay increases (on top of average annual pay per teacher of $71,000 for a nine-month year), the union agreed to a longer school day, and it agreed to limit the number of sick days that teachers can “bank” as a future benefit upon retirement.

All that amounts to tinkering at the edges of a failing system. “Beyond this contract is a larger reality,” the Chicago Tribune noted in an editorial. “This school system faces declining enrollment and rising expenses. CPS needs to find a sustainable financial footing. This contract doesn’t help much.”

Kansas City public schools are facing the same bleak reality, as public school enrollment in the city has declined by roughly 35 percent in the past five years while expenditures per pupil have increased to more than $14,000 — far exceeding per pupil costs in most suburban schools. Further, just as in Chicago, Kansas City schools have an extraordinarily high dropout rate, with only about half of high school students graduating within four years.

It is hardly surprising that strong teachers’ unions in large school districts with multiple failing schools will do everything possible to maintain their jobs and to increase their benefits. But that is exactly what makes major reform from within these same school districts a near-impossible task. Reform — if it is to happen — will have to come from the outside, through increased competition and choice.

As things stand today in most large public school districts, including Kansas City and Chicago (both before and after the strike), it remains the case a) that teachers will only be fired for egregious misconduct; b) that when districts reduce staff for budgetary reasons, the most senior teachers stay on the job regardless of their fitness as teachers; and c) principals and others in positions of supposed authority are extremely limited in their ability to reward their best teachers through any kind of pay-for-performance system.

Highly unionized public school districts — where many teachers have understandably grown to feel that they are entitled to hold on to their jobs even though many of their students are failing to learn — need the spur of competition.

Still more, it is a tragedy that so many students and parents in city centers such as Kansas City and Chicago are trapped in schools that are not working. They deserve to be given a choice — and that is something that elected officials at the local and state levels must finally begin to recognize and rally around as a cause for action.

The Show-Me Institute has long called for a major expansion in charter schools to create a real alternative to today’s failing public schools.

Some educators are calling for greater “COOP-ETITION,” meaning a joining together of the traditional public school education with a big increase in the number of charter schools (mostly non-unionized and free from most regulation governing public schools).

We say: Bring it on!

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

‘Saint Louis Has High Taxes!’ Say International Accountants

KPMG, one of the world’s Big Eight, Six, Five, Four accounting firms, released a study last week that ranked Saint Louis as having the second highest tax burden of major American cities. I admit that I was surprised Saint Louis ranked that poorly. (Perhaps our “progressive” citizens are proud of this, and now have a goal to shoot for being No. 1.)

There are two frustrating things about the study. First, as the St. Louis Post-Dispatch’s David Nicklaus noted, it does not make clear whether it is referring to just the city or to the entire region. Obviously, that has repercussions. If they applied the city’s 1.5 percent earnings and payroll tax to the entire region (as I think they did), that would be an error. Second, it is frustrating that Kansas City was not included in the study.

According to Nicklaus’ write-up, the main reason we ranked so poorly was our “relatively high property tax costs.” Some people might question that, as Missouri is not really known for high property taxes, even for businesses. In fact, this study by the Tax Foundation ranked Missouri as seventh best from the business property tax perspective.

How do these discrepancies come about?

First, it appears they are compiling their rankings with different methodologies. The Tax Foundation (which gives a better explanation of its methods) gives a lot of weight to certain property taxes (intangibles, inventory, franchise) that Missouri no longer has. So we rank very highly because we do not have those. KPMG appears to be going simply on total property tax bills and rates.

But I think the main reason Saint Louis ranks poorly while Missouri is ranked highly is that the main corporate property tax is the commercial surcharge, and that tax varies wildly by county within Missouri.

The commercial surcharge is a property tax rate applied on top of general charges for just commercial property, as its name implies. It ranges from 1 cent per $100 of assessed valuation in Reynolds County to $1.70 per $100 in Saint Louis County (followed right behind by $1.64 in Saint Louis City). That is a difference of $5,408 on a $1 million commercial property (not a high valuation for a commercial property). For comparison, 16 of Missouri’s 115 counties have a rate of more than $1, and 68 have a rate below 50 cents per $100 of assessed valuation. That is how Missouri can rank well, but Saint Louis poorly, on business property taxes.

Missouri needs to change our commercial surcharge system to allow the rates to decline as assessments increase, like all other property taxes. For that and other needed changes to the system, please check out this testimony.

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