Missouri: A State of Uncertainty on Health Care Regulation

Posted on by Christine Harbin

Last month, a judge in Florida struck down the individual mandate component of the federal health care regulation, and declared that the Patient Protection and Affordable Care Act (PPACA) is null and void. He is the second federal judge to rule that the health care regulation is unconstitutional. Meanwhile, two federal judges have upheld the law. Policymakers are obviously divided on the issue, and this creates an uncertain business climate for the near future.

Many attorneys general have provided direction in their own states, but this group does not include Missouri Attorney General Chris Koster. By keeping quiet on the issue of enforcing the federal health care law, Koster increases the uncertainty in Missouri to a level above that in other states, which hurts business development.

When the government enacts policies that extend its authority to new areas, such as the impending health care regulation, it creates an unknown environment. Economists call this, “regime uncertainty,” a concept developed by the economic historian Robert Higgs. Because the health care regulation is so complex and convoluted, members of the business community are left scratching their heads. Instead of growing their businesses, they will spend time and resources figuring out how to comply.

Regime uncertainty has real, immediate effects for economic activity. It leads businesses and individuals in the private sector to hesitate to make investments or hire additional people. Koster’s silence also makes it difficult for government agencies in Missouri to plan for the future. As officials develop budgets, they need to know whether and how to allocate resources to comply with the health care regulation. The operations of multiple state agencies in Missouri would be impacted by the potential invalidation of the health care law.

Many experts expect that the question of whether the health care regulation is constitutional will go all the way to the Supreme Court. In the meantime, Missouri is in a state of limbo. Regardless of whether a higher court overturns the law in the future, businesses, lawmakers, and individuals in Missouri need to know how to act in the present. Do they need to adhere to the federal health care regulation, or don’t they? As the Republican leadership recently posited, “Must state officials follow its unconstitutional dictates, or should we ignore them as we see the top officials of other states doing?”

Koster didn’t sign onto the multistate lawsuit in Florida, despite having ample opportunity, along with resolutions from the state legislature, the will of the electorate, and his fiduciary duty to consider. The 26 attorneys general who signed onto the lawsuit in Florida have demonstrated that they find the federal takeover of health care to be unconstitutional. Missourians are left to wonder, what does Koster’s hesitation indicate? Does he support the lawsuit or oppose it?

What do we do now, Mr. Koster?

Christine Harbin is a policy analyst for the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

A Perfect Storm of Sales Taxation

Posted on by Vince Smith

A lunchtime trip to the The Loop in Saint Louis taught me that local sales tax rates are getting out of hand. After enjoying a tasty BLT salad, I was shocked when I saw the sales tax on my bill: 12 percent! I did not know before being seated that the restaurant is located in two overlapping transportation development districts (TDDs), each adding its own percentage to my bill.

This perfect storm of sales taxation means that the restaurant and the surrounding area charge the highest sales tax in the state. Eight other areas in the city of Saint Louis share this distinction. The 2 percent additional sales tax levied by the TDDs, in addition to the sit-down restaurant sales tax, brings the restaurant’s total sales tax rate to a stifling 12 percent. This rate is nearly three times as high as the state’s sales tax rate of 4.225 percent, and more than 40 percent higher than the city’s standard rate of 8.491 percent.

TDDs are becoming increasingly common in Missouri, with about 150 currently existing districts and many more in the process of becoming established. TDDs are independent political subdivisions with the ostensible purpose of improving area infrastructure and overall appearance. As separate government entities, they wield the power to levy taxes on sales, of up to 1 percent, and on property, up to one tenth of a percent. This revenue is used to fund many projects intended to improve the districts.

It is important to note that every tax levied by a TDD is subject to voter approval by its residents. However, district residents are not the only patrons of these businesses, and this can often lead to visiting customers being blindsided by a tax rate far higher than the state or city standard. Furthermore, it is a tax that most people are unaware they are paying. This creates a situation in which outside consumers unknowingly foot much of the bill for district improvements and the subsequent rise in property values.

These TDD tax hikes may be politically inevitable, but I object to the lack of disclosure to visiting patrons. Missouri Statute 238.280 attempts to tackle this problem by requiring businesses residing in TDDs to “prominently display” the rate of the district’s increased sales tax at the cash register area. Still, the statute fails in three different ways. First, the language of the law is too vague; retailers often interpret their responsibility as a barely noticeable sticker on the clerk’s side of the sales desk. Second, the law doesn’t account for situations in which the customer is brought a check, such as at a restaurant. And, lastly, there is no enforcement mechanism for disclosure rules.

When I returned to The Loop to search for any disclosure of the TDD tax that I might have failed to notice, I found nothing. The restaurant appeared to be in clear violation of the statute. I asked the manager, but she seemed confused and responded, “There might have been something in the past, but I don’t see anything.”

Full disclosure could be accomplished with a simple sticker on the front window of an establishment reading, “Thank you for supporting the ‘blank’ TDD. You will be charged an additional ‘blank’ percent sales tax.” Saint Louis restaurants are required to post their health inspection grades in the exact same manner, so such a requirement would be feasible. Perhaps it would serve as a marginal disincentive to business owners who support TDD tax hikes as an easy way to improve their businesses at the expense of others. Customers who are undeterred by the notification of a 1- or 2-percent sales tax increase will demonstrate this with their patronage. In order to make better decisions, though, customers must be adequately informed.

I believe that if more people became aware of the higher sales tax rates that exist in TDDs, they would avoid them — and the districts would therefore defeat their intended purpose. Missourians would benefit from greater disclosure by businesses operating in these special districts, and should demand, at the very least, a notice about TDD tax hikes on every storefront window.

Vince Smith was a 2010 intern for the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

Eliminating Income Tax Would Lead to Faster Growth, Despite Opponents’ Scare Tactics

Posted on by Joseph Haslag

The scare is on. Some wild economic predictions have been put forward by Amy Blouin, director of the Missouri Budget Project, and James Moody, former state budget director, regarding the legislative proposal to eliminate Missouri’s income tax and replace it with a higher sales tax rate.

One egregious mistake they both make is the failure to understand economic growth. Since the work of Nobel laureate economist Robert Solow in the 1950s, and more recent research advances from Washington University economist Rodolfo Manuelli and Larry Jones in the 1990s, economists have understood the impact that income taxes have on the payments made to workers, business owners, shareholders, and lenders. This work presents a consistent and compelling result: People will realize higher after-tax returns when income tax rates are lowered. As after-tax returns increase, they will be employed more intensively as factors of production, and economic growth rates will rise.

Blouin and Moody repeatedly downplay this, but based on what? They demonstrate no economics expertise. Neither of them cite even one vetted economic article to support their claims. The reason: They cannot find such an article in the economics literature. Their rhetoric is akin to claiming that the sun will rise in the west. Anybody can claim it, but science stands firmly against that claim. Blouin and Moody go further, predicting that implementing a revenue structure based on sales taxes will cripple the Missouri economy, but by what economic expertise? Such claims are made to scare people who are not experts.

To further illustrate their economic mistakes and half-baked analysis, note that they ignore the benefit to Missourians that comes with expanding after-tax income. Missourians will see their take-home pay rise. Blouin and Moody got half of their analysis right, noting that an increase in the sales tax rate and a broadened sales tax base will affect consumer spending. This effect on consumer spending is the cost of faster economic growth. These two points must be considered jointly. If we focus only on the near-term costs, we miss the gains of faster growth unleashed by the change in the tax structure.

Like any project, the costs are borne up front and the rewards are realized later. This analogy holds for any number of investments — things like plant expansion, education, and kitchen remodels. In each case, there is an initial sunk cost, and rational people can decide whether the rewards are worth that cost. In Missouri’s case, faster growth means that the economic pie gets bigger, growing in size. These are the kind of attractive qualities that make a state’s economy the envy of other states.

Moody predicts that retailers would cross the border if Missouri’s higher sales tax rate were implemented. He is half right (note that 50 percent is a failing grade). It is true that a few retailers might make the decision that it is in their best interest to locate differently based on a regime that taxes purchases at a higher rate. The other half of the story is also important. Because income taxes would be simultaneously eliminated, there would be an incentive for many other out-of-state businesses to relocate here. Missouri’s economy would likely experience a change in its industry composition if the income tax were replaced with a higher sales tax. It is wrong, however, to ignore the growth benefits that go with eliminating the income tax. Some stores may cross the state line, but Missouri shoppers will be richer.

Do not be afraid. See through these wild claims and make up your mind based on the evidence. Tennessee is not crippled by relying on sales taxes and eschewing the state income tax. You may not want to bear the costs associated with the proposed switch. I can understand that. In my view, it is worth it because it will result in faster economic growth — more specifically, faster income growth for Missouri’s citizens and faster growth in state revenues. Weigh the costs against the benefits and decide, but do not let the fear mongers scare you.

Joseph Haslag is an economics professor at the University of Missouri–Columbia and chief economist for the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

A-Rod Moves Into a TIF District, Pays No Property Taxes

Posted on by Christine Harbin

The Yankee’s third baseman Alex Rodriguez has a 10-year, $275 million contract — surely he has enough to pay his property tax bill. However, because his new five-bedroom penthouse in New York City’s Upper West Side is located in a TIF district, he won’t have to pay any property taxes for the next 10 years.

If A-Rod can afford to pay $6 million for an apartment, then his property taxes shouldn’t be a problem. Why should New Yorkers who earn less have to pay the full cost of their property taxes in addition to his?

Furthermore, why is there a TIF district in Upper West Side? Isn’t this an area where development would happen anyway? If wealthy professional athletes are willing to move into the area, then undoubtedly it can’t be that blighted. The same thing happens in Saint Louis: The city is quick to label an area as “blighted,” even if it doesn’t fit the definition.

Cities that use TIF face a significant reduction in revenue: New York City forgoes $900 million each year, and Saint Louis has missed out on $600 million up through 2009. This is largely why Saint Louis has to raise taxes on those who remain in the tax base — such as the earnings tax and trash fees. If each city stopped carving out sections in its tax bases, it could assess a lower tax rate on its residents.

Show-Me Institute scholars and staffers have shown that TIF harms regions. The East-West Gateway Council of Governments report, which I have discussed before, found that TIF fails to boost development and economic activity in a region, and it’s particularly harmful to neighboring municipalities.

Hog Tied

Posted on by David Stokes

Kansas City’s Pitch has a detailed account of a legislative town hall forum in northern Missouri regarding the issue of corporate hog farms. Sen. Brad Lager has introduced a bill limiting the liability of these types of large-scale hog farms, one of which is planned for his district. Many of his constituents near the proposed hog farm (aka, confined animal feeding operation, or CAFO) are opposed both to the legislation and to the hog farm itself. Right off the bat, I am going to admit that I don’t really know where I stand on this particular issue.

We have debated the important issues of corporate farms, local land-use controls, and tort reform here at Show-Me Daily before. My own views favor general tort reform (as passed in Missouri in 2005), and the power of local communities to pass zoning regulations (although I would be perfectly happy to live somewhere without zoning), but generally oppose special laws. In this case, those special laws could be seen as either tort limitations or land-use contraints involving only large-scale animal farming operations.

The theoretical free-market solution here does not involve either zoning  restictions or tort limitations. On the other hand, the practical solution probably does not involve them, either. If an area does not have zoning, or is zoned for industrial uses, a CAFO should be able to open. If that CAFO then harms its neighbors, its owners should be held responsible under the same civil litigation rules that all businesses face. Regular readers know that I generally favor practical solutions over theoretical ones, but it’s nice when they fit together.

It may seem that I have arrived at a conclusion despite my initial statement that I don’t know where I stand. Not really, though — this is a very tricky issue, and I’d love to read comments from people with firsthand knowledge of these cases. I don’t want to see businesses driven from Missouri by nuisance lawsuits, but, from what I have read, I don’t see these lawsuits as petty or improper. I think this was one of the best points in the article:

A grad student pointed out — correctly — that the innovations in odor-reducing technology are the direct result of litigation. Companies like Smithfield didn’t start spending money to reduce the stench of tens of thousands of hogs and their waste until the threat of legal action provided incentive to do so […].

If the company in question is improving its production process, it won’t be nearly as affected by the lawsuits in the future. That is something we can all root for.

Changes to Utility Financing Regulations Necessary for Cleaner, More Efficient Energy

Posted on by David Stokes

In his State of the State address, Gov. Jay Nixon suggested that all systems are go for work to begin on the new nuclear reactor in Callaway County. That would be excellent news, but plenty of hurdles remain before this complex proposal gets going, and it will be years before it starts benefiting Missourians. Changes to utility financing regulations that have been proposed during this legislative session are a crucial part of allowing this project to move ahead.

The state of Missouri, like many governments around the world, has decided that utilities are to be treated differently than other industries. For the most part, Missouri long ago granted monopoly powers to utilities, along with price regulations. Private, investor-owned utilities are granted monopoly jurisdiction within certain areas of the state, and their prices and fiscal structure are subject to strict regulation by state law and the Public Service Commission (PSC). This system works fine in some capacities, but current regulations are preventing the development of increased nuclear capacity — something that could greatly benefit the citizens and economy of Missouri. It is time for the General Assembly to relax the restrictions on utility financing that prevent a second nuclear reactor from being constructed in Callaway.

Ideally, we would have less regulation, more competition, and more choice in all aspects of utility provision in Missouri, but it is necessary to deal with current realities. The state’s laws and regulations make it prohibitively difficult for Ameren to construct an expanded nuclear power facility. The primary obstacle is the construction-work-in-progress (CWIP) law that prohibits utilities from charging current energy customers for expenses incurred during a construction phase. Even if such construction would bring more electrical power, environmentally cleaner power, and potentially lower rates over the long run, the law prevents the project from moving forward unless Ameren can fund the entire project itself without passing on any charges to customers until after the operation is completed and running. This requirement is so restrictive that it has succeeded in preventing any nuclear power expansion in Missouri since it was passed in 1976 — which is exactly what its backers intended.

Thankfully, utilities do experience some degree of competition. Regulated gas, cable, and water companies still compete with propane, satellite television, and well or septic systems. But consider the regulatory obstacles that face one of these monopolies when it plans to begin a major capital project. Companies that compete in a free market, on the other hand, have the option of raising their prices to help pay for such projects. That type of funding strategy may or may not be a smart move, depending on numerous factors, but at least they have the option. Ameren does not, because the interests of anti-nuclear activists in the 1970s still dominate our discussions in 2011.

The citizens of Missouri now know a great deal more about the risks of nuclear power in Missouri then they did when CWIP was passed. Nationwide, support for the increased use of nuclear power is strong. A March 2010 Gallop poll found that 62 percent of Americans favored the use of nuclear power, with only 33 percent opposed.

If completed, an expanded nuclear power plant in Callaway County would benefit all of Missouri, not only Ameren customers or shareholders. Because of the way the electrical grid is maintained, the increased baseload power generated at Callaway would be put to safe, efficient, and clean usage throughout the state and country. For that reason, it is fair that other regulated power utilities participate in financing the plant and that their customers pay a portion of the costs.

A pending bill, S.B. 50, would exempt the second Callaway plant from some of the CWIP regulations, and has received early bipartisan support. Unlike the failed proposal to amend CWIP two years ago, this bill addresses the use of CWIP only for nuclear power plant expansion. The bill’s sponsors deserve credit for that. Support for or opposition to this bill should now be based on the merits of nuclear power, rather than on tangential issues.

Nuclear power still has significant shortcomings that need to be settled, such as long-term waste storage. France has demonstrated that reprocessing of nuclear waste can work, and that might be one answer for the United States. A few powerful federal politicians have been able to prevent the installation of one workable storage idea: Yucca Mountain. But even though technological solutions are being temporarily held hostage to narrow political interests, that is hardly a reason for Missouri to halt the power expansion it requires for economic growth. History has shown that technological progress will win out in the end, to the benefit of its pioneers.

Missouri needs increased generation of environmentally friendly energy, and nuclear power is currently the most effective way to provide it. Removing CWIP restrictions from this project is a necessary maneuver. It’s important to remember that end-consumers of energy will pay the final costs either way, whether by financing construction or by purchasing less-efficient energy. A second Callaway plant is one instance in which the benefits of an increased supply of clean, efficient energy in the future are worth the costs of higher consumer prices in the present.

David Stokes is a policy analyst for the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

The 2010 Midterm Elections: A Tipping Point in U.S. Politics?

Posted on by Bob Roper

In this talk, given in Columbia on Feb. 7, 2011, columnist Bob Roper makes the case that the increased influence of the tea party on federal elections represents a major shift of power and influence away from the traditional Republican Party, and that the effects will be long-lasting. Moreover, Roper sees the increased influence of the Republican Party and decreased influence of the Democratic Party as a result of the 2010 election as an important signal to both the politicians and the electorate. An in-depth Q&A session follows the talk.

Myths and Realities of Campaign Finance: Lessons for Reform

Posted on by Jeff Milyo

Economist Jeff Milyo begins this talk debunking popular notions of campaign finance with the following true/false quiz:

True or False?

  • It is illegal for corporations to contribute to federal candidates.
  • It is illegal for unions to contribute to federal candidates.
  • In the 2010 election cycle, the Democratic Party spent more than the Republican Party in federal races.
  • In the 2010 election cycle, political action committees (PACs) gave more to Democrats in federal races.
  • Corporate PACs gave more to federal candidates than labor PACs.

Milyo shows that people are systematically misinformed about campaign finance, and sheds light on a number of important matters relating to elections, political spending, and the effect of one on the other. This talk was given in Columbia on Nov. 1, 2010 — the day before election day.

Missouri Public Workers Are Paid Much More Than President of Labor Union Claims

Posted on by Christine Harbin

Wisconsin isn’t the only state that’s talking about labor issues these days. In an editorial that ran in the Springfield News-Leader earlier this month, Gerald McEntee argued that public employees in Missouri face difficulty in the current economy and are lower paid than their counterparts in the private sector. McEntee is the president of a labor union, so the fact that he would argue on behalf of public workers is not surprising. McEntee wrote:

Missouri state workers are not a privileged class. They are the lowest-paid of any in the country. The median pay for state employees providing direct care services in Missouri is about $22,700 annually. That’s $22,000 a year for citizens who give treatment and dignity to those with severe disabilities at the Nevada Habilitation Center.

In reality, state workers are paid more than the author claims. Using Show-Me Living to find salary data for public employees in Missouri, I found that the median earnings of public employees is actually much higher — it’s $29,923. Plus, in 2009, 38 percent of percent all state workers (including full-time and part-time workers) made more than $40,000. There are 560 employees on the government’s payroll who earned more than $100,000 in 2009. Gov. Jay Nixon himself made $123,970 that year. On the list of highest paid public employees, he only ranks 101.

2009 Gross Pay for State Worker In Missouri (includes FT and PT)
(Source: Show Me Living, n = 65,535)

Mean $32,067
Median $29,923
Mode $28,596

In the editorial, McEntee gets the $22,700 figure by restricting his view to “those providing direct care services” in Missouri. The author makes a mistake by focusing on a small group of state workers. He doesn’t take into account the wages and salaries of all public employees in Missouri. It’s not possible to determine from the article which job roles he is lumping into this category, nor is it possible to determine whether they are full- or part-time positions.

There are many, many types of workers who provide direct care services and who have salaries higher than $22,000. In fact, the highest-paid people on the state government’s payroll work in a direct care capacity. In 2009, the highest-paid person by the state government was a physician in the mental health department, and this person earned $301,991. He’s certainly not alone in his income bracket. In 2009, six individuals earned more than $200,000: three physicians, a medical director, and two health administrators. (I used the Show-Me Living web tool for government payroll to find this information.)

Overall, public employees are making more than employees in the private sector. According to data from the Bureau of Economic Analysis:

Compensation by Industry — Year 2009
(Source: BEA)

Private nonfarm employees State government employees
Wage & Salary Disbursements / Total full-time & part-time employment $32,255 $35,157
Total compensation / Total full-time & part-time employment $39,180 $48,323

I haven’t studied the strict definitions of “compensation” and “wage and salary disbursements,” but I suspect that the difference between these two figures likely includes the cost of pensions, health insurance, etc. In either metric, workers in the public sector make more than workers in the private sector.

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