Audrey Spalding will be on KWMU, 90.7 FM, tomorrow at 11:00 a.m. to discuss the city of Saint Louis’ landholding policies. Spalding’s research has found that the city rejects roughly one out of every two offers to purchase its vacant property. Today, the city owns more than 9,000 parcels of vacant land, in part because of its reluctance to sell.
A Sky-Is-the-Limit Federal Budget
In Charles Dickens’ classic novel David Copperfield, one character observes the need for careful budgeting: “Annual income, twenty pounds; annual expenditures, nineteen pounds, ought and six; result, happiness. Annual income, twenty pounds; annual expenditures, twenty pounds, ought and six; result, misery.”
If you are not in the happy position of earning at least slightly more than you spend, what portion of your household budget comes from borrowing, or selling the family silver? Is it the seemingly modest 3 percent that spelt M-I-S-E-R-Y for Dickens’ character, who wound up in debtors’ prison? Or is it even worse than that? Say, a mind-boggling 43 percent? In percentage terms, that is the expected shortfall between U.S. government receipts and expenditures in the 2011 federal budget.
According to revised numbers released last week, the Barack Obama administration expects its annual revenues for fiscal 2011 to come in at $2.173 trillion, versus annual expenditures of $3.818 trillion. That leaves a deficit of $1.645 trillion. As a result, our government will have to borrow (or find other ways to paper over) 43 cents out of every dollar that it intends to spend.
The Obama administration has more than tripled the national deficit since the last full year of the George W. Bush administration. In doing so, it has achieved a remarkable feat: It has made the gap between federal receipts and outlays even wider than it was at the height of World War II.
U.S. spending during the war increased by a factor of eight, rising from $8.5 billion in 1940 to $70.6 billion in 1945. The huge increase in federal expenditures happened for many reasons. Among other things, it supported the 12 million men and women serving in the U.S. armed forces at the peak of the war. It also supported a hundredfold increase in annual production of military airplanes, on the way to annual production of more than 96,000 fighters, bombers, and transport aircraft in 1944.
To raise additional revenues during the war, the government came up with the ingenious device of a withholding tax on payroll checks. Federal tax receipts rose from $8.2 billion in 1940 to $41.5 billion in 1945 — a fivefold increase. That left an annual deficit in 1945 of $29.1 billion, or 41 percent, on total expenditures of $70.6 billion.
Thus, during the greatest war in human history, the United States — supplying not just its own forces, but those of Britain and Russia — had a budget deficit two percentage points below the gap that now looms for fiscal 2011.
When a nation is at war against a deadly enemy, many people accept that the government will demand sacrifices on the part of citizens. During World War II, this included not just increased taxes, but rationing, price controls, conscription, and other limitations on individual freedom. As Nobel laureate economist F.A. Hayek wrote in The Road to Serfdom, “The only exception to the rule that a free society must not be subjected to a single purpose is war and other temporary disasters when subordination of almost everything to the immediate and pressing need is the price at which we preserve our freedom in the long run.”
Does the Obama administration live up to Hayek’s test? I believe not. The all-encompassing unity of national purpose of which Hayek spoke disappears under all but the gravest and most immediate peril.
Federal spending will reach an estimated 25.3 percent of gross domestic product in fiscal 2011, up almost five percentage points since 2008. To what end? Far from kick starting the economy, the government’s heavy reliance on deficit spending has only served to expand an already bloated public sector and to constrict the private sector. This is, indeed, the road to serfdom.
Andrew B. Wilson is senior editor at the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.
Longest-Serving LRA Commissioner Resigns
The head of the Saint Louis Land Reutilization Authority (LRA), which owns more than 9,300 vacant city parcels, has resigned. The resignation of LRA Commissioner Howard Hayes came two weeks after the Show-Me Institute began inquiring about Hayes’ appointment, and three weeks after the institute met with LRA staff members to discuss the city’s landholding policies. The LRA’s Board of Commissioners consists of three members, one each appointed by the city’s mayor, comptroller, and Board of Education.
Hayes was the longest-serving member of the LRA, having begun his service on Jan. 1, 1999, as the representative appointed by the Saint Louis Public Schools. During his tenure, the LRA’s property holdings rose from 8,729 parcels to more than 9,300 — an increase of nearly 8 percent.
The Show-Me Institute made an effort to contact each member of the LRA Commission prior to publication of the institute’s initial LRA findings. Indeed, the institute contacted Saint Louis Public Schools for comment about our research multiple times, on Jan. 31, Feb. 2, and Feb. 11, and met with LRA staff members in late January.
On Feb. 14, Hayes resigned his unpaid position as a member of the LRA Commission with the following statement:
This letter is to serve as my official resignation from the Land Reutilization Authority.
It has been a unique experience that will long be remembered.
A phone call today to Saint Louis Public Schools confirmed that the Special Administrative Board will meet Thursday night, March 10. The school district’s communications director promised me that he will ask the SAB whom it intends to nominate as Hayes’ replacement.
Our yearlong study into the practices of the LRA found that the agency rejects roughly one out of every two offers to purchase vacant city property.
The Show-Me Institute will be following the selection of a new commissioner closely, because this represents an opportunity for a fresh start at the LRA. Will a new commissioner choose to sell more property? Will a new commissioner change LRA policy? We’ll keep you posted.
David Stokes on the Radio in Springfield Wednesday Morning
David Stokes will be discussing his op-ed about nuclear power financing regulations on KWTO AM 560 with Dan Vaughn and Dan Calfano, at 9:00 on Wednesday morning. Please listen in if you are able.
David Stokes Guest Hosting on the Marconi Machine This Afternoon
Show-Me Institute Policy Analyst David Stokes will be guest hosting on the Dr. Gina Loudon Show this afternoon from 4:00 to 6:00, on KJSL 630 AM in St. Louis. Please listen in, if you can. Scheduled topics include nuclear power expansion, and housing prices and demography in St. Louis. Other potential topics include:
- The harms of occupational licensing
- Mardi Gras
- The earnings tax in St. Louis and Kansas City
- English punk rock of the 1970s with a focus on The Clash
- The Missouri minimum wage
- St. Louis University High School
- Public pension fund problems
- David’s adorable children
Eliminating Missouri’s Income Tax Is One Road to Greater Prosperity
A current legislative proposal seeks to eliminate Missouri’s income tax and replace it with a higher sales tax rate. It may not seem obvious to readers that one form of taxation is clearly better than the other, but economics teaches us a valuable lesson about how income taxes in particular slow down economic growth and prosperity.
There’s a pretty straightforward correlation between taxes and economic activity. When you tax something, you usually encourage people to do less of it. Income taxes induce people to be less productive, because the financial return that people gain from work and entrepreneurial activities, which are difficult, are reflected in other things that are less costly at the margin. In short, the other things they could do with their time become a little more valuable in comparison. Similarly, sales taxes induce less consumer spending, because people receive fewer goods and services for their dollar. Each type of tax makes people a little worse off, but in different ways.
So, why should we be particularly concerned about the income tax? For more than half a century, economists have understood that people will realize higher after-tax returns when income tax rates are lowered. In simple terms, this means that when income is taxed less, aggregate effort and employment increase, on average, leading to more money in people’s wallets. In addition to the total pie increasing, there is an incentive to invest more in the future, because the returns to entrepreneurial activity also increase when income tax rates are lowered. People’s savings flow to new investment, and economic growth rates rise as a result. When the economic pie gets bigger, people’s individual slices also grow. This has been a consistent finding in economics, both in theoretical models and real-world observations.
People benefit directly when their income is taxed less, but if Missouri eliminates its income tax, the government still needs to maintain a source of revenue. In this case, the proposed source for that revenue is a higher sales tax rate, with fewer tax exemptions. This has drawbacks, true enough. When people have to pay more for the goods and services they purchase, they generally choose to consume less. It’s no secret that people like to consume, so higher prices are a cost. It’s important to realize, however, that this decrease in consumption is only a short-term effect. Remember that the elimination of a state income tax allows people to take home, save, and invest more money — growing the economy. So, consumption spending benefits from the increase in take-home pay. Moreover, as the economy expands, consumption grows at a faster rate.
With respect to consumer spending, the increase in the sales tax rate and the broadening of the base will have its effects. Whatever the immediate costs, though, it is important to recognize that the growth rewards are permanent. This comparison of current costs to future rewards holds true for any number of investments — things like plant expansion, education, and kitchen remodels. In each case, there is an initial cost, and rational people can decide whether the rewards are worth that cost. But the two points must be considered together. If we focus only on the near-term costs, we miss the gains of faster growth unleashed by the change in the tax structure.
Another potential drawback is that retailers might relocate across the state border if Missouri implemented a higher sales tax rate. It is true that a few retailers might make this decision, but there is another half to this story. 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 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.
Other states have successfully implemented this revenue model. Our neighbor Tennessee, for one, has an economy that is outpacing Missouri’s growth. There’s more. From August 1998 to August 2008, the nine states without an income tax added more than 4 million jobs, a 16.3-percent increase that doubled the national job growth rate. Only one of those states failed to exceed the national job growth rate.
Some people may decide they do not want to give up some short-term consumption to achieve higher growth rates in the future, which is understandable. Ultimately, though, paying careful attention to the long-term effects of government policy helps to make the world a better place — not only for ourselves, but for our children. Eliminating Missouri’s income tax is one road to greater prosperity.
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.
Proposal to Get Missouri Moving – Full Interview
Upon the release of Jerome Day’s new study analyzing Missouri’s transportation options for the future, Show-Me Institute Communication Director Rick Edlund sat down with him to talk about some of his findings.
Missouri: A State of Uncertainty on Health Care Regulation
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
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.
