Helping the Poor by Denying Them Access to Money

Posted on by John Payne

In yet another case of good intentions gone bad, the bill Congress passed last year to reform the credit card industry is driving up the price of credit and eliminating many consumers from the credit card market altogether. Like millions of other Americans, I was just hit by a nearly $40 annual fee for a credit card I rarely use and have never missed a payment on, which is most likely attributable to the bill. At Reason, Katherine Mangu-Ward details some of the other damage the bill has inflicted so far:

Eight million Americans cut up their credit cards this year, according to new data out from credit bureau TransUnion. Some of those plastic deserters were folks who faced scary economic conditions and decided to voluntarily cut back on debt spending. But for others, it wasn’t a matter of choice.

Millions of customers found themselves unceremoniously ejected from the ranks of the card-worthy thanks to last year’s Credit Card Accountability, Responsibility, and Disclosure Act, or Credit CARD Act. The new rules were supposed to “protect American credit card holders” by stopping “unfair rate increases.” Instead, credit card companies prepared for their new straitened circumstances by booting customers who would no longer be profitable (read: poor people and other risky borrowers), and hiking interest rates for others. American Express even offered $300 bonuses to customers willing to pay off their cards and close their accounts—a deal designed to entice the kind of cash-strapped customers AmEx was soon to find less lucrative.

But as the new rules make it less appealing for credit card companies to offer their services to certain segments of the population, most of those people don’t revert to a cash-only state of nature. The appetite for credit doesn’t vanish when credit cards are harder to get. Instead, customers turn to options like installment plans, layaway, and payday lending for quick credit—and the fees they pay for those options are as high or higher than the credit card costs Congress and the White House found so objectionable. And in an economy that runs on plastic, debit cards replace credit cards for everyday purchases.

Congress has destroyed credit card access for many low income individuals, but many states have already eliminated second- and third-best options like payday loans, and there is pressure for Missouri or its localities to follow suit. For instance, in this editorial from the Springfield News-Leader, Pastor Roger Ray argues that Springfield should ban payday loans because “on a per capita basis, no state takes such reprehensible advantage of the desperate poor, fueling drug and alcohol addiction and gambling addiction with easy-to-get but hard-to-pay-back loans.” The rest of the editorial is packed with evidence-free assertions, overblown rhetoric, and enough fallacies that it would take a book to refute them all, so I will confine myself to the consequences that would follow from such a ban.

As I showed in my op-ed about this subject earlier this year, restricting payday loans leads to more bounced checks, complaints to the Federal Trade Commission about lenders and debt collectors, utility shutdowns, and higher rates of bankruptcy. Payday loans are far from the best form of credit, but, in some cases, they are the best available to people. If Pastor Ray wants to eliminate payday loans in his community, I would encourage him and his congregation to start a fund to lend to low-income individuals at lower interest rates (or for free). If enough people share his sentiment, the payday loan industry can be eliminated without the force of law because very few people will opt for a more expensive loan over a cheaper one.

However, if the city government eliminates the loans by law, debtors will be forced to turn to even worse alternatives. I’m relatively certain Ray believes that a ban on payday loans would improve the lot of the poor, but that is an empirical question that most studies of the issue have answered with a resounding “no.” So, in the famous words of Oliver Cromwell, “I beseech you, in the bowels of Christ, think it possible you may be mistaken.”

Eliminate, Reduce, Discount, or Cap? Considering the Future of Missouri’s Historic Tax Credit

Posted on by Thomas Duda

Missouri’s Tax Credit Review Commission, like the Bowles-Simpson National Commission on Fiscal Responsibility and Reform, is a far-from-perfect mechanism for devising sound public policy recommendations. After all, politics is ever-present in government commissions. That said, I could not be happier about reports that the Tax Credit Review Commission has suggested that Missouri’s Historic Preservation Tax Credit is in desperate need of improvement.

According to a Nov. 18, 2010, St. Louis Post-Dispatch article, “Historic tax credit could face big cut,” the Tax Credit Review Commission has proposed the following changes to the historic tax credit:

Using data from the Show-Me Living tax credit tool, we see that the state of Missouri expended $973 million on historic preservation from 2000 to the present, the highest expenditure for any tax credit program after the low-income housing tax credit. Historic preservation represents 28 percent of the $3.4 billion in total tax credit spending by the state during this period.

AllMoTC2000-Present
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Of this historic preservation spending, $530 million — or 54 percent of the state’s total expenditure under this program — went to projects located in the Fifth Senate District, which includes downtown St. Louis.

Since the year 2000, 1,734 projects received the state historic preservation tax credit. The median amount received per project was $78,400. Of these projects, 761 — or 44 percent — also received the federal historic preservation tax credit. For these projects, the median Missouri expenditure per project was $157,607. For projects receiving only the Missouri state historic preservation tax credit and no federal historic preservation tax credit, the median Missouri expenditure was $55,690.

Projects in the top 25 percent by cost accounted for $780 million of the $970 million spent by the state on historic preservation. The bottom 75 percent of projects received 20 percent of the funding.

mohptc per project
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Project Costs

A proposed cap of $50,000 per owner-occupied residence would impact fewer than 500 of the projects represented in the data above, because projects that receive the federal historic preservation tax credit are not owner-occupied.

The following chart considers the impact of a proposed $75 million annual cap on historic preservation spending:

Proposed Cap
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We see that for the years 2002 through 2007, the cap would have limited the amount of Missouri taxpayer money expended. Over time, we see that the cap could have reduced total Missouri spending by $220 million.

The Tax Credit Review Commission is right to draw attention to tax credit “stacking,” with its recommendation that the historic preservation tax credit should not be combined with the low-income housing tax credit for the same project.

Consider this: Missouri’s various tax credit programs, despite their many names, perform very similar activities. Low income housing tax credits reimburse project costs incurred by “housing professionals, such as architects, appraisers, attorneys, accountants, contractors and property managers.” Historic preservation tax credits reimburse “costs associated with work undertaken on the historic building, as well as architectural and engineering fees, legal expenses, development fees, and other construction-related costs.” In both programs, expenditures of taxpayer dollars accrue to the exact same activities and individuals. Thus, “stacking” of tax credits on a project may yield the holy grail of public subsidy: “zero dollars” in private equity development.

In such a scenario, the stacking of tax credits is likely “crowding out” private investment, while potentially distorting the stated function of the tax expenditures. (Is the “historic credit” building low-income housing, or is the “low-income credit” building historic?)

The Tax Credit Review Commission’s report is only a start. Missouri has much to debate.

To add my two cents, I think that the most efficient way to reduce state expenditures on historic preservation would be to discount the state’s spending on projects that also receive federal reimbursement for the same costs.

Continuing Mixed Messages on Targeted Tax Credits

Posted on by Christine Harbin

I’ve discussed previously that, although Gov. Jay Nixon likes to talk tough about tax credits, he frequently demonstrates support for these programs in his actions.

Over the holiday weekend, while the commission that he appointed was wrapping up its recommendations for targeted tax credit reform, the governor handed out some more. From an article in the Houston Herald:

Nixon was in Mountain Grove to announce Missouri has awarded $305,907 in Enhanced Enterprise Zone (EEZ) tax credits to 3G Processing, the company that will process food waste into animal feed. It is completely renovating a former steel plant and purchasing new equipment for its facility.

I happened to miss this because I was in Wisconsin for the weekend. Thankfully, though, a regular Show-Me Daily reader alerted me to the event by email.

This particular tax credit program has been shown to fail to deliver on promised results. In a report issued in September 2010, the Missouri state auditor studied 19 businesses authorized for Enterprise Zone Tax Credits (EZTC) and Enhanced Enterprise Zone Tax Credits (EEZTC), and found that the actual jobs created were 6.1 percent fewer than proposed in 2007, and actual investment was 29.5 percent less than proposed.

Despite the program’s lack of success in producing the desired outcome, the Tax Credit Review Commission recommended expansions — not limitations — to the Enhanced Enterprise Zone tax credit program in its final report to the governor. It recommends amending the program to include a discretionary option for up-front financing, and it also recommends expanding the definition of distressed communities to expand eligibility. Because this particular program is underperforming, expanding it will make Missourians worse off.

Well, That’s One Way to Increase Health Care Costs

Posted on by Audrey Spalding

On Tuesday, Gov. Jay Nixon announced his first priority for the coming legislative session: Requiring prescriptions for medicines that contain pseudoephedrine, a key ingredient used in meth production. If the governor’s recommendation is put into place, Missourians will no longer have relatively easy access to many cold medicines, including Sudafed.

Gosh, it was only a year ago when U.S. senators and representatives were debating provisions of a large-scale, mostly unread health care bill. One of the biggest issues at the time prompting the discussion of health care policy was the concern that U.S. health care costs are rapidly increasing, for both the government and the private sector.

Nixon’s proposal flies in the face of previous and current attempts to decrease health care costs. Requiring residents to see a doctor to obtain a prescription for, say, Sudafed vastly increases the cost for both individuals and health insurers.

For example, if I am sick tomorrow and need nasal decongestant, I will head to the nearest Walgreens and pick up the generic version of Sudafed for about $5. The entire process will take me less than 15 minutes. However, if I am sick in the future and the prescription requirement has been implemented, the additional cost to obtain medicine will include a visit to my doctor. The monetary cost to me could still be relatively low, if I have a low co-pay, but if I am uninsured, have a high co-pay, or a high-deductible health insurance policy, I may have to pay a great deal more. Meanwhile, my health insurance provider will pay whatever cost that I don’t, resulting in — all else being equal — higher health insurance premiums. All for the privilege of seeing a doctor. Because the state says so.

Now, I know that some, including the governor and Attorney General Chris Koster, will argue that these increased costs are worth it if meth-related accidents decrease. But this ignores that a number of other state laws have already been implemented specifically to eliminate meth production (and access to decongestant). The governor, in his press release, enumerates other restrictions already in place:

By law, pseudoephedrine must now be sold behind a pharmacy counter and buyers are limited to purchasing no more than 3.6 grams, or 120 standard tablets in a 24 hour period, and 9 grams, or 300 standard tablets, in a 30-day period. On Sept. 28, a new state rule took effect, giving authority to the Missouri Department of Health and Senior Services (DHSS) to work with law enforcement and pharmacies on a new database that automatically blocks over the limit sales of pseudoephedrine and allows law enforcement agencies to track pseudoephedrine purchases in real time.

So, Missouri government already limits the purchase of pseudoephedrine, restricts where it can be sold, and tracks those who purchase the drug. What else can the state do, short of making nasal decongestant illegal?

In fact, a good example of these policies at work can be found in Oregon, one of two states that have enacted prescription requirements for pseudoephedrine. According to Oregon’s Narcotics Enforcement Association, in late 2004, the state began requiring photo identification from purchasers of medicine containing pseudoephedrine, and the state required that those medicines be sold behind the counter. In 2005, the state tightened these restrictions, requiring the medicines to be sold behind pharmacy counters, and began tracking purchasers of the medicines. Those restrictions led to a dramatic decrease in the annual number of “meth lab incidents.”

In 2004, Oregon reported 448 meth lab incidents. In 2006, the count was down to 63.

But that wasn’t low enough for Oregon. In July 2006, a new rule was set: Medicines containing pseudoephedrine could only be purchased with a prescription. And that odious requirement, which almost certainly has pushed up health care costs in Oregon, appears to have resulted in the elimination of roughly 40 meth incidents per year (Oregon now has about 20 each year).

There are a few things I don’t know, but suspect may be at work. First, how do we know that Oregon’s policies have stamped out dangerous drug-related incidents? It may be that Oregon’s pseudoephedrine restrictions have merely encouraged meth producers to produce different illegal drugs instead. Furthermore, these numbers are for recent years. In the future, meth producers may figure out a way of acquiring pseudoephedrine that will bypass the restrictions.

All the while, more Oregonians have to go to the doctor in order to obtain cold medicine. Is the cost of their time and the resulting increase in health care costs worth it? I don’t think so.

Rapidly increasing health care costs are not a new problem. From our most recent three U.S. presidents:

Former President Bill Clinton:

Small businesses will continue to face skyrocketing premiums and a full third of small businesses now covering their employees say they will be forced to drop their insurance. Large corporations will bear bigger disadvantages in global competition, and health care costs will devour more and more and more of our budget.

Former President George W. Bush:

We share a common goal: making health care more affordable and accessible for all Americans. The best way to achieve that goal is by expanding consumer choice, not government control.

President Barack Obama:

Then there’s the problem of rising cost. We spend one and a half times more per person on health care than any other country, but we aren’t any healthier for it. This is one of the reasons that insurance premiums have gone up three times faster than wages. It’s why so many employers — especially small businesses — are forcing their employees to pay more for insurance, or are dropping their coverage entirely.

Regulations and restrictions like the prescription requirement proposed are certainly part of the health care cost problem. I hope Missouri’s governor will realize that, and withdraw his proposal.

Letting the Federal Bush Tax Cuts Expire May Have Negative Revenue Consequences in Missouri

Posted on by Christine Harbin

When I was driving into work yesterday, I heard a story on NPR reporting that the decision of whether to extend the Bush tax cuts or let them expire is a significant topic of discussion in Washington.

In an article on the Missouri Watchdog, Brian Hook links to a new study from Tax Foundation. It concludes that letting the Bush tax cuts expire would negatively affect revenues for states that allow residents to deduct the amount that they pay in federal income taxes — which includes Missouri. This is because if the tax cuts expire, a high-earning individual living in Missouri would pay more in federal taxes. He or she could therefore deduct more from state income taxes, and Missouri would receive less revenue.

I want to highlight my statements in the article regarding the marginal effects of this policy in Missouri, because it’s a concept fit for Show-Me Daily. From the article:

If the tax cuts are allowed to expire, taxpayers in Missouri will experience higher tax rates, said Christine Harbin, an analyst with the Show-Me Institute, a free market think tank. The top marginal effective tax rates on income would increase to 46.69 percent under the Democrat’s plan, or 41.13 percent under the Republican’s plan.

“Because they will experience reductions in their take-home income, it’s likely that fewer individuals and businesses will decide to come to Missouri to conduct business,” Harbin told Missouri Watchdog.

“People tend to think on the margin, and a marginal number of individuals and businesses will elect to go to other states where the cost of doing business is lower. For those individuals and businesses that do remain in Missouri, this reduction in net income will mean that they will have less money to save or spend.”

The tax policy will also likely have negative consequences for the state budget as well, Harbin said.

“A reduction in general revenue collections will mean that the state will have to raise tax rates further, cut expenditures or borrow more to cover the shortfall,” she said, adding changes in tax policy could further discourage individuals and companies from remaining in Missouri or relocating to the state.

It’s additionally notable that the expiration would negatively affect all taxpayers, not just those in the highest marginal income bracket, because the Bush tax cuts reduced marginal income tax rates for all earners. The Bush tax cuts introduced a new 10-percent bracket; previous to this, the lowest rate was 15 percent. If the Bush tax cuts expire, low- and middle-income earners would also experience a tax increase.

I hope that this reduction in state tax revenues doesn’t lead to the unfortunate consequence of eliminating federal deductibility in Missouri. Contributors to Show-Me Daily have discussed the negative consequences of income taxation before.

If the tax cuts were extended, individuals living in Missouri would be better off because they could keep a greater share of their income, and the state government in Missouri wouldn’t experience a consequent reduction of revenue.

Private Water Company in the News

Posted on by David Stokes

A small, private water company in Southwest Missouri is in the news because one of its pumps failed a few weeks ago. The Joplin Globe has the story (link via Combest). A key pump failed, the company was unable to fix the problem immediately, and for a few days the town — and the fire department — didn’t have a water supply. I did not write this post intending to discuss whether the Public Service Commission (PSC) is correct in its allegations against the company, or whether the company’s defense is true. It’s not that the allegations aren’t serious or important, just that I have no idea who is correct.

Rather, my purpose is to show how the system works with private companies. Private utilities in Missouri are closely regulated by a variety of actors. Water utilities report to the PSC, the Missouri Department of Natural Resources, and local county health departments. (The bulk of the regulations are at the state level — and this does not include the Environmental Protection Agency (EPA), because I believe state agencies enforce EPA guidelines.)

I am not automatically opposed to every aspect of the regulated utility system we use in Missouri. Technological improvements have demonstrated the absurdity of treating telephones and cable television like utilities and/or monopolies, and the legislative environment has properly adapted. I can at least understand the historic purpose behind telephones being regulated as utilities. Treating cable as a utility, though, was always idiotic, and often just a device for corruption. I believe electricity will eventually (in the long run) be deregulated as a utility, too.

As for water and natural gas, infrastructure issues will make it more difficult to move away from monopoly. They may be the best examples of natural monopoly, because the up-front investment costs alone make competition unprofitable. As David Henderson writes:

Economists tend to oppose regulating entry. The reason is as follows: If the industry really is a natural monopoly, then preventing new competitors from entering is unnecessary because no competitor would want to enter anyway. If, on the other hand, the industry is not a natural monopoly, then preventing competition is undesirable. Either way, preventing entry does not make sense.

My paper on privatizing the St. Louis water division dicusses one way to bring competition to the water industry on p. 17. Absent that price competition, I understand the reasons for some types of price regulations.

Back to the original subject. The PSC moved pretty quickly in addressing this potential issue. In fairness, the private company states that it attempted to move quickly, but could not move quickly enough. (The issue here could well be one of utility size, rather than a question of public vs. private.) I hope people don’t read a story like this and think the problem lies with private utilities. The problem in this case has been addressed. Fines may be imposed after the full details emerge. If there was a company failure, the company will be held accountable — the key word here being “if.” Private water, like other private utilities, works just fine under our system in Missouri.

Education Panel Tonight!

Posted on by John Payne

I will be part of a panel discussion of education at Washington University in Saint Louis tonight, from 7:30 to 8:30. The event will be held at the Danforth University Center, in Room 276 at the top of the main staircase. Panelists will also include Robbyn Wahby, Mayor Francis Slay’s education adviser, Terry Harris, director of equity and diversity for the Rockwood School District, and Dr. Janet Duckham, an English teacher at Ladue High School.

The event is open to the public, so come out and join the conversation.

Don’t Hate the Players, Hate the Game

Posted on by Audrey Spalding

The Post-Dispatch has an excellent article that illustrates one reason why government tax incentives for private development almost always fall short. To summarize: Government officials usually fail to make sure that private companies deliver on the promises they make in exchange for taxpayer dollars.

In this case, the city of Saint Louis entered into an agreement with the Cardinals baseball team about eight years ago, when the team decided to build a new stadium. In exchange for tax incentives from the city worth $145 million, the Cardinals agreed to a few obligations, including at least 100,000 free tickets and 486,000 discounted tickets each year. And, if the owners sold the team, the agreement specified that the city would receive a portion of the sales profit.

It appears that city officials did not even attempt to make sure that the team upheld its side of the bargain.

From the article:

The team’s 2002 agreement with the city did not require proof that the team was giving away 100,000 tickets a year, or making 486,000 inexpensive seats available to the public, or giving $100,000 to city recreation programs.

[City officials] said they never asked the Cardinals for documentation, until the Post-Dispatch called recently.

Fortunately, it seems that the team had worked to meet most of its contractual obligations. After the Post-Dispatch inquiry, the team sent the newspaper a spreadsheet showing that it had exceeded the benchmarks.

However, there is some dispute about the profit-sharing clause. In January, as reporter David Hunn recounts, one of the team’s owners sold 13 percent of the team. The Cardinals’ attorney said that the owner did not make a profit on the sale, meaning that no money is owed to the city.

Of course, no city official has bothered to investigate the matter. As Hunn writes, “They trust the Cardinals.”

If city officials aren’t bothering to monitor this agreement, what else aren’t they checking up on? There are certainly many tax incentive deals in both Saint Louis and elsewhere in the state. Governments hand out millions upon millions of targeted tax incentives all the time.

Not only are those handouts bad policy from an economic standpoint, there is the possibility, as in Saint Louis city, that government officials won’t even bother to try to make sure that tax incentive agreements are followed. Not that you needed another one, but this is one more reason we should let free competition, not government favoritism, determine profits.

P.S. — At least Saint Louis isn’t making debt payments on a non-existent stadium.

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