BILLIONS: Bad News for Michigan, Great News for Missouri

Posted on by Audrey Spalding

As a former Michigan resident and current Missourian, I am both dismayed and elated by the latest news from the Great Lakes State. Yesterday, Michigan’s governor announced that the state had awarded more than $2 billion (yes, billion) in tax credits. The bulk of these tax credits will go to car manufacturers: Ford Motor Company is set to receive $909 million from the state, while Chrysler, a company that has already received a great deal of public subsidy, is set to receive an additional $1.3 billion.

As has been discussed on this blog before, tax credits are not free money. A tax credit is a dollar-for-dollar reduction in an individual’s or company’s tax bill. In short, if a state awards you a $1 tax credit, that credit reduces your tax bill by $1, and the state’s revenue by $1, all else being equal. Looking at yesterday’s tax credit bonanza, Michigan has promised away more $2 billion of its future revenue. This strikes me as less than prudent, especially because the AP has recently reported that Michigan is already facing a budget deficit of more than $1 billion. It will also have negative fiscal consequences for the state’s other residents, because when targeted industries are exempted from paying taxes, the marginal tax rate for everybody else will rise if government spending doesn’t decrease by the amount of the credit issued.

This is terrible news for current Michigan residents. The governor justifies the $2 billion in credits by promising, in her press release, a great deal of new economic activity that will be spurred by the public subsidy. Michigan officials anticipate more than 6,000 new jobs, and a retention of more than 216,000 jobs.

They should know better than to make such lofty promises of job creation. The Mackinac Center for Public Policy, a nonpartisan research and educational institute, showed in an extensive study that the award of tax credits rarely creates the economic activity it promises. According to the Mackinac study of tax credits awarded in Michigan during a 10-year period, 127 projects were approved (just like the projects announced by the governor’s office yesterday), but only 10 projects had created the number of jobs promised. Michigan’s tax credit program success rate is a minuscule 7.87 percent.

Michigan’s tax credit failure rate fits with Show-Me Institute Research Analyst Christine Harbin’s recent observation, in her testimony before the Missouri Tax Credit Review Commission, that when it comes to subsidizing economic activity, governments frequently end up supporting industries in decline:

The government has no special ability to predict which businesses and industries will succeed. Yet tax credits are an attempt to identify and subsidize future successes. Unfortunately, in the game of picking winners and losers, the government almost always picks losers. This is because tax credits are an attempt to protect companies and industries that the market has already rejected to some degree. If they were successful and viable on their own, these companies and industries wouldn’t need to seek the favor of the government.

In the context of Harbin’s analysis, the following statement from the press release is downright depressing: The tax credits awarded to Chrysler and Ford will “[guarantee] the auto industry’s long-term future in Michigan.”

But there is good news for Missouri residents. The Michigan release specifically notes that two of the companies awarded tax credits were considering locating in Missouri.

Michigan awarded one company $1.5 million in order to “convince the company to expand in Michigan over competing sites in Missouri and Illinois.” Michigan awarded another company $1.1 million “to expand in Michigan over a competing site in Missouri.”

If we consider only the promised economic activity, it may appear that Missouri has lost out on some opportunities for job creation. However, now that these companies will locate in Michigan and receive subsidies from Michigan taxpayers, Missouri residents will not have to pay the millions it would have taken to persuade the companies to move here (assuming the state doesn’t decrease spending elsewhere in its budget to make up for the resulting revenue loss).

Furthermore, we have to keep the tax credit failure rate in mind. Tax credit awards, according to the Mackinac study, rarely result in the promised economic activity. More likely, Missouri would end up with the cost of the tax credit, but without promised resulting job creation and growth.

I am more excited and optimistic about the economic growth that has, and will, come about in Missouri as a result of widespread individual enterprise.

P.S. — I hope that none of these Michigan tax credits will be awarded to convicted embezzlers, although that has happened in the past.

Healthier Smiles, One Dental Therapist at a Time

Posted on by Caitlin Hartsell

Good news for deregulation!

The W.K. Kellogg Institute released a study yesterday evaluating the success of the Alaskan dental therapist program over the past two years. The results reflected both high patient satisfaction and quality of care. Dental therapists — a topic we’ve discussed on Show-Me Daily before — are mid-level dental professionals that can provide basic and preventive oral health care at a lower cost than traditional dentists. Alaska’s recent results add to a growing body of research showing that deregulation in dental care can improve health by bringing quality care to underserved areas.

For Missouri, this is just further proof that loosening the restrictions on dental practitioners could be beneficial. Of Missouri’s 114 counties, 50 have a shortage of dental professionals, a problem that is most profound in rural areas. This has led to fewer Missourians receiving dental care: Missouri was ranked 47th in the nation for the percentage of its adult population who visited the dentist during the past year.

While rural Alaska reaps the benefits of this dental deregulation, Missouri still only allows dentists certified by the American Dental Association to perform even basic dental care. With the benefits of mid-level practitioners becoming increasingly apparent, Missourians stand to gain from a reconsideration of state dental regulations.

Judge Not, Lest Ye … Oh, Just Go Ahead

Posted on by Mary Chism

For many of us, election time can be overwhelming: We understand that we have the opportunity to create significant change, both for ourselves and for the people around us, but we also know that voting for the wrong candidate can perpetuate a bad situation, or make matters worse. Few voters have adequate time or inclination to research the views, qualifications, and past behavior of election candidates, while television smear campaigns just make viewers tired of all the mudslinging.

In a letter to the editor of the Sedalia Democrat, John S. Johnston, president of the Missouri Bar, offers voters a tool to make an informed decision regarding the selection and retention of nonpartisan judges. The Missouri Bar website features a section called “Judging the Judges,” which presents the findings of Judicial Performance Evaluation Committees — nonpartisan committees made up of both lawyers and non-lawyers. According to Johnston:

The committees have a completely non-partisan agenda: to provide voters with the unbiased information they need to cast an informed ballot.

The committees have published their evaluations along with surveys of lawyers’ ratings, jurors’ ratings and samples of appellate judge’s written opinions.

You can investigate your local judges by checking out “Judging the Judges” and clicking on the area where you live.

In addition to selecting specific judges, citizens also have the power to vote to retain or kick out judges after they have served for one year, thanks to the Missouri Plan, adopted in 1940. The Springfield News-Leader also explains how, since 2008, residents of Greene County try to keep politics out of judicial processes, by voting each term whether to retain or get rid of each judge, based on a system of merits.

Online tools like “Judging the Judges” are great, because they educate voters about judicial candidates, and also because they present new ways for the populace to become involved in the process, helping put power back into the hands of the voters.

Talkin’ Hotel Taxes in St. Louis With McGraw Tomorrow Morning

Posted on by David Stokes

I will be appearing on the McGraw Milhaven show on The Big 550, KTRS radio, tomorrow morning at 7:50. The topic will be the proposed local hotel taxes in Clayton, Richmond Heights, and St. Peters (though focused mostly on the first two). Shockingly enough, I think all of these proposals are bad ideas. For Clayton and Richmond Heights, the current, pooled hotel tax system of St. Louis County works just fine. You can read about it in detail in this op-ed that the St. Louis Business Journal published last Friday. Please listen in if you can!

The Wall Street Journal Weighs In on Unicameral Legislatures

Posted on by David Stokes

Yesterday’s Wall Street Journal had an article about something that we here at the Show-Me Institute have discussed previously: the idea of unicameral state legislatures. I mentioned this issue briefly in my “Government In Missouri” opus, and Josh wrote a blog post on the subject last year that lead to one of our better comment-section discussions.

Josh’s blog post adds important information that today’s WSJ article is missing. Many state legislatures used to be structured like the federal model, with a House based on population and a Senate based on the number of officials per county, or something like that. After the Supreme Court ruled that all public bodies had to be based on population (except the U.S. Senate), the purpose of having separate bodies declined.

So, how do you reconcile these potentially conflicting goals (which I assume many of you visiting this blog share, at least to some degree)?

  1. Greater efficiency in government, as measured by lower costs rather than by greater ease of passing laws.

  2. The desire for a wide range of viewpoints in government, i.e., enough elected officials that various viewpoints can be included. (Think Ron Paul and Nancy Pelosi both serving in the same House.)

  3. The knowledge that legislative bodies with more members spend more money. This is the “Law of 1/N,” a generally accepted rule of public choice economics.

  4. The desire to have a system in which it is difficult, not easy, to pass new laws or spend money.

I think points three and four are the real conflicts. I can imagine moving to a unicameral Missouri General Assembly, which would save significant operating costs and would allow for enough members to represent a variety of views. But, once established, it would need to have strict rules that would restrict the incentives to spend more money, but make it easier for the leadership to pass the laws they want (i.e., no filibuster); or, you could do without those rules and empower individual members in a way that would make passing new laws harder but also increase logrolling opportunities and incentives to spend more. (Passing laws and spending money don’t necessarily go hand in hand. Many laws that infringe on our freedoms don’t cost much, and most of the spending occurs within the budget process that every elected body will have.)

I think you can also achieve these goals if you are willing to sacrifice the second goal — a variety of viewpoints. A very small unicameral legislature with empowered individual officials could reduce the logrolling incentives to spend, and make it hard to pass new laws, but this situation would sacrifice the presence of more divergent views in favor of very large districts. However, if it had a very short session length (meeting for one month a year, say, or even just every other year), you might be able to accomplish these goals and also have a larger number of representatives. As with the number of members, time is an important constraint.

Most of the papers that support the statements above are not available for free online. You can read about them, though, and see the citations in sections three and four of my policy study.

Private Investigators Can Go to Jail if They Don’t Get Their Licenses

Posted on by David Stokes

Missourinet has the scoop on the recently installed requirements for licensure of private investigators in Missouri. I remember when the efforts to license that profession got going. I owned a firm that did a lot of process serving in the 1990s, and I attended some industry meetings at which the subject of licensing was discussed. (To be clear, I was never a private eye — not that there is anything wrong with being a private eye.)

All the standard justifications for licensing were used: Higher standards would be good for the industry, would lead to increased public respect, would bring more profits for current practitioners, etc. In most cases, for most industries, those reasons are totally bogus. In the case of private investigators, however, I can see some merit in licensure.

The lifeline of the private investigation industry is access to information. In the Internet age, information is all around us, but some of it is still restricted. Consider driver licensing or credit bureau information. Both of them are imperative to the investigation industry; they contain obvious key information needed for finding people, etc. If you allow some people access to that information, I can understand that you would want to know who has access to it and who is using it, in case they start to abuse it. It is really just a modern technology version of the logic Milton Friedman used to support registration of taxicabs.

I can understand the arguments some readers might make, that private investigators should not be able to access information like that in the first place, license or no license. So why not just prevent access altogether and get rid of licensing rules at the same time? I can agree with that in part, but I don’t like the implicit assumptions that only agents of the government (including lawyers, as members of the bar) get to have access to certain information. Obviously, you can’t be giving out that information to everyone, either, so I admit I don’t quite know where to draw the line.

In reading the rules of private investigator licensing in Missouri, they appear to have left out the worst excesses of licensing. They don’t appear to have placed any limit on the number of licenses, or instituted any extreme education or experience requirements. However, that same lack of explicit guidelines might allow the board too much discretion in rapidly approving ex–law enforcement officials (who, for obvious reasons, make up the bulk of the labor pool in this field), while rejecting applicants without law enforcement backgrounds. I hope that does not happen. Those are decisions that clients and markets should make.

The fees for the application process are high, which is probably intentional. Not high as in law school high, but still high. Often, licensing rules are designed to help the current practitioners by reducing part-time competition. A $500 application fee might not deter anyone who wants to do the job full-time, as a career, but it may well be high enough to prevent someone from applying who is looking to do it part-time. The fact that the fee is only $50 if you want to be an employee of an existing agency tells me the same thing, and I don’t think it is proper for government to be making those decisions.

P.S. — Thanks to Combest for the story link, and our thoughts go out to John on the recent passing of his father.

I Wish They Paid Me for Grades Here

Posted on by Abhi Sivasailam

A recent working paper from the National Bureau for Economic Research adds to the evidence that “performance pay” for students produces gains. From the abstract:

Policymakers and academics are increasingly interested in applying financial incentives to individuals in education. This paper presents evidence from a pay for performance program taking place in Coshocton, Ohio. Since 2004, Coshocton has provided cash payments to students in grades three through six for successful completion of their standardized testing. Coshocton determined eligibility for the program using randomization, and using this randomization, this paper identifies the effects of the program on students’ academic behavior. We find that math scores improved about 0.15 standard deviations but that reading, social science, and science test scores did not improve.

The Coshocton program is funded with money contributed by a local businessman.

Although 0.15 standard deviations may seem small, it’s not bad compared to other educational interventions. In terms of improvement per dollar spent, this program seems more efficient than other more popular interventions, like lowering class sizes.

Proposals for New Hotel Taxes in Suburban Saint Louis Misguided

Posted on by David Stokes

Unlike most other taxes within Saint Louis County, the hotel tax is nearly always the same wherever you stay. That’s because hotel taxes in the county have, for 20 years, operated through a countywide pool that supports the regional work of the St. Louis Convention and Visitors Bureau, funds major county parks, and pays off the bonds used to finance the Edward Jones Dome.

The pooled nature of the tax also reduces the incentive for city planners to attempt to use tax dollars to lure hotels to their municipality. Outside of a pooled tax system, cities will frequently promise away property taxes, which in large part fund other government agencies, in exchange for the hope of being able to keep the bulk of the resulting increased sales tax revenue. A pooled system greatly reduces this practice, because cities share tax revenues. This practice makes everyone better off, because it allows market forces to dictate where hotels are located, rather than leaving it to government planners.

Two cities located in Saint Louis County are now proposing local hotel taxes. Voters in Clayton and Richmond Heights will decide on Nov. 2 if they want to institute the tax. Voters prefer taxing other people instead of themselves, so I will be pleasantly shocked if the proposals fail. But just because voters will likely approve the tax does not make it sound policy. Hotels already pay substantial commercial property taxes and business license fees to the cities in which they are located. The guests themselves also pay the standard city sales tax on their rooms. These taxes already account for the public services used by hotel guests during their stay.

The hotel tax system is similar to another successful pooled tax for many cities in Saint Louis County — the sales tax pool. Cities within this pool have seen less usage of tax increment financing (TIF) and other forms of incentives. Indeed, all the prominent cases of eminent domain abuse in the county have occurred in cities that are outside of the sales tax pool, such as Sunset Hills and Rock Hill.

If every city in the county is authorized to adopt its own hotel tax, you can rest assured that some cities will offer property tax abatements and other incentives to persuade hotels to move there. We have already seen that scenario with the retail industry in the county. The end result does nothing to increase total economic growth for our region. Instead, it only benefits select cities at the expense of school districts and other taxing bodies.

The structure of the tourism tax pool benefits our entire area. Most importantly, it allows hotel owners to invest in their businesses without fearing they will be put at a tax disadvantage to competitors in neighboring cities. This is no theoretical risk: One project in Richmond Heights has already been put on hold because of the potential tax increase. The pooled tax approach also allows for coordination in advertising our city to potential conventions and tourists. This author does not necessarily like using tax dollars to run ads in Des Moines urging people to come to Saint Louis, but it would be far worse if those ads said, “The 12 residents of Champ, Mo., encourage you to visit their village.”

If cities want to grow business within their communities, they should focus on keeping taxes on businesses low, and not imposing additional taxes on select industries — as the cities of Clayton and Richmond Heights currently propose — or on business in general, as Clayton is also doing with its commercial property tax rate increase. Pooling taxes works for the cities in the sales tax pool, and it has been working for the hotel and tourism industry in Saint Louis. Voters in Richmond Heights and Clayton should consider the costs associated with these hotel tax increases, and the state legislature should consider rescinding the ability of cities in Saint Louis County to enact their own hotel taxes. The county’s existing hotel and tourism taxes are more than sufficient to accomplish their purposes: to advance both the city and county of Saint Louis as a whole, not 92 separate municipalities.

David Stokes is a policy analyst for the Show-Me Institute, a Missouri-based think tank.

 

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