Policymakers in Missouri Have a Lot to Learn From Taiwan

Posted on by Christine Harbin

[Note: This blog entry was written on Friday. The governor’s trip to Taiwan has since been canceled.]

Later this month, Gov. Jay Nixon will travel to Taiwan and South Korea in order to lobby to them to buy Missouri agricultural exports. Previously, I discussed how this would lead to the subsidization of foreign consumers by Missouri taxpayers. From an article in the Kansas City Star:

On Wednesday, Nixon announced that a trade mission planned for Dec. 10-16 was expected to produce a letter of intent with Taiwanese businesses that will agree to buy Missouri corn, soybeans and other products during the next five years.

At a rate of about $120 million of exports a year, the new agreement would outpace the $69.1 million worth of exports Missouri sent to Taiwan in 2009.

The governor is traveling to Taiwan with the intention that it will influence their government’s public policy decisions. My fingers are crossed that the direction of this knowledge transfer will be in the reverse. Policymakers in Missouri can learn much from Taiwan.

Hopefully, this trip will serve as an opportunity to learn that Taiwan has developed rapidly and meets the needs of its citizens well because it enforces public policies that embrace the free market. If the state government in Missouri were to remove itself from arbitrarily picking winners and losers in the market, the economy would achieve a greater rate of growth. As I have commented before, centrally planned economies have not worked historically, and there is little reason to believe that they will work any differently in Missouri.

I encourage the governor to watch Free to Choose, a multipart PBS television series by Milton and Rose Friedman from the early 1980s that communicates how the economy benefits from free-market principles. Perhaps it would make for good viewing on the flight to Taiwan. (And he might be further interested to know that Arnold Schwarzenegger, a governor from another mother, provides a commentary to the updated 1990 version of the series.)

The first episode, in which Dr. Friedman visits Hong Kong, is particularly relevant to this trip to Taiwan. Friedman explains that Hong Kong has experienced success because it has established basic economic policies that are rooted in free market principles — principles that would benefit Missouri as well. From Friedman’s narrative:

This thriving, bustling, dynamic city, has been made possible by the free market — indeed the freest market in the world. The free market enables people to go into any industry that they want; to trade with whomever they want; to buy in the cheapest market around the world; to sell in the dearest around the world. But most important of all, if they fail, they bear the cost. If they succeed, they get the benefit and it’s that atmosphere of incentive that has induced them to work, to adjust, to save, to produce a miracle. This miracle hasn’t been achieved by government action — by someone sitting in one of those tall buildings and telling people what to do. It’s been achieved by allowing the market to work. Walk down any street in Hong Kong and you will see the impersonal forces of the market in operation.

By increasing American imports to countries like Taiwan, China, and India, the rising living standards in those regions will continue, and this will lead to the demand for more American goods. This change does not require the lead of the government, however. It happens spontaneously and incrementally in unrestricted markets. Missouri could achieve a higher annual rate of growth if it stopped subsidizing and protecting favored industries and instead let the free market work.

Governor’s New Trade Policy Will Lead to Subsidization of Foreign Consumption

Posted on by Christine Harbin

[Note: This blog entry was written on Friday. The governor’s trip to Taiwan has since been canceled.]

Gov. Jay Nixon is travelling to Taiwan later this month, and a gaggle of subsidized special interests is tagging along. From a news release from the governor’s office:

Joining Gov. Nixon on the trade mission will be First Lady Georganne Nixon; David Kerr, director of the Missouri Department of Economic Development; Jon Hagler, director of the Missouri Department of Agriculture; and senior leaders from the Missouri Chamber of Commerce and Industry; Missouri Soybean Association; Missouri Corn Growers Association; Missouri Rice Council; Missouri Energy Development Association; Missouri Biotechnology Association; Boeing Corporation; Pfizer; Advantage Capital Partners; and other major industry associations and businesses.

All else being equal, increasing the exportation of subsidized Missouri goods will have the negative effect of forcing Missouri taxpayers to subsidize the consumption of their trading partners.

How does this work? Let’s say that the price of a particular good on a store shelf is $5. Let’s also say that that the production of that good received $2 in government subsidy. (The production of agricultural and technological products is subsidized at the federal, state, and local levels.) That means that the total price of the product to the domestic consumer is $7. When the foreign consumer purchases this same good, he pays the $5, but because he does not contribute tax monies to subsidize the production of the good, domestic taxpayers still pay the $2 in subsidy.

Missourians would be able to achieve higher overall levels of productivity and consumption if they focused on profitable non-subsidized economic activity and then engaged in voluntary trade with others. Eliminating agricultural subsidies would have positive consequences because taxpayers would be able to keep more of their earnings. This is because they would not be forced to continue to prop up agricultural industries so that they produce at a level that’s higher than optimal, nor would they be forced to subsidize the consumption of foreign consumers.

If public officials are serious about promoting economic growth in Missouri, they should avoid public policies that remove wealth from the regional economy.

Fake Markets in Everything

Posted on by Audrey Spalding

We already know that tax credits and other targeted tax incentives encourage all sorts of strange economic behavior. In recent cases, easily accessible government money has motivated individuals to fill out onerous forms, steadily increase the weight of their cattle, buy yachts in certain states, continue to produce cars in Michigan, and even film movies in Missouri.

But did you know that there is an entire journal devoted to explaining what tax credits are and how to get them? And, yes, you can subscribe to the print version.

The existence of this journal makes sense. After all, if governments are giving away relatively easy-to-obtain public money, we would expect businesses to crop up in order to make a profit by helping others access taxpayer money. This journal, and all the other companies and websites dedicated to encouraging others to apply for public tax incentives are illustrative of the strange activity that is a byproduct of government-manufactured incentives.

(special thanks to Christine Harbin for suggesting that I shamelessly copy Tyler Cowen.)

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
Click to enlarge

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
Click to enlarge

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
Click to enlarge

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.

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