Rein in Tax Credits, Widen the Tax Base

Posted on by Christine Harbin

According to an AP article dated yesterday:

Education officials from across Missouri joined Gov. Jay Nixon’s call to rein in tax credits, asserting Wednesday that escalating incentives are diverting money from financially strapped schools and colleges. […]

Nixon, a Democrat who last year backed an expansion of state tax credits for businesses, now says tax incentives have grown so greatly that they are threatening other essential government functions. About $585 million of tax credits were redeemed last year — up 86 percent over the past decade, he said.

I realize that education officials are self-interested, but I agree with their assertion here that Missouri’s tax credit programs are funded at the expense of other programs. When tax revenue is spent on subsidizing select businesses and industries, taxpayers cannot spend that money elsewhere, such as on education; they face an opportunity cost that at least equals the amount of the tax credit.

Additionally, the state shouldn’t carve out sections of its tax base to reduce tax burdens for a select few, because those who remain in the tax base have to pick up the difference. By having a broad tax base, Missouri can assess a tax rate that’s lower and more equal for all taxpayers. This low-tax environment would attract new businesses and individuals to Missouri better than any selective tax credit program could. This would result in a steady stream of more reliable tax revenues, so government in Missouri would not have to struggle to pay for itself.

On Education Consolidation

Posted on by John Payne

The Missouri Senate has given initial approval for a proposal by Gov. Jay Nixon to consolidate the Department of Elementary and Secondary Education (DESE) and the Department of Higher Education. Approaching the issue purely as a matter of spending, this looks like an obvious move. With one department, some of the redundant agencies and services can be rolled into one capable of doing the same work for less money. However, the effect that such a change would have on educational outcomes is far more ambiguous.

Once they are a single department, the management styles of the old departments will influence each other. No doubt the influence will flow in both directions, but ultimately either higher education will end up looking more like elementary and secondary education, even if only on the margin, or vice versa. I hope it will be the latter, because higher education gives far more autonomy to individual schools, instructors, and ultimately students, which I believe is one of the reasons that — for all its problems — the American higher education system remains highly touted.

That said, I fear DESE’s influence will win out. It is the far larger department, with a 2010 appropriation of more than $5.4 billion compared to Higher Education’s $1.3 billion. This will probably mean far more micromanagement of college curricula and a greater emphasis on pedagogy compared to content. That’s simply how DESE officials think; they create a statewide standard to make classes nice and formulaic. If this plan is implemented, I fully expect that within a decade there will be state-mandated standards for common courses (e.g., western civilization, macroeconomics, chemistry, etc.) similar to the Class Level Expectations (CLEs) in high school classes. Missouri will have a “seamless” education system, as one legislator describes it, but at the expense of the independence of our public universities.

Missouri’s Green Tax Rebates a Wasteful Use of State Funds

Posted on by Christine Harbin

On April 19, Missouri began a weeklong program of providing $5.6 million in rebates and eliminating the state sales tax on Energy Star appliances. This is a wasteful use of state funds that also entails significant unintended consequences.

Instead of creating new economic activity, programs that offer rebates on specific products like appliances and cars merely distort the market. Such transactions would occur anyway, in the future, independent of a rebate in the present, because consumers naturally upgrade to new machines as their older models begin to wear down or break. Additionally, the promise of increased energy savings is already a significant incentive.

The intended environmental impact of such rebate programs is negated by the way they are usually constructed. The subsidy creates an incentive to destroy operational appliances and build new machines to replace them. This destroys wealth in the Missouri economy, because the resources used to create these new appliances could have been used elsewhere. Acquiring a more fuel-efficient new appliance could also encourage the purchaser to wash dishes and laundry more frequently than before, which means that the overall decrease in energy usage may be much smaller than anticipated — or could even increase. If usage does drop as a result of sanctioned purchases, however, the reduction in overall Missouri energy usage will still be minimal at best unless every Missouri resident purchases a new appliance during the week that rebates are offered.

As a negative unintended consequence of the program, Missouri will lose a significant amount of tax revenue, independent of and in addition to the $5.6 million rebate. First, the state loses sales tax revenue from new appliance purchases. Then, if households do use less energy, the state will lose out on utility tax revenue in the future.

Programs like Missouri’s green tax holiday illustrate the parable of the broken window by economist Frédéric Bastiat. When the government spends money on rebates, it cannot devote this money to other programs that could otherwise benefit, or return it to taxpayers who would spend it in any number of other ways. When the government uses taxpayer money to stimulate one part of the economy, it comes at the expense of those other sectors in the economy.

The tax holiday is undesirable on a fundamental level, as well. It reinforces the flawed idea that individuals should look to the government for approval of which products and services to buy and how to behave. By eliminating state sales taxes on only those appliances that have the Energy Star designation — the Environmental Protection Agency’s stamp of approval — the government favors certain products and behaviors over others. When seeking direction on their buying behavior, consumers would be better off if they consulted third-party sources, such as Consumer Reports, that aren’t as swayed by special interests.

The green sales tax holiday is a wasteful and inefficient program, and Missourians would be better off if the $5.6 million in rebates were either spent in a useful way or returned to taxpayers.

Christine Harbin is a research analyst with the Show-Me Institute, a Missouri-based think tank.

 

I Leap Head First Into Cosmetology School Licensing, and Come Out With a Fabulous Haircut

Posted on by David Stokes

Yesterday, I was invited to attend an informal meeting in Jefferson City between members and staff of the state’s Board of Cosmetology and Barber Examiners, several owners of cosmetology and barber colleges, and lobbyists for the state association of cosmetology schools. I was invited by John and Nancy Tirre, who own Current Trends Academy in St. Peters. They are the only people in attendance that I’ll name, out of an abundance of caution. The Tirres were concerned about the provisions in House Bill 2194, which would have further regulated an already heavily regulated industry: cosmetology and barber colleges. (Here is the bill summary.) There is no nice way for me to put this; the proposals in this bill are awful, and fundamentally anti-competitive and anti–free market. If you don’t agree with me, you probably feel that the government has a perfectly good reason to dictate via legislation that every new cosmetology school in Missouri must have at least nine instructors on staff before they can enroll even one student.

At the beginning of the meeting, the lobbyist for the cosmetology school association (of which the Tirres are members) told everyone that the bulk of HB 2194 will be pulled from consideration. This is excellent news. Next, he said that a new proposal would replace the deleted language with a simple two-year moratorium on any new cosmetology and barber schools opening in Missouri. This, of course, is an equally horrible idea.

After that, the meeting got down to business. One of the moratorium’s supporters, who owns three cosmetology schools in rural Missouri, stated that the primary problem the industry is dealing with is a lack of qualified instructors in colleges. He said that the moratorium — and the language that had been removed from the bill — are all just ways of dealing with that problem, and that the moratorium is designed so the industry can collectively propose solutions.

Many of you reading this will probably react exactly as I did, which is to say that if you don’t have enough instructors, then private colleges should offer a higher salary for instructors and the problem will solve itself — resulting in whatever equilibrium instructor allocation tends to be more efficient. The most basic economics tells you that shortages are best dealt with by increasing price. If you need more instructors at barber colleges, then offer to pay them more.

However — and this is where I wanted to tear my hair out, as I patiently sat there listening — it honestly took a half-hour of shortage discussion before anyone mentioned salaries. They went through the numbers of licensed instructors in Missouri in detail. There are 343 current instructors in Missouri. There are 279 people with active instructor licenses who do not teach. Finally, there are 364 people with inactive licenses who could very quickly and easily reactivate their licenses. So, there is a pool of 643 people who are trained to do this work but not doing it. Clearly, some of them would choose to again teach at cosmetology school is the salary offered were high enough. It should be noted that, in a related and worthy effort to increase the supply of instructors, the licensing qualifications for instructors were substantially pared down a few years ago. I am all for that, but if that strategy did not work by itself, another solution like raising salaries is a logical next step.

If the first half of the meeting might have been unsettling, the second half was inspiring. The arguments of those who favored the moratorium were strongly opposed by several of the other people in attendance. One member of the state board of cosmetology, who owns a school and would benefit from the moratorium, called it “selfish” and said that the industry had no right to stop someone who was trying to “fulfill a dream” by opening their own business. Another board member said similar things, and made it clear that she would oppose the proposal. The Tirres, too — who, as school owners, could also benefit from a moratorium — opposed it on principle. In the end, those present agreed not to move forward with proposing the moratorium, and it appears that all of the anti-competitive ideas in the bill are dead for now — hopefully, dead for a long time.

The discussion contained plenty of areas of positive agreement. I heard a number of great proposals on ways that the schools could work together to improve teacher recruitment, change their teaching methods to reach students who are a “new type of learner,” and more. There was discussion about the absurdity of parts of the current regulatory system, such as how a school can get in trouble if one of its instructors goes home sick, and a random state inspection comes later that same day to find the school temporarily short of the required 25-1 student-teacher ratio. It’s beyond me why tax documents would not suffice to demonstrate the correct number of instructors. (And I’m not overlooking the fact that a mandated 25-1 ratio is a dumb requirement in the first place, but they all seemed to think it is not a big deal.)

I did say my piece at the end of the meeting. I left feeling happy to have watched members of the board kill bad legislation. I readily admit that I don’t think cosmetology and barber practitioners and schools should be licensed at all, but it is worth my time and effort to help prevent bad rules from becoming even worse rules. It was great to see defenders of competition win out, at least for now.

Anyone reading this who was present at the meeting should feel free to use our comment section to claim credit for the above paraphrased quotes, expand on my opinions, or tell me how I am stupid.

Lesson From the Election: Examine Claims on Both Sides of Tax Issues

Posted on by Rik W. Hafer

This article first appeared in the St. Louis Beacon.

In the recent election, a surprising number of tax issues were passed by the voters. Perhaps the most discussed of these was Proposition A. Passage of Prop A raises sales taxes by a fraction of a dollar. Much of those new funds are earmarked to restore many public transportation services that were shut down because of budget shortfalls.

Reaction to the outcome was predictable. Tea Party sympathizers viewed the results with outrage, though they couldn’t seem to muster enough votes to defeat the proposition. Supporters claimed victory for the people, especially those who rely on subsidized public transportation for work or school. Both positions have some validity.

Public services like mass transit simply are not cost effective. If they were, a private firm would probably be offering the services. But that does not mean that they offer no public benefit. Numerous studies show that, for the poor, the disabled and the young public, transportation is a vital service for gainful employment. If there are few job opportunities in the inner city, how do those people get to the jobs in the county? At entry-level wages, making a 50-mile round trip by cab is prohibitively expensive.

The dialogue about Prop A revealed efforts at misinformation. One anti–Prop A pundit argued that if passage helps one family get to work but, because of the higher tax, five families are unable to meet their monthly mortgage payment, then on net it is harmful. That would be true if based on fact. While making a good sound bite, I seriously doubt that there is evidence to support such hyperbole.

Such exaggeration is not unique to this one tax issue. The ongoing debate over the Saint Louis city earnings tax is another example of an issue where misdirection should not guide policy.

Two analyses are being publicized in the swelling debate over the earnings tax. Several years ago, the Show-Me Institute published a study examining whether an earnings tax affects economic growth. The question asked was very specific: Does an earnings tax like that of Saint Louis city drive businesses to the surrounding area? In other words, does the tax diminish the economic growth of Saint Louis city relative to its neighboring cities and counties?

The analysis, conducted by Joseph Haslag, a professor of economics at the University of Missouri–Columbia, found that the answer is yes. His statistical analysis of more than 100 similar municipalities showed that having an earnings tax is likely to push businesses out of the taxed area into nearby untaxed municipalities. This finding helps explain the slow growth of Saint Louis city relative to the county.

But this conclusion was recently dismissed in a study conducted by Jack Strauss, director of the Simon Center for Regional Forecasting at Saint Louis University. Writing in the Kansas City Star, Strauss and his coauthor argue that earnings taxes have no negative effect on economic growth. Does this mean that cities like Saint Louis could increase the tax without limit and not face negative repercussions? That is absurd, but it is consistent with Strauss’ finding.

There is another, more subtle, reason to suspect the applicability of the Saint Louis University study as a foundation for tax policy by cities like Saint Louis. Strauss’ investigation essentially tests whether an earnings tax by a city located within a metropolitan area impacts the aggregate growth of the entire region. In other words, does the earnings tax in Saint Louis city affect the economic growth of the 15-county metropolitan area?

That is not the question addressed in the Show-Me Institute study.

Basic economic theory predicts that if the city significantly raised its earnings tax, businesses would likely move to nearby cities or counties within the metro area. If this is true, Saint Louis city loses economically — Haslag’s finding. But this scenario also explains Strauss’ findings: The economic impact of the city’s tax increase simply washes out across the region.

Simply put, Strauss’ study focuses on the wrong geographical area. Even so, his analysis will provide those who favor the city’s earnings tax with false support.

If the policy discussion is how to improve Saint Louis city’s future economic condition, let’s first get the facts straight. As we witnessed in the debate over Prop A, unfortunately facts lose to exaggeration when the topic is taxes.

Rik W. Hafer is distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.

 

“Should Five Per Cent Appear Too Small, Be Thankful I Don’t Take It All”

Posted on by Christine Harbin

Last week, I wrote about how Missouri residents enjoy relatively low taxes on alcoholic beverages, cigarettes, and gasoline. Friday, on Prime Buzz, Steve Kraske enumerated reasons why these taxes are so low in Missouri, and why the state is unlikely to raise them in the future. Additionally, he explains that Missouri’s low taxes act as an incentive for its border states to keep their taxes low as well:

That Missouri is so reluctant to raise taxes puts added anti-tax pressure on Kansas. Convenience stores in Wyandotte and Johnson counties fear losing even more business to Missouri stores if Kansas boosts the tax again.

When you tax something, you get less of it, after all. When a state increases the tax rate on goods like alcoholic beverages, cigarettes, and gasoline, individuals will consume less of them. After a certain point, the total tax revenue generated from these products is reduced, as well.

By keeping its tax rate low relative to its neighboring states, Missouri can maximize the amount of revenue that it generates. This would help ensure that not only Missouri residents shop in-state, but that individuals located near the border in neighboring states will also shop here.

Tax increases are not cost-free for states. In addition to the cost of reduced sales tax revenue, they have a cost in terms of lost competitiveness. Fewer people and businesses will locate to high-tax states because the costs of living and doing business are higher.

“The County Will Help Bridgeton Find a Better Deal.”

Posted on by Christine Harbin

According to an article in the St. Louis Post Dispatch from Friday, St. Louis County Executive Charlie Dooley encourages the municipality of Bridgeton to reject TIF for Walmart. I commend St. Louis County for exercising fiscal restraint; for reasons that David Stokes explains in a 2008 editorial, it’s preferable that counties, not cities, allocate TIFs.

However, the following statement in the article concerns me:

[Garry Earls, Dooley’s chief of staff and chief operating officer of the county,] pledged “the county will help Bridgeton find a better deal.”

The government should not be in the business of “finding a better deal” or picking economic winners and losers. The free market does this fairly and more efficiently — and at zero cost to taxpayers. Instead of getting involved, local and county governments should allow development to happen naturally in an unrestricted market. Having general low-tax and pro-business policies is the most efficient way to attract businesses to an area and incite economic growth. Developments that use TIF are not guaranteed success, and those that are successful may have been successful independently.

If there is a sufficient level of consumer demand for the new Walmart, then the company will decide to move to the location independent of government assistance. If there is not enough demand in the area, then Walmart will decide to move elsewhere, and local governments would not have to forfeit revenues in the short term to pay for the project.

In Their Defense, Kids Do Love Explosions

Posted on by John Payne

From the Columbia Daily Tribune:

A recent demonstration by the Missouri State Highway Patrol SWAT team had students ducking for cover and later upset at least one parent.

On April 8, about 27 students — mostly high school juniors and seniors — were taking part in a Student Alliance Program course in the highway patrol hangar at the Jefferson City airport. As part of a demonstration by Troop F, a SWAT officer rolled a “flashbang” grenade under the seats of the students without their knowledge.

The grenade, a non-lethal weapon used to stun or divert the attention of criminals when tactical teams enter a building, went off, emitting a loud noise, a burst of light and smoke.

Thankfully, no one was seriously injured, but if police officers have become so desensitized to flashbangs that this can be considered normal behavior, the SWAT team is raiding far too many houses.

Via Radley Balko.

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