“That’s Right, and Who Might You Be?”

Posted on by David Stokes

In yesterday’s “Political Eye” column in the St. Louis American, the author welcomed the Show-Me Institute to the city of St. Louis:

A recent email sent to drive traffic to Slay’s campaign site with one of its inane polls referred blithely to “your tea party friends.” Slay’s team seems to want to send the message that government-hating right wingers are welcome here. No wonder the Show-Me Institute set up shop in the city.

There is, of course, only one legitimate reply to this, and, not surprisingly, it was said by Homer Simpson. From the fourth season, episode 14 — you’ll find the video here. The line comes at about the 0:48 mark. Definitely one of the best lines in one of the single best episodes of the best TV series ever.

Thanks to St. Louis’ own Bart Simpson for the article link.

Overall Tax Burdens and the Good Thing About Missouri’s Personal Property Tax

Posted on by David Stokes

Megan McArdle over at The Atlantic is one of my favorite economic bloggers. She has a very good post up today about the debate over the fact that quite a large number of Americans essentially pay no income taxes. The piece does a great job of considering all sides of the issue, and I fully agree with this key point she makes:

I think the real problem with the current setup is the political economy of it.  A very large percentage of our electorate has nothing at stake when they vote for new spending.  Since that spending imposes real costs on other people, and the economy at large, this is a problem.  We don’t want to end up in a situation where 65% of the population is systematically voting to take the stuff possessed by the other 35%.

Which leads me to property taxation in Missouri. Exactly in line with what McArdle writes on income taxes, the Lincoln Institute of Land Policy wrote in a study about property tax circuit breakers (which are targeted relief laws) that circuit breakers should not eliminate the entire property tax burden:

Circuit breakers can lead to overspending by local governments, because some taxpayers will vote for additional public services knowing that higher property taxes will be entirely offset by circuit breaker benefits.

Missouri has a circuit breaker, as well as another property tax relief program called the Homestead Preservation Act. But, aside from real estate taxes, Missouri also taxes personal property — which brings me to my main point. Although there might be legitimate arguments against personal property taxes (such as the double-tax issue; buying a car also entails a substantial sales tax), the main thing I like about the personal property tax is that, for many people, it gives them the necessary “skin in the game.”

This might seem silly to like a tax just because more people pay it, and perhaps it is. However, if roughly half of Americans pay no income tax, than we can assume roughly half of Missourians pay no state income tax (although, as I said earlier, it probably totals a little less than half). Certainly some of that portion own homes, but for most people even those taxes are partially hidden in monthly mortgage payments — or hidden to an even greater extent in rent payments. We all know that sales taxes are paid in bits and pieces, except when you buy very large items. But the large majority of Missourians own cars or trucks, and — unlike with real estate — you owe a tax on your car even if the bank that loaned you the money still has the title.

I really think that there is a significant number of Missourians for whom the only time they make a tax payment of any substance at all (automobile property taxes likely average around $200) is when they pay their personal property tax. Hopefully, everyone who makes this payment — which is not due on April 15 but Dec. 31 every year — they take a moment to think about tax rates and government services, and contemplate whether they believe they get what they pay for. If this tax gets a large number of Missourians to realize that they are taxing themselves when they vote on tax increases, rather than just taxing other people, the structure of this particular tax may have a beneficial silver lining.

Post-Dispatch Prefers Broken Legs Over Court Dates!

Posted on by Caitlin Hartsell

The editorial board for the St. Louis Post-Dispatch recently published a piece denouncing politicians who support payday loans. The editorial is filled with rhetoric, but doesn’t contain much economic analysis or critique of the bill’s actual provisions. I’d like to expand on the discussion here.

From the editorial:

The big losers are the vulnerable Missourians who are being ripped off with impunity by payday lenders. Republicans have let the public down. Gov. Jay Nixon, a Democrat, hasn’t been much help either.

The highly charged language of this paragraph ignores that payday loans are consensual agreements made by individuals. Payday loan customers are not forced to take these loans, but rather take them out voluntarily for any number of personal reasons.

People who apply for payday loans usually have a high risk of default, or need money immediately — otherwise, a bank would be willing and able to offer a longer-term loan at a much lower interest rate. When payday loan stores lend out money, they have to take into account the risk of that loan remaining unpaid. Because these loans are made to people who are less likely to pay them back, that higher risk is counterbalanced by a higher interest rate. If rates are lowered by force of law, many higher-risk borrowers will find themselves entirely without access to legitimate forms of credit.

(For those who read Show-Me Daily often, you know that payday loans have been a regular discussion topic for the past two years. The previous posts are well worth reading.)

The Post-Dispatch also includes an AP photo of a group of payday loan stores, which well illustrates the abundance of stores in the market. This image illustrates an important free-market principle: competition. The close proximity of the stores means that payday loan lenders need to compete for customers. If one store is charging a higher rate than warranted by customer risk factors, accounting for an individual’s ability to pay back the loan, then another lender will be willing to undercut their competitor by offering that loan at a lower rate (an ongoing process, until the “market rate” is reached). Any worry about people being “ripped off” should be abated when one factors in the idea of marketplace competition: Each store sets rates to vie for customers while balancing the risk of repayment.

The Post-Dispatch ignores the fact that some people who really need loans cannot always get those loans from a bank, but that the necessity of the money immediately outweighs the longer-term potential cost of a payday loan. Setting any sort of regulations on payday loan operations means that some people will not be able to get loans legally. That does not mean they won’t get loans at all, but they will have to use underground or black market means to obtain them. This puts high-risk borrowers in an even worse situation, because if someone can’t pay back a payday loan or a bank loan, there are legal methods to handle the situation, like bankruptcy. If someone doesn’t pay back a loan, on the other hand, the lender has little recourse other than black market violence.

Deciding to increase payday loan regulations amounts to misguided paternalism. People at the margin will still take out loans they cannot afford to pay back — but that will happen whether they get them from a payday lender or, as the present mortgage crisis has shown us, from a traditional bank. In an attempt to save consumers from themselves, such loan regulations push desperate borrowers to illegal sources. Payday loan rates should be left to market competition, not government officials.

The Possibilites and Limitations of Educational Alternatives

Posted on by John Payne

Last week, I wrote that we needed many more options in education than the traditional public school. In his latest column, Steve Chapman echoes that sentiment but cautions that no single alternative is likely to bring revolutionary change. For instance, Chapman looks at the lackluster results from the voucher program in Milwaukee:

In 1990, in one of the most innovative developments in modern American education, the Milwaukee public schools created a parental choice system. Some low-income parents got vouchers that could be used to send their children to private schools.

It was a richly promising idea. The new option would let disadvantaged kids escape wretched public schools. Competition would force public schools to improve or close. Students would learn more.

Twenty years have passed. Last week, researchers at the School Choice Demonstration Project at the University of Arkansas published their latest assessment of the results.

What did they find? Something unexpected: Kids in the program do no better than everyone else. “At this point,” said professor Patrick J. Wolf, “the voucher students are showing average rates of achievement gain similar to their public school peers.”

Although I agree with Chapman’s main point, I think he is too critical here.  Voucher students score basically the same as public school students, but the graduation rate for students receiving vouchers is 77% to 65% for students without the voucher, which is hardly insignificant. Even more striking, especially in such a lean fiscal year, voucher students attain the same level of education as their public school peers for less than half the cost — $6,400 a year for voucher students against $14,000 for public school students. In other words, the private schools are doing the same job with half the resources. Cutting costs without substantially improving educational outcomes is not worthy of a standing ovation, but it at least deserves mild applause. The same point can be made about charter schools.

That said, Chapman’s conclusion is incredibly wise:

What should we learn from these experiences? Not that nothing works, but that few if any remedies work consistently in different places with different populations. We shouldn’t expect that broad, one-size-fits-all changes imposed by the federal government—such as those offered by the Obama administration—will pay off in student performance.

From the local school district to the federal Department of Education, humility, caution, and open-mindedness are in order. Because right now, the main thing we know about improving schools is that we don’t know very much.

This is why changes in the educational system should come from the bottom up. Students, parents, and individual schools and districts should be encouraged to experiment and imitate those experiments that work. Grandiose nationwide (and even statewide) plans, on the other hand, have a tendency to ignore local and individual particulars. Ignoring those particulars all too often leads to general failure.

It’s That Time of Year Again

Posted on by Christine Harbin

In a Kansas City Star article, Steve Everly reminds us that Missouri’s annual green tax holiday is coming up:

Beginning Monday, the state will offer $5.6 million in rebates to Missouri residents who buy energy-efficient clothes washers, dishwashers, furnaces, air conditioners and heat pumps.

That’s not all. The state from April 19 to 25 won’t collect its 4.225-percent sales tax on those products, plus energy-efficient refrigerators and freezers.

Contributors to Show-Me Daily have written extensively about how programs like Missouri’s green tax holiday and last year’s Cash for Clunkers program are ineffective. These are examples of government programs that provide an incentive to consumers (i.e., a rebate) to buy certain items (e.g., an appliance or a car) in an attempt to incite economic activity and change individual behavior (which will ostensibly help preserve the environment). The following is a digest of these arguments. If any Show-Me Daily readers know of additional disadvantages to these programs, please add to this post in the comments.

1. Instead of creating new economic activity, programs that offer rebates on products like appliances and cars only distort the market.

In a previous post, Charis Fischer explained that these transactions would have occurred anyway in the future, independent of a rebate in the present:

Using tax dollars to help people buy more energy-efficient machines is likely an inefficient use of funds, because purchases of these machines will become much more common within the next few years anyway, as older machines start to die. The fact that people can save money on energy costs by upgrading their appliances is already a significant incentive.

2. The intended environmental impact is negated through the construction of the program.

The subsidy incentivizes the destruction of operational appliances and the construction of new appliances to replace them. It could also be possible that having an appliance that is more fuel-efficient would encourage a person to wash more dishes and laundry than he did before. Justin Hauke posted previously that, unless each Missouri resident buys a new appliances that week, the Green Tax Holiday would have no impact on overall energy usage in the state.

3. The money that is spent in rebates could be devoted to other programs.

Caitlin Hartsell explained in an earlier post how programs like Missouri’s Green Tax Holiday and Cash for Clunkers illustrate Bastat’s broken window fallacy.

[W]hen the government uses taxpayer money to stimulate one part of the economy, this comes at the expense of those other economic sectors that will no longer benefit from some measure of either consumer spending or invested savings.

4. This cements the idea that individuals should look to the government for approval of which products and services to buy and how to behave, which should not be the role of government.

Sarah Brodsky pointed out that, by eliminating state sales tax on only those appliances that have the Energy Star designation, the government favors certain products and behaviors over others.

Getting It Right

Posted on by John Payne

Yesterday, I complained that the city should not be waiving parking fees downtown on one of its busiest days of the year, but should instead raise the fees. The city is constrained, however, by the archaic technology of most of the parking meters. Well, it didn’t take long for some of my ideas to get implemented, even if it happened in a different part of the city. From the Riverfront Times:

The parking meters in Grand Center that used to shut down at 7 p.m. each night (allowing free parking to theater-goers and gallery patrons) have been dialed back to 10 p.m.
[…]
Since April 1, drivers who don’t feed the meter after 7 p.m. have been issued a warning and served with a flier alerting them to the change. The grace period ends May 1. After that, parking scofflaws will get a $10 ticket. Parking rates for the meters are 25 cents per 20 minutes.

As KSDK reporte[d] earlier this spring, Grand Center Inc. is partnering with the city in the new parking policy and will get a portion of the revenues from the meters. Grand Center Inc. wants to use that money to build a new parking garage in the district, according to the television station.
[…]
“We’re happy that some of the parking meters will allow you to park for four hours instead of 90 minutes,” says Pinmann. “That would give people enough time to see a show and stay longer.”

In January Grand Center began a $10 valet service that offers people a $5 discount if they get their ticket validated after dining at a restaurant.

Kudos to Grand Center Inc. for implementing a policy that both efficiently rations parking spaces in midtown and will allow them to improve the area. A shortage of parking spaces is not a problem that most areas in the Saint Louis region face on a regular basis, but let’s hope it becomes one — and that, when it does, area leaders will have the wisdom to charge for the spots.

Missouri: Land of Relatively Low Taxes on Beer, Wine, Spirits, Cigarettes, & Gasoline!

Posted on by Christine Harbin

I used the Show-Me Institute’s newest web tool, IDEAS: Interactive Database for Economic Analysis and Synthesis, to compare the tax rates on on beer, wine, spirits, and gasoline in Missouri compared with its eight neighboring states: Arkansas, Illinois, Iowa, Kansas, Kentucky, Nebraska, Oklahoma, and Tennessee.

We see that Missouri residents enjoy lower taxes on beer, wine, spirits, cigarettes, and gasoline than those who live in neighboring states. Kentucky is the only neighboring state that has a lower tax on spirits, and it’s only 0.8 cents lower than Missouri’s. As we’ve discussed before on Show-Me Daily, this discrepancy gives non-Missouri residents an incentive to travel to Missouri to purchase these products. As a positive unintended consequence, Missouri benefits from increased tax revenue.

tax_wine tax_spirits
tax_cigarettes tax_beer
tax_gasoline

Note: The trend of taxation on spirits in Iowa looks wonky, and this is because Iowa’s state government directly controls the sale and distribution of distilled spirits within the state. Because they are taxed differently, it is difficult to compare spirits across states. Beginning in 2005, the graph shows an implied excise tax rate, which is calculated using a methodology that the Distilled Spirits Council of the United States (DISCUS) designed. The Iowa Alcoholic Beverages Division has an explanation on its website:

Tax on distilled spirits in Iowa is levied through a 50% mark-up on product sold through the Iowa Alcoholic Beverages Division wholesale liquor distribution system. The mark-up system was enacted with the privatization of state stores in 1987 and was originally set at 60%. The General Assembly reduced the mark-up to 50% later that year in April 1987.

I encourage our blog readers to use the IDEAS web tool to perform similar comparisons.

Legitimizing Tax Stacking a Bad Move

Posted on by Caitlin Hartsell

Municipalities that employ tax stacking — levying multiple sales taxes above the state cap of 1.5 percent — may soon receive state protection. Missouri House Bill 1442 will protect municipalities, like St. Joseph and Joplin, that have already approved taxes higher than the state limit. The bill would allow them to keep any taxes already approved and would protect those cities from having to refund the relevant revenues.

Stacked taxes have been discussed at length previously here at Show-Me Daily. I agree that refunding the money that has already been acquired could be a counterproductive task. It would be difficult to redistribute previously collected sales taxes unless the affected municipalities lower sales tax rates for a specific amount of time. (Lowering the tax rate could also potentially bring in more revenue, if people take advantage of the lower rate through increased consumption. After all, raising taxes does not always increase revenue.)

At any rate, municipalities should not be allowed to keep the stacked taxes in place. The state capped municipal sales taxes at 1.5 percent for a reason: to prevent cities from raising taxes beyond a specified point. Municipalities need to find a way to use their funds more efficiently. Allowing them to keep the extra taxes without any sort of penalty sets a bad precedent for future behavior. Protecting the practice of tax stacking now only ensures that it will continue to happen in the future.

“You Keep Using That Word. I Do Not Think It Means What You Think It Means.”

Posted on by Caitlin Hartsell

St. Louis Public Radio posted a piece yesterday about $54 million in stimulus funds that Missouri has received to spend on underperforming schools. One particular paragraph caught my eye (emphasis added):

The competitive bids will fund interventions into schools that are in the bottom 5 percent academically, or have graduation rates below 60 percent. But districts have to agree to one of four draconian options, including firing the principal and most of the staff, closing the school and reopening it as a charter school, closing the school and sending students elsewhere, or a model that focuses on teacher education and curriculum changes.

Last time I checked, “draconian” meant “rigorous; unusually severe or cruel.” I’m not sure I would consider “closing the school and reopening it as a charter school” or using “a model that focuses on teacher education and curriculum changes” as severe or cruel. In fact, they seem to be rather obvious solutions, especially considering these schools consistently underperform.

Show-Me Institute scholars have written extensively about charter schools, including a recent policy study highlighting the benefits of charter schools. Of the four options summarized above, charter schools provide the most promise for improvement. Although they’re not a cure-all, charter schools can inject some needed competition into the school system. Not every charter school will succeed, just as there will be public schools that do not succeed. Nevertheless, the ability to innovate — and to close failing schools — gives charter schools an advantage over traditional public schools. If a school is failing, as these are, it does not serve the children or the taxpayers to continue funding it. Schools that are not fulfilling their mission to educate their students need to be overhauled.

With this large potential influx of federal money, it would be imprudent not to require that some radical changes occur first. The four options given may seem extreme, but they are necessary to improve the schools. Keeping children in failing schools without expecting those schools to make changes that might better serve to educate them properly is the truly draconian option.

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