If you don’t have any other plans tonight, come out to the Plaza Frontenac Cinema to see The Cartel, a new documentary discussing the troubles facing public schools in New Jersey. The main showing will begin at 6:45 p.m., after which yours truly will open up the floor for a brief Q&A session about the ideas contained in the film and how they might make a difference for Missouri. Hope to see you there!
Farm Subsidies Are Not an Energy Policy
The big news in Missouri today is President Barack Obama’s visit to an ethanol plant in Macon, so I thought it would be worth briefly rehashing the airtight case against ethanol subsidies, as we have done here so many times in the past.
Most obviously, ethanol costs more than gasoline, so consumers have to pay more for energy to run their vehicles. However, because ethanol diverts foods like corn from their more traditional use as energy for humans and farm animals, food prices are driven up by greater ethanol use. Ethanol backers like to claim that such costs are justified by the environmental benefits of ethanol, but those benefits appear to be completely illusory. From the abstract of a 2008 study on biofuels:
Most prior studies have found that substituting biofuels for gasoline will reduce greenhouse gases because biofuels sequester carbon through the growth of the feedstock. These analyses have failed to count the carbon emissions that occur as farmers worldwide respond to higher prices and convert forest and grassland to new cropland to replace the grain (or cropland) diverted to biofuels. By using a worldwide agricultural model to estimate emissions from land-use change, we found that corn-based ethanol, instead of producing a 20% savings, nearly doubles greenhouse emissions over 30 years and increases greenhouse gases for 167 years.
Research has repeatedly confirmed that ethanol subsidies only drive price inflation for both energy and food without cutting greenhouse gas emissions, and it is long past time for politicians to admit that such programs are nothing more than a means for buying favor with voters in agricultural states.
Audit Confirms What Show-Me Institute Scholars Have Said All Along: Tax Credits Are Overhyped
On Monday, Missouri State Auditor Susan Montee released a study of tax credit cost controls. The audit’s conclusions have been covered by the media, as well as on Show-Me Daily. The audit seems to affirm much of the Show-Me Institute’s scholarly work on tax credits; it reports that the economic impact of tax credits is routinely overestimated and their costs underestimated. Some key findings from the audit are outlined below:
Fiscal Notes
Fiscal notes tended to understate the cost of tax credits, some of which underwent further expansions after their initial passage. Of the 15 tax credits reviewed, the fiscal notes underestimated their total cost by $1.1 billion over a five year period. This is not surprising given the tendency that Show-Me Institute research assistant John Payne noted for politicians to overestimate the impact of their policies and underestimate the costs.
Four of the five tax credit programs for which fiscal notes underestimated the amount that the credits would disperse were new. They had lower participation than expected, as well as annual limits on the amount that could be redeemed. (See page 8 of the audit for a table displaying the projected and actual costs for all 15 of these tax credit programs.)
The audit notes that the short time frame — three years — of the cost estimates limits their ability to predict long-term effects. On the flip side, the audit also notes that even longer estimates are inaccurate and unable to predict true costs. Given that the fiscal notes had poor predictive power, the audit suggests that limits and sunset clauses may be necessary methods to limit the costs of tax credits.
Annual or Cumulative Limits
Annual or cumulative limits cap the amount of tax credits that can be redeemed from any particular program. This is one measure that the audit suggests be put into place for all tax credits, although 23 of the 53 programs redeemed in 2009 did not have annual or cumulative limits.
Some tax credit programs have seen their limits increased substantially, like the Missouri Quality Jobs program, which initially had a $12 million annual limit and currently has a $80 million limit. Officials’ ability to increase these limits through committees or departments, without having to go through the full legislative process, circumvents the purpose of limits.
Sunset Provisions
In 2003, Missouri passed the Sunset Act, which stipulated that each program must be reauthorized after six years. This allows the economic impact to be evaluated before further extensions are granted. Of the 18 tax credit programs passed after 2003, only 10 have sunset provisions. The audit suggests that sunset provisions be included in every new tax credit.
Conclusions From the Audit
Sunsets and both annual and cumulative limits could substantially control the cost of tax credits. As the audit points out, it is difficult to predict the long-term effects of specific tax credits; with a sunset provision, the effects are reviewed and evaluated before a program is continued. Annual and cumulative limits would hold tax credits to the amount specified by the bill, which would discourage underestimates as well as control tax credit expenditures. Currently accounting for 7.8 percent of the 2009 Missouri budget, tax credits will continue to grow if cost-control measures are not better implemented.
How has the legislature responded to the audit’s pronouncement on tax credits? The speaker of the House issued a press release disagreeing with its conclusions:
“Auditor Susan Montee and Governor Jay Nixon are playing a dangerous and damaging political game creating a fictitious conflict between education and Missouri jobs. Education and economic development are mutually beneficial, not mutually exclusive,” [the speaker] stated. “In the House, we have always welcomed independent, objective scrutiny on how to best reform and enhance tax credit programs. Missourians need jobs. Therefore, the Missouri House will continue to protect responsible economic development programs that create those jobs. And we will have the last word on this matter.”
With all of the evidence that tax credits cost more than anticipated with less impact than predicted, greater scrutiny is warranted before the state considers passing any further credits. The audit brings to light important issues that proponents of tax credits must face in order to bring greater fiscal responsibility to Missouri’s budget.
Aside from the audit’s careful consideration of the unforeseen costs that tax credits entail, it’s also important to consider some of the broader economic reasons that such targeted industry credits are not as effective as their proponents suggest. As Show-Me Institute scholars have repeatedly pointed out, tax credits are less efficient than lower tax rates, both because legislators have no special talent for picking winners and losers in the economy, and because the credits distort economic incentives, causing a misallocation of capital — subsidized producers have an incentive to produce more than is efficient, and some other set of unsubsidized goods or services are slightly underproduced as a result.
Perhaps this audit will encourage a the legislature to consider lower tax rates in lieu of inefficient tax credits.
Taxes and Sports: The Earnings Tax (Part One in a Series)
This is the first in what will be a series of posts on taxation and professional sports in Missouri written by Audrey Spalding and myself. By “professional sports,” we mean the four main leagues — one of which is no longer represented by a Missouri team. (Where have you gone, Tiny Archibald?) This Show-Me Daily series aims to examine taxation levels for the Rams, the Chiefs, the Cardinals, the Royals, and the Blues in regard to income and earnings taxes, land and property taxes, tax subsidies of various types, sales taxes, and more. You can probably tell from this list that some examples will show that the teams and athletes benefit greatly from subsidies and taxpayer support, and other examples will show where they pay a hefty tax tab. Let’s start with one of the latter.
It is not exactly groundbreaking research for me to state that teams and players pay substantial income taxes in various forms. Here are the most recent payrolls and league ranking for the five Missouri teams:
- Rams, $62,384,821 (32)
- Chiefs, $83,187,156 (31)
- Cardinals, $93,540,751 (12)
- Royals, $71,405,210 (21)
- Blues, $46,485,000 (22)
As far as I know, the location in which a team plays its regular season home games is the primary determinate for which taxes must be paid. So, the city of St. Louis, which hosts the home games of all three St. Louis teams, gets $1,518,079 per year in earnings and payroll taxes just from the Cardinals, Rams, and Blues players. Kansas City gets $772,962 from Chiefs and Royals players. (This post originally mistakenly said that the KC stadiums were outside of Kansas City proper. Thanks to David Nicklaus of the Post-Dispatch for sending me a correction, and for reading our blog!) Of course, when you account for team employees and the profit tax levied on each organization, the earnings tax receipts grow even larger.
Missouri receives an estimated $10,710,088 each year from applying the 6-percent income tax rate to athletes from each of its five sports teams. (With deductions, etc., this figure would be a little lower.) Missouri, like many other states, enforces its income taxes on visiting athletes, too. However, just as players from visiting teams must pay the income and earnings taxes, all the players get credit for taxes paid to other cities and states. The result is that the total taxes paid are just moved around between jurisdictions, as our former editor Tim Lee first pointed out when writing about the “jock tax” in 2005:
But Missouri athletes who pay other states’ jock taxes are able to subtract those tax payments from their Missouri tax bills. When you subtract the revenue lost from other states’ jock taxes, the result is practically a wash. If all 20 states repealed their jock taxes simultaneously, states would get virtually the same revenue with a lot less administrative overhead.
Two lists help us determine whether players pay more or less taxes: states without an income tax, and cities with an earnings tax. The Cardinals players don’t appear to do so well here. They pay both a state income tax and city earnings tax at home, and regularly travel to Pittsburgh, Cincinnati, New York, and Philadelphia. Only when they travel to play the Astros — and, less frequently, the Marlins — do they really get a pay raise. The Royals also pay the local earnings tax when they travel to Detroit, Cleveland, or New York. Both the Cardinals and Royals pay the other city’s e-tax each year when they travel across I-70 for the annual “rivalry” series.
The Blues pay a local tax on their frequent visits to Detroit or Columbus, but get a nice tax vacation when they head to Nashville. Of course, Canadian taxation becomes a issue for any hockey player, and for the Royals to a lesser extent.
The NFL schedule rotates from year to year more than other leagues, but the Rams players have to like getting to play one guaranteed road game in Seattle each year, because Washington has no state income tax and Seattle has no earnings tax. The Chiefs and Rams play this year in the regular season, so both teams will be paying the host city’s e-tax then, as well. (The two football teams usually play in the pre-season for the much-coveted “Governor’s Cup” but I don’t think athlete’s salaries are based on pre-season games so no earnings tax would be collected in that case.) If you are looking to avoid taxes, the AFC south is where you want to play — aside from the smallish earnings tax in Indianapolis, of course. The Chiefs have to pay high California state taxes for at least two games per year. (Disclaimer: All team opponent and schedule info listed here has been pulled from my own memory, with a little help from ESPN.com.) Of course, other factors such as where an athlete keeps his primary residence, the agressiveness of his accountant, etc., will all play a factor here. A player who lives full time in Missouri is going to pay Missouri income tax on salary earned, but not taxed, playing in Texas, while someone who lives in another state might not. I am a policy analyst, not a CPA.
What does all of this prove? Nothing really, yet. This post is less debatable than future posts in the series might be, because in these cases the teams and players are treated just like other businesses, and the taxes paid are substantial. That does not mean I think they should be substantial, just pointing out that the applicable tax policies show no favoritism. Also, it is simultaneously difficult to say that the athletes and teams are not paying enough in taxes when around 100 individual players generate more than $1.5 million per year to the city of St. Louis alone, and it is almost as hard to seriously complain about the taxes paid by modern professional athletes, who earn enormous salaries to play a game for a living. (Am I jealous? Absolutely!)
Future posts in this series will deal with areas in which teams are not treated like other businesses, for better or worse.
Two Market Distortions Do Not a Free Market Make
According to an article in the Wall Street Journal, Mayor Michael Bloomberg proposed that New York City assess a $300 permit fee on film shoots, in an effort to assuage the city’s budgetary problems.
This represents an unfortunate trend in public policy: to counteract the negative consequences of one policy, government officials propose another policy that further distorts the market, instead of repealing the first policy. It’s similar to the way in which the federal government subsidizes the production of corn, then proposes to tax products made with corn syrup. If New York City were serious about solving its budgetary problems, perhaps it would consider eliminating the 5-percent film tax credit that it offers to producers, instead of slapping fees on top of subsidies.
I have additional concerns about the policy. From the article:
“Everybody I’ve talked to about this—and I’ve called a number of producers—they couldn’t stop laughing because it’s $300 one time,” said Mr. Bloomberg. “They go anyplace else, they pay $1,000 every two weeks. And it’s such a small percentage of their budget.”
If a producer is in Bloomberg’s list of contacts, he has probably already experienced success in the film or television industry and has a large budget. I am skeptical that Bloomberg has any small-scale, independent filmmakers on speed-dial. Additionally, I’m not surprised at all that these large-scale producers would support an additional barrier to entry in the film industry — the fee positively affects them because it protects them from future competitors. This is a prime example of rent seeking.
Mayor Michael Bloomberg […] said the fee was too small to impact Hollywood business decisions.
Although $300 may not be significant to productions with large budgets, this fee could have a measurable effect on smaller, independent productions. Many of these producers will decide to move away from New York City as a result of this policy, and it’s possible that some of them may end up in Missouri. According to the Missouri Film Commission, Missouri does not require local film permits.
Missouri Again Leads the Way on Occupational Licensing (In a Good Way)
Combest this morning linked to a story in the Post-Dispatch about the decision by the Missouri Supreme Court to adopt a national standardized bar exam that will, in the future, make it easier for Missouri lawyers to practice in other states and vice versa. I think this is a great move, and I hope that a number of states follow it. Changes like this — which improve the ability of people to practice their chosen job where and how they would like — really have no downside.
The law is one field for which I support some level of licensure. In my opinion, though, that licensure should begin and end with the bar exam. If you can pass the bar exam without attending law school, I see no reason why you should not be allowed to ply your trade. I can’t imagine there would be any reputable firms, nor many clients, that would want to hire someone with that kind of limited background. Yes, I think people who want to be lawyers should go to law school, but that would be a perfectly reasonable decision for competitive legal markets, rather than a rationale for intervention by state laws.
(Also, the thought of someone just becoming a lawyer out of the blue could make for a whimsical “fish-out-of-water” story about a urban lawyer definding his cousin in a rural community. The possibilities are endless. …)
So Much Misinformation in This Editorial … So Little Time!
On the subject of Illinois’ film production incentives program, the editorial board at the Chicago Tribune poses the question:
What’s not to like?
On the contrary, what’s not to dislike? Film production incentive programs are undesirable policy for states, including Illinois and Missouri, and they have many unintended negative consequences. I have written extensively about film production incentive programs before. In this post, I’d like to highlight specific statements from the editorial and explain why they are incorrect in an economic sense.
Expect this flurry of activity to continue.
The estimated economic and fiscal impact of these programs is debatable. Film tax credits do not result in permanent economic activity because the purchases are single-time expenses and they do not create permanent jobs. The Tax Foundation recently released a study that concluded these programs fail to incite economic growth. In fact, the programs restrict growth because they force taxpayers to support an entire industry.
The tax credit is something lawmakers got just right — in size, scope and sustainability.
Tax credit programs in Missouri are anything but “just right” in size, scope and sustainability, because they are growing at a much faster rate than the state’s revenues. This is why the Missouri state auditor’s report on tax credits recommends that government officials set both expiration dates and annual and cumulative limits for all tax credits programs, including those for film productions. The state of Missouri has awarded nearly $13 million in film tax credits since 2000, and this money comes at the expense of basic government functions, such as education.
“It creates jobs without breaking the bank.”
This is fundamentally false. First, as Henry Hazlitt explains in Economics in One Lesson, this kind of spending destroys jobs in the private sector. As a positive consequence of eliminating the program, there will more workers available to do other kinds of work. Second, for reasons I described earlier, this program is very expensive!
“And it has the potential to make Chicago not only a destination for big Hollywood productions, but also a center of independent film activity.”
States like Missouri and Illinois do not have a comparative advantage in filmmaking, so most film productions are more efficient and cost-effective when undertaken in states that have this comparative advantage. Spending public funds to bring film productions to Missouri means that extra resources are expended to make films, which also means that those resources are no longer available for use in other industries. If Chicago, Kansas City, or Saint Louis were truly suited to be a center for the film industry, it would happen in an unregulated market, independent of government assistance.
Furthermore, it seems to me that practically every state aspires to be a center for the film industry. First, by definition, they can’t all be the center. Second, from the perspective of a government agency, why is filmmaking preferable to any other activity? The free market — not the government — should decide which economic activities occur in an area.
“[T]he value of Chicago’s film infrastructure overcomes bigger tax credits from neighboring states. […] And a plethora of talented stage actors call Chicago home. In other words, you have a place that provides everything a filmmaker might need.
The availability of desirable resources is already a significant incentive to locate in an area. If a state boasts resources that are attractive to filmmakers, then it should not need to use tax credits to encourage firms to locate within its borders.
States like Missouri and Illinois do not have an absence of supply of film production; I disagree that this is the issue, however. Instead, what these states experience is an absence of demand for filmmaking. Unless other factors change over time, there is not enough demand in Missouri for the film industry to exist here without a considerable level of government assistance.
Painting a Rosy Picture
Missouri Auditor Susan Montee has found that fiscal notes relating to tax credit programs severely understate their costs. From the Columbia Daily Tribune:
The audit found fault with the legislature’s “fiscal note” system that estimates projected program costs.
“Fiscal notes associated with legislation establishing or modifying tax credit programs do not accurately project the financial impact on the state’s general revenue fund collections,” the audit said. “For 15 tax credit programs reviewed, the actual redemptions exceeded the projected long-term fiscal impact by a net amount over $1.1 billion for the five years ended June 30, 2009.”
Fiscal notes sometimes failed to accurately predict how many people and businesses would participate in the programs, the audit said. Sometimes agencies administering the credits would make changes that increased costs.
In 1997, the legislature enacted a tax credit for historic preservation, a program that offers subsidies to people refurbishing old buildings. The estimate of the program’s cost at that time was $14.3 million per year. When the legislature modified the program a year later, the fiscal note projected an “unknown” cost.
“Based upon our methodology, the projected fiscal impact was $14.3 million annually and $71.5 million over the 5-year period, while redemptions totaled over $637 million,” the audit said. “Recent tax credit program audits have shown agencies consistently overstate the economic benefit of tax credit programs.”
Of course, this is no surprise. On top of the difficulties inherent in projecting a program’s impact into the future, politicians always overhype a program’s benefits and undersell its costs. They will even use all manner of political influence and accounting chicanery to manipulate the projections produced by independent scoring agencies. Even at the federal level, where the highly respected and nonpartisan Congressional Budget Office does its level best to accurately project a bill’s costs and benefits, members of Congress frequently game the process by requiring the CBO to score unrealistic versions of bills. The most obvious recent example of this subterfuge is the last CBO scoring of the recently passed health care bill, which, in order to achieve the illusion of deficit neutrality, includes 10 years of taxes and only six years of spending — as well as cuts to Medicare that we all know will never come. Just remember that no matter how bad a government program sounds when a politician proposes it, the reality is almost certainly worse.
Link via John Combest.
Tune in to Hear David Stokes Speak About Ethanol on the Radio This Afternoon
I’ll be appearing on the Mike Ferguson Show on The Eagle, 93.9 FM in Columbia, this afternoon to discuss ethanol. Everyone can listen live online, and I hope you will tune in.
