Licensing, the Recession, and Day Care With Love

Posted on by David Stokes

Today’s Post-Dispatch had a front-page story about the economic troubles faced in this recession by day care centers, particularly licensed day care centers. The overall article is good, but it has some issues I will get to in a moment. The article is a million times better than this terrible story in the Chicago Tribune about licensed movers, from earlier this year. The Tribune piece expressed a number of assumptions about the purported benefits of licensing. Today’s Post version bought into some of those same assumptions, but with much less frequency and less defamation of unlicensed providers. Here is how the Post puts it:

Both locally and nationally, operators of licensed and accredited day cares — centers that typically cost more because of their recognized quality standards — are taking hits as financially strapped parents find other options, usually with parents or friends or in smaller, often unlicensed arrangements.

In many places — including traditionally stable suburbs — this means more day care closures and a reduction in quality slots that adhere to regulatory standards and quality curricula.

Sure, the reporter fails to consider whether there is any evidence of the superiority of licensed day care centers, but at least doesn’t refer to the unlicensed neighborhood mom who watches three of her neighbor’s kids during the day as a “fly-by-night” operation, as the Trib would have.

The real issue here is that the licensed day cares charge more, and they are being hit the hardest as families cut back during these tough times. I hope that supporters of stricter day care licensing in Missouri read both the article and this post, so they can see how licensing raises business costs, and how consumers actually react to those price increases. If we impose the day care licensing changes that were considered during the last legislative session, and will almost certainly be brought up again, we will impose a further economic drag on Missouri families. They will then respond just as they have in this article: by using families and neighbors (often under the table) as sources for day care, and, more drastically, cutting back working hours themselves.

I don’t think any of those above options are necessarily bad alternatives to using ordinary paid day care, except for the last one when it is a matter of necessity rather than choice. Obviously, the supporters of licensing do think those options are harmful, or they would not be working hard to regulate the industry further. The state of Missouri should not dictate who families choose to watch their children. A state license is a poor substitute (and it often becomes a substitute) for doing the work necessary to make sure your child is in a safe environment.

Assuming that the day care licensing bill is introduced again, I look forward to being the children-hating jerk deep thinker who stands up to oppose it. I honestly think this legislation will accomplish nothing but raising costs for Missourians and protecting current day care centers from future competition, which is usually the point of occupational licensure in the first place. (My final caveat is to acknowledge that the supporters of this licensure are genuinely concerned about children, so this is a rare exception to that rule.)

Government Employees: The Final Frontier

Posted on by Sarah Brodsky

Britain has determined that it can no longer justify paying someone the equivalent of $73,000 a year to monitor UFO reports. It justified the position for the past 50 years, though.

I’m not surprised that the British public kept the UFO office busy for decades. Such is the human imagination, that if you ask people to report sightings of green-tailed Loch Ness monsters, someone is bound to call you and ask whether the orange-tailed kind is dangerous.

Besides, Missouri has a mountain lion response team, but no mountain lions.

Food Protectionism in Europe

Posted on by Sarah Brodsky

The Wall Street Journal reports on the strange predicament of an English village named Stilton:

The bar on producing Stilton cheese here is a curious consequence of EU efforts to protect revered local foods by limiting the geographical area where they can be made.

Here is the ponderous statute. It looks like the people of Stilton, the village, could make Stilton, the cheese — but they couldn’t market it as such, so it wouldn’t do them any good. The law also forbids them to label their cheese “Imitation Stilton” or “Stilton Style,” proof that the regulations enforce a monopoly for producers without helping consumers at all. Were the goal to protect consumers from misleading advertising or inferior products, it would be fine to label products as imitations and let consumers choose between them and the “real thing.”

As more Americans become interested in where their food comes from and in giving preference to products from certain areas, I hope the United States doesn’t model any legislation on Europe’s detrimental policy.

MoDOT, Traffic On 64/40, and the Fundamental Law of Road Congestion

Posted on by David Stokes

I have heard some complaints from people, via talk radio and message boards, that after two years and more than a half billion dollars, I-64/40 still has traffic jams at rush hour. I have news for the complainers: They could have expanded it to 10 lanes in each direction, and eventually it would still get backed up (I exaggerate, but only a bit). First, let’s all admit that we can’t properly judge the new highway’s traffic issues after only three rush hours, and this morning’s took place in poor weather. Beyond that, however, there is something called the Fundamental Law of Road Congestion. In short, as you expand capacity, which MoDOT did for part of the new project, you release latent demand that fills up that capacity.

Dr. Ken Small is one of the leading urban and transportation economists. He wrote a study for the Show-Me Institute that we thought was terrific. He’s also written extensively about road congestion. If the people of Missouri want reduced traffic jams, there is only one way to do it, and it isn’t capacity expansion. (Don’t take this as indicating a blanket opposition to capacity expansion. There are plenty of reasons that such expansion is often needed.) The only way to reduce congestion in Missouri is through pricing. If you want your roads to be “free,” you’ll get high traffic at peak times. On the other hand, if you want free-flowing traffic on highways at 5:30 p.m., the only way to do it is to charge a toll that continually adjusts pricing as demand changes.

MoDOT did an amazing job with the project, and so did the private contractors involved. But MoDOT does not control the laws of economics, and there is nothing they could have done to eliminate congestion.

More on Missouri Film Tax Credits

Posted on by Christine Harbin

When recently questioned about why he chose to film Up in the Air in St. Louis, Jason Reitman curiously didn’t say that it was because of the $4.5 million in tax credits that he received from the state of Missouri. Instead, he said that it was because of the sheer amount of vacant office space (emphasis added):

In location scouting in St. Louis and Detroit, I walked into empty building after empty building. I realized that I was surrounded by the realities of this recession.

I find this to be poignant, but for a reason different than Reitman probably intended.

Perhaps businesses could afford to staff those office buildings if Missouri weren’t redistributing their money to filmmakers and property developers via tax subsidies.

But then, Reitman would have to find other things to exploit explore than “real people who really lost their jobs.”

Hat tip to David Stokes!

See Something You Don’t Like? Call the Government!

Posted on by Sarah Brodsky

Someone in Texas had the idea to put a replica of Michelangelo’s “David” in his yard, wearing only a Santa cap. Tacky? Yes. Criminal? No. Still, the government had to get involved:

Then, parents started calling Big Spring city officials saying their children were asking why Santa was naked.

The city attorney determined that the statue did not violate any ordinances, but she called the owner anyway and asked him to put clothes on it.

If this is what happens when you erect a little replica, imagine what kind of complaints the city of Florence must get about the real statue, which is much bigger and more visible — and doesn’t even wear so much as a Santa cap.

Small Businesses Can’t Drive Job Growth if They’re Saddled With Higher Taxes

Posted on by Susan K. Feigenbaum

With high unemployment rates continuing to plague the nation, there has been a renewed federal focus on the “engine” of economic recovery — small businesses. The president has pledged to crack open credit markets to help these struggling enterprises grow and expand hiring. But the real remedy for small business stagnation is much simpler: The president and Congress must reject any and all health care reform proposals that will end up soaking small business owners.

The most immediate concern of small businesses is that many of them have been conveniently lumped in with “rich” Americans filing personal tax returns with net income greater than $250,00–$350,000. These are the taxpayers who will incur surtaxes and other indirect tax increases in order to finance coverage for the uninsured.

As it turns out, more than 2.5 million personal income tax filers with incomes of $200,000 or more declared income from farms, businesses, partnerships, or “S corporations” in 2005 (the latest year for which we have data). Of these entities, almost 2 million had net business income that was taxed as personal income. Lurking among these high-income filers are numerous S corporations, including businesses in the “Education, Health and Social Assistance” industry (an IRS classification). An IRS study of 1999 filings by S corporations (the latest available) reported that S corporations in the educational services category generated more than $645 million in net income; those devoted to health care and social assistance generated another $7.6 billion. Among the businesses in this latter category are virtually all of the private medical practices in the United States. In fact, federal tax initiatives aimed at stimulating small business employment have led a vast number of small businesses to incorporate as Chapter S entities.

As a Chapter S corporation, the net income of the business passes directly through to its owners for tax purposes. At the end of each tax year, this income is divided up and reported on each owner’s personal income tax return. These owners tend to be actively engaged in the business — doctors who provide patient care, for example — rather than passive stockholders.

All of the net income is taxed in the year during which it is earned, whether it has actually been distributed to owners or is retained by the business. Why would businesses retain earnings? The answer is simple: To avoid the vagaries of the small business credit market, many retain earnings to self-finance the acquisition of new plant and equipment. Small businesses that fill highly specialized market niches often require highly specialized equipment. In the case of my OB-GYN, a 3-D mammography machine that costs $500,000 promises earlier detection of breast cancer and lower mortality. Is this the type of collateral that outside lenders truly wish to loan against? And what about the $150,000+ electronic medical records system that Medicare will first encourage (through small grants) and then foist upon my OB-GYN by 2012? Sure, there are accelerated depreciation opportunities, but unless there is 100-percent depreciation during the first year of use, self-financed capital expenditures must be spread out over several years.

Clearly, increasing personal income tax rates to finance health care reform will have a depressing effect on small business investment and growth. Along with this, there are more subtle tax implications for small businesses in the current health care proposals. Take, for example, the plan to tax Cadillac employee health care plans. Businesses with a small number of employees tend to pay substantially higher medical insurance rates than large, self-insured corporations. It is not unusual for a small employer to pay an annual premium of $22,000 or more for family insurance coverage, with a $500 deductible and a 10-percent copayment. Any dollar cap on the tax deductibility of employer-provided health insurance would likely snag a disproportionate number of small businesses. The end result would be to increase the tax liability of small businesses, putting them at a competitive disadvantage relative to large companies. This disadvantage would be further exacerbated if those who are happy with their self-insured policies win their battle to be exempted from most of the insurance regulations included in the current federal reform proposals.

A more recent proposal that would negatively impact small businesses is the one that finances health care reform by increasing payroll taxes. At least some of these taxes will be passed backward to small business owners, especially those who are at a competitive disadvantage, relative to large corporations, when it comes to hiring.

Finally, many small businesses struggle to provide their employees with some type of health insurance. By and large, however, this coverage is much less extensive than the plans offered to employees of large self-insured companies, at least in part because of the higher cost of providing coverage to a small group. Should the minimum benefits package dictated by Congress be richer than what small businesses can reasonably offer, those business owners would be forced into a “pay-or-play” scenario that would undoubtedly raise their costs and reduce their competitiveness.

To promote the true survival and growth of small businesses, the first step to take would be to see to it that these companies are not saddled with higher tax burdens as a result of health care reform. The second thing would be to focus less on policies that encourage “easy credit” (isn’t this what got us into our current financial mess?) and more on policies that create incentives for small business owners to invest in themselves. Rather than increasing the tax rate on the net income of S corporations, why not instead exempt retained earnings from taxation altogether? In this way, policymakers would create a much needed incentive for small businesses to self-finance their capital needs and resume their historic role as the engine of employment growth in our economy.

Susan K. Feigenbaum is a professor of economics at the University of Missouri–St. Louis.

 

Education or Indoctrination?

Posted on by Christine Harbin

[In the interest of transparency, please allow me to post this note to indicate my change of perspective. I agree with Sarah and Donald in the comment section below that the use of President Obama’s campaign logo in classrooms was just a mixup and had nothing to do with Mr. Obama. My apologies. — CDH]

Apparently, President Barack Obama’s presence in public classrooms is not limited to songs or writing assignments.

According to an article in the Columbia Daily Tribune, supplies that display Obama’s 2008 presidential campaign logo have been sold in public schools in Columbia, Mo.

Link via Drudge Report.

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