What Does the State Income Tax Cost Missourians?

Posted on by Joseph Haslag

The recession has dominated economic news of late. As with any downturn, there is an opportunity now to reevaluate the structure of the economy and try to create a situation that will produce the most future growth. More specifically, what is the best tax structure for the Missouri economy? In this article, we quantify the impact that the Missouri individual income tax will have in terms of foregone economic growth.

Even before the recession, Missouri’s economy had suffered relative to the rest of the country. For the last 20 years, the standard of living for the typical Missourian has not kept pace with the national average. The real GDP of the United States increased 34.3 percent between 1995 and 2005, but during the same 10-year period, Missouri reported a more modest 23.8-percent increase. That difference means that Missourians realized a lower standard of living.

Seven states do not have a personal income tax, and two others that levy an income tax only on interest and dividend income. These states have seen their economies grow at a much higher rate than those with an income tax. For example, between 1995 and 2005, Texas saw 53.2-percent GDP growth — a rate that is more than double the rate of increase reported by Missouri.

Without the current 6-percent income tax, the take-home pay for Missourians would increase, leading also to an increase in consumption. This would generally improve standards of living, and attract new businesses to Missouri that want to cash in on the benefits that the lack of an income tax brings. If Missouri were to become the only Midwestern state without a personal income tax, the state would gain a regional advantage.

To quantify the gains Missouri would see without an income tax, we projected the growth rate in Missouri’s real GDP for the next 25 years. In one projection, we assumed that Missouri would continue to grow at the same rate that it has in the recent past. In the second projection, we used an economic model to compute what Missouri’s growth rate would be without a state income tax. Our calculations indicate that Missouri’s real GDP would increase at a 2-percent annual rate if the state income tax were eliminated, as opposed to Missouri’s historic 1.3-percent growth. While a 0.7-percent increase in the growth rate may not sound like much, its impact would be significant for the next generation of Missourians. Indeed, Missouri’s real GDP gains would total $438.6 billion over this 25-year period, a substantial amount that would translate into more jobs and a higher standard of living. This would be a substantial windfall that Missouri cannot afford to forego.

The income tax adversely affects the state’s economic growth. Missouri could go a long way toward catching up by eliminating its state income tax. Although there are significant challenges associated with such a policy, such as the need to replace state revenues in a way that will not impinge upon economic growth the way that taxing income does, Missouri has a relatively small state government, at least in terms of government spending relative to state GDP. Replacing the revenue would be a challenge, but one that could be well worth it. The current recession would be a great time to implement state policies that eliminate the negative effects of an income tax on growth, and instead set up Missouri’s economy to thrive.

Joseph Haslag is executive vice president of the Show-Me Institute, a Missouri-based think tank, and a professor in economics at the University of Missouri–Columbia. Michael Owens and Caitlin Hartsell are interns at the Show-Me Institute.

 

Turning Your Money Against You, Part II

Posted on by Dave Roland

Almost precisely one year ago, I wrote about how some Missouri cities were dedicating your taxpayer dollars to preserve the government’s ability to take property from one private owner and give it to another private owner. As you may remember, the Missouri Municipal League engaged in litigation intended to prevent Missouri’s citizens from voting on the question — using a combination of funds from city governments and contributions from the same commercial developers who are eager to see eminent domain used to their advantage.

Folks, they’re at it again.

Almost as soon as Missouri Citizens for Property Rights got a ballot title from the Secretary of State, the Missouri Municipal League sued in an attempt to make the ballot title recite a parade of imaginary horrors that they claim would follow the end of eminent domain abuse. A couple of weeks ago, Judge Richard Callahan ruled that the Secretary of State’s ballot title could go forward with only one insubstantial adjustment.

The Missouri Municipal League has appealed that ruling, continuing to insist that the restoration of property rights should be described as nothing less than the death knell for America. And, again, they’re calling on your elected officials to pony up your money in order to prevent you from having a say in the matter.

As a “Red Alert” sent out by the Municipal League states:

[A]lthough cities cannot directly contribute to support or oppose any ballot measure, cities may fund public informational campaigns. The City of Springfield has already committed $5,000 to this effort. Other cities are following suit. City contributions should generally reflect the size and financial capacity of the participating city. The League will also continue to coordinate these efforts with private sector “partner organizations” such as the Missouri Chamber of Commerce.

Of course, other cities have a more direct means of trying to prevent your participation in the political process. The city government of Slater, Mo., passed a resolution last week that “urges the citizens of [that] community to refrain from signing a CPR constitutional initiative petition because doing so would be contrary to the best interest of most property owners within the State of Missouri.”

When I used the Sunshine Law to compel the city to produce all documents its officials considered before adopting this resolution, all they could provide was a PowerPoint presentation created by the Missouri Municipal League — meaning, apparently, that city officials did not even consider the actual text of the proposed amendment, much less seek out any alternative interpretations. Instead, they resorted to the Orwellian suggestion that a constitutional amendment designed to protect the property rights of all Missourians would somehow be bad for property owners.

This should not be tolerated. Fortunately, it seems that some people have recognized this and are taking action. The Post-Dispatch reported just the other day that some citizens in Pacific, Mo., have demanded that their city withdraw from the Missouri Municipal League.

If enough people put pressure on their city governments to do the same, the Municipal League may have no other choice but to start respecting property rights instead of continuing their defense of eminent domain abuse.

Columbia’s History With Eminent Domain Abuse

Posted on by Dave Roland

This weekend, the Columbia Business Journal ran a tremendous article (part one of what looks to be a series) discussing how that city used eminent domain to demolish a thriving part of its black community. I’ve discussed previously how, particularly in the mid–20th century, cities would frequently use eminent domain to accomplish “Negro removal.” I had not previously been aware of Columbia’s own experiment with this racist enterprise, and I’m thankful to the Business Journal for bringing it to light.

The Color of Technology

Posted on by Sarah Brodsky

When I first glanced at the title of Bill Schrier’s latest blog post, “Gray, Not Green, Technology,” I thought he must be referring to green jobs. Those are the jobs in alternative energy that aren’t productive enough to sustain themselves in the marketplace, but that are supposed to be the professions of the future (if the government subsidizes them, that is). Wasting resources on jobs that wouldn’t exist in a competitive environment is antithetical to the goal of saving and conserving resources, so I would readily classify such programs as “gray” rather than “green.”

However, reading further I see that Schrier isn’t referring to any specific policy; he’s wary of technological progress in general. Here’s why he thinks green technology is a myth:

Technology contains scarce minerals mined from the earth. It uses a lot of plastic (plastic comes from oil, right?). It takes a lot of water and toxic chemicals to make electronic components. An integrated circuit or chip factory uses as much water and power as a small, not-very-green, city.

Using technology is injurious, both to the environment and to people.

I’m starting to wonder why he took the job of Chief Technology Officer for the city of Seattle!

Schrier doesn’t consider all the materials and brainpower that would be wasted if we tried to do the same tasks without the benefit of technology. For example, imagine if there were no Internet and blog posts had to be printed in newspapers. You would have to deliver the newspapers several times a day in order to deliver information as quickly as a blog. Maybe you’re thinking, “They should just print them once a day and people could do without reading blog posts as soon as they’re written.” But then you have to take into account all the resources that would go to waste because of a lack of information — all the poor decisions that could have been prevented had people known more, sooner.

Even if you accept Schrier’s premise that technology is harmful, you must admit that technology is here to stay. And, because it is, the smartest thing to do is to create more new technologies, because they are cleaner, greener, and more efficient. It’s a good thing we didn’t stop developing computers when they were the size of rooms. Let’s welcome technological innovation and the environmental benefits it’s sure to bring.

Locavore Movement Takes Too Few Factors Into Account

Posted on by Abhi Sivasailam

James McWilliams, author of Just Food, discusses in a recent issue of Forbes magazine how the practice of buying local does not necessarily support the aim of reducing environmental impact.

McWiliams begins by citing a 2006 academic study in New Zealand that determined Londoners could reduce their environmental impact by purchasing lamb imported from New Zealand rather than lamb produced in England, because factors other than transportation often play a far larger role in environmental impact.

Mcwilliams continues by discussing how economies of scale in production can positively distribute environmental costs:

To choose a locally grown apple over an apple trucked in from across the country might seem easy. But this decision ignores economies of scale. To take an extreme example, a shipper sending a truck with 2,000 apples over 2,000 miles would consume the same amount of fuel per apple as a local farmer who takes a pickup 50 miles to sell 50 apples at his stall at the green market. The critical measure here is not food miles but apples per gallon.

We’ve argued on this website before that locavore policies constitute a new form of protectionism. This is true, but likely not a very compelling line of reasoning for locavores.

In this case, the economically efficient and environmentally efficient solutions do not have to be polarly aligned. Locavores should understand how their actions may fail to uphold the values they are rooted in, because of logistics and unintended consequences that haven’t been thoroughly considered. It’s even more important to view with a skeptical eye any legislation, government purchases, or changes in trade policy based on the reasoning that local consumption equates to environmentally friendly consumption.

Minimum Wage Laws

Posted on by Abhi Sivasailam

Over at Mises Daily, Art Carden revisits the harmful effects of minimum wage laws and cites a Show-Me Institute study to do so:

Suppose that a job can be done by either three unskilled workers or two skilled workers. If the unskilled wage is $5 per hour and the skilled wage is $8 per hour, the firm will use unskilled labor and produce the output at a cost of $15. However, if we impose a minimum wage to $6 per hour, the firm will instead use two skilled workers and produce for $16 as opposed to the $18 cost of using unskilled workers. In the “official data” this shows up as a small job loss — in this case, only one job — but we see an increase in average wages to eight dollars per hour in spite of the fact that the least skilled workers are now unemployed.

I am in favor of helping the poor, but minimum wage laws — striking examples of the law of unintended consequences at work — are not the best tools to address the plight of the working class. As Carden notes, wage floors create unemployment for low-skilled workers. But earning a low wage would be better than no wage at all. Further, wage floors create deadweight losses through inefficiency, strain employer-employee relations, and foster the emergence of black markets in labor.

Wage floors are supported by people with the noblest intentions and the poorest reasoning. Proponents would do well instead to support education, skills training, and expansion of market opportunities through deregulation as better mechanisms to alleviate lower class struggles without the sting of such harmful unintended consequences.

Policy Pulse Updates

Posted on by Abhi Sivasailam

Over at our Policy Pulse portal, staff reporter Audrey Spalding has published several recent articles about education issues in Missouri.

This past week, Audrey has explored how recent school board meetings have not led to a resolution for teacher negotiations in the Lindbergh School district, how recent state legislation has affected Lindbergh’s budget, and how that same legislation threatens to choke funding to 23 St. Louis County school districts.

Please stay tuned to Policy Pulse as we continue to promote government transparency, civic participation, and policy analysis.

Blue on the Boys’ Wall, Yellow on the Girls’ Wall

Posted on by Sarah Brodsky

The Panama City Renaissance School blog links to an article in the Las Vegas Sun about same-sex public education. The article quotes the usual experts for and against single-sex schooling. Then it concludes with this on-target quote from a parent:

“I don’t know if boys and girls really do learn differently — I know that’s the theory,” Curiel told the Sun as he dropped Eric off for class. “But whatever it is, it’s working.”

Experts on the both sides make the mistake of overgeneralizing. Single-sex education proponents claim, for example, that all boys should learn in classrooms painted certain colors because the average boy reacted better than the average girl to that color in a research study — never mind that wall color may not affect achievement, or that individual boys have different color preferences. On the other hand, critics of single-sex education rally against the perceived unfairness of separate classes, dismissing the fact that some students have had good experiences with single-sex schooling.

One system wouldn’t work for everyone, but it’s better when people have a choice.

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