The quotation above is from Aaron Hedlund’s new report, an exploration of what happens when tax rates change. Among the findings:

• The effect of tax policy on the size of the tax base can be as important as the actual tax rate.
• Looking only at the impact of taxes on the incentives of primary earners yields can lead to misleading projections about the revenue a tax hike will generate; a household’s secondary income earners, as well as those considering entrepreneurship or investments in their own human capital, can be more sensitive to tax rate changes than primary earners.

Click on the link below to read the entire essay.

The post Report: How Do Tax-rate Changes Impact Revenues appeared first on Show-Me Institute.

Take the results from the April 5 votes, for example. Eleven school districts proposed operating levy property tax increases—six passed, and five failed. Below I highlight the 2015 tax rate ceiling for operating funds in these school districts. The chart indicates that the districts that passed increases already had higher tax rates than the districts where a proposal was rejected.

Each of the districts is listed below. They are organized from highest to lowest based on the tax rate ceiling for operating expenses after the vote. As you can see, the six that passed also have the highest tax rates. They also tend to spend more money per pupil.

We see the same thing at the state level. Take the 50 highest-spending districts, for instance. They spend, on average, $15,537 per pupil (not weighted by the number of students). The 50 lowest-spending districts spend about half of that. The casual observer might look at this and conclude that the difference in spending was caused by property taxes. They would be partly right. The highest-spending districts tend to have more local property wealth, but they also tend to tax themselves more. The average tax rates in our highest-spending districts is $1.553 more than it is in our lowest spending districts. In other words, some of the inequalities are self-inflicted.

The state guarantees every school district a certain level of funding.  This funding formula helps close the gaps between property-rich and property-poor school districts, but gaps persist partly because wealthy school districts tend to be comfortable with taxing themselves more.  Indeed, the state assumes each district’s local effort will be $3.43 per $100 of assessed valuation. In 2015, 205 school districts taxed themselves at a rate lower than this assumed rate. In fact, 101 districts taxed themselves less than $3.00 per $100 of assessed valuation.

Here is the question we must consider: Are we comfortable allowing school districts to tax themselves more to pay for schools? If we are, then we are comfortable with some level of inequality. If you are not comfortable with giving districts this freedom, then what you are really saying is that you want to hold down spending in school districts, especially wealthy ones.

*An earlier version of this post incorrectly indicated that Laclede Co. R-I had failed to pass the proposed increase. 

The post School Spending Inequalities Are Not Just Caused by Property Wealth appeared first on Show-Me Institute.

Despite the Governor’s claims, Missouri is not a low-tax state. We may have low taxes on gasoline and cigarettes, but when it comes to something important like your income, there are many other states with lower taxes.

Why focus on income taxes? Economic theory—and everyday experience—tells us that if you want less of something, you should tax it. That is the thinking behind carbon taxes. But while taxing carbon emissions may reduce the levels of CO₂, taxing labor income will reduce the desire to work. That is, raise income taxes and people will work fewer hours, which will result in less output.

In the end, higher income taxes stifle economic growth—and the creation of wealth. That is why tax rates matter. There is hard evidence indicating that states (and counties) with lower income tax burdens perform better economically than states with higher tax burdens.

With that in mind, the important question becomes: How do Missouri’s income taxes stack up against those of other states?

To answer this question, Rik Hafer and I used standard tax preparation software to calculate how much a family of four earning the U.S. median income had to pay in income taxes across all 50 states This allowed us to compare the tax burden in Missouri to that in other states. (The full report is available at ShowMeInstitute.org)

Contrary to the claim that Missouri is a low-tax state, we found that this average family of four would have to pay more in income taxes in Missouri than in 27 other states. Closer to home, that family also would pay more in Missouri than in Oklahoma, Nebraska, Kansas, and Tennessee. Our results are just one indicator that Missouri’s income taxes are not among the lowest in the country.

The Tax Foundation has compiled information regarding the top marginal income rates for every state. According to their calculations, Missouri has the 22nd-highest marginal income tax rate in the country. While this does not mean Missouri has the highest tax rate, it does mean that Missouri is not one of the lower-rate states, either. This ranking can understate how Missouri’s rates compare for most people. For example, California’s top tax rate is much higher than Missouri’s. However, Missouri’s top rate kicks in after $9,000 of income, and California’s kicks in after $1 million. In fact, many Californians face lower tax rates than Missourians of similar incomes.

Taken together, these rankings suggest that there is room for Missouri to cut taxes in order to remain competitive with other states. Nine states, including Tennesse—which borders Missouri—do not tax labor income at all. Kansas, Oklahoma, and Illinois all have top marginal rates that are lower than Missouri's. There are ways to help lower income taxes for Missourians without causing large revenue shortfalls. This includes broadening the sales tax base and cutting down on issuing economic development tax credits. If Missouri wants to remain competitive with its neighbors, it needs to build on the tax cuts it has already enacted and pass more tax cuts.

People who claim Missouri is a low-tax state are ignoring the taxes that really matter, like income taxes. For Missouri to be a low-tax state, there is more work to be done.

The post Taxes Are Still Too High for Missouri appeared first on Show-Me Institute.

Have you ever wondered whether gasoline is cheaper on this side of the border or right across the state line? Show-Me Data can help you find out.

Not only can you compare various state tax rates, you can also see whether a state is gaining or losing population. You can also see how a state’s economy is performing relative to other states in the country.

We have included an introductory video on the site to show how you to get started. Please take a look and find the information that interests you the most.

The post Welcome To Show-Me Data appeared first on Show-Me Institute.

First, what is the case for Missouri being a low-tax state? Most often, people cite the Tax Foundation’s calculations based on Census Bureau data. For example, in 2011, Missouri ranked 46th lowest in terms of per capita state tax collections. No one would disagree with that stat, per capita state tax collections is measuring the amount of taxes paid to state government divided by the population of the state. In other words, it is a measure of the average state tax burden for people living in Missouri. It follows that Missouri government does not collect much from its citizens compared to other states.

Most often, economists focus on the marginal income tax rate. The marginal rate is the policy variable while the actual payment is the product of the income tax rate, which is the state government controls, and the base, which reflects the decisions people make. In terms of 2011 corporate income tax rates, Missouri had the 33rd-highest tax rate of the 50 states. Missouri’s individual income tax rate of 6 percent is the 21st-highest rate among the 50 states. Some would argue that we want to include Saint Louis and Kansas City earnings taxes. It is true that both rates apply, but only to those living or working in the two cities (probably about a million people). If we include the earnings tax rate, then the marginal rate for people living or working in those two cities is 7 percent. Accordingly, people living or working in those two cities face the 14th-highest individual income tax rate. (Similarly, the corporate tax rate would rank higher if you included earnings taxes.) These are the facts.

Do the facts imply that Missouri is a low-tax state? To help illuminate how people change their behavior and how these responses affect some of the alleged “low-tax” measures, consider, for illustrative purposes, that there is a state consisting of two houses, labeled House A and House B. Suppose that House A and House B each produce goods and services that are sold to the rest of the world. The value of each house’s production is $100,000 so that total production is equal to $200,000. Now consider that the state government implements a tax rate of 2 percent on House A’s production. For simplicity, assume that the people in House A can walk to House B and produce there, thus avoiding the new state tax. Because there is no production in House A, 0.02 times zero equals zero. By the state tax burden measure, the state would not impose any burden on its citizens. The marginal income tax rate is 2 percent.

Now, suppose every other state consists of two houses just like our home state. Total production is $200,000 in every other state. We consider a case in which every other state imposes a 1 percent income tax rate on all houses. In addition, it is costly to move from state to state so everyone stays in his or her own state. The total tax revenues in every other state would be $2,000, or the per capita state revenue burden would be $1,000.

Based on this hypothetical snapshot world, if we call the first illustrative state “Missouri,” then it would be the 50th-lowest tax state because its per capita state tax burden is zero while all other states’ per capita state tax burden is $1,000. In contrast, Missouri would have the highest marginal income tax rate because 2 percent is greater than 1 percent. Missouri would simultaneously be ranked the lowest- and highest-taxed state.

There is one last fact that needs to be raised. What is the state economy’s performance? Between 1997 and 2012, Missouri’s economy increased at a 0.9 percent annual rate. This is the 47th-slowest growth rate among the 50 states. And the corporate and individual income tax rates are the two rates that are most associated with economic growth; in other words, these are the tax rates that are most harmful to economic growth.

Missouri’s slow economic growth is not solely the result of its tax structure. The tax structure, however, does not help. The key facts are that Missouri is growing slowly and there are tax reform measures that can improve economic growth without shrinking state government. Let’s talk about those.

The post The Difference Between A Low Tax And A Harmful Tax appeared first on Show-Me Institute.

This is a tale of two neighborhoods. Both Saint Louis-area neighborhoods are impressive and outwardly they look like twins. Hampton Park and Lake Forest sit on opposite sides of Hanley Road between Clayton Road and Highway 40, and they both boast large, stately homes. They are equidistant from the region’s central business districts. With two exceptions, they have the same level and quality of public services and the same tax rates. With so many similarities, you might assume property values would be the same. But you would be wrong.

Hampton Park and Lake Forest illustrate how different people finding different solutions to their housing and educational needs can have a substantial impact on housing prices.

The two exceptions noted above are the neighborhood school districts and the differing tax rates they impose. Both neighborhoods are subdivisions of Richmond Heights, but Lake Forest — which is located west of Hanley — is part of Clayton School District. In 2010, Clayton was the highest performing district in Missouri according to MAP scores. Over the past 10 years, residents have paid an average tax rate of $3.44 per $100 of assessed valuation. East of Hanley, Hampton Park is part of Maplewood-Richmond Heights (MRH) school district. In 2010, the state ranked MRH’s performance 315th out of 556 districts, making it an average district. Over the past decade, residents paid an average tax rate of $4.48.

Homes in Lake Forest are located in a higher performing school district and have lower tax rates than those across the street in Hampton Park. Do homebuyers react accordingly, and by how much?

Of course homebuyers adjust. According to a study of assessed valuations in the two neighborhoods, the difference between the prices paid for a theoretical house of the same square footage and lot size in the two neighborhoods is $109,000, or a little more than 10 percent. Homebuyers in Lake Forest are willing to pay approximately $109,000 more to live in a higher-performing school district with lower tax rates. Conversely, homebuyers in Hampton Park are paying $109,000 less to live in a more average school district with higher tax rates. Economists refer to this kind of difference as capitalization. It is the process that incorporates tax rates and other variables into the value of a piece of property.

Capitalization is a complex process, especially in regions that have as many taxing districts as Saint Louis. Prospective homebuyers typically take the time to research local school quality and tax rates, but they usually stop short of researching fire districts. Although homebuyers may not investigate them, the insurance industry certainly has. A home located in an area with a poor quality fire district will have higher insurance rates, and those higher rates will be translated into lower home prices. The combined wisdom of thousands of individual decisions is sorted into a price that is readily understood by everyone.

Capitalization works in both directions, often simultaneously. A great school district will lead to higher property prices, while the high tax rates used to fund those good schools will lower the price. The low crime rates of the outer suburbs will increase prices, while the higher commuting costs will lower prices. As for Lake Forest, the lower tax rates leads to higher home prices, and this may result in the same final tax bill as higher rates on less valuable property.

The higher tax rates and lower ranking school district do not automatically do economic harm to the residents of Hampton Park. A Hampton Park purchaser may intend to send their children to private or parochial schools and might be using the $109,000 discount to do just that. This appears to be the case for many residents, as the MHR school district offers no school bus service within Hampton Park. In effect, the $109,000 price difference can be viewed as a voucher toward the cost of private education, the payment of future (higher) taxes, or both.

The larger point is that with the variety of different cities, school districts, etc. that we have in Saint Louis County, there is an abundance of choices, making it more likely that everyone can find a suitable combination of taxes and services. Homeowners vote with their feet — by leaving cities that increase taxes too much or fail to offer quality services. This pressures cities to be efficient. That pressure and competition is reflected in property values, and that benefits all of us.

Gaudiet emptor — Let the buyer rejoice!

The post A $ 109,000 School “Voucher”: A Story of Tax Rates and School Districts appeared first on Show-Me Institute.

Pujols falls into the top federal tax bracket with a 35 percent marginal rate, so his federal tax bill will come in a little below $10.5 million. (It’s lower than that because of the lower rates he pays for the first few hundred thousand dollars and his ability to write off his Missouri income tax on his federal tax return.) The state of Missouri’s take is easy to determine because it is a flat 6 percent, clocking in at $1.8 million. The Saint Louis earnings tax is for 1 percent of income, but it only applies to games he plays in Saint Louis, so it will be half of 1 percent in his case, or $150,000. (He will have to pay earnings taxes in other cities that have them, like New York City and Kansas City, for the games he plays there, but if I were to try to tabulate his tax bill exactly, it would be absurdly complex, and I’d demand to be paid like his accountant.)

In short, it’s a bit of an exaggeration to say that Pujols might make $30 million a year, because after paying the various taxmen, he will end up with closer to $17 million — or less than 60 percent of his gross income.

The post How Much Will Pujols Pay in Taxes? appeared first on Show-Me Institute.

In an article on the Missouri Watchdog, Brian Hook links to a new study from Tax Foundation. It concludes that letting the Bush tax cuts expire would negatively affect revenues for states that allow residents to deduct the amount that they pay in federal income taxes — which includes Missouri. This is because if the tax cuts expire, a high-earning individual living in Missouri would pay more in federal taxes. He or she could therefore deduct more from state income taxes, and Missouri would receive less revenue.

I want to highlight my statements in the article regarding the marginal effects of this policy in Missouri, because it’s a concept fit for Show-Me Daily. From the article:

If the tax cuts are allowed to expire, taxpayers in Missouri will experience higher tax rates, said Christine Harbin, an analyst with the Show-Me Institute, a free market think tank. The top marginal effective tax rates on income would increase to 46.69 percent under the Democrat’s plan, or 41.13 percent under the Republican’s plan.

“Because they will experience reductions in their take-home income, it’s likely that fewer individuals and businesses will decide to come to Missouri to conduct business,” Harbin told Missouri Watchdog.

“People tend to think on the margin, and a marginal number of individuals and businesses will elect to go to other states where the cost of doing business is lower. For those individuals and businesses that do remain in Missouri, this reduction in net income will mean that they will have less money to save or spend.”

The tax policy will also likely have negative consequences for the state budget as well, Harbin said.

“A reduction in general revenue collections will mean that the state will have to raise tax rates further, cut expenditures or borrow more to cover the shortfall,” she said, adding changes in tax policy could further discourage individuals and companies from remaining in Missouri or relocating to the state.

It’s additionally notable that the expiration would negatively affect all taxpayers, not just those in the highest marginal income bracket, because the Bush tax cuts reduced marginal income tax rates for all earners. The Bush tax cuts introduced a new 10-percent bracket; previous to this, the lowest rate was 15 percent. If the Bush tax cuts expire, low- and middle-income earners would also experience a tax increase.

I hope that this reduction in state tax revenues doesn’t lead to the unfortunate consequence of eliminating federal deductibility in Missouri. Contributors to Show-Me Daily have discussed the negative consequences of income taxation before.

If the tax cuts were extended, individuals living in Missouri would be better off because they could keep a greater share of their income, and the state government in Missouri wouldn’t experience a consequent reduction of revenue.

The post Letting the Federal Bush Tax Cuts Expire May Have Negative Revenue Consequences in Missouri appeared first on Show-Me Institute.

However, there were two things that Maryland politicians didn’t count on (1) a world-wide economic crisis decreasing the number of million dollar earners and (2) millionaires simply leaving (or taking in less income). “By April 2009, one-third of the millionaires have disappeared from Maryland tax rolls. On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year – even at higher rates.

Harvard economist and New York Times columnist Greg Mankiw elucidates the micro-level choices that lead high income earners to avoid income taxes or reduce their incomes:

Suppose that some editor offered me $1,000 to write an article. If there were no taxes of any kind, this $1,000 of income would translate into $1,000 in extra saving. If I invested it in the stock of a company that earned, say, 8 percent a year on its capital, then 30 years from now, when I pass on, my children would inherit about $10,000. That is simply the miracle of compounding.

Now let’s put taxes into the calculus. First, assuming that the Bush tax cuts expire, I would pay 39.6 percent in federal income taxes on that extra income. Beyond that, the phaseout of deductions adds 1.2 percentage points to my effective marginal tax rate. I also pay Medicare tax, which the recent health care bill is raising to 3.8 percent, starting in 2013. And in Massachusetts, I pay 5.3 percent in state income taxes, part of which I get back as a federal deduction. Putting all those taxes together, that $1,000 of pretax income becomes only $523 of saving.

And that saving no longer earns 8 percent. First, the corporation in which I have invested pays a 35 percent corporate tax on its earnings. So I get only 5.2 percent in dividends and capital gains. Then, on that income, I pay taxes at the federal and state level. As a result, I earn about 4 percent after taxes, and the $523 in saving grows to $1,700 after 30 years.

Then, when my children inherit the money, the estate tax will kick in. The marginal estate tax rate is scheduled to go as high as 55 percent next year, but Congress may reduce it a bit. Most likely, when that $1,700 enters my estate, my kids will get, at most, $1,000 of it.

HERE’S the bottom line: Without any taxes, accepting that editor’s assignment would have yielded my children an extra $10,000. With taxes, it yields only $1,000. In effect, once the entire tax system is taken into account, my family’s marginal tax rate is about 90 percent. Is it any wonder that I turn down most of the money-making opportunities I am offered?

The worst effect of income taxes is probably not actually on the people who pay them. They have the option of consuming more leisure instead of working more and still living very comfortably. The biggest loss is the wealth that is never created because of the system’s disincentives, which hurts consumers across the board.

The post Diminishing Returns appeared first on Show-Me Institute.

The Wisconsin State Journal published an article that the film industry is thriving in Wisconsin, my home state, despite the fact that the governor reduced the cap for film tax credits in Wisconsin from $1.5 million to $500,000.

Why did Chicago writer and director Terry Green film in Wisconsin rather than some other state with more generous tax breaks for movies?

It wasn’t because of a fat state subsidy. According to the film’s Web site, Milwaukee was Green’s “first choice location” because of “the city’s rich history, vintage architecture and Lake Michigan’s horizon,” which made a “perfect backdrop for the 1919 period locations which simulate old world New York City.”

What’s more, Wisconsin is able to attract major blockbuster films without providing a cent of subsidy. According to an article in the Milwaukee Journal Sentinal, many scenes of Transformers 3 will be filmed in Milwaukee this summer:

Visit Milwaukee spokesman Dave Fantle says “Transformers 3” doesn’t qualify for that particular [tax credit] program, and that no public money is going to the production in Milwaukee.

”They are here because director Michael Bay fell in love with the Art Museum (the Calatrava addition) and wants to feature it in the film,” Fantle said, in an e-mail.

Wisconsin sets a great example for Missouri in this regard. Both states have many positive attributes (e.g., the river, the architecture, the skilled human capital, the history, etc.) which can attract business on their own merit. Firms will locate here for these reasons; they don’t need to be bribed with generous incentive packages.

As an example, the True/False documentary film festival in Columbia illustrates that the Show-Me State doesn’t require production incentives from the government in order to have a thriving film industry. My colleague, Audrey Spalding, is a fan of the festival. In the comment section of a previous post, she writes (emphasis mine):

Just last weekend, I attended the True/False Film Festival in Columbia, watched at least 13 documentaries, and spent all sorts money to eat out. And, I loved it, not because it was subsidized activity that otherwise wouldn’t occur in this state, but because it was central Missouri doing something central Missouri does well: Hosting an intimate film festival to screen documentaries about such disparate subjects as tween NASCAR, the war in Afghanistan, and the inventor of the floppy disk.

And, for clarification, I called Paul Sturtz, one of the founders of the festival. True/False, which is run by a nonprofit organization, does not receive any state tax credits or local tax incentives.

This is true for industries other than film, as well. For example, American Express decided to locate a new $600 million data center in Greensboro, N.C., without receiving a cent of assistance from the state or local government. This is a stark contrast from Missouri, whose state legislature proposes offering generous incentives to data centers as a means to lure them to the state, and also gave $28 million in state tax credits to IBM for locating a service center in Columbia.

Furthermore, when officials don’t offer tax credits, the state benefits because new businesses contribute revenues from sales and property taxes, none of which has to be reimbursed or abated by the state.

The optimal way to attract business to Missouri is to eliminate the uneven playing field that exists in the status quo and reduce marginal tax rates for all individuals and businesses — not just some.

The post States Can Entice Businesses and Industries Without Tax Credits appeared first on Show-Me Institute.