State taxes do not matter?

Richard W. Rahn at the Cato Institute:

Why is it that some of the states with the biggest fiscal problems have the highest individual state income tax rates, such as New York and California, while some of the states with the least fiscal problems have no state income tax at all?

High-tax advocates will argue that the high-tax states provide much more and better state services, but the empirical evidence does not support the assertion. On average, schools, health and safety, roads, etc. are no better in states with income taxes than those without income taxes.

More importantly, the evidence is very strong that people are moving from high-tax states to lower-tax-rate states — the migration from California to Texas and from New York to Florida being prime examples. (Next year, the combined federal, state and local income tax rate for a citizen of New York City will be well over 50 percent, as contrasted with approximately 38 percent for citizens of Texas and Florida.)

If the citizens of California and New York really thought they were getting their money's worth for all of the extra state taxation, they would not be moving to low-tax states.

The obvious question then is: Where is all the extra money from these state income taxes going? It is going primarily to service debt, and to pay for inflated salaries and employee benefits. It is interesting that the high-tax-rate states also, on average, have much higher per capita debt levels than states without income taxes. (Alaska is an outlier because it has its oil reserve to borrow against and actually gives its citizens a "dividend" each year.)

Plight of the states: What happens when the feds stopping sending money?

Edward Glaeser:

I don’t think that states should cut spending now, but I’m not happy with the idea that the federal government is stepping in and eliminating the states’ need to handle their own obligations. In principle, states can create sufficient rainy-day funds and allow for sensible borrowing during economic downturns. Moreover, handling state budget shortfalls with federal bequests creates all manner of oddities.

Governor Patrick releases House 1 Budget Recommendations

Citing the current economic downturn and declining state revenues, Governor Deval Patrick this morning released his House 1 budget. The $28 billion budget raises registry fees and meals and hotel taxes, draws from the state's rainy day fund and expands the state's bottle bill. The governor also reaffirmed a recent plan to cut $128 million from this year's local aid and $220 million in the next fiscal year.

Flanked by members of this cabinet at the State House, Patrick outlined the "multi-pronged solution" including a fix to the current FY 2009 budget. One part of that effort includes the elimination of sales tax exemptions on certain foods and beverages such as candy and alcohol. This change is expected to generate $25 million this year and $121.5 million next year with funds to be earmarked for public health and wellness programs.

Throughout the press conference, Patrick stressed his efforts to strike a balance between competing interests, long-term goals and commitments and the sharp downturn in revenues.

"The national recession is inflicting serious pain across Massachusetts, from household budgets to the state's balance sheets, and like many residents throughout the Commonwealth, we have to make do with less," said Governor Patrick. "At the same time we also have opportunities. The Economic Recovery Plan leverages reforms and responsible budgeting that could help alleviate the mounting pressure on our communities now and in the future."

Patrick said the the budget may call for more layoffs of state employees. He noted that some programs faced severe reductions "to prevent deeper cuts" down the road.

A portion of the governor's proposed budget relies on federal aid dollars yet to be approved by Congress. The Governor said he was optimistic that the Obama administration would provide states with funds from the stimulus package.

Patrick also unveiled a second Municipal Partnership Act which calls for the an increase in the meals tax and an option for cities and towns to levy their own 1 percent sales tax. It also calls for the ability of local government to tax telecommunications property, a measure that will raise approximately $26 million according to budget documents. The act urges cities and towns to shift more of their retirees to Medicare, a move which won legislative approval last year.

Patrick also suggested that cities and towns could achieve efficiencies from regionalization particularly in the area of contract advertising.

"I anticipate there will be vigorous debate," the governor told reporters. "But endless debate is not acceptable. We need action."

During a question and answer session, Patrick said the state will move to direct all capital gains tax revenue to rainy day fund. In the past, capital gains tax revenue, because of their volatile nature, have made estimates used for planning budgets unpredictable and complex.

New revenue for the FY2010 budget include proposals for:

Meals and hotel taxes ($150 million from a 1-cent statewide increase dedicated to taking the sting out of local aid cuts and $200 million for a 1-cent local option)

Commonwealth Wellness Fund: Earmarking $121.5 million for public health initiatives by eliminating sales tax on alcohol, candy and sweetened beverages.

Expanding the state's bottle bill: Earmarking $20 million for recycling and water and and sewer rate relief by including once exempt beverages such as water, juice, sports and coffee-flavored drinks into the bottle bill program.

Registry fees: Earmarking for the state highway fund an expected $74.5 million from "updated and consolidated Registry of Motor Vehicle fees."

More on the governor's budget recommendations here, here and here.

Press coverage Globe/AP; Herald and Boston Business Journal

How Much Would You Pay?

Governor Blagojevich stands accused of attempting to sell President-Elect Obama's vacant seat in the U.S. Senate. Among other things, he asked for a very plum position at a non-profit or union job. His wife was part of any prospective deal.

Obviously a U.S. Senate seat has its value to each person and, in the case of Blagojevich, his spouse. Andrew Roth takes a crack at calculating the value of this open seat and comes out with a NPV (Net Present Value) of $6.2 million. However, this number is underestimates the what can be termed as the going price, considering in the 2004 election candidates for Illinois senate seat collectively spent $17.25 million.

There's another problem with this estimate. In accounting for only possible benefits, Mr. Roth makes a mistake similar to those made by environmentalists touting the economic returns of green power such as the number of jobs. If jobs were a benefit employees would pay their employers for them. For me the costs of a political career (including the deal-making with high-maintenance peers on a daily basis) would signal that the costs are much higher than the benefits.

This might be one of the many reasons that I was not asked to place a bid on the senate seat.

Globe publishes BHI Op-Ed on prevailing wages

Taking on the canard raised by police unions and paid details, we take a look at the prevailing wage.

GOVERNOR DEVAL PATRICK'S announcement that the state will substitute civilian flaggers for police details on public-works projects represents a watershed in Massachusetts politics. A Democratic, pro-labor governor taking on one of the state's most powerful unions - who knows where this could
lead?

Skeptics characterize the action as more form than substance. The Legislature put locally authorized construction projects (as opposed to state projects) temporarily off limits for civilian flaggers. And the unions ceaselessly argue that the state prevailing wage law will prevent any real savings from being captured.

In fact, the governor has shaken up the status quo. Intentionally or not, he also exposed the much deeper flaws that run through state labor policy.

Consider the unions' argument about the prevailing wage. They point out that the prevailing wage for civilian flaggers is about the same as the cost of hiring police details - an amount approaching $40 per hour. Because contractors have to pay the prevailing wage on public works projects, the state won't save any money by substituting civilian flaggers for police details - or so they argue.

By making this argument, the unions have done us a service. If a law compels the state to spend the equivalent of $80,000 a year for someone to flag down oncoming traffic, then it's time to rethink the law.

Read the whole Op-Ed.

Police Details and the Road to Serfdom

See this letter to the Boston Herald:
(http://www.bostonherald.com/news/opinion/letters/view.bg?articleid=1111714&format=comments&cnum=2)

It provides a good illustration of what I have long seen as the key implication of Friedrich Hayek's argument in his best known book, The Road to Serfdom: that the restrictions on personal freedom imposed on ordinary citizens by the looting class beget further restrictions, which beget still further restrictions until there is no one left for the looters to loot. At some point, the motto, "We are all looters now," becomes apropos.

Massachusetts is the only state that requires public utilities and public works contractors to use paid uniformed police officers at work sites along public roads. Other states use civilian flaggers, who are paid far less.

The pay for the Massachusetts-style "police details" is almost $40 per hour, and the practice of using them is characterized by rampant featherbedding. Massachusetts drivers commonly see detail police ignoring the traffic they are supposed to direct while talking away on their cell phones or chatting with construction workers. The Beacon Hill Institute just conducted a poll showing that 86% of Massachusetts voters want to end this expensive perk.

The letter to which I provide a link here comes from a police union official who is trying to preserve the union monopoly that presides over the hiring of police details. The Governor of Massachusetts, thanks in large part to revelations from the Beacon Hill Institute, is considering a proposal to end this monopoly and to introduce the use of civilian flaggers on a limited basis.

I urge readers to take a number of lessons from this letter and from the comments that follow (of which I offer one). The first lesson is that no claim is too absurd to make when it might serve the goal of permitting the person making the claim to pick the pocket of someone else. Consider the claim that the state could not save money by hiring civilian flaggers since state laws would require the payment of a "prevailing wage" that is no less than the wage paid the police. That implies that state taxpayers and rate payers should have to pay something approaching $80,000 a year to do a job that could be performed by any functioning human being after a few hours of training. Suffolk University hires PhDs for less than that.

The second lesson goes back to my point that one form of looting begets another. Consider the argument that police details are a bargain because they don't require the health and pension benefits to which civilian flaggers would be "entitled." But, of course, there is no entitlement to such benefits traceable to the Constitution or any other founding document. What we have is a society in which entitlements of this kind are being imposed involuntarily on employers and, to a degree, the workers themselves. Suppose a retired police officer, who already has health and pension benefits wants to work as a civilian flagger -- a job for which he would be, by the union's own logic, supremely qualified. Under this logic he would be entitled to benefits he doesn't need and that he would happily forgo in order to make his services more competitive. Nevertheless, the union bosses use laws aimed at looting those employers who would prefer not to pay health and pension benefits as an argument for looting taxpayers who would prefer not to use grossly expensive police details.

And that isn't the end of it. An argument frequently used by the union bosses is that police details are important because police can make arrests and even respond opportunistically to crimes taking place near the work sites they are hired to work. By that logic, we should have a cop at every corner, inasmuch as the probabily of a crime taking place at a work site is immeasurably different from a crime taking place at any other point where traffic is flowing. For that matter, we should use cops everywhere that crimes can happen. No more mall cops or university cops. After all, they can't make arrests but can only detain suspects till the real cops arrive. Put a real cop everywhere, since the cost of doing that pales in comparison to the benefit.

This is but a small saga in the history of union looting, Massachusetts style. The prevailing wage law, the practice of using project labor agreements and others loom larger. But this one is worth following since it plays so heavily on our emotions. Some of us -- this writer included -- are "law and order" types who want to love the police. It saddens us to see people called to such an honorable profession embarrass themselves in this way by perpetuating a scam aimed only at fattening their wallets.

Update! The Herald published my letter this morning.