BHI, Mass. lawmakers again try to gauge revenues

From the State House News Service in the Berkshire Eagle:

BEACON HILL INSTITUTE

Forecasted fiscal 2019 growth: $690 million or roughly 2.8 percent

Paul Bachman of the Beacon Hill Institute said revenue growth has slowed down dramatically over the past few years, a situation he called "a little bit puzzling" given the 70,000 jobs created in the past year. But he said personal income growth has also slowed dramatically -- falling to 0.9 percent in the fourth quarter of 2016 after having been over 5 percent in earlier quarters — and now may be on track for a rebound.

"That's what's driving the less than robust tax revenue collections," he said.

A response to the Institute on Taxation and Economic Policy's misguided critique of the STAMP model

On May 21, 2014, The Institute on Taxation and Economic Policy (ITEP) released a report entitled, “STAMP is an Unsound Tool for Gauging the Economic Impact of Taxes.” The report makes several criticisms of the Beacon Hill Institute (BHI) State Tax Analysis Modeling Program (STAMP®).  BHI responds here on what ITEP gets wrong about the STAMP model. (PDF file)

In defense of STAMP as a tax modeling tool

A PDF version of this primer is available here. 

The following is an assessment of the appropriateness of modeling state tax policy using methods that came to the fore in The General Theory of Employment Interest, and Money, published in 1936 by the British economist, John Maynard Keynes. The two features of Keynes’s book that are most relevant to the topic at hand are (1) that it was written to address the economic conditions of the Great Depression, which was in its 7th full year at the time of the book’s publication, and (2) that it offered a tool, called the Keynesian multiplier, for measuring the effectiveness of the policy recommendations that came out of the book.

Keynes saw it as his purpose to replace the hitherto recognized economic paradigm, then called the “classical” model, with a new paradigm that reflected the depth and persistence of the Depression. In the classical model, economic downturns, even severe economic downturns, were supposed to be self-correcting. The relevance here is that the classical model (whose assumptions mirror those of our CGE model) assumed that supply equaled demand except for brief periods of imbalance between supply and demand, which would be eventually corrected by price and wage adjustments.

Given that the ongoing economic downturn was clearly not self-correcting, argued Keynes, it was necessary to forge a new approach that both explained that downturn and provided a path back to more normal conditions. It was necessary to build a model in which the supply of goods and labor could exceed the demand for goods and labor over a protracted period of time.

Keynes’s approach turned the classical model on its head: Previously, saving was necessary for investment and therefore for production and employment. Now saving was a “leakage” from the spending stream that slowed the pace of economic expansion. Previously, government spending crowded out personal consumption. Now government spending provided a spur to consumption. Government could rescue the economy from a protracted downturn by using its tax and spending powers to boost aggregate demand.

In doing so, the government would take advantage of how the Keynesian multiplier could be relied upon to increase production and consumption. Government would spend, say, another$1,000 on some activity. It didn’t matter if the activity was something useful like building a bridge or something wasteful like paying men to dig holes and fill them in again. Spending was spending. And this spending would cause production to expand by some multiple of $1,000.

A key concept in computing the multiplier is the “marginal propensity to consume,” or ”MPC,” defined as the additional consumption that another dollar of disposable income would yield. Suppose this MPC equaled .5. An “injection” of $1,000 in government spending would immediately bring about $1,000 in new production. But then consumers would spend 50% of that, adding another $500 to production. Then consumers would spend 50% of that, or $250, leading to further new production and to further rounds of new consumption and production so that, at the end of the day, the initial ”injection” of $1,000 in government spending yielded altogether $2,000 in new production. Thus by spending only $1,000, the government would cause production to rise by twice that amount. Hence, the Keynesian multiplier.

A further wrinkle in this analysis is the Keynesian “balanced budget multiplier.” This concept, which comes up in Keynesian models of state tax policy, begins with the idea that, just as government spending is good for the economy, taxes are bad (though for reasons unlike those considered by STAMP). Taxes are bad in this analysis because they reduce disposable income. Suppose that the government decided to raise taxes by $1,000, rather than increase spending by $1,000. Now disposable income would fall by $1,000, and as a result, consumption would fall by $500, causing production to fall by the same amount. Then consumption and production would fall by another $250, and so forth, until both had fallen by $1,000.

Now suppose the government decided to raise spending and taxes by $1,000. We get the following effects on production:

• Change in production from $1,000 in new government spending = $1,000 + $500 + $250 + $125 + ... + 0 = $2,000.
• Change in production from $1,000 in new taxes = -$500 - $250 - $125 - ... - 0 = -$1,000.
• Adding: $2,000 - $1,000 = $1,000.

Voila! The simultaneous $1,000 increase in spending and taxes has a net positive effect on the economy of $1,000. Conversely if the government had cut spending and taxes by $1,000, the economy would have shrunk by the same amount. And interestingly, the result doesn’t depend on the size of the MPC. Economic models that have built-in Keynesian elements show that a given increase in spending and taxes will expand the economy by that increase and that a given decrease in spending and taxes will contract the economy by that decrease.

Despite the fact that Keynes himself recognized that this line of analysis was legitimate only when production and employment were significantly below their ”full-employment” norms, the Keynesian model dominated economic thinking well beyond the end of the Depression and until the early 1970s, when “stagflation” cast doubt on its applicability to current conditions. Thereafter, economists started to rehabilitate the previously discarded classical model, causing mentions of Keynes to disappear almost entirely from the academic literature and to receive less and less consideration in college textbooks.

The recent economic downturn did, in fact, breathe new life into the Keynesian corpse. But the failure of the economy to respond measurably to the 2009 “stimulus” policies suggests that this renewed life will quickly fade. The current economic weakness appears to be due, not to an insufficiency of demand, but to uncertainties surrounding Obamacare and Dodd Frank and to safety net measures that deter people from taking jobs, all of which operate on the supply-side of the economy. When ITEP criticizes us for assuming full employment, it is implying that we should be more “Keynesian” in our approach. We should treat government spending as good for the economy and taxes as bad only insofar as they reduce disposable income. The balanced budget multiplier is a handy tool for government expansionists who want to claim, in effect, that the state government can make the state economy as big as it wants by merely spending more.

We prefer the alternative approach is to revert to classical arguments that government spending crowds out consumption and that taxes matter, not for how they affect disposable income, but for how they affect incentives to work, save and invest. In that framework, a reduction in government spending translates into an increase in personal consumption. Reductions in tax rates, as they apply to sales or income taxes, increase the reward to work, saving and investment and, through that mechanism, cause production to expand. This “supply-side” approach makes sense insofar as the demand-side palliatives called for by the Keynesian model seem to have lost their usefulness some 70 years ago. No one outside of some other modeling organizations takes the idea of the balanced budget multiplier seriously anymore.

It is the position of the Beacon Hill Institute that, in modeling tax policy, Keynes’s ideas work well, insofar as they do at all, for considerations of federal tax policy changes in an economy that is clearly depressed owing to a lack of aggregate demand. The federal government can influence national economic conditions through Keynesian policies since it can run budget deficits and print money, whereas state governments can do neither. Furthermore, the federal government doesn’t have to concern itself with the outmigration of capital, jobs and consumer activity in the way that the states do when it comes to raising taxes.

Economic models that use Keynesian multipliers to rationalize individual projects, such as building a sports arena in a depressed area, are also fine as far as they go. But state policy makers should be wary of models that presume to generalize that approach to making to state tax policy.

The BHI approach to modeling a reduction in, say, the state sales tax is focus on how that tax change will expand consumption by making consumption cheaper in the state and thus bring in more retail business and, by doing so, increase production and salaries. Sales tax revenues will go down, but the reduction in those revenues will be partly offset by an increase in income tax revenues and other tax revenues. Government spending will fall but the taxes previously paid to government will show up as increased consumption. The alternative view, that the path to economic expansion lies in combined spending and tax increases does not fit the facts of the current economy at the national level and certainly does not fit those facts at the state level.

A 25% Massachusetts gas tax hike would mean loss of 1,000 private sector jobs

With gas prices falling in Massachusetts, state leaders are thinking about increasing the gas tax. Just how much the Governor and legislature are willing to raise the tax is unclear.

But assume that the legislature approves a new 29 cents per gallon tax (up from 23.5 cents) representing a 25 percent increase (not unlike the last hike to the state sales tax). What would that mean for the state's economy?

Using its State Tax Analysis Modeling Program, the Beacon Hill Institute estimated that a 25 percent increase would not help the Commonwealth's economy as it tries to add jobs.

Compared to a baseline of no gas tax increase, the state would have 1,170 less private sector jobs, while adding 600 public jobs in the first year. Riding the brakes would have consequences. At the margin, less employment means consumers will have less money to spend, so while gas tax revenues increase by $152 million, the state would collect $5 million less in sales tax, not to mention that companies will be selling less. Similarly, with 570 total less full time equivalent jobs, state personal income tax collections would decrease by $8 million.

In total , instead of collecting $152 million more in gas taxes, the state would see a total revenue increase of only $116 million, due to dynamic effects. At the cost of lower employment, income, disposable income and investment, raising the state's gas tax is a bad policy at a bad time.

Taming the Amazon with taxes

States look to Internet taxes to close budget gaps

Internet retailers cite a 1992 U.S. Supreme Court decision involving catalog sales, Quill Corp. v. North Dakota, which ruled that states could require only companies that had a physical presence within the state to act as tax collector.

To get around the ruling, some states are expanding what it means to be physically present. For example, an online retailer hiring a marketing firm or owning a subsidiary inside the state would qualify under definitions adopted in some states.

In February, the Texas comptroller demanded that Amazon.com pay $269 million in back sales taxes because a subsidiary operated a warehouse near Dallas. Amazon is appealing the order.

Last year, New York enacted a law that said Internet retailers' practice of paying commissions to marketing agents based within the state constituted a presence. Arkansas, Colorado, Illinois, Rhode Island and North Carolina quickly followed with similar laws.

Bills are pending in Arizona, California, Florida, Hawaii, Massachusetts, Minnesota and Pennsylvania. Texas lawmakers passed such a measure, but Gov. Rick Perry vetoed it. Now legislators are trying to resurrect the bill by attaching it to a larger budget measure. The matter is now before a conference committee.

California estimates it loses at least $200 million a year in uncollected tax from online sales, $83 million from Amazon.com alone. A bill that has passed the state Legislature would force Seattle-based Amazon and others to collect that tax from California residents.

Amazon, Overstock.com and other big Internet retailers cite the Quill decision as their primary defense against collecting sales taxes, but they also argue that collecting tax in the District of Columbia and the 45 states where a sales tax exists would be extremely complex and expensive.

"There are over 8,000 taxing jurisdictions in the United States," said Jonathan Johnson, president of Overstock.com, which has offices only in Utah. "We think it's wrong that states are trying to cause out-of-state retailers to be their tax collectors."

"Taxachusetts Minus"

Jon Keller interviews BHI's David Tuerck on taxes in Massachusetts

Major takeaway: "Our competitiveness is a fragile thing."

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.)

Mercatus Center: Say goodbye to interstate competition

Veronique de Rugy and Stefanie Haeffele-Balch:

In theory, fiscal federalism is a great tool that holds state and local governments accountable for their policy actions. In practice, it hardly exists. The increasing scope of federal programs and grants has largely eroded its impact on policy decisions by state and local government to the point that tax considerations become almost irrelevant in people’s decisions about where to live.

By removing the natural check that mobility imposes on bad state tax policy, those who favor expanding the scope of federal government activity make it difficult to correct bad state tax policy.

All other things being equal, it remains less costly to live or run a business in a low-tax rate state than in a high-tax rate one. However, when the central government imposes an ever-increasing percentage of each taxpayer’s total tax burden, differences in state taxes become less important. In other words, if your main tax burden is going to be the same wherever you live, why bother even moving to another state, especially if you get to deduct your state taxes from your federal ones? Being able to deduct state taxes from the federal burden obviates any differences between the states.

So say goodbye to Tiebout.

Proposition 13 is not a good target for California's failures

The time to blame Proposition 13 for California's status as a failed state has long passed. The public understands this; the ruling elite refuses to believe it in the slightest.

Is it possible that California's pro-13 majority, denounced for decades as shortsighted and greedy, is actually on to something? The reason people refuse to believe that California's taxpayers keep too much money and its tax collectors don't get enough is, as Brown now says, that there's "so little confidence in state government."

The core of that distrust is the belief that California's public sector suffers not from the lack of money but from the failure to use the ample funds it does receive efficiently and beneficially. There's no shortage of facts about the revenue and spending sides of government, California-style, to justify that suspicion.

California, in the first place, is not a state with low taxes. It's not even a state with especially low property taxes. In 2007, the year of the most recent Census Bureau data comparing state finances, California's state and local governments levied $1,141 in property taxes per capita, less — but only 11% less — than the corresponding average, $1,288, for the 49 other states and the District of Columbia.

If we broaden the view to look at all taxes (property, income, sales and excise taxes) paid to state and local governments by individuals and corporations, California's governments received $4,731 per resident, 14% more than the $4,160 average outside California. Only eight states and the District of Columbia had a higher per capita tax burden.

Not only is California a high-tax state, it is even more conspicuously a high-revenue state. Things that aren't taxes, such as fees for government services, often have a high degree of "taxiness," as Stephen Colbert might say. The Golden State, routinely described as desperately short of funds because of Proposition 13, brought in $12,776 per capita in governmental income from all sources — taxes, fees, federal aid, charges for government-administered insurance and revenue from government-owned utilities — in 2007. Only three states and the District of Columbia received more.

No relief! States increase sales taxes

FORBES: U.S. Sales Tax Rates Hit Record High

During 2009 seven states and the District of Columbia raised sales tax rates, with one jurisdiction--North Carolina--actually doing it twice. Only four states hiked rates in 2008 and only one in 2007. Given state budget problems, the 2009 state sales tax increases aren't surprising. States have also been raising income tax rates on the wealthyand on corporations and boosting excise taxes on alcohol and tobacco. With states now facing record budget shortfalls, more tax increases seem likely.

State level sales tax generally accounts for only about two-thirds of the total sales tax bill. The rest comes from levies assessed by counties, municipalities, Indian tribes and special-purpose taxing districts funding mass transit, urban renewal and even stadiums. Among lower level jurisdictions such as counties and towns, Vertex counted 649 new or increased sales tax rates during 2009 and just 192 reductions.

The result is a wide range of combined sales tax rates across the country. At the bottom: 0%, found in all of Delaware and New Hampshire, and most of Montana, Oregon and Alaska. The country's highest rate now is 12%, in the tiny portion of tiny Arab, Ala., (population 7,500) sticking into Cullman County. The rest of the northern Alabama town, in no-sales-tax Marshall County, pays just 8%.

Right now Chicago has the highest big-city rate, 10.25%. But in a move forced by Cook County lawmakers, the rate is scheduled to drop on July 1 to 9.75%, matching that of Los Angeles. In New York City the total bite is 8.875%. Other high big-city rates include San FranciscoandSeattle(9.5%), New Orleans (9%), Houston, Dallas and Charlotte (8.25%), Las Vegas (8.1%) and Philadelphia and Atlanta (8%).

Do taxes matter?

Apparently for retailers in Massachusetts this past holiday season. Business is down!

Holiday sales at local merchants dropped 2.6 percent compared with the same period in 2008, the third straight year of declines in Massachusetts, according to a survey released yesterday by the Retailers Association of Massachusetts.

Results of the 2009 survey of 3,100 business owners were in line with the association’s projection of a 3 percent drop for November and December sales. That comes on top of a 7 percent plunge during the same months in 2008.

Some businesses, including jewelers and home goods shops, saw a small uptick in Christmas sales, but the recession, coupled with an increase in the state’s sales tax, made it another tough year for Massachusetts merchants, according to Jon Hurst, president of the Retailers Association of Massachusetts.

“Retailers were more prepared this year with lower inventories and lower expectations,’’ Hurst said. “This year’s decline isn’t as bad as 2008, but that was really the worst holiday season that the retail sector had seen in a long time.’’

Research firm ShopperTrak yesterday reported that sales across the country rose 1.7 percent for the 2009 holiday shopping season while traffic at shopping centers dropped 2.9 percent for the same period. Winter weather also seemed to take a toll in New England, with BJ’s Wholesale Club blaming a severe snowstorm before Christmas for taking away sales.

Hurst and other local merchants suggested Massachusetts fared worse than other states because of the sales tax increase. State lawmakers hiked the sales tax in August to 6.25 percent from 5 percent.

BHI's analysis of last year's tax hike is here.

STAMPing out our critics

No matter how hard they try, BHI's critics in Pennsylvania still
don't have a handle on STAMP.

Herald lead editorial cites BHI sales tax study

Expanding the debate on taxes, The Boston Herald cites BHI's new study on a proposed sales tax increase for Massachusetts. The choice words are here:

That 20 percent increase in the sales tax no doubt will be filed as an amendment to the House budget on which debate is expected to begin April 27. That’s because for many lawmakers hitting up the taxpayers is easier than saying no to public employee unions (who would be asked to pay a greater portion of their health insurance under the proposed House budget) or cops (who would lose Quinn Bill pay hikes for college degrees).

But the Beacon Hill Institute study found that the 20 percent sales tax hike would “destroy 10,182 private sector jobs and reduce investment by $41.31 million per year. The average person would lose approximately $369 a year in wages.”

The tax, of course, is the most regressive and would hit low income families hardest. Also bearing the brunt of the impact would be small retailers along the New Hampshire border - already an endangered species - as Massachusetts residents head north to avoid taxes on computers and a host of high-ticket electronics.

The Institute noted that the state was already losing about 2.2 percent to 3.5 percent in sales taxes to Internet sales. And that Amazon.com’s 2008 holiday season sales increased by 16 percent over the previous year, while Massachusetts’ sales tax revenue dropped 8.6 percent for the same period.

There may be nothing that can be done to stop that kind of bleeding, but there’s no need to make it worse either. And that’s what a sales tax hike would do.

Tax increases have consequences.

A bad idea for retail in Massachusetts: Legislature again considers sales tax hike

Increasing the state's sales tax by 20 percent will have negative effects on the Massachusetts economy. According to BHI's trademark STAMP tax model, raising the rate to 6% would destroy approximately 10,000 jobs and preclude some $41 million in business investments. Sales taxes raise prices. They may raise revenue in the short-run but they have corrosive effects over the state's long-term competitiveness. A higher sales tax also means that shopping across the border in New Hampshire for big ticket items such as furniture, electronics and other home goods becomes more attractive. Moreover sales taxes (including the state's generous exemptions for necessities) are always regressive.

The BHI FaxSheet is available here.

Background on the current proposal from the Boston Globe.

Who's to blame for the fiscal crisis facing all 50 states? Reason Foundation suggests the states, for spending far beyond population growth and inflation.