I appreciated LL's coverage of the floor debate of HF3149, which passed with an 80-52 vote, including five DFL legislators opposed. The bill, the darling of Tax Committee chair Ann Lenczewski, completely upends the basis of a property tax, in a state where we rank about in the middle of property tax collections.

There is debate whether the Revenue Department's testimony, mentioned by the Taxpayers League, that 69% of taxpayers would see a net tax increase under this formula (because they would lose the ability to deduct state property taxes from their state income tax, which for some will cost more than the property tax relief advertised). I do not find anything on Revenue's website with the 69% number, and if someone wants to point me to that analysis I would eagerly read it. It doesn't sound implausible, however. The state income tax has always been set to tax relatively lightly the "perfect MN family", with a mortgage, kids in school or day care, etc. Single renters making more than $35,000, I've always thought, don't get treated so well. As I mentioned when I filled out #1's taxes last month, if you don't have itemized deductions in Minnesota, you tend to pay in at fairly low income levels.

There's also the removal of the circuit breaker on local property tax increases. Part of the property tax refund that HF 3149 repeals is to shield homeowners from sudden increases in property taxes from, say, new levies passed by local government. But you still had to pay some (I make it as 64% of a property tax increase stays with you, the state refunding the remainder. The House Research analysis makes no mention of the income tax recapture.) That 64% is enough to keep some people from voting for your new local project, which makes local governments unhappy. Now, however, if you end up with taxes greater than 2% of your income because of a levy, every last dollar is relieved from your property tax: It is paid by the state out of its income and sales tax revenues. It is an attempt to tear down the barrier to greater government spending -- the Truth in Taxation statement that tells you "vote for this, and your taxes go up." The DFL, along with the LGA booty it distributes under this bill, takes a brake off of local spending.

But the truly most bizarre portion of this thing is the premise Lenczewski is using for the bill, that your property tax depends on your income. Why do we tax property, anyway? Property provides us with a stream of income, much of which is not realized. My recuperation from surgery this week has helped remind me I live in a nice house, in a great neighborhood. Many of the services I receive are non-monetary, and many of them are the result of the city of St. Cloud's public expenditures, such as the paths behind our houses that travel up from Whitney Park through the old airfield that pre-dates the development I live in. The city provides flowers that I am walking by along that path. It provides these services to everyone living in this area, true public goods. Since I am receiving that benefit as the result of the property I own, should I pay for it by a tax on property or a tax on income? We tax property precisely because the flow of its benefits are non-monetary. And the removal of the circuit-breaker says we can increase benefits to all property owners -- who will enjoy those in equal share -- but that we will tax only those who have non-property income, labor income, in excess of what the Minnesota DFL decides is "enough".

Labels: legislature, Minnesota, taxes

As you probably know, today is referred to as Tax Freedom Day. But, if you live in Minnesota, hold on for Monday. Our state and local taxes push Tax Freedom Day for us out to April 28 (see p. 7). Congratulations, Wisconsin, yours is tomorrow.

Meanwhile, you can learn a nice tune:

Labels: Minnesota, taxes

This post covered the tax rally held at the Capitol in St. Paul, MN on April 12. I've included a few more photos, some on topics not directly related to taxation.

There are a number of people beginning to question the global warming mantra which has morphed into climate change. (see this post). It will again morph to something else after this year's election, depending which party gains control. We know humans have adapted in millenia past and we can again, with the right focus. Here's my question to those of you who wish to criticize those of us who remain skeptical about the sky is falling mantra of the leftist global warming crowd.

After spending all this time, money and effort trying to brainwash our kids to thinking the earth will be destroyed with global warming/climate change, how are you going to answer your kids when they find out what they've been taught is fear, plain unadulterated fear? How much credibility will you have with the next fear-mongering crisis?

Or maybe this explains why people get more conservative by the time they hit 30 - they realized so much of the fears they were taught as kids are not real.

Labels: taxes

Responding to something I said on air Saturday, Speed Gibson wonders why we don't have a simpler tax form for state income taxes (perhaps x% of the federal taxes paid.) The answer is quite simple: To do so means that the Legislature forgoes its ability use the tax code to favor its political supporters and harm political opponents. Filling out my own last night I noted the various credits offered for certain kinds of expenses. Luckily I have a child in a private school; I make too much to get a credit for that, but I do get a deduction. That tax policy makes it cheaper to send children to private schools, or to piano lessons, or for public schools to shield the cost of its extracurriculars from taxpayers. In Minnesota as much as any state, taxes can be much more burdensome if you don't spend your income in the ways the legislature has decided is socially desirable.

Labels: economics, Minnesota, taxes

From this morning's WSJ Political Diary, Stephen Moore writes:

Pooh-poohing the idea that low taxes and/or the job growth associated with lower taxes are important incentives to movers, the New Century Foundation cited several high-tax areas -- such as Washington D.C., Vermont and Oregon -- that have been attracting new residents. True enough, and another exception is North Carolina, which has a relatively high income tax and yet remains a destination state -- although North Carolina also has a smaller tax burden overall, thanks to low sales and property taxes.

Yet the general trend seems clear. The eight states in the continental United States without an income tax all gained population, even South Dakota. One of the few states in the northeast that has continued to attract people is New Hampshire -- a no-income-tax state. Indiana State University's John Tatom, a former economist at the Federal Reserve Bank of St. Louis, did more than just eyeball the trends. He applies sophisticated econometric techniques and concludes that tax rates do matter: "The in-migration rate is sensitive to the tax rate.... Each one percentage point rise in the tax rate will reduce the in-migration rate by 0.41 percentage points."

Tatom's paper is here. Below is the graph that displays the data with the trend line of -0.41%.
This should be used by our discussants from February on the relationship between state taxes and migration. Let me also add this fascinating State Demographer's Office report (the fascinating was a joke, son) which includes data of paired tax returns of in- and out-migrants to Minnesota. "Minnesota gains net migrants from most Midwestern states except Wisconsin. Other than Wisconsin, the biggest net losses between 2000 and 2005 were to Florida, Arizona and Texas. The largest net gains were from foreign addresses, North Dakota, Illinois and Iowa." The data would suggest to me that people leaving here are getting warm; we don't have data on age, but it's a fair guess, I'd think, that many of these are retirees.

Labels: Minnesota, taxes

To those of you outside MN, here's the background: in 2006 MN Republicans, along with Republicans across the country, decided to stay home and "teach the Republicans a lesson." In MN, that "lesson" resulted in the largest tax increase in 150 years, courtesy of our DFL (Democrat, Farmer Labor party). Today we held our tax payer rally at the State Capitol in St. Paul, MN. The politicians who understand that the answer to our concerns and problems are not more taxes also attended. Included in these photos are these politicians, ones responsible with OUR money, including:

John Kline, Republican from MN's 2nd Congressional District

Michele Bachmann from MN's 6th Congressional District
Barb Davis White (in black cowboy hat), Republican challenger to Keith Ellison from MN's 5th Congressional District



Their speeches were electric and to the point. Below are photos from the rally. Remember, the Dems in DC are bent on driving the US economy into the ground with their passed and proposed tax increases. The DFL in MN is bent on driving MN's economy into the ground with their tax increase and plans for more. These increases at the state and national level will hurt every American who works, every one of us. It's time to stop - enough is enough.

Today's crowd estimate was 5000-7000. I'm no counter on this but the photos show a LOT of people.

Labels: DFL legislature, taxes

Arthur Laffer and Stephen Moore have issued a study through the American Legislative Exchange Council on which states are rich or poor. Minnesota ranks 26th for 50 states for economic performance and 35th for economic outlook. Performance is a combination of income and employment growth plus net domestic migration. Outlook is a "forward-looking forecast based on the state’s standing (equal-weighted average) in the 16 important state policy variables." The study runs through 2006. Minnesota fares worst in corporate tax rates (45th of 50), rising tax burdens (43rd), and marginal personal income tax rates (39th). So far, it doesn't appear those numbers have been changed so perhaps backsliding in other states will improve Minnesota's score for 2007.

The report emphasizes that progressive personal income taxes exacerbate the cyclicality of state revenues. During booms, the states spend too much:

The analysis and case studies discussed in this chapter have shown that states often find themselves in fiscal trouble because they spend far too much during economic expansions. They are like the scorpion that is carried on the back of the frog across the river that then stings the frog causing them both to drown. “Why,” asks the frog in his dying breaths. “I couldn’t help myself,” responds the scorpion. “It’s in my nature.” It seems that overspending when the coffers are flush is in the nature of state legislators.

The most advisable path to avoid future fiscal crises is to keep spending and tax receipts at a manageable and justifi able rate, usually population growth plus inflation.

Minnesota's population grew faster than the national average between 1992-2000 (10% vs. 8.8% nationally). The additional families created demand for government services but also more revenue. Their analysis suggests the state received a windfall of $701 in revenue per person, above and beyond the revenue needed to keep real per capita tax revenues constant. Only three states had higher "excess" revenue taken from taxpayers: Michigan, Vermont and California. For the country as a whole, state tax revenues above inflation and population growth rose $108 billion between 1992 and 2000.

As Governor Pawlenty and the Legislature both look at tax reform, these trends should be considered. Laffer and Moore are fans of the Colorado tax limitation amendment (TABOR) which may not fly here. But weaning government off its addiction to income tax revenues does provide a more stable tax revenue stream. Now would be a good time to start.

Labels: economics, legislature, Minnesota, taxes

A South Carolina state senator wants to tax pR0n. He says "Just as we're trying to do with cigarettes, we have tried to do and continue to try to do with alcohol, is lets the users of those products pay for some of the consequences that come from that." Presumably the consequences are crimes against women and increased divorce rates.

I suspect there will be people lining up to estimate the external cost of pornography. I mention this because there was an interesting paper a couple of years ago that looked at the link between sales of Penthouse and the use of private P.O. boxes (all the better to keep your subscriptions away from prying eyes.) If you instrument the demand for pR0n with the use of private mail boxes, the relationship between smut and crime actually turns negative, and that with divorce disappears. The negative relationship would lead one to believe smut and sexual assault might be substitutes. I don't think that's likely, but I neither would throw the idea away as preposterous. And if so, what's the right tax for your Playboy to meet the Pigou criterion? Do club members make an allowance for the possibility that they cannot accurately measure the external cost?

I suspect the tax in this South Carolina story has more to do with Colbert. How many feathers do you pluck from a goose before it's rated R?

Labels: economics, taxes

The Student Senate at St. John's University has issued a condemnation of the Minnesota Legislature for its override of Governor Pawlenty's veto of the gas tax.

WHEREAS: The Minnesota Legislature raised the Minnesota tax on gasoline and diesel fuels; and,
WHEREAS: This increase has an enormous financial impact on people with fixed and low income; and,
WHEREAS: Students are a major demographic of people living on limited budgets; and,
WHEREAS: This tax will only affect students negatively when they are traveling within the state for internships and trips home; and,
WHEREAS: This will place an additional, undue burden on families who are scrapping to make tuition payments; and,
WHEREAS: This is a wholly avoidable tax levied against the students of the state; and,
WHEREAS: If the Minnesota Legislature is going to make claims that it will stand in support of its student constituents, it must understand that this tax is contradictory to any such notion; and,
WHEREAS: Saint John’s University and the College of Saint Benedict rely on diesel fuel for inter-campus transportation; and,
WHEREAS: This transportation fee is paid for by student dollars
NOW, THEREFORE, BE IT RESOLVED, THAT WE, THE SAINT JOHN’S UNIVERSITY STUDENT SENATE, do hereby condemn the Minnesota Legislature for raising the gas tax to levels so high that student mobility is threatened.

Will other student governments follow suit?

Labels: gas, legislature, Minnesota, taxes

I was in on a blogger conference call with Senator Norm Coleman on Tuesday, in which his introductory remarks (and my one question -- guys, I usually show up with three and forget it when I do radio!) concerned the budget deficit. He was quoting several numbers that were I thought from something he was reading. His office was kind enough to point me to the document, created by the Republican Policy Committee. It makes one key point that I think bears repeating. If you let the Bush tax cuts expire in 2011...

A family of four with two children and an annual income of $56,300 ($50,000 today) will see its taxes increase by more than $2,000 — a 132 percent higher tax bill. A family of four with $67,600 in annual income ($60,000 today) will see its taxes increase by more than $1,800 — a 58 percent higher tax bill.

They quote a one-page press release from Treasury, which puts the assessments at $3,675 in 2011 for the current $50k couple w/kids versus $1,583 if the cuts are extended; $5,065 versus $3,207 for the $60k couple w/kids.

The Senate passed a bill today that will cut those numbers down, permanently extending the 10% tax bracket.

By a vote of 99-1, the Senate passed a Democratic amendment to permanently extend a 10 percent tax rate, mostly for low-income earners, along with a child tax credit and marriage penalty relief. These provisions are due to expire at the end of 2010. A Republican amendment that would have extended the remaining tax cuts was defeated.

The House, meanwhile, seems determined to go forward with fewer cuts. The House GOP is offering an alternative which has more reduction than the Senate plan. In a press release, Rep. Michele Bachmann described the House alternative in stark terms:

This is an assault on the American family: the Democrats’ budget will force a $683 billion tax hike on working families and small businesses. In Minnesota’s 6th Congressional District, this means an average individual tax increase of $2,256 and an average loss of per person income of $1,609. It means 2,665 fewer jobs and $292 million less in our local economy.

Families will be attacked from both ends: this punitive budget will shrink opportunity and destroy jobs, while taking yet more money from the pockets of hard-working taxpayers.

The Heritage Foundation analysis of the Pelosi plan is here. There are competing arguments out there for whether the Pelosi Democrats are improving or harming tax progressivity. Gerald Prante has a rundown of the arguments.

I am sure there's more time to deal with these issues after the Novembre elections, but the Democrats I think have a tougher time the later it gets to having all these cuts expire. The numbers I gave in that first quote are numbers for four years from now (tax bills due in 2012), so it's easy to talk about them as being something not entirely real to voters. In 2010, that will no longer be true. So perhaps the time of decision on the Bush tax cuts actually is at hand.

Labels: economics, Minnesota, taxes

Greg Mankiw points to a bet you can now make at Intrade on the top marginal tax rate in America in 2011.

Notice that there is a one in three chance the rate will exceed the level that prevailed under President Clinton.

Too bad we couldn't have a contract like this in Minnesota. Anyone for a top rate of 8.5%? How about 9% giving us a top rate above those of the Arne Carlson Administration?

(Oh, and Arne? Put on your Gopher sweater and shut your pie-hole.)

Labels: Minnesota, taxes

One product of being taught by free market types in graduate school -- my undergraduate education had mostly left-liberal faculty, where in my senior year I was the only econ major wanting to take the Friedman side of a debate on monetary and fiscal policy -- is a certain resignation that, at times, elections bring together enough people in a coalition to create a majority that imposes its will to take the income of the minority. You might wish to complain about it, and surely it's wrong, but the process may require a certain amount of wasteful spending in order to get something done. That's the logrolling I wrote about on Monday, for example.

So where does this coalition come from? Drew Emmer points to a "shrewdly calculated outcome" of a relatively large coalition of firms who stand to benefit from greater government spending on transportation. It's a pretty interesting group, including pavers, engineers, local government, and large associations of firms who want someone else to pay for improvements on roads they ship on. Even a few firms that provide professional services, like the contractors' law and accounting firms are in on the game. If you were teaching state and local public finance or political science and wanted to show how coalitions form, Drew's list would be a good one.

But it extends a little further. My own union's lobbyist makes his reasons plain:

This is good news for higher education because the $416 million the governor had designated for roads and bridges in the bonding bill is now available for other types of projects—like higher education. IFO supported the gas tax increase for this reason.

The public universities are relying on the government to definitely spend their 3% of the budget on bonds, and now that they pushed the governor's road requests aside there's more room at the trough for these porkers to lard up. Understandable, though hardly commendable. But look who else is in? I got a copy of an email sent by ISAIAH to its membership:

Congratulations everyone! ISAIAH marks a huge victory with the successful passage of the Transportation Funding bill into law on Monday February 25, 2008!

Over the last four years, ISAIAH leaders have been champions of a vision for a transportation system that works for everyone, including those unable to drive. Every person has the regular need to travel, whether it is to their home, workplace, school, church or another location. ISAIAH envisioned that Minnesotans should be able to rely on transit as a thriving part of the state's transportation system.

This law was made possible through Minnesotans gathering around a common vision for a transportation system that: gets everyone where they need to go; is a responsible stewardship of our resources for the public good; considers the legacy we leave for the Minnesotans who will live here 30-50 years from now.

...it is critical to note that the content of this law was shaped by the participation of these groups and many others. This includes ISAIAH and the Transit Partners Coalition of which we were founding members.

ISAIAH, of course, is a social justice group that affiliate with churches. I attend church at one of the group's sponsors. I drive about 300 miles per week, and my wife another 100 or so. We probably consume between us about 25 gallons a week. I wonder how the stewardship committee would feel if I withheld $1.25 a week from my offering (rising to $2/wk over the next few years), since the church has now decided I should contribute more to roads? Does the church think the government is a collection agent capable of doing His work?

And these folks aren't through:

While this is a critical infusion into Minnesota's infrastructure, it is also the product of compromise. ISAIAH and transit advocates believe some areas of transportation policy and funding still need additional attention in order to provide adequate and equitable support to our growing transit system. We will bring these to your attention as necessary at ISAIAH gatherings over the next year.

Of course, and if you resist the holy coalition that will not leave you alone until you have paid from your pocket for every additional need that they decide you should pay for, well, that would make you unholy, right?

Labels: Minnesota, taxes, trains

• Poland
• Iceland
• Taiwan
• Ireland
• Hungary
• Kuwait
• Russia

All but one has adopted flat taxes or lower taxes recent. Summary here for all except for Russia, here.

Minnesota will be like one of those. Hint: Not the good one.

Labels: Minnesota, taxes

My own representative, Larry Haws, is quoted in the local paper (not online, and my copy is at home so I'll do this from memory) saying he voted for the transit tax bill and its override based on thinking the gas tax was a better way of getting that money than getting it from grandma through property or income taxes. Again, not exactly those words, but that was the gist of what he was saying. And that's an argument worth having, a basis for voting that I can respect because that's the real choice that was made yesterday. I disagree with it vigorously, though.

I received a prepared email assailing yesterday's vote sent to a group of individuals mostly living in the Twin Cities directed against DFL Sen. Linda Berglin. I'm not sure how I ended up on this list, but it contains a number of prominent private citizens who I know to be conservative. One such individual sent back a message.

I agree that our overall tax structure is too high, but we need the roads and we need money to fund them.

I never thought that I'd support anything that Linda Berglin supported, but here it is. Thank you Linda.

I believe the description of my reaction would be 'gobsmacked', if you were British. I am admittedly one to respond to people who write things to me that leave me in such a state, and this was no exception.

I notice your address is in Minneapolis. I live in St. Cloud. Approximately 13,000 St. Cloud residents (out of the 105,000 workers in our area) drive outside our metro area to work each day, and most of those drive to some place in the seven-county metro. It’s about a 75-mile one-way trip. Assuming they get the average fuel efficiency of American cars, your “need” just cost my friends an extra $172 just to commute to work and back. They’d buy a more fuel-efficient car, but your “need” just hit them with an extra $200 for their tabs.

So as you enjoy the new roads and bridges you “need” – which will be not many, since a big chunk of this money will go for the half-empty trains you’ll watch while waiting at a crossing (but you’ll be waiting on new roads! O joy!) – thank a St. Cloud resident.

Using our benefit principle discussion from yesterday, I assume you to say that the commuters are paying for roads they benefit from so are properly charged. But the point is that all taxation and expenditure involves a reallocation, and the extra $172 is not going to improve I-94 or US 10. It's not going to be used to build a connector in Clearwater between those two highways. Rep. Haws chose to have his own residents who work outside of St. Cloud, who are likely to be wage earners with families, bear a larger burden instead of grandmothers. Even if we accept the premise of our interlocutor, that we "need" roads and bridges and even if we assume that we actually will get roads and bridges and not just more transit projects, what makes Grandma more deserving of protection from government taxation than the family trying to better themselves, provide for their children, and producing goods and services people want to buy?

As the old saying goes, those who rob Peter to pay Paul can always count on Paul’s support. If you're Grandma, Rep. Haws is your hero. If you're a worker commuting from St. Cloud to Hennepin County, or from Randall to Waite Park to work in our manufacturing plants, Rep. Haws decided you are Peter.

Here's Peter's friend. I don't know if he would tax Grandma more; he might just decide to make some real budget choices.

Labels: gas, Minneapolis, Minnesota, St. Cloud, taxes, trains

In some places, people look at the budget they have and make choices of what they can and cannot provide. Take for example the Bureau of Labor Statistics. I got a postcard this morning from BLS indicating that they were not able to mail any more paper reports due to unexpected budget issues. No big deal, I thought, since I get The WSJ economics blog writes that a rather valuable survey may have to go away because money is needed for updating other surveys. I think it's a hard choice to have to make, but notice that the Bush Administration is at least making choices. That's what they do in the big leagues.

Meanwhile, our minor league Legislature has decided to have you pay rather than choose.

Taxpayers are going to see a significant bump in their tax burdens now that the Governor’s veto of the Transportation Bill has been overridden.

That’s good news if you think that the bonding bill should devote significant resources to Polar Bear exhibits, hiking and biking trails, convention centers, and other local projects instead of high-priority roads and bridges.

“Legislators had an opportunity to demonstrate their commitment to prioritizing State spending by making local projects compete with roads and bridges. Instead, they chose to raise taxes and place the burden of making hard choices on citizens instead of on State Legislators,” said David Strom, President of the Minnesota Free Market Institute.

“Governor Pawlenty was absolutely right when he proposed using General Obligation Bonds to fund roads and bridges. In fact, we believe that he should have gone farther and proposed to use State bonds for State roads, and requiring that all bonding projects have cost-benefit analyses to demonstrate their worth,” Strom said.

“Now that Legislators have decided to raise taxes the bonding bill will have plenty of room for pork-barrel spending, as it always has,” Strom concluded.

Victory for universities, too. Met your match? Sure you will -- every time you fill up. And don't drive less! You'll just cut down their revenues, and they'll raise your taxes again.

It's not the size of taxes that describes government extortion. It's the size of government spending.

Labels: legislature, Minnesota, taxes

As we continue the discussion of the transportation budget today -- liveblogging going on at Let Freedom Ring and Ladies Logic capturing everyone's attention (UPDATE: The override passes) -- it's worth pondering some points that have bothered me. I find as I go through this debate to find confusion on the terms public provision and public financing, about transportation versus transit, and over whether some people have plans. Let's pose this as a series of directed questions.

1. Does Minnesota need more money spent on transportation? Now it is popular for many to focus on where the money we already budgeted was spent: "MVST was supposed to be a fix, but it isn't." "The Legislative Auditor tells us we built too many new roads and maintained too few existing ones." "Our bridges are falling down." "You should have spent less on bike trails." None of these points is now relevant. They are sunk costs. The question before us is simply, should we budget for building new roads and bridges? Since Gov. Pawlenty proposed bonding for bridges, he certainly wants more spent. The House caucus has repeatedly said there's a compromise available, which surely means more to be spent. So the argument isn't over whether to build more roads and bridges. That's been agreed to by all parties. You want to punish for past decisions on bike trails or MVST? There's an election for that. As Mitch pointed out, you had a chance last time.
2. Are we buying the right roads, bridges, etc., or is this another transit boondoggle? The MnGOP has been labeling this the transit tax. Probably so, but how many of the legislators live in the seven county area? If you wanted to stop the transit boondoggle, the only way would be to stop awarding Senate seats by population, and switch to one vote per county or some other geographic division. The next apportionment in 2010 will probably move more legislative districts into the second ring suburbs -- what do you suppose that does to demand for rail projects? So my point is that outstate will always be in the minority on transit; the governor's veto only requires the Legislature to hold party ranks together and to bribe a few legislators -- which they've done. That's not extortion or coercion, that's plain old logrolling. Some payment is already in HF 2800, and others will be forthcoming in the bonding bill that the Legislature will now re-write; after all, there's money to spend!
3. No, but really, are they in the right place? But that doesn't mean we bought the package of roads and bridges that we should have bought. The problem with government provision of public services is that it provides goods in return for political support, not for places where benefits exceed costs. If you want the latter, don't expect government to do it for you. Governments have no profit motive and thus no assurance that what they spend will have the value provided for. Jim Fedako writes at the Mises blog:

   The difference between government and business is the chain of taxation versus the dollar vote. The public school district taxes regardless of value produced. Once the bond issue passes the voters, the bill must be paid, to be enforced by the long, strong arm of government. On the other hand, the entrepreneur must face the consumer every day, product in hand, hoping to make a sale. The consumer can as easily bypass as enter his store, based on a whim if he so chooses. The taxpayer? Well, just try to hide.

   Did we build bike trails that provide too few benefits for their cost? Are we paying for trains that have low ridership? When private firms do this, they fail. Government passes another tax.
4. How would we prefer to pay? Public finance students are given a set of lectures on the benefit versus ability-to-pay principle. I have argued before that since many people will use the roads a generation from now it made sense via the benefit principle to bond for those roads and bridges. The Legislature, seeing the bonding bill as an opportunity for other transfers of public money to political constituencies, chose instead to use something closer to a current benefit principle rather than future benefit. The gas tax is preferred by some for roads because people who buy gas use roads, so they are the ones benefiting from their construction. But when goods are shipped to us in Minnesota we now either pay for transporting them from out-of-state or we get fewer goods. And sales and excise taxes are usually seen as being regressive both on firms and on households (any wonder why the big hitters in the Chamber of Commerce like this bill? It's anti-competitive.) Indeed, the three most regressive taxes in Minnesota are the cigarette tax, the gambling tax, and the motor fuels excise tax. At least one might make the argument for the first two as reducing bad behavior. Does the DFL think driving is a bad?

The argument was not about past decisions. It was not about whether to build roads, and it was not really even about transit versus roads and bridges. Those decisions were already baked in the cake. The decision was over who will pay. Now we know. The question will be whether anyone has enough votes to demonstrate this was not the politically optimal solution.

Labels: gas, legislature, Minnesota, taxes, trains

The MN House passed a transit bill today, 89 to 44 in favor. This bill is not for roads, 75% is for "other" transit (read more light rail that will NEVER pay for itself), trails, etc. This bill is not for the metro area where 60-70% of the state's population resides. This bill is for special projects - it is a TRANSIT bill, not a transportation bill. Very little will help the Metro congestion problems.

The bottom line is that MN taxpayers who rank 11th in tax burden, will be gouged, again. - for what? The legislature could not even wait for the budget to be presented. No, the DFL club had to rush this bill through, the third day after the current legislative session started. What do you think these part time legislators were doing during their off-time? We're supposed to have a part-time legislature. Looks to me like this DFL club is far too eager to "need a year long session" to "get all the work done" - at our expense. They have gotten so busy doubling committees, spending our money on committees, and trying to find more ways to put their hands in our pockets, that they forgot, WE voted them in. Perhaps it's time for us to start finding ways to vote them OUT.

This political behavior of Democrats in general, and some guilt-ridden Republicans who think it is their duty to make the rest of us pay for their dreams is nuts. I'm reminded of this quote by Vernon Howard (word in parentheses is my paraphrase):

Permitting your life to be taken over by the (government) is like letting a waiter eat your dinner. (You pay, he wins.)

It is time Minnesotans say, "Enough is enough. Stop letting people gorge themselves at the government trough; stop spending MY money for unnecessary, irresponsible pet projects because you don't know how to say 'no'."

Labels: legislature, taxes

This new trend using information on interstate migration and economic freedom seems to be catching. Phil Miller uses state-level data and argues that the higher your rank on state economic freedom, the more interstate shipping (using United Van Lines data, not U-Haul as I did earlier) flows into your state. Dirck the Noorman does a similar correlation pattern with states voting for Kerry and for Bush in 2004 -- the movement is from Kerry states to Bush states.

However, Charlie Quimby argues that there's a balancing problem for trucking firms to get their fleet to places they are most needed. This seems to help explain the data I saw on U-Haul to some extent. But United Van Lines (which Phil and Dirck use) would have to be explained by intra- versus inter-state shipping, which Charlie could perhaps argue for us.

Two quibbles with Phil's and Dirck's posts unrelated to Charlie's critique. First, the flow in the 1980s was almost exactly the opposite -- people moved from Flyoverland to the coasts. I don't know that the Midwest is a whole lot more economically free now than twenty years ago. You would need to do a similar study over time to demonstrate this better. Also, I really hate regressions that regress on a ranking when we don't know the degree to which the ranked states are separated. That is, states 4 through 13 might be almost identical in economic freedom but all very different from state 14, but you are asserting that state 14 is as different from 13 as 13 is from 12. I realize Phil is doing a quick-and-dirty for a blog, but we should acknowledge that is what it is. It would be fun to have a senior student write a thesis with a more careful analysis of this data.

Labels: economics, taxes

The battle over the budget deficit -- with a revenue forecast still ten days away -- is heating up and before we even get to that the Minnesota Legislature is trying to salt away some money for transportation. I talked a little below about a corner of that debate, but let's get some additional information together.

The big news today is that the Legislative Auditor produced a report on transportation that said several things. I'm reading the report in bits, so don't consider this a thorough review, but what I have gleaned is this:

1. "After 2003, inflation-adjusted revenues from Minnesota motor vehicle and fuel taxes declined, and the state made substantial use of debt financing to support the state trunk highway system." According to the last Tax Handbook, Minnesota collected $650 million on the gas tax in 2005 and $646 million in 2006. Which will of course lead people to think we aren't taxing enough, but consider the reasons offered: people are driving no more miles than before, in no small part because of more efficient vehicles and rising gas prices causing a reduction in the amount of gas used. Now I doubt we've raised the price of gas to the point where it's elastic in demand -- which would mean the gas tax revenues would fall for an increase in gas tax rates -- but it's almost certainly true that it's more elastic than previously estimated, so that a proposed 42.5% increase in the gas tax rate will not increase the amount of gas tax revenue raised by anything close to 42.5%. Yet it appears from reading the research summaries on the transportation bills that the DFL intends to spend more than $300 million per year on transportation, immediately freeing up that amount from the bridges to make pork.
2. "Since 2002, the ride quality of state trunk highways has generally declined. The structural condition of bridges has generally improved." Call me paranoid if you must, but I think that second sentence isn't going to appear in news reports. MnDOT uses some qualitative measure of ride quality and for principal highways aims for 70% of them in good or very good condition. It looks like we're at 66-67% rather than 70%: Not very good, but we seem to be exerting a lot of effort for 3% improvement. Expected remaining years of useful life of the roads has indeed declined, but this was not enough of an emergency for the Legislature to pass anything more than a lights-on transportation bill. If the highways are in such dire condition, why is the Legislature this year threatening to not fund transportation unless their one bill is passed?
3. We've spent more on highway expansion than on highway preservation. OK, that one looks real, though in a state where population is moving so dramatically away from the west to the east, do we really want to spend money preserving roads in places the people have left? 21.5 per 100 in-migration to Sherburne County, with large gains also in Isanti and Morrison counties. Name a western county, and you will see population decline. I find the LA's analysis, though correct, a little too macro-oriented. But because the Legislative Auditor isn't thinking that way, the office is arguing for much greater spending on highways.

So with that in mind, look at where we are. The DFL leadership came out with a press release today decrying the lack of money and that we need the tax increase. Not that it will do a thing for the deficit if it comes forward -- indeed, my argument is that the DFL is hurrying this bill along because they fear the revenue forecast will suck all the air out of this plan, forcing them either to pass more tax increases for that or cut spending, in which case nobody will be able to support both a tax increase for a budget deficit AND THEN a tax increase for transportation. But if they can pass the transportation tax increase first, they can pretend that didn't happen while fixing the budget.

Meanwhile, Governor Pawlenty continues to say he's going to veto the transportation bill.

Brian McClung released a statement in response to the DFL news conference. In his statement, McClung said:

"We appreciate the legislative auditor's report. It contains many helpful suggestions that we expect MnDOT to implement. Regarding the DFL press conference this afternoon - it appears DFL legislators are determined to pass a massive and overreaching $8 billion tax increase that the Governor has said he would veto. Just recently, DFLers increased the overall amount of their gas tax hike to 8.5 cents, in addition to license tab tax and sales tax increases. They are essentially disregarding the Governor's concerns and appear to believe they have the votes to override a veto. We'll soon find out the answer to that."

The governor's red veto pen is going to be challenged early, and while I am not sure this is more than a wild goose chase, the DFL is undoubtedly trying to buy some votes somewhere. (At least AAA's girlfriend got a good meal.) It's easy to have it both ways as Drew Emmer suggests -- you could have six GOPers vote for the bill but then vote to uphold the veto (they'd've voted for it before they voted against it.)

The Governor is taking an ax to the state payroll, implementing a hiring freeze. Now, there are some folks who are trying to make an argument that savings by budget cuts are just as harmful as tax increases. The logic is pure Keynesianism: if you cut spending by a dollar there's a dollar less of aggregate demand, but if you increases taxes by a dollar some taxes are paid out of savings, so aggregate demand only falls by the part that is funded by reduced consumption. It's part of those bad principles of macro courses where the instructor teaches the students government spending and tax multipliers. But, the story is always told using lump-sum taxes. For it to be right, the taxes must be taken from the public in some way that doesn't change the return on labor, capital, land or entrepreneurship, or alter the relative prices of goods purchased. (A head tax would be one example.) If the tax change DOES change the return on any productive resource, then the tax increase will decrease the supply of output and has an effect that could be more harmful than a spending cut. Increasing income taxes would be one example of a tax that changes the return on productive resources. It's an empirical question, as I often say, and the devil is in the details. Don't be fooled by simplistic explanations.

Still working on some other items so this post tonight might have to substitute for more over the next couple of days. We'll see. 80 days down for the Legislature (including the one in Special Session), 40 to go.

Labels: gas, legislature, Minnesota, Pawlenty, taxes

Michael noted a comment by state Senator Steve Murphy that raised an eyebrow:

Minnesotans would pay more for gasoline with the DFL bill, Murphy said, but they will see transportation improvements.

“They’re definitely going to notice a difference because their roads are going to get fixed,” he said. “That’s the bottom line here, fixing roads and lowering the (vehicle crash) fatality rate.”

The state’s gas tax is 20 cents a gallon. Indexing would have resulted in a rate of 31.4 cents a gallon in 10 years, nonpartisan legislative experts said. By removing the inflation provision, the tax should be 28.5 cents a gallon by 2018.

Two thoughts: First, if I am driving on a better road, don't I drive faster? Potholes tend to slow me down. What part of building new roads leads to lower fatality rates? Certainly not during construction. If more and better roads leads to increased driving, will this increase or decrease the number of fatalities of vehicle occupants? I realize he said fatality rate, but as a matter of public policy do I care more about rates or about the number of fatalities?

Sounds like another job for cost-benefit analysis.

Meanwhile, did anyone notice how 7.5 cents of increase plus indexing became 8.5 cents? It appears the rate goes up five cents in September and then a half-cent a year after next if I read this right. I need to run off to something now, but I'll update this if I can draw a comparison between this and the old bill. The headline figures show a decrease in the total dollars spent, but they always sum 2015 dollars and 2008 dollars at the same value, ignoring discounting.

Labels: gas, Minnesota, taxes

Because it can't be the taxes:

Politicians who think taxes don't matter might want to explain the Dakotas. North Dakota ranked second worst in out-migration last year, while South Dakota ranked in the top 10 as a destination. The two are similar in most regards, with one large difference: North Dakota has an income tax and South Dakota doesn't.

Source. A 26-foot truck from Minneapolis to Sioux Falls from U-Haul was $489, from Sioux Falls to Minneapolis $288. St. Cloud to Rapid City $880, Rapid City to St. Cloud $518.

Boy, those South Dakotans retiring to Minnesota to take advantage of our high taxes are sure getting a deal there! [/snark>

I had thought they had cherry-picked, and thought perhaps U-Haul was looking to move trucks into a higher-population market more generally, but it doesn't appear so. Someone could have fun with a study of those rates. Clearly you pay less to drop the car in the higher-demand market, and demand is a function of more than tax rates, but the ND/SD distinction takes out a number of confounding factors.

Mankiw asks if one has ever turned down a job that you would have accepted if it paid twice as much. I can think of one job I declined because net of cost of living and higher taxes (than Minnesota! Yes, Virginia, such places exist) I would have ended up with a worse standard of living. But it turns out the U-Haul would have been cheaper.

Labels: economics, taxes

Congress and President Bush appear to have settled on a budget. How many months did Congress stall on this basic need of our citizens? Oh, well. I have another point to make.

Many of our youth have very little concept of numbers. As stated early on, I give my college students a 50-fact multiplication test (50 seconds) to attempt to drive home the phenomenal processing speeds of computers.

Related to little exercise is a requirement that all numbers on papers include the zeroes. For example, gross sales of $46.5 billion is not allowed; it must be shown as $46,500,000,000.

Back to the US budget. A $3.1 trillion dollar budget has little impact but $3,100,000,000,000, that's another story. Maybe elected officials just might become more responsible with our money if they realized just how much of it they spend.

Labels: legislature, politics, taxes

...it would be that firms are not the champions of free enterprise. It is the outsider, the poor, the immigrant who benefits from them. Andy -- who after this post might need a better title than ex-Mayor, perhaps Chancellor of the Apple -- discovers that organized businesses are just fine with an increase in the gas tax.

The Chamber did not side with the already over taxed and over burdened Minnesota businesses and consumers, but instead want the Government to tax and take more money out of the economy by making goods and services even more expensive.

Should this be a surprise? No. Businesses routinely engage in rent-seeking. Making roads cheaper to use, and having others pay for them, is enhancing to their bottom lines. If it raises taxes to where outside firms are not inclined to come to Minnesota, all the better. It reduces competition for their goods they sell (if they sell largely in-state) and for the labor they hire. They are happy to pay higher taxes and charge higher prices, if they do not face outside competition.

Sometimes rentseeking is easy to spot, like the Amazon story from France. Sometimes rent-seeking leads to capture of bureaucracy. There's a story in the Chronicle of Higher Education this morning (subscriber link) about an audit showing that the National Institute of Health doesn't monitor financial conflicts of interest among biomed researchers. And those researchers don't want the NIH looking at them. The NIH's response? "We're not a regulatory agency."

It isn't a matter of Minnesota being unfriendly to existing businesses that will help Minnesota consumers and taxpayers. What we want is for them to be friendly to new businesses looking to innovate and grow and employ and invest. Is there any reason why you'd expect existing businesses to do that?

Labels: economics, Minnesota, taxes

So do you know what you'll get for a raise? You can figure out what it means for your bottom line by using Ironman's paycheck calculator. This is a reminder, by the way, that income tax withholding is very costly and blurs our incentives.

I probably have mentioned this here before, but I used to work while in graduate school for a private consulting business operated by Craig Stubblebine, a professor specializing in public finance at Claremont McKenna College. With my check I would receive a very elaborate "stub" showing both what was withheld and what I paid in. Let's use Ironman's data to show what I mean. Suppose you work for me as a research assistant and I pay you a salary of $30,000 to be distributed biweekly. You're married, have no children, and you can throw 3% of your pre-tax dollars in a retirement account, which I match. You also set aside $1000 a year to a flex medical account. You work in Minnesota. Craig would write out for you something like this.

Wages $1153.84 $14.42/hr

SocSec -$71.53 -$0.89/hr
Medicare -$16.73 -$0.21/hr
FIT -$50.83 -$0.64/hr

Income b/4
contrib $1014.75 $12.68/hr

401(k) -$34.61 -$0.43/hr
FlexHlth -$38.46 -$0.48/hr

Paycheck $942.11 $11.78/hr


Wages $1153.84 $14.42/hr
SocSec +$71.53 +$0.89/hr
Medicare +$16.73 +$0.21/hr
Unemploy +$26.77 +$0.33/hr

Employer
cost $1268.87 $15.86/hr

It took me a couple of times to figure out what he was getting at. But what he was trying to define was the size of the tax wedge created by income based taxes. I haven't included worker's comp or other such payments the government might require on the employer (in CA at the time there was a worker disability fund that he had to pay into and showed up on the employer half of the stub.)

I wonder whether people who advocate Fair Tax wouldn't be helped by using Craig's stub as a way to show how distorting income taxes can be. In short, my researcher's labor has to be worth almost $16 an hour for me to hire her, but she must not value her time more than $12.68 for it to be rational for her to give me that labor. (And this assumes she's perfectly willing to consume those bundles of retirement plan and health care.) An hour of her time worth between $12.68 and $15.86 are not going to be bought, so I will hire her less than I would otherwise.

Labels: economics, taxes

You remember perhaps from a few months ago a pop-can smuggling scam? Yes, it's just like that old Seinfeld episode with Kramer and Newman taking the U-Haul to Michigan, and when it happened in real life I had a chuckle about it reading the story probably on Fark.

But understand the mechanism: The government creates a rule that requires us to pay deposits on cans. The cans have a legal price well above their price in the market without this price control. Some governments place a higher legal price than others. Ergo, those who get pop cans in the low-legal-price states have some incentive to move those cans to the high-legal-price states. It's an artificial incentive, one created by government, which government then has to prevent by creating the pop-can police.

It's happening again with cigarettes in Maryland. There, the cigarette tax is doubling:

So, two cartons, with 20 packs and 400 cigarettes, would sell for $127 in Maryland but only $77 in Virginia. Our previous report on illegal cigarette smuggling showed it was on the rise because of high cigarette taxes, and in this case, such an illegal transaction could net the smuggler a lucrative $50, or 65 percent profit. Plus there's online smuggling too.

It doesn't take a U-Haul trailer to get a carton of cigarettes across the border.

Labels: economics, smoking, taxes

You wouldn't think you should worry about the property taxes of someone living in Westchester County, NY, but one senior citizen, facing a property tax bill of $12,000 while living on Social Security, is being offered a chance to trade labor for taxes.

The town is pushing a program that would let seniors work part-time, for $7 an hour, to help pay off some of their property taxes.

"People shouldn't have to sell their house, move away to a place with less taxes, leave behind their family and friends," said Town Supervisor Paul Feiner.

He envisions retired doctors mentoring schoolchildren, retired accountants helping with the town's finances, retired lawyers offering their services for a discount. But there are plenty of less-skilled jobs that need doing, he said.

"It's not like we're going to see grandma running the snowplow," he said. "There are lots of things people can do for the town and it wouldn't cost us that much to pay them."

The proposal has caused a stir in Greenburgh, a town of 90,000 in Westchester County, which has the nation's third-highest homeowner property taxes. The plan would be unusual if not unique in New York, but similar programs are considered successes in Colorado, Massachusetts, South Carolina and elsewhere.

The tax workoff programs have existed elsewhere, we're told, but with property taxes becoming much more of a burden on homes that have less and less value lately, we'll hear more about these.

One interesting thing the young 'uns are doing in California is to use Proposition 8 to reduce their tax bills.

Across the U.S., concerns about property taxes have reached levels not seen since the passage of California's Proposition 13 in 1978. That landmark law capped property taxes at 1% of assessed value and said the base assessment on a home couldn't increase more than 2% a year until it is sold. A companion initiative, Proposition 8, allows homeowners to get assessments temporarily reduced during a weak housing market, until home prices recover.

This year, thousands of California homeowners -- primarily those who bought their homes in the past few years, at the market's peak -- are getting a tax break because of Proposition 8. Assessors in counties such as Ventura and Contra Costa decided to review thousands of properties sold since 2005 and reduced many of the tax bills mailed this fall.

With home prices down 6.7% in the nation (and more in CA, it appears) these revisions could be substantial. That cuts the amount of tax revenue the state collects and is helping create the fiscal emergency facing Gov. Schwarzenegger. And when Arnold tells Granny to get to work, you better believe she'll listen.

Labels: economics, taxes

THe St. Cloud Times ran a story in yesterday's paper announcing that Sauk Rapids property taxes will rise. The subheading reads "Hike reflects loss of Local Government Aid." Yet inside the story we learn, that isn't entirely true.

The final general fund budget was set at $5.19 million, a 9 percent increase compared with the 2007 budget.

The budget was approved without much deviation from the preliminary budget, Finance Director Jack Kahlhamer said.

It includes an additional $20,000 for the street maintenance budget, as it will cost more to maintain the downtown beautification efforts related to the bridge project.

The city also agreed to fully pay for the Sauk Rapids-Rice school resource officer.

The school district decided it no longer could pay its share of the officer’s salary, Kahlhamer said.

Sauk Rapids is also looking to add one full-time position, either a police officer or maintenance worker, he said.

But the decision to hire a new employee could depend on funding outlooks — and Local Government Aid — in the years ahead.

The city will see a reduction of $140,000 in LGA in 2008 and is unsure whether cuts will continue.

OK, let's do a little math. 9% of $5.19 million is $467,100. LGA is falling by $140,000. Another $20,000 is going to downtown beautification after the building of the new Sauk Rapids bridge. (As someone who drives through downtown SR each weekday morning during the school year, I will say you are getting at least some value for that $20k.)

That leaves over $300,000. What do we know about it? We know the school district, which lost a levy vote last month, decided to cut a position and that the city chose to pay for it instead. Perhaps this was agreed between the city and district, but at any rate it supports a claim that the city is raising your taxes because the district couldn't. We know the city is also looking for money for another position as well. It will choose to do so depending on whether more milk flows from the LGA teat.

So why does the newspaper run a sub-head reading "Hike reflects loss of Local Government Aid"?? Why not say "Hike reflects hiring decisions of Local Government"?

Note that this same newspaper, in the very same section, runs an editorial criticizing the vintage of science textbooks the school board is using. What is their preferred method of paying for this?

This board points the bulk of the blame at state and federal governments for everything from unfunded mandates to an outdated K-12 education funding formula. To say nothing of neither entity having a credible estimate as to what it takes to educate today's students to today's standards.

That's not to say St. Cloud school board members and district administration are free of blame. Clearly, more local diligence the past several years likely would have raised awareness, perhaps even funds, to address this situation.

Obviously the paper has forgotten the basics of budget constraints. Deciding to have newer textbooks or prettier downtowns or an extra maintenance worker can be paid for in three ways: you can tax more, you can borrow more, or you can spend less on something else. The Times editorial board and its headline writers appear blind to that last choice. If the newspaper were to, let's say, hire another reporter, it could either raise prices on the paper or its ads, it could borrow more money from its Gannett parent, or it could cut spending somewhere else in the office. I know the people at the Times, they are smart people, they know that choice and make it EVERY DAY. What is it, then, that blinds them to using that same logic to a textbook?

The school board has made its choices: It chose to continue to use vintage textbooks. Now I don't know what new things have happened in physics in the last decade that are imperative to put in front of high school students in their textbooks (is there a webpage that can substitute?) But was it imperative enough to get teachers to accept a lower salary? Was it imperative enough to forgo keyless entries in all classrooms? Was it imperative enough to kill off a couple trips for the dance team?

Your budget reflects your choices, but the choices will only be rational when the budget constraint is hardened. The Times is wheezing for softening that constraint, and its headlines reflect that the only ones who will have to face a hard budget constraint are taxpayers.

Who always have.

Labels: education, St. Cloud, taxes

During the disinflation of the 1980s and 1990s there were references to opportunistic disinflation (this 1996 speech by former Fed governor Laurence Meyer is a good start) as a stabilization strategy. It made monetary policy in essence asymmetric in its response to inflation. If it accelerated the Fed would aggressively tighten monetary policy. But if a recession occurred due to some negative demand shock, the Fed would use that opportunity to move inflationary expectations lower. Likewise, if a favorable supply shock happened that pushed inflation lower the Fed would not try to keep inflation at the current rate.

Suppose one held the view that government is too large. Gridlock in Washington (be it partisan gridlock or an executive branch more small-government conservative than the legislative branch held by the same party -- no, we're not describing the Bush Administration 2001-06 here) makes it difficult to build consensus to right-size government spending. But during recessions, one might be able to argue for tax cuts that temporarily raised the deficit and then as growth returned one could argue for reducing deficits by reducing the size of government spending. I would call this "opportunistic tax cutting" or "opportunistic fiscal policy."

Contra Mark Thoma, I would argue that fiscal policy isn't just stabilization policy. There is an argument for allocative policy (for those of us who grew our public finance roots on the Musgraves), assigning to public funding and provision those goods and services for which there's both a market failure and not a government failure. If one were to believe government was too large then proposing a 0.5-1.0% of GDP tax cut, as former Clinton Treasury Secretary Larry Summers did Wednesday, may be seen as an attempt to chip away at overgrown government. (I sincerely doubt that is Summers' major intent, but it might be a minor one.) When the next boom hits, government may not expand as much since, Felix Salmon puts it, "taxes are a hell of a lot easier to cut than they are to raise." Indeed they are; that's the point of the exercise.

Labels: economics, taxes

I was at a public presentation made by some Republican legislators last week -- I have some notes but don't think I'll post them -- the discussion was about veterans and our support for the Iraq War. Some chirpy woman, who had made several critical comments already that evening, declared that we had made no payment on the Iraq War, which only could make sense to me by her claiming that every dollar taxed by our Federal government has to be spent on all the other things in the budget. That is, her implicit assumption is that we can only spend a dollar on Iraq after all those farm subsidies, health care cost reimbursements and post offices named after everyone and his mother-in-law.

I find this logic either amusing or irritating, depending on my mood. At the time I was irritated, but after visiting with friends I let it go.

Irritation returned this morning as I read the second in the StarTribune's full frontal assault on your wallet in the name of safety.

For MnDOT to keep pace with all statewide transportation needs from 2008 to 2030 -- including construction, safety projects, maintenance, and upgrades -- it would cost taxpayers $38.1 billion, according to MnDOT's most recent estimates.

But over that same time period, with current funding policy, MnDOT estimates that it will only have $14.5 billion.

McFarlin said MnDOT's fiscal 2008 budget is short at least $85 million for scheduled construction projects.

At what point did anyone discuss redistributing money to transportation from other parts of the budget? "Which ones?" you ask. Well, Phil Krinkie has an idea: Maybe we don't need to spend money on transit, particularly when you buy an 80 mile project but get a 40 mile project instead. Nicole Russell wonders about $50 million to provide security at the GOP Convention. Nice that Bemidji State gets some sugar for engineer and nurse training but could that money be better spent?

Every additional dollar spent on bridge repair, construction, or inspection has three sources: You can tax more; you can borrow more; or you can spend less somewhere else. Dropping any of those three from the equation means you are optimizing subject to NO budget constraint. This is the height of folly; you cannot run your own home buying more of X, Y and Z without at least considering if you could do without so much of A, B, or C. Neither can you run a government.

Labels: economics, Minnesota, taxes

In 2005, the overall U.S. effective tax rate (the ratio of federal taxes to household income) rose to 20.5% from 20.1% percent in 2004, reflecting a rise in the effective individual income tax rate and in the effective corporate income tax rate, the Congressional Budget Office said in its annual tally. In 2000, before President Bush’s tax cuts, it was 23%.

CBO said the effective tax rate paid by the top 1% Americans declined slightly to 31.2% from 31.4%. In 2000, before Mr. Bush’s tax cuts, the top 1% paid 33% of their income in taxes.

But the share of taxes paid by the best-off 1% of the population rose to 27.6% in 2005 from 25.4% from 2004 because their share of pretax income rose so significantly.

The effective tax rate paid by the American households in the middle class in 2005 was 14.2%, up from 2004 (14.1%) but down significantly from the pre-Bush 16.6% level of 2000. The tally includes all federal taxes, not just the all-too-familiar federal income.

Source. This will of course come as real news to those who get their news from newspapers. To the rest of us, not so much is new. The top 1% is a bigger share of total income than it was before -- yes, that means inequality went up, for those of you scoring at home -- so while they are paying more of the taxes, their tax/income ratio went down. The question is, if you had kept the tax/income ratio at 33% for that 1%, would there be an increase in GDP for everyone else?

Labels: economics, taxes

It is of course unsurprising that a StarTribue editorial would promote higher taxes as a cure for the state budget shortfall, even while admitting the reserves would be sufficient to cover the deficit. But its last paragraph belies some oversimplified economic thinking.

Pawlenty rejected any state tax increase yesterday, saying he considers the best economic stimulus "more money in Minnesotans' pockets." While money in private pockets can produce economic good, if it stays there, it won't buy the roads, transit, schools and other public assets that a robust economy requires. Strategic use of resources for economic betterment must be state government's guiding principle now.

The state cannot spend money it does not first withdraw from the economy through taxes, so there is a question of whether the government can spend the money more "strategically" than private citizens do. And if people save, says the STrib, that's bad.

This is of course the old Keynesian wheeze of the "paradox of thrift". It hypothesizes that any dollar received by a Minnesotan that is not spent on other goods and services produced by Minnesotans (or at least sold by them) is a leakage from the economic system. To offset that leakage, government spending should be injected into the economy. But of course the dollar the state injects is just a dollar leaked out in higher taxes. The usual story is that state government spending is subject to a "balanced budget multiplier". (Here's AmosWeb with a review of multiplier analysis for those of you who remember it vaguely from a principles class in the past. See also the one for tax multipliers.)

With states there's the additional complication of spending on goods from other states and countries. The simple balanced budget multiplier is equal to 1 if there is no leakage to purchases of goods and services from other jurisdictions, otherwise it is quite likely less than one. For example, the St. Cloud area employs about 14% of its workforce in retail sales, but retail produces only 8% of its area GDP because much of the goods sold come from outside St. Cloud.

How is it that the STrib knows that dollars spent by the state government will be more sticky in the state economy than dollars spent by private individuals? Even if we assume the tax dollars taken in come from those "idle balances" in people's savings accounts, it may very well be that the dollars expended must use resources from outside the state. Furthermore, expectations of higher taxes later to pay for bonding requests may lead individuals to save more now (a story economists call Ricardian equivalence.) In fact, there is no reason to believe a priori that state governments can be at all stimulative to their economies -- though particular programs might be found to do so after the fact.

Add to this the efficiency arguments, that private citizens will better know what to buy to improve their welfare than governments will, and a solid case can be made for not increasing taxes to stimulate a soft state economy.

There may be a case made that Pawlenty's plan -- offer individual property tax relief across the board, paid for by closing the foreign operating corporation tax loophole -- could be more stimulative. I don't know that this is true, but it is something to be determined by an efficiency argument that I can see one making. There is a commission working on these very issues right now with representatives from the Governor's office and the Legislature. I'd wait to see what they find before making any recommendations.

Labels: economics, Minnesota, Pawlenty, taxes

In New Mexico, a county votes narrowly for a sales tax to support the creation of a spaceport (plus a fillip to the school district for "spaceport-related education.") But because the state's enabling legislation required two other counties to join in taxing for the spaceport project to proceed and expenditures to be made, the county doesn't know what to do with the money. The Tax Foundation reports that the county might "be stuck with a pool of money that it wouldn't know what to with." They might not be able to charge the tax as planned from January 1. The blame is largely laid on the other counties that aren't moving fast enough to raise their taxes.

Labels: economics, taxes

Gary links to a Tarryl Clark press release that argues for a state fix to the property tax so that the state can provide funding for education. I'm going to very selectively quote this, so be sure to go read the whole release -- you are invited to quarrel with the interpretation I am about to give by arguing these are out of