Public policy often seems that it should be intuitive. If a state needs more revenue, the easiest way to raise some is to increase taxes (easiest for elected officials, that is). Who has the most money to appropriate? Millionaires, obviously. Connect the dots, and raise taxes on millionaires.

Maryland did just that, but their experiment shows why political common sense and real life common sense are distinctly separate things. From the Wall Street Journal:

We reported in May that after passing a millionaire surtax nearly one-third of Maryland’s millionaires had gone missing, thus contributing to a decline in state revenues. The politicians in Annapolis had said they’d collect $106 million by raising its income tax rate on millionaire households to 6.25% from 4.75%. In cities like Baltimore and Bethesda, which apply add-on income taxes, the top tax rate with the surcharge now reaches as high as 9.3%—fifth highest in the nation. Liberals said this was based on incomplete data and that rich Marylanders hadn’t fled the state.

Well, the state comptroller’s office now has the final tax return data for 2008, the first year that the higher tax rates applied. The number of millionaire tax returns fell sharply to 5,529 from 7,898 in 2007, a 30% tumble. The taxes paid by rich filers fell by 22%, and instead of their payments increasing by $106 million, they fell by some $257 million.

Don’t feel sorry for the poor poor millionaires; that’s not the point I’m trying to make. Taxes are a serious driver of out-migration, be it small states like Maine, or more populous states like New Jersey:

New Jersey out‐migrants tend to move to states that have much lower property values (35% lower), property taxes (41% lower) and overall costs of living (17%lower). Destination states also have notably lower average incomes, substantially higher crime rates, higher infant and child mortality; slightly lower school quality, but somewhat warmer winters. Overall, it appears that net out‐migration is due to the high cost of living (especially the high cost of housing and property tax) in New Jersey.

Policy makers and their hangers-on have often regard taxpayers as little more than fiscal sheep, and periodically shear them. But people, unlike sheep, can vote with their wallets and feet. Usually the powers that be see this as something akin to letting the home team down, or not doing one’s “fair share.” The word “selfishness” is also thrown around.

Policies like the levels of taxes, services, and entitlements that a government prescribes are hardly a form of science. Law makers and interest groups would like to portray them as a serious commitments, and not self-interested social experiments. Again from the Journal:

Thanks in part to its soak-the-rich theology, Maryland still has a $2 billion deficit and Montgomery County is $760 million in the red. Governor Martin O’Malley’s office tells us he wants the higher rates to expire “as scheduled at the end of 2010.” But there are bills in both chambers of the legislature to extend the surcharge. The state’s best hope is that politicians in other states are as self-destructive as those in Annapolis.

The “Soak the Rich” phenomenon is a common-sense argument for redistributive policies, but it has significant flaws beyond the simple fact that it doesn’t work. Take a look at this chart of how tax burdens are distributed in Federal taxation. (here, either insert or link to this: http://www.mint.com/blog/wp-content/uploads/2009/11/MINT-TAXES-R4.png)

Libertarians and liberals can mostly agree that there is too much money and influence in politics, but the policy prescriptions each group suggests are dramatically different. Advocates of punishing the rich ignore the simple fact that when a certain group bears so much of the tax burden, they have massive incentives to care about and influence politics. It’s that or leave the country, or just stop making money (by, for instance, not hiring new employees.)

See this graphic (or click below) for a good visual explanation:

Neighborhood Effects blogger Emily Washington writes in today’s Daily Caller about the need to fundamentally address systemic state budget gaps:

Many states have reduced spending with government employee furloughs and widely publicized layoffs in the last year. This is only a short-term strategy, and it comes at a high cost to taxpayers who face sharply reduced public services. By minimizing redundancy and waste within state bureaucracies, legislators can find ways to ease their budget shortfalls without cutting valuable services.

This problem is not a Democrat issue or a Republican issue—regardless of party politics, state leaders want to give their constituents more than they pay for. Unfortunately, national headlines reveal: the tipping point is here.

Since the 1990s, states have been expanding their service provisions while attempting to avoid tax increases. As with any other bank account, outflow cannot continually exceed inflow in state coffers. Bills from past spending are coming due, and taxpayers will pay for these mistakes.

Read it here. If you comment on the article on the Caller site, please feel free to cross-post your comments here!

Today, Slate’s Explainer column tackles the question: Can California declare bankruptcy?

No:

Chapter 9 of the U.S. bankruptcy code allows individuals and municipalities (cities, towns, villages, etc.) to declare bankruptcy. But that doesn’t include states. (The statute defines “municipality” as a “political subdivision or public agency or instrumentality of a State”—that is, not a state itself.) For one thing, states are said to have sovereign immunity, as protected by the 11^th Amendment, which means they can’t be sued. In other words, they don’t need any protection from angry creditors who would take them to court for failing to pay their debts. As a result, states can simply borrow money ad infinitum.

California Senate candidate Carly Fiorina mooted the idea last month.

Maine’s legislature recently engaged in a strange exercise. A representative introduced a bill to eliminate local referenda on educational budgets. The bill read in part:

A regional school unit’s budget must be approved at a regional school unit budget meeting and by a budget validation referendum as provided in section 1486.

The very next day, the bill’s sponsor disavowed the measure, after he was inundated by constituent mail opposing the proposal. After hearing Representative Howard McFadden’s mea culpa, the education committee unanimously voted the bill down, allowing localities to retain control of local education spending.

The issue was far from dead, however. The education committee was also considering a separate bill which contained a referendum-killing provision, ostensibly to enable easier school-consolidation measures.

Ultimately, a “tidal wave” of constituent input convinced the education committee to unanimously abandon the measure. For now Mainers retain the right to control local education spending, and judging by the hue-and-cry voters raised, by a significantly popular margin.

School consolidation in Maine is problematic. The state is divided into two radically different polities. Southern/Coastal Maine is relatively affluent and densely populated, while Northern and Central Maine are sparsely populated and less affluent.

Consolidation makes sense in many respects, but the economics are questionable. Some towns, like Fayette, have no higher education facilities, but have a voucher-style tuition system to send students to any of the surrounding high-schools, including a local private high school.

This kind of school choice introduces a modicum of competition into local systems, and allows families to choose the school that is best suited to their particular needs.

Instead of removing local control via consolidation measures, Maine’s education committee should consider measures introducing more personal and local choice.

Previously on Neighborhood Effects, Emily Washington wrote about education competition and Eileen Norcross detailed the struggles of D.C.’s controversial voucher system. Eileen also recently co-authored an issue of Mercatus On Policy on educational competition.

(H/T Maine Heritage Policy Center.)

Mercatus Senior Fellow and Neighborhood Effects leading lady Eileen Norcross appeared on Fox Business this afternoon, discussing her recent article in Reason. She discussed the fiscal situation in New Jersey, and how it got so bad. From the Abbot court cases to public sector unions, she covers a lot of ground. Watch the interview here.

In the Reason article she dives into the union stranglehold on state finance in more depth:

Since 1990 local governments have added 45,500 new jobs. Nearly all of them are represented by one of a dozen unions, which have helped secure some of the plushest public sector jobs in the nation. It’s easy to see how property taxes have grown at twice the rate of inflation over the past decade. A government worker in New Jersey earns an average of $58,963, a police officer averages $84,223 (the second highest in the nation), and six-figure public sector salaries are commonplace. Compare this to neighboring Philadelphia, where the average police salary is $49,000. According to one estimate, of the $23 billion New Jersey raised in property taxes in 2008, $18 billion was spent on police, municipal, and teacher salaries.The tab for public workers doesn’t end there. Factor in the state’s pension plan, currently under-funded by $34 billion. The New Jersey Taxpayers’ Association calculates pension payouts for the average teacher range from $1.6 million to $2.5 million, per retiree. For the average police officer, that range totals between $3.2 million and $6 million, per retiree.

Colorado’s Tax Payer’s Bill of Rights (Tabor) is the strongest tax and expenditure limit in the country. It fixes per capita spending, adjusted for inflation, at the 1992 level. The only similar state law is California’s Gann Limit, but this rule has been amended so many times by both legislators and voters that it has become meaningless, leaving the state at present near financial ruin.

Tabor is popular among many Colorado residents because all state and local tax increases must be approved by voters. However, new proposals threaten to move the state’s budget further toward California’s by cutting taxes when the state is already struggling to cover its expenditures. The New York Times reports:

The combined results would blow a $1.7 billion hole, or more, in a state budget that is already facing a $1.3 billion shortfall, according to an analysis by the Bell Policy Center, a research and advocacy group in Colorado that has opposed Tabor-driven spending cuts in social programs.

Dan Maes, who is seeking a nomination to run for governor, is among the Republicans in the Colorado state legislature who proposed the tax cuts. Creating budget shortfalls is poor policy, despite its potential for popularity among voters. Any tax cuts in a state without budget surpluses should be met with cuts in expenditure as well, which this proposal is not. Democratic Governor Bill Ritter explains in the article:

“The cynical game the proponents are playing with our future would quite literally destroy the safety net and wipe out any hope of creating a better future for our children,” said Mr. Ritter, who has said he decided not to run again so he can spend more time with his family and focus on the state’s battered budget with fewer political distractions.

Tax and expenditure limits like Tabor are important steps toward maintaining fiscal health and stability at the state level, but perhaps even more important is that states, like their citizens, do not spend beyond their means. Too often, the budget debate is split between Democrats who will not support budget cuts and Republicans who will not support tax increases. Basic arithmetic demonstrates that these conflicting policies cannot coexist in the long run.

Colorado’s fiscal policy of relatively low taxes and stable expenditures has helped the state’s GDP grow faster than the national average since Tabor’s implementation. Even more important to the state’s future, however, is a governor, Republican or Democrat, who limits debt and and emphasizes balanced budgets.

Present state budget crises will likely seem mild compared to what they will face in F Y2011. In order to comply with  their constitutionally mandated balanced budgets, many states relied on one-time gimmicks to pass their FY 2010 budgets and must now turn to even more drastic measures.

In California, Governor Schwarzenneger’s proposed solution to close a $19 billion dollar funding gap is to rely on $8 billion of hoped-for federal aid. This prediction was deemed overly optimistic by the state’s Legislative Analyst’s Office. However, that Gover Schwarzenneger is relying on federal funding at all should signal that the states’ “one-time” federal bailout last year has created a culture in which state legislators look to higher levels of government to fix their fiscal irresponsibility.

The current state budget problems exemplify the danger of fiscal gimmickry: one-time solutions allow states to pass their budgets when the crunch hits, but they create long run problems as the structural gaps between spending and revenue grow over time.

The Sacramento Bee reports:

LAO said that while there is a “good prospect” for receiving more money, “the chance that anywhere near all the federal funds and flexibility sought by the governor in his budget package is almost nonexistent. The state is very likely to fall several billion dollars short of the governor’s goals.”

After the state received stimulus money that helped close its budget gap in June, it asked for further bailout money as a budget gap opened. Planet Money explains that this experience did not teach lawmakers any lessons:

Last summer, state officials were turned down hard after going hat in hand to the White House, warning of a dire situation if the state’s budget hole wasn’t addressed soon.

This time, Sacramento isn’t using the b-word, instead calling any federal bailout a needed “investment.”

“No one is looking for a bailout. We’re looking for an investment,” said Senate President Pro Tem Darrell Steinberg, D-Sacramento, adding that the state needs to “fight” for more money.

On top of next year’s projected shortfall, California must deal with a $1 billion deficit from this year, caused by overly rosy projections of revenue and expenditure that budget makers employed last year to make the budget appear balanced. Even as they suffer the consequences for these practices, legislators continue to use gimmicks that will cause more problems in the future.

Arizona’s even more unusual approach is another example of taking extreme measures to balance a budget for the sake of passing it, rather than taking a long run view of the state’s economic health.

…for a hamburger statehouse today. In all seriousness, this sounds like an excellent plan. Arizona is going to sell public buildings in exchange for a twenty year lease.

It’s a bit unusual to sell a state capital, state hospital, prisons and park visitor centers, but when you have a billion and a half dollar deficit to make up between now and July, Arizona Department of Administration spokesman Alan Ecker says you do unusual things.

Mr. ALAN ECKER (Spokesman, Arizona Department of Administration): The proceeds will be going to – straight into the Arizona state general fund to offset the budget crisis that we’re dealing with.

ROBBINS [NPR reporter]: The total – $735 million, Arizona would then lease back the buildings over 20 years. Investors would buy $5,000 certificates of participation and get an estimated four to five percent interest a year. The question is, how safe is an investment in the state of Arizona? Its credit rating was downgraded just last month because of its budget crisis. But Alan Ecker says, in this case, we’re talking about buildings which have to operate if Arizona remains a state.

Mr. ECKER: So the state would be very, very unlikely to ever default on payments and walk away from those facilities. So investors should have a strong piece of mind.

NPR doesn’t attempt any analysis of the proposal. Why bother, when the state’s own spokesman assures us “investors should have a strong piece of mind?” Turns out this is old news, which we covered. Arizona Central reports:

Under the most recent legislative proposal, the state would seek a series of lease arrangements spanning as much as 20 years. Deals that would generate the targeted $735 million in revenue would mean state lease payments totaling $60 million to $70 million a year, according to budget analysts.

Over two decades, that would equate to at least $1.2 billion in lease payments. Once the leases had expired, the state would again take ownership of the properties.

House Majority Leader John McComish called the payments preferable to a tax increase, as proposed by Brewer, or alternative fiscal schemes such as selling future income from state Lottery sales in exchange for a lump-sum payment.

“What are our choices?” asked McComish, a Phoenix Republican. “We could cut more, or we could raise taxes more. Borrowing over the long term, we think, is better for the people, better for the economy.”

Arizona can’t afford the current level of spending, but instead of cutting spending McComish thinks it’s wise to engage in budgetary games that will cost the state an extra 63%. That’s politically easier than being responsible and cutting spending. Maybe the state should sell endorsements, like professional ballparks. I would love to take a tour of the Arizona State Capitol, brought to you by the good people at Pampers.

Eileen previously gave a tentative thumbs up to these kinds of deals as examples of privatization, but as the comments to her post pointed out, selling state offices is akin to selling off state-owned railways. Instead, this is just a gimmick at the expense of future taxpayers. Eileen has a forthcoming issue of Mercatus On Policy on budgetary gimmicks.

This morning, the US Census Bureau released the 2008 Annual Survey of State Government Finances showing — no surprise here — that state revenues were significantly down in 2008, while expenditures were actually up by an average of 6.7 percent. State debts nationwide total over $1 billion.

From the press release:

State governments took in nearly $1.7 trillion in total revenues in fiscal year 2008, a 15.8 percent decrease from 2007, according to new data on state government finances released by the U.S. Census Bureau. The largest share of those revenues came from taxes ($780.7 billion), which made up 46.5 percent. The decline was primarily because of a decrease in insurance trust revenue, which fell by $377.7 billion (72.7 percent).

[....]

Total state government expenditures increased 6.2 percent from fiscal year 2007, totaling slightly more than $1.7 trillion in 2008. Education ($546.8 billion), public welfare ($412.1 billion) and highways ($107.2 billion) represented the top three outlays, accounting for nearly two-thirds of all state government total expenditures.

A state-by-state table is available from the Census Bureau here in Excel format, or here from Neighborhood Effects here in PDF format.

New York’s Metropolitan Transit Authority is broke. Back in May, Governor Paterson approved $2.1 billion in tax hikes to plug the authority’s $383 million hole, including, as the Manhattan Institute’s Nicole Gelinas notes, an ill-advised payroll tax in the middle of a deep recession. Predictably, revenues fell short. On top of this, the Governor agreed to $91 million in pay increases for top MTA officials. The MTA’s hole is now $400 million.

As if to hammer home that the MTA exists to serve its employees rather than its customers, a judge ruled this week that the state must pay the Transit Workers Union an 11 percent pay increase over the next few years.

The result: MTA will cut off service on the W and Z lines, reduce service on the G and M lines, and shrink 49 bus routes. Riders are guaranteed longer wait times, and cars will be packed. An MTA board member calls it “a failure of government.”

For some policy ideas, the MTA might review its history. Initially, NYC’s buses and and train services were private. Between 1932 and 1953, the city and the state acquired New York City’s transit systems. And since that time it has experienced frequent financial crises. In spite of years of subsidies, transit prices continue to rise. As Wendell Cox writes, New York transit remains immune to competitive pressure and instead relies on the deep pockets of taxpayers. By contrast, the Tokyo and Hong Kong transit systems get most of their revenues from rider fares.

While privatizing is a near-impossibility, Cox notes that competitive contracting might go a long way to lowering MTA’s runaway spending. The Transport for London bus system took this route and reduced costs per mile by 40 percent.

Eileen Norcross has an op-ed in the Asbury Park Press arguing that Governor-elect Christie must deal with New Jersey’s education system before it will be possible to deal with the budget deficit, property taxes, income taxes, and outmigration:

School funding is a mess not because of decisions by the Legislature, but edicts from the state’s Supreme Court. For more than 30 years, the courts have controlled the schools through the Abbott decisions (which number 20 separate rulings over 24 years).

To wit, 31 court-designated Abbott districts must spend the same amount per student as the highest-spending district in the state. While other state courts have ruled on state funding formulas for education, none have effectively taken over the Legislature’s policymaking functions as the New Jersey courts have.

[...]

Regardless of what type of reforms Christie and the Legislature choose to undertake, one thing is certain: Without reforming education, New Jersey will continue to raise taxes and engage in reckless fiscal gimmickry that would make an Enron accountant blush.

The citizens of New Jersey know that something is deeply wrong. An increasing number of New Jerseyans are leaving the state for lower-tax pastures. Rutgers University economists Joseph Seneca and James Hughes have found some 377,000 people left New Jersey between 2000 and 2006 alone — the combined populations of Newark and Woodbridge. With the worst tax climate of all the 50 states, according to the Tax Foundation, New Jersey is paying a great deal and getting little in return. [NB: Links added in this post.]

Here’s the section from Eileen’s recent paper about court-set education policy. Here’s a case study on the Abbott decision. Here are the Abbott decisions. Read the whole op-ed, here.

Last week, Surprise, Arizona was in the news for questionable accounting practices. This week, accountants in Ohio are expressing concerns about the state’s long run fiscal prospects. Ohio used more than $7 bilion from the American Recovery and Reinvestment Act to close this year’s budget gap, but this gap will reappear in the budget once stimulus funds are gone.

J. Matthew Yuskewich, chairman of the Ohio Society of Certified Public Accountants said in The Columbus Dispatch:

“Every month that goes by that they delay acting on that next budget reduces the options they have available to solve that gap,”  If they wait too long, “the only solution available is going to be a tax increase, and it’s going to be a big tax increase.”

Yuskewich hints at an ongoing problem in public finance — the absence of profit and loss calculation makes government slow to adapt to changing economic conditions.  The article goes on to explain the society’s recommendation for a long-term solution to this deficit:

If taxes are in the works, “sin taxes” on alcohol, cigarettes, soda and high-fat foods should be first in line.

While Yuskewich and his colleagues seem to have correctly identified Ohio’s core budget problem, sin taxes are not likely to represent a valid long-term solution. Katelyn Christ and Richard Williams of the Mercatus Center illuminate the problems with these excise taxes.  They are inefficient, regressive, and distort the basket of goods that consumers would otherwise purchase.

Ohio will have plenty of company in budget shortfalls in the coming years.  The Sunshine Review projects that 42 states will face shortfalls in fiscal year 2010. While states do need to find long term solutions rather than relying on bailout funds, they should focus on creating prosperous states through low, broad-based taxes instead of targeting specific goods that policy makers identify as sinful.

In 2008, Maine set a shameful record. This past year we sent more money to Augusta, as a percentage of income, than ever before. Unfortunately, it gets even worse. According to the U.S. Department of Commerce, Maine is on pace to send almost forty cents of each dollar to the capitol in 2009.

For over a decade now, Augusta has been getting bigger. As a result, we have lost jobs, tax revenue, businesses, teachers and public services. Despite all this evidence, unions, legislators and bureaucrats want us to think that they can spend our money responsibly. There has to be a way to make the state both effective and affordable. Question four, the Taxpayer Bill of Rights, while not perfect, is the best solution for our cancerous growth of government.

Mainers trust each other; it’s one of the best things about life here. We know that if we ask for directions, get a flat, or need a hand, our neighbors will be right along to help. We take pride in our communities, and it makes living here special. TABOR allows Mainers to take responsibility for their choices, and use our famous common sense. The only alternative, the way things are now, is letting Augusta arbitrarily decide whether our communities thrive or die.

TABOR is less about how much money is spent, and more about who decides where it goes. Currently, unions and special interests are running ads that claim TABOR would cut vital public services Mainers rely on. These are simply empty threats they use as scare tactics.

TABOR isn’t the ‘cap’ opponents claim, but an extra dose of accountability. It allows Mainers to hold Augusta responsible for how and why they spend our money. It will force the state spend more intelligently. With only a ‘good enough’ policy, Maine has wasted millions on education that doesn’t teach kids, on healthcare that doesn’t keep us healthy, and on public services that only benefit special interests. We deserve better.

By relying on direct democracy and operating under a simple rule, TABOR fosters transparency and fiscal discipline. Augusta must present the amount, purpose, and time in which they want to spend extra funds for citizen approval. If there is a tax surplus, taxpayers can decide what happens to the money. The state is forced to reduce the level of taxation within the limit set by inflation and population growth, automatically restricting government growth to a level chosen by citizens. Who doesn’t want to be more effective and save money?

When programs aren’t working, Augusta’s solution is to spend more money and raise taxes. Bureaucrats said Dirigo would cover 30,000 Mainers, but it only covers a third of that number. When the program proved inefficient and overly expensive, their solution was to tax soda, wine and beer. Maine voted that down, and held Augusta accountable for wasteful spending. This opportunity is what we want to protect with TABOR. It is much better than good enough.

When Mainers go grocery shopping, we don’t just rush into Hannaford’s or Whole Foods with a wad of cash and throw items in a cart until we’re broke. We take our time and bargain shop; we want the best quality and nutrition for our dollar. However, when it comes to state spending, for decades Augusta has thrown everything into the cart. When money runs out they demand more. Is our education or fire department dollar less important than our grocery bill?

Colorado learned that TABOR can help stretch a dollar. In 1992, before TABOR, Colorado was leading the nation in education spending. However, their students’ results hovered below the national average. Since TABOR, Colorado spends less than the average on schooling and their students achieve at a much higher rate. People can argue if Colorado’s education
system is better or worse, but it’s clearly more efficient. They pay less and get more. Maine pays more and gets less.

TABOR opponents want to prevent us from voting on spending increases. They insist rushing wasteful spending through the legislature is the best way for Maine to prosper. It’s not working, because legislators don’t want their constituents to see where the money goes. TABOR is the only way to show Augusta we are paying attention, and care about how the state is operating. Bureaucrats hate TABOR because they know Mainers won’t accept bloated unions and wasteful government any more. Colorado did better than good enough, and so can Maine.

California managed to pass a budget for fiscal year 2010 at the eleventh hour, but now the Center on Budget and Policy Priorities reports that the state faces a midyear projected shortfall of $1.1 billion.

Budget strife has recently led to cut backs in services and hours at state parks, after Governor Arnold Schwarzenegger cut over $14 million from the parks budget.

The parks department chose to cut hours rather than raising rates as it did last year in an effort to reduce budget shortfalls then.  In the Sacramento Bee, department spokesman Roy Stearns explains:

Parks leaders increased entrance and camping fees last year, and decided not to do it again, for fear of losing revenue if too many visitors stayed away.

State employees are attempting to choose the method to close their budget shortfalls that will bring the least pain to residents, but in truth, they do not know how to best serve their “customers.” Unlike firms who rely on profit and loss calculation to let them know if they are successfully serving consumers, government agencies can only make educated guesses about providing the optimal level of services to constituents at the right price.

Across the country, the Washington (DC) Metropolitan Area Transit Authority is facing a similar problem. The Metro and bus services are paid for by a combination of subsidies and rider fares, but setting the “optimal” ticket price and determining the agency’s budget are largely a matter of guesswork.

A WMATA report details the need for $11 billion in funding for fiscal years 2011-2020, ignoring that some of the budget could be covered by cost savings or changes in fare price.

If a private firm provided a transit or park system, it would have a profit incentive to determine the most efficient fare price and to pay for its services, but government agencies have no equivalent. Some services with public goods characteristics may simply not be provided by private firms, which is why many people advocate a government role in providing these services. However, as long as the public sector is offering such goods, we should acknowledge that there is not a good way of determining the appropriate level of provision, despite what lobbyists and politicians may tell us.

People who live in New Jersey and New York already know that their property taxes are high. But they may not know just how high, that these two states have the highest property taxes in the United States, by various quantitative measures as described below.

New York and New Jersey vie in any given year for first place for highest per capita homeowner property tax burden in the nation. The Tax Foundation recently published rankings of median per capita homeowner property taxes paid and 2008 is no exception. The top 10 counties are nearly split between the two states. Number one is Westchester, NY with a median per capita homeowner property tax of $8,890.

When dividing the median property tax burden by median home value, only New York counties make the top ten. Niagara County is number one with median property taxes representing 2.89 percent of median home value.

I decided to do another calculation using the Tax Foundation’s data and combining it with median homeowner income for each county in the U.S. to calculate another measure of property tax pain: how big a bite it takes out of homeowner income.

Not surprisingly, the results don’t help either state.

New Jersey has 16 out of the top 25 highest property tax counties (among counties with populations greater than 65,000) in the US. New York has six counties, and Illinois, three. For three counties in New Jersey — Passaic, Essex and Bergen — the median property tax represents over eight percent of median homeowner income. As a benchmark, the average for the US is 2.8 percent.

New York has six counties in the top 25 in the eight percent range. It’s only by 21st place that a new state jumps into the rankings: Lake County, Illinois with a ratio of median property taxes to median income of 6.5 percent.

Here are all the top 25 counties:

Highest 25 Property Tax Counties in United States, 2008 (Median Homeowner Property Tax as a Percentage of Median Homeowner Income)

Note that these are counties with populations of over 65,000.

Cigarette tax increases are often politically palatable because of the product’s harmful nature, but perhaps the recent $0.62 increase in federal taxes is approaching a level that many people feel is inappropriate. Like other sin taxes, those levied on cigarettes are designed both to raise revenue and to discourage people from smoking. However, the first objective may be more and more difficult to achieve as people quit smoking because of the higher cost or find ways to avoid the tax.

A CNN reporter spoke with Denver, Colorado customers to gauge their reactions to the tax increase. Resident Larry Juke pointed out the regressive nature of such taxes, particularly relevant for a tax increase during a deep economic recession:

“They’re picking on us poor people, the ones that smoke,” Jukes, a 65-year-old who has been smoking since he was a teen, said of the government. “They have been for years.”

Since the most recent increase in federal taxes, Tobacco Haven in Brookline, New Hampshire, has come under scrutiny for a machine it owns that allows customers to make their own cigarettes with a variety of different types of tobacco. The machine is both a novelty and a way for customers to avoid some of the taxes on pre-made cigarettes without having to roll their own. An All Things Considered story explains:

Smokers in a New Hampshire tobacco shop have been lining up to use a commercial roll-your-own machine. The contraption spits out hundreds of cigarettes — for less than half the price of brand names.

But state officials want to pull the plug. They say the shop is now a cigarette manufacturer and can no longer sidestep what it owes the government.

Cigarette taxes are an especially important issue for New Hampshire because many of their sales are to customers who come in from Massachusetts or Maine to avoid the even higher taxes in their own states. A state policy blog explains:

Cigarettes are a higher-margin item and out-of-state customers typically buy other goods as well. For small stores struggling in a difficult economic environment, driving away any customers is a problem. A significant loss in a higher-margin item could make the difference between survival and closing up shop.

As tax increases urge consumers the alter their behavior more and more, customers and retailers grow more willing to resort to illegal behavior to purchase cheaper cigarettes, such as purchasing them online or from stores that do not pay the taxes. A Chicago Tribune article reports:

75 percent of cigarettes smoked in Chicago come from packs that don’t bear city tax stamps. The rate of tax avoidance here dwarfs the national average of about 20 percent, he said. In New York City — the only place in the country where cigarette taxes are higher — the avoidance rate is about 50 percent, he said, still sharply lower than Chicago’s.

Policy makers should keep in mind that as cigarette taxes continue to increase, higher revenue will not indefinitely.

Furthermore, as customers alter their behavior more and more as a result of the tax, the associated deadweight loss will increase correspondingly.

Inside State and Local Policy is featuring a new podcast with Kail Padgitt of the Tax Foundation discussing his new State Business Tax Climate Index:

The Index measures the competitiveness of the 50 states’ tax systems and ranks them accordingly based on the taxes that matter most to businesses and business investment: corporate income, individual income, sales, property and unemployment insurance taxes. Tune in to find out which states come out on top and bottom [guess which one New Jersey is?  --ed.], and what policy makers can do to boost their ranking.

Listen here:

Click here to download the podcast as an MP3 file, or click here to subscribe to Inside State and Local Policy via iTunes.

On October 15, Puerto Rico’s public sector labor unions promise “the most massive movement” in their history.  Yesterday union leaders clashed with riot police outside La Fortaleza, the governor’s mansion in San Juan.

A general strike is being called in response to Governor Luis Fortuño’s decision to layoff 17,000 government workers in order to avoid a budgetary crisis. Puerto Rico faces a budget deficit of $3.2 billion.

It’s a bold move, considering that 25 percent of all those employed in Puerto Rico work in the government sector. The move is part of a larger plan to deal with Puerto Rico’s poor economic growth, growing public sector, and the lowest credit rating in the U.S. (now at BBB-).

While the unions argue that layoffs will drive up the unemployment rate, what is striking about Puerto Rico is the long-running anemia of its private sector. Stephen Davis and Luis Rivera-Batiz find in a 2005 study that employment rates in Puerto Rico are 55 to 65 percent of US employment rates. The employment shortfall is concentrated in the private sector, in particular for labor-intensive jobs.The authors cite several causes:

• High minimum wage requirements,
• Tax incentives for capital-intensive activities,
• Regulatory barriers, and
• A business climate that rests on being able to secure favors from the government.

In other words, economic policy — heavily reliant on government transfers — has discouraged private sector growth making the government sector a leading provider of jobs.

The cuts are, in a sense, unavoidable. Public sector employment is a main driver of the commonwealth’s budgetary crisis: nearly 70 percent of Puerto Rico’s budget is for payroll.

The Chicago Tribune reports that Mayor Daley and the City Council have given unanimous support to fund any expense overruns should Chicago win its bid to host the 2016 Olympic games. This decision gives the city a fighting chance to be selected to host the games, keeping it in the running with Madrid, Rio de Janeiro, and Tokyo, all of which have secured similar financial guarantees.

Afterward, aldermen and Mayor Richard Daley gave themselves a standing ovation. The vote reauthorizes Daley to sign the Olympics host city contract in advance of the Oct. 2 vote in Copenhagen by the International Olympics Committee on which of four finalist cities gets the Summer Games in seven years.

This decision by the city’s leadership may not represent the desires of Chicago citizens who, a Tribune poll shows, have dwindling support for the city to host the games, largely because of concerns about taxpayer liability.

After the vote, many of the aldermen gave quotes to the press:

Ald. Ray Suarez (31st) said he initially ”had some reservations.” But Suarez said he now feels the Olympics would bring jobs, housing and a new global reputation to Chicago.

“It will make Chicago a world-class city,” he said.

Of course, Chicago residents and leaders may have many reasons for wanting to host the 2016 Games, but it is uncertain that the event would be an economic boon to the city.  A study conducted to analyze the potential economic effects of the 2012 London Olympics found that historically while some host cities have benefited economically, others have suffered losses as tax dollars used to fund the games are not always recouped during the course of the event.

Adam Blake of the University of Nottingham Business School found that the event was likely to benefit London in 2012 and that increased growth is likely to last until 2016, but that in the years before and after this bracket the results are less certain.

Short-lived, costly events such as the Olympics often result in the construction of facilities that will have limited use after the games are over.  For example, the Bird’s Nest that became symbolic of the 2008 Beijing Olympics is today underutilized, making revenue today only from tourists who wish to see where the athletes competed.

A USA Today reporter speculates:

In other countries, the Bird’s Nest might be revealed as a white elephant — an expensive possession with little commercial value. But in China, the government and state-controlled media are unlikely to advertise the fact and citizens will never know the real cost.

Ex ante, we do not know if the 2016 games would benefit or harm Chicago in the long run, but looking to past cases gives reason to question whether or not host cities benefit in the long run.  Perhaps a more reliable policy to promote economic growth and tourism in the city would be to lower its notoriously high taxes. The Economist recently found that Chicago has the greatest tax burden for tourists of any American city.  The cities’ leadership would be wise to consider how this tax climate would impact potential visitors’ decisions to attend the games before speculating that increased tourism would certainly benefit residents.

How will state governments recover from the catastrophic collapse in revenues? According to Indiana Governor Mitch Daniels, that all depends on whether states want to face up to the caus — the happy (and now unsupportable) spending binge of the 1990s, when states increased spending an average of 6% a year.

Writing in today’s Wall Street Journal, Governor Daniels estimates it will take GDP growth twice the historical average of 3.49% to return state tax revenues to their previous long-run trend line by 2012.

And even then, revenue recovery may not happen. Consumer spending is down. Americans may have moved into a renewed era of saving. That means less sales tax revenues for states.

The choice before states: more taxes, or less spending, and permanently smaller government.

State governments will continue to face hard choices: slash services, union benefits, or privatize what the state cannot support.

The Journal also reports on what one-day employee furloughs look like in the states: A 3 hour wait for drivers license renewals in California, no birth certificates available in Wisconsin, the shutdown of shooting ranges and visitor centers in Michigan, no food stamp applications filed in Maine, and fewer traffic patrols on Maryland highways.

There is a bright spot in this exercise: furloughs force efficiencies. When California began DMV furloughs in January, 473,000 people chose to renew online, an increase of 32%.