Monthly Archives: May 2009

Unallotment in Minnesota

An unusual executive power is being put into practice in Minnesota.  Governor Tim Pawlenty is “unalloting” funds. That is, taking away $2.7 billion in proposed spending from the budget in order to balance it.  Unallotment has been used four times since 1939.  The governor has refused to raise more taxes to cover proposed spending putting him at odds with legislators, unions, and program beneficiaries.

The Minnesotan response to its $4.6 billion shortfall differs markedly from the Californian, as Kimberly Strassel at The Wall Street Journal notes, “a refreshing break from the financial-crisis norm.”

The  governor is asking cities and counties, “how much should I cut?,” from their piece of state aid, while 201 state legislators got letters asking for their budget cut recommendations.   Something to watch in the coming days – what will local governments suggest?

Minnesota operates under a two-year budget with the new budget beginning July 1 leaving a few weeks for cuts to be identified.

If you’re curious about unallotment in Minnesota law, you can read  more here.

Introducing Competition to Public Schools

As states are attempting to improve the quality of public education while facing tight budget constraints, school vouchers are gaining publicity as a means of improving education through increased competition while not requiring increased funding.

Voucher programs have been implemented in several cities across the country, generally improving achievement among students who are able to use them. As reported in USA Today:

Vouchers have improved the math and reading of inner-city children from Dayton, Ohio, to Charlotte, N.C., various studies show. The Washington vouchers improved the reading of girls and younger kids by about half a school year, though results for other groups were iffier. Yet opposition is so fierce that few voucher experiments survive past the seedling stage. Florida vouchers were blocked by a party-line vote in the state Supreme Court. In Utah, they were killed by a union-funded anti-voucher campaign.

While critics of voucher programs such as the National Education Association fear that they would reduce the funding and quality of public schools, those who support vouchers assert that by introducing competition into public education, teachers and administrators will have new incentives to improve the level of service without raising costs.

Economist Charles Tiebout elucidated that competition between communities to attract investment has led to greater variation and improved choices for consumers who each have different preferences.  Communities’ residents are able to sort themselves into the neighborhoods and cities that are best for them by voting with their feet.  The same freedom for parents and children to choose which school to attend might improve the quality of education available generally as well as increase the variety of schooling options available to each child.

The Flat Tax Debate in New Jersey

The Wall Street Journal writes that the Republican primary race in New Jersey is the center of contentious debate over the flat tax. Frontrunner Chris Christie rejects rival Steve Lonegan’s proposal to flatten New Jersey’s highly progressive income tax rates (which run from 1.47% to 8.97%) to 2.98%. Christie claims it will raise the taxes on “70 percent of working families.” Lonegan argues it will only raise taxes on 40 percent of working families, by about $300. But more importantly, as the Journal notes,  if  implemented the flat tax represents a $1000 reduction in taxes for the average New Jersey income taxpayer.

Should the state decide to go this route, they will not be alone. Alvin Rabushka who proposed a national flat tax with Robert Hall back in 1981, traces the advance of the flat tax in the last 25 years around the world  (including Russia and Estonia) and in the states. Colorado, Illinois, Indiana, Massachusetts, Michigan, Pennsylvania all have flat taxes. Rhode Island and Utah, have an optional flat tax (taxpayers must pay the higher of the AMT or the regular income tax).

If any state could use tax (and institutional) reform  it is New Jersey.

As my colleague Frederic Sautet notes at The Austrian Economists, the ideas of James Buchanan and of the Austrian economists – fiscal prudence- are immensely relevant to New Jersey’s (and many other states’) fiscal crisis.  For more on how these ideas are driving emerging policy prescriptions in New Jersey, watch the debates here. As Frederic rightly concludes, the liklihood of true reform will ultimatley depend, not on the merit of the ideas, but politics.

New Jersey's Lifeline: A Line of Credit?

“We are nearing the abyss,” is the opinion of Tom Byrne, son of former Governor Brendan Byrne, and past Democratic State Chairman.  The state must present a balanced budget by June 30th, and they are still $1.2 billion short. This is in spite of the stimulus, tax hikes, and spending cuts. Revenue projections continue to fall. In April the state found it had  $800 million less in income tax revenues than initially projected. (that’s 40 percent less than last year’s collections.)

What is left?  Property tax rebates are now cancelled for eveyone except seniors and the disabled (they are paid for mainly in income tax collections).  And the Governor has cancelled plans to expand state spending on pre-school.  The income tax is being hiked from 6.37 percent to 8 percent on those earning between $400,000 and $500,000 and the rate is  being increased from 10.25 percent to 10.75 percent on those earning over $1,000,000.

It won’t be enough. So the state is seeking a line of credit from a bank. The Treasurer has asked a willing “cash borrowing facility” to lend them $2 billion. California may need to do the same in the next year, for 10 times that amount.

There is a common denominator in the problems of both states. They surrendered control of their  budgets to public sector unions and interest groups. New Jersey has the added problem of having 40 percent of its budget (and its income tax system) crafted by court mandates on education spending.

Perhaps this new fiscal fix is not surprising. Credit cards will soon be the refuge of habitual debtors.

Congress is actively reshaping credit card companies, restricting interest rate increases and fees to help those who can’t make their bills. The outcome: those with good credit will be subsidizing those who walk away from their payments.

The financial market bailout that began in September has infected everything. With the same principles at work and outcomes observed. Those who behaved badly or made poor choices are being rewarded by those who paid their bills on time and lived within their means. Result – An insatiable redistribution of resources from the market economy and into bureaucracies of all kinds.

The bailout bulldozer shows no signs of running out of fuel.

The Super Bowl as Economic Remedy

It seems obvious that when a city is chosen to host a major event — political convention, Super Bowl, Olympics — this provides a natural economic boost to the city’s economy. If any city is deserving of such a boost it is New Orleans, which will be hosting the 2013 Super Bowl for the first time since Hurricane Katrina. (It will be the 10th time the city has been the site of the championship.)

And like many governments that find themselves chosen for a major sporting event, the Louisiana legislature is deciding if it should spend $85 million in Superdome upgrades. However, the boost is largely symbolic: while New Orleanians may feel a sense of pride over the selection, and the stadium will get another make over, economic gains are very likely to be fleeting and possibly negative.

Much academic work has been done assessing the impact of sporting events on regional economies. The findings generally show little lasting impact on host cities. Robert Baade finds the primary beneficiaries of taxpayer subsidies for stadiums are team owners, and players, not local residents.

That has not stopped cities from competing for the honor. 

University of Maryland economist Dennis Coates, writing in The American, finds since 1990 Major League Baseball has opened 19 new stadiums, the NFL opened 17, and the NBA over 20. These projects are highly subsidized on the federal, state and local levels, with the public bearing as much as 63 percent of the cost.  Coates and fellow economist Brad Humphreys find in an analysis of  of wages between 1969 and the 1990s in metro areas where these stadiums reside is that incomes actually decreased.

Why? Consumer spending on sports replaces consumption of other kinds of entertainment, and the spending patrons undertake has a relatively small multiplier effect in real the local economy. Athletes get the income boost. And to top it off, increased local subsidies to the franchise redirect tax revenues from other use, making the local economy less efficient.

While local and state governments might like to think otherwise, being chosen as a host city may be as much an economic drain as a publicity boon.

Louisiana Pork Report

Fiscal austerity brought on by the economic crisis is causing states to figure out how to increase revenues or cut expenditures. On the day of the likely failure of several ballot initiatives in California which seek to do the former, the “Louisiana Pork Report,” published by the Pelican Institute for Public Policy and Citizens Against Government Waste, suggests projects that the authors argue Louisiana can do without. Find the whole thing here.

The introduction pulls no punches:

The Louisiana Pork Report reveals rampant and undisciplined spending by Louisiana’s state and local governments. It unmasks an ingrained addiction to overspending as the real culprit behind the state’s budget crisis. Whether reading the following makes one laugh, cry, or both, it should inspire a heightened commitment to greater transparency and accountability from state and local government.

New York Stimulus Spending Transparency

Like many states, New York set up a nifty website to solicit public input about how to spend its share of federal stimulus dollars. In casting a wide net, the state received some off-the-wall proposals, including $500,000 for a marijuana farm in Rochester in a state that has yet to legalize medical marijuana.  And, not surprisingly, the sum cost of all the ideas submitted (about $100 billion) greatly exceeds the amount available for distribution (about $4 billion).

That the state surveyed citizens for suggestions about how to spend their share of the stimulus money is commendable.  But that’s only part of the equation.  It’s equally important that the state make public the process by which officials vet, prioritize, and green-light the more than 18,000 project submissions received. Without clear and transparent guidelines, it’s impossible for citizens to know how state agencies will weigh the stimulative value of a $500,000 pot farm against a $1.2 million composting facility or a $10 million aquatics center.

More than likely, the vast majority of New Yorkers who took the time to submit a request will soon receive a form rejection letter — “thanks, but no thanks” — without any explanation as to why their project was deemed unworthy of funding vis-à-vis the “winners.”

Legislative Action Against Kelo

In Texas, House Joint Resolution 14 could give voters the opportunity to increase the security of the state’s property owners, pending passage in the State Senate, which already passed a separate, weaker bill.  Currently, under precedent set by the Supreme Court case Kelo v. the City of New London, states can take ownership of property under their eminent domain powers by demonstrating merely that government ownership would offer “public benefit” as opposed to being required to prove “public use.”

The Institute for Justice explains that  HJR 14, which passed unanimously in the Texas House of Representatives, could potentially improve the state’s policy environment:

Under Kelo, a government is free to take your home or business and give it to anyone who might create more jobs or pay more taxes with your land than you do.  HJR 14 fixes Kelo in Texas by making it clear that “public use” means a use of the property by the government, the condemning authority or the public at large.

This action to strengthen the rights of Texas property owners contrasts with movements in some U.S. cities, including Cleveland and Flint, which are considering planned shrinkage as a way of dealing with mortgage foreclosures. City planning authorities in these cities tout the benefits of confining development to a more compact area because it would allow public services and infrastructure to be provided at lower cost.

However, this policy comes with negative incentives for property owners which these planners are ignoring.  If a locality’s residents begin to fear that their government, rather than protecting their property, may seize it to put it to use for the “public benefit” (which poses a much lower burden than “public use”), private investment, not to mention faith in good governance, will decline. If it passes, HJR 14 will allow policy makers (and policy researchers) to gather evidence across municipalities as to the costs and benefits of using eminent domain for public benefit takings, as some cities outside of Texas begin to employ this policy measure more heavily.

Newark's Glass Half Full?

From New Jersey Business, “Newark’s Glass Half Full“:

“There were 20 economic development and housing development ground breakings and ribbon cuttings in 2008, half of them in the last quarter,” says Stefan Pryor, the city’s deputy mayor for economic development. “The pace is accelerating.”

The city’s improbable confidence is based in part on a theory that Newark will benefit from the downturn by attracting newly cost-conscious businesses.

“Newark’s time is now. The city is a low-cost alternative to Manhattan,” says Ted Zangari, an attorney with Sills Cummis & Gross PC, who specializes in commercial real estate. Zangari says he has two clients now eyeing 40-50 acre industrial sites in the city, each promising to bring nearly 1,000 jobs from higher-cost locations inside and outside of the state if they sign on. He’s also representing a landlord who is in discussions with a prominent national retailer.

The state’s recently adopted Urban Transit Hub Tax Credit program, designed to spur development in communities near commuter rail stations by providing businesses that locate near them with tax credits based on capital investments and jobs, makes the sale even easier, he says.

While rents for commercial real estate in Manhattan are around $80 per square foot, they are in the $20-range in Newark. Added incentives, such as the new tax credit program, “bring net effective rents into the single digits,” Zangari says.

“If Newark doesn’t undergo a renaissance now, I don’t know when it ever will,” he adds.

The story mentions the Coffee Cave on Halsey Street, one of the new businesses to have started in the city recently. I had a drink there earlier this year and heartily recommend it.

Furloughs v. Bankruptcy: The New Unionism

New Jersey continues to stare straight at bankruptcy.  Revenue projections indicate that this is not an ordinary crisis . A shortfall of $2 million is projected.  Income tax revenues have fallen 40 percent. It is going to be painfully tough for Governor Corzine to balance the budget by June 30th. His latest proposals to cut spending include a furlough for union employees, a request for a $2 billion line of credit, less aid for colleges, and a $125,000 cut in aid to 12 independent living centers for the disabled. But program beneficiaries are not happy. There is a protest against the latter today at the Trenton statehouse.  Union workers are threatening to take the governor to court over his proposed furloughs.

Part of the driving force behind New Jersey’s imminent bankruptcy is the growth in salaries, pensions, and health benefits for unionized workers, including teachers. The state’s income tax is 100 percent Constitutionally dedicated to providing “Property Tax Relief.” This is a misnomer. It actually goes mainly (70 percent) to supplementing school budgets, and most of that take goes to 31 Abbott districts. Administrative  costs for teachers have skyrocketed in these districts over the decades.

Another source of trouble – the state’s pension system – negotiated by unions, agreed to by the state, with the costs passed through to municipalities, which are responsible for paying for fire and police benefits.  Result – the second highest property taxes per capita in the nation.

The mark of  public sector unions in directing New Jersey’s state and municipal budgets has been strong and devastating. And New Jersey is by no means alone. Steven Malanga of the Manhattan Institute,  writes in today’s Wall Street Journal about a very important distinction that bears repeating:   these are public sector unions – not private sector,  heavy industry unions

This phenomenon – the decline of the private sector union and the rise of the public sector union was identified and developed by my  economics professor, Dr. Leo Troy of Rutgers.  See his book, The Twilight of the Old Unionism.  His work on this subject is worth reading.