Author Archives: Daniel M. Rothschild

The Hutton Report

Last week, Lord Hutton of Furness released his long-anticipated report [pdf] recommending changes to the future of the British public employee pension systems. It contains some pretty stark recommendations, especially in comparison to most of what has been suggested in America.

For instance, while many American public pension reform proposals include changing the pension calculations to the final five years’ salary rather than the final three (to prevent so-called “pension spiking”), Lord Hutton’s recommendation is to calculate pensions based on average career pay. Additionally, he would greatly increase the retirement age in the uniformed services (police, firefighters, military) to 60 years, as much as a 10 year increase. Generally, public sector workers will expect about a five year increase in age of retirement.

Here is what the Hutton Report calls “The Deal,” which helpfully reminds us that what’s really at issue is negotiations between public sector employees and taxpayers.

Here’s a good summary of provisions by the FT. Here’s the Treasury FAQ.

Comparing cell phones and cigarettes

One of the ways in which hard-up states are seeking to increase revenues is by increasing taxes on cell phones and other mobile communications devices, which when combined with federal taxes, can now total almost a quarter of a user’s monthly bills. (Indeed, only in three states is this total tax rate less than ten percent.)

Today an article on BNA suggests that on the federal level, lawmakers may have had enough. The Wireless Tax Fairness Act, which was introduced but never voted on in two previous Congresses, would prohibit  new “discriminatory” fees and taxes on cellular products. One of the bill’s sponsors, Rep. Zoe Lofgren of California, is quoted as saying “Some localities are taxing cell phones like sin taxes. I don’t think using a cell phone is like smoking, but that’s the tax rate.”

This stikes me as exactly right. A little background on basic public finance is in order. The purpose of taxes is to raise money for necessary governmental functions. To that end, economists frequently prescribe that rates be low and broad in order to minimize the impact on consumers’ behavior — so-called tax neutrality. This is because taxation should be about raising revenue, not changing behavior.

Some economists tweak this prescription through the Ramsey Rule, which holds (in a nutshell) that the more influenced by tax rates consumers are (demand elasticity) the less something should be taxed (and vice versa).

Sin taxes are the opposite; they’re about reducing a behavior that policy makers judge to be morally offensive (like many people view smoking).

Relatedly, Pigouvian taxes seek to bring the costs to society (the social cost) in line with the costs born by a buyer. (For instance, some people advocate higher alcohol taxes on the theory that drinkers impose costs on others, though this argument is fraught with difficulties.)

Cell phone taxes above regular sales taxes levied by states and localities do not fit any of the four rationales provided here. On the one hand, taxing them at over twenty percent of a user’s bill is hardly neutral. Nor does it likely fit the Ramsey Rule prescription; consumers respond to cell phone taxes by buying less of it or by avoiding taxes by pretending to move. (Just look around you at how consumer takeup and use of cell phones has changed as prices have fallen over the last decade.) Cell phones are not sinful or offensive. And there’s no serious case to be made that the social cost of cell phones exceeds the cost born by users. In short, by any principle of public finance, high cell phone taxes are a bad bad bad idea.

Cell phones are, most people’s revealed preferences show, a great thing. There’s simply no case under the principles of tax neutrality, the Ramsey Rule, sin taxes, or Pigouvian taxes to tax cell phones at these high rates. Policy makers would be well advised to cut rather than hike these rates going forward.

Forbes’ map of intercounty migration patterns

Forbes has put together a nifty interactive map of nationwide county-by-county migrations patters. See Tiebout sorting at work! The map shows inward and outward migration numbers, and the income of the households doing the moving. To take one example, here’s what it looks like for Arizona’s Maricopa County:

Via Radley Balko.

New Jersey’s Pension Crisis: New Research

Eileen Norcross and Andrew Biggs have a new paper out this morning entitled “The Crisis in Public Sector Pension Plans: A Blueprint for Reform in New Jersey.” While it’s focused on New Jersey, it does an excellent job of outlining the larger problem with state pension plans nationwide and what policy makers can do about it.

Here’s the abstract:

New Jersey’s defined benefit pension systems are underfunded by more than $170 billion, an amount equivalent to 44 percent of gross state product (GSP) and 328 percent of the state’s explicit government debt. Depending on market conditions, the state will begin to run out of money to pay benefits between 2013 and 2019. The state’s five defined benefit pension plans cover over 770,000 workers, and more than a quarter million retirees depend on state pensions paying out almost $6 billion per year in benefits. Nationwide, state pensions are underfunded by between $2.8 trillion and $5.2 trillion, some 20 to 37 percent of America’s annual output as much as $3 trillion, approximately 20 percent of America’s annual output..

This path is not sustainable. In order to avert a fiscal crisis and ensure that future state employees have dependable retirement savings, New Jersey should follow the lead of the federal government and the private sector and move from defined benefit pensions to defined contribution pensions. While significant liabilities will remain, the first step to addressing the pension crisis is capping existing liabilities and providing new employees with more sustainable retirement options.

Specifically, the paper recommends that policy makers:

  • Extend the defined contribution plan already available to state university faculty and staff and the state’s Defined Contribution Retirement Program to all state employees.
  • Reduce or freeze cost of living adjustments (COLAs) to reduce the state’s unfunded liability.
  • Transition non-vested workers to defined contribution plans.

Whole thing here.

Hurricane Season Begins

Today is the first day of the 2010 hurricane season, which NOAA predicts will be more active than usual, with 14 to 23 named storms. (In fairness, NOAA has been way off the mark in recent years, to the relief of the residents of the Gulf and Atlantic coasts.)

The Mercatus Center’s Gulf Coast Recovery Project has put out over 50 studies since 2005 looking at the rebuilding of the Gulf Coast after Hurricane Katrina. Below are links to eight studies that state and local policy makers may find useful today and in the coming months.

  • A Policy Maker’s Guide to Effective Disaster Preparedness and Response. In the years since Hurricane Katrina devastated the Gulf Coast region of the United States, scholars, policy makers, and concerned citizens have been working to understand what exactly went wrong in the response to the event and how better to prepare for future natural disasters. Post-Katrina New Orleans presents a unique opportunity to study how and how not to undertake the rebuilding of a major population center after such a catastrophe. Proper study of this subject, if conducted objectively and rigorously, will not only save other communities countless dollars but will also save lives.
  • Building a Safe Port in the Storm: Public vs Private Choices in Hurricane Mitigation. This Policy Comment analyzes the connection between hurricane mitigation and insurance. As many people fail to purchase government-subsidized flood and earthquake insurance, some researchers argue that market failure explains the lack of mitigation. But empirical evidence shows that markets do value natural hazards risks, including hurricane mitigation, and thus the case for market failure has been overstated.
  • The Entrepreneur’s Role in Post-Disaster Community Recovery. This Policy Primer recommends that in the aftermath of a disaster, government relax non-disaster regulations in order to allow entrepreneurs, who are in the best position to assess local conditions and needs in the rapidly changing, post-disaster environment, to step in and quickly respond to the community’s needs.
  • The Road Home: Helping Homeowners in the Gulf Post-Katrina. This comment explores Road Home’s policy goals and design, placing them in the context of the destruction wrought by the hurricanes and the role of insurance and government before and after a disaster. It then contrasts Road Home’s goals and design with the policy goals and design of Mississippi’s Homeowner Assistance Program.
  • Disastrous Uncertainty: How Government Disaster Policy Undermines Community Rebound. This Policy Comment looks at the ways in which public policy has had negative unintended consequences on the ability of communities to make informed decisions about sustainable rebuilding after Hurricane Katrina.  Based on fieldwork, the authors explain why social capital and signals generated by market and civil interactions are important to recovery efforts and how policy makers can encourage rather than retard grassroots rebuilding efforts.
  • Making Hurricane Response More Effective: Lessons from the Private Sector and the Coast Guard During Katrina. Many assume that the only viable option for emergency response and recovery from a natural disaster is one that is centrally directed. However, highlighted by the poor response from the federal government and the comparatively effective response from private retailers and the Coast Guard after Hurricane Katrina, this assumption seems to be faulty. Big box retailers such as Wal-Mart were extraordinarily successful in providing help to damaged communities in the days, weeks, and months after the storm. This Policy Comment provides a framework for understanding why private retailers and the Coast Guard mounted an effective response in the Gulf Coast region.
  • Ensuring Disaster: State Insurance Regulation, Coastal Development, and Hurricanes. This policy comment examines how state insurance regulation affects societal vulnerability to hurricanes. States provide insurance for high-risk properties at below market rates primarily through insurance pools. Seven states, including Louisiana and Mississippi, have wind pools, with over 1.8 million policies and a total liability of over $500 billion as of early 2007. Wind pools are financed, in part, through additional charges on other citizens’ premiums throughout the state to cover excess losses from hurricanes. State guaranty funds, which ensure payment of claims of insolvent insurers, also subsidize high-risk properties.

For more information about these studies or to request hard copies, feel free to email me using the link here.

Unintended Consequences, Cul-de-sac Edition

Via Seth Goldin’s Twitter Feed, the unintended consequences of cul-de-sacs:

Though suburban cul-de-sacs have long been attractive as quiet, safe places for families, their disadvantages are becoming clear. One of the biggest problems is interference with motor- and foot-traffic flow. Research by Lawrence Frank, Bombardier Chair in Sustainable Transportation at the University of British Columbia, looks at neighborhoods in King County, Washington: Residents in areas with the most interconnected streets travel 26% fewer vehicle miles than those in areas with many cul-de-sacs. Recent studies by Frank and others show that as a neighborhood’s overall walkability increases, so does the amount of walking and biking—while, per capita, air pollution and body mass index decrease.

Last year, Eileen Norcross wrote about Virginia’s ban on future cul-de-sacs, arguing for internalizing the externalities associated with them rather than banning them outright.

Atlantic’s “Future of the City”

The Atlantic is hosting a one-month blog by Conor Friedersdorf about the future of the city:

In the coming month, this page will explore cities in the same spirit as the person who thrills at urban life more than any other kind. He or she may find rural or suburban settings likable enough, but bliss as a traveler means arriving at a downtown train station armed with a map, a comfortable pair of shoes, and endless walkable blocks to explore. And everyday living? The lover of cities craves bustle if not always hustle, contact with different kinds of people, the anonymous solitude that masses provide as well as lakefronts, and every benefit of civilization that requires a certain scale before it is a daily possibility.

Today’s offerings include an interview with Portland’s iconoclastic mayor Sam Adams and a list of free things on Craigslist in some major and minor cities.

Talk on States Fiscal Health at GMU, April 21

George Mason University’s Department of Public and International Affairs is hosting Ray Scheppach, executive director of the National Governors Association, on April 21 from 4 to 6 PM for a talk entitled “The State Fiscal Situation, Health Care Reform and Federalism.” This should be of interest for most of the readers of this blog. The talk will be in Enterprise Hall on GMU’s Fairfax Campus. Continue reading

Budgeting Tactics for States

Tax Foundation state projects director Joe Henchman writes in today’s Daily Caller about five ideas to help states facing budget shortfalls (that is to say, virtually every state) get back in black:

  • Prioritize appropriations. When the majority-Democratic Arkansas Legislature votes to appropriate money, the money isn’t immediately spent. Instead, each appropriation goes to a legislative committee that ranks them in order of priority. Items are funded only to the extent money is available, forcing debate about how best to allocate limited resources while permitting a wish list if revenue exceeds expectations.
  • Review tax incentive programs. Although many states recognize they have burdensome tax systems, they use targeted incentives for particular industries rather than reducing burdens for everyone. Besides dumping a higher tax burden on everyone else, the jobs created are dependent on the handouts and often vanish when the incentives end. Tax incentive programs also often escape oversight and cost-benefit analysis. Iowa recently recommended elimination of several ineffective tax incentives after a review. Other states should do the same.
  • Broaden sales taxes and use the revenue to lower tax rates. A good sales tax applies to all final goods once and only once. Exempting clothing and groceries may seem like a good idea, but doing so causes year-to-year revenue instability and drives up the rate on everything else. Gross receipts taxes and taxes on business inputs cause distortions that harm economic growth. Adopting a sales tax base of all final products and services would enable both lower rates and more predictable revenue.
  • Reduce reliance on taxes on high-income earners and corporate profits. When deciding in which state to live or locate their business, one of the factors that top earners must weigh is the marginal tax rate they will face in each state. While high statutory tax rates on high incomes may bring a revenue increase in the short term, they can harm long-term economic growth as providers of jobs and capital choose to locate in lower-tax states. With these volatile revenue sources at a minimum, it may be perfect timing to minimize them.
  • Establish rainy day funds and spending restraints. To ride out recessions, states need to build a rainy day fund of 12 to 18 percent of their annual spending. Setting aside 2 to 3 percent of each year’s budget in good times can accomplish that, but those structures need to be in place now or else states will be in this mess again.

Joe discussed state tax policies on C-SPAN earlier this month.

“You know taxes are too high when even the liberals root for spending cuts.”

Thus begins David Halbfinger’s Week in Review essay on New Jersey in today’s New York Times.

He continues:

New Jersey’s tough-talking new governor, Christopher J. Christie, the first Republican elected in 12 years, is grappling with a deficit in the billions by squeezing nearly everyone — school children, the elderly, mass transit, cities, suburbs, subsidized renters and home owners.

[…]

But what’s most surprising about New Jersey is how in such a blue, labor-dominated state, Democrats and union members seem to be cracking under the pressure of the state’s tax burden, revealing a kind of split-personality disorder. Continue reading