Tag Archives: Frederic Sautet

States Move to Revoke Tax Exemptions for Charities

Hawaii, Indiana, and Pennsylvania are a few of the states thinking about getting rid of the tax exemptions for non-profits. Steep declines in revenues have prompted states and counties to reconsider breaks for charities. States argue non-profits partake of government services but get a free ride on taxes, while charities claim that they are helping governments by providing services for the needy. Hawaii State Representative Calvin Say believes revoking exemptions for non-profits (as well as other tax-favored groups) could result in $500 to $750 million to help close the state’s $1.2 billion shortfall.

Revoking tax breaks is never popular. As the New York Times reports, the Payment-in-lieu-of-Taxes (PILOT) program used by many local governments evolved as a compromise. In 2005, Harvard and MIT brokered a deal with the city of Cambridge to pay $60 million over 20 years for city services in lieu of making property tax payments. (For more on PILOT programs see this 2006 Mercatus Center study by Frederic Sautet and John Shoaf).

Through tax policy, governments influence charitable activities and giving. The way exemptions are awarded or taken away can cause great controversy. For example, as states go on the hunt for revenues, some organizations, like churches, will remain exempt.

For a discussion of “The Politics of Giving”, see this month’s Reason for an interview with Adam Meyerson, President of The Philanthropy Roundtable.

Assorted Links

Rick Harrison on zoning to support home-based businesses.

Emily Washington and Frederic Sautet on tax and expenditure limits.

Is Houston ready to move to regulated land use?

An amateur Washington historian is guarding his hometown’s Wikipedia entry.

Brian Doherty on keeping rent control in New York City.

Jacob Grier on Portland, Oregon’s new streetcar system. (Update: More here.)

The “Right Size” for Local Governments

On NPR today, Morning Edition featured a story about peace officers in Texas, which number one per 330 state residents. The reporter tosses out this fact and then goes on to report on something basically unrelated: the number of police forces in the state.

The story begins skeptically:

Texas has so many police officers, some lawmakers are worried there are too many.

Among the many entities in Texas that have their own peace officers is the State Board of Dental Examiners. But you won’t generally hear these officers saying “Stop, put your hands up! Dental police!”


It turns out Texas is just full of small, specialized police forces: the State Insurance Department has one, as do the Lottery and Racing commissions, the Pharmacy Board, and a handful of water districts.

But the story ends on a very different note, profiling Gary Patterson, the police chief (and only officer) in the Blooming Grove Independent School District:

Patterson patrols the halls of Blooming Grove High School — home of the Fighting Lions — a benign figure in his blue police shirt with a tonsure of white hair and a shambling gait. After a long career as a dispatcher for the state troopers, Patterson came back to the town where he grew up.

“You’re kind of like a father or grandfather figure to a lot of them,” Patterson says. “Cause you’ve known them since they were in elementary and you’ve kind of grown up with them.”

It would be easy to criticize his position as one more example of superfluous Texas peace officers — until you follow him around the school. He knows the kids by name. He knows their parents. He knows what’s going on in their lives. He knows why they’re in trouble.

This story reflects a point made by Eileen Norcross and Frederic Sautet here, and by Robert Nelson here: in the public sector, where there are no prices to convey information, hence making benefits and costs hard to weigh, there is no universally correct number or size of local government entities.

It’s easy to scoff at the idea of a single-person police force for a three-campus school district. We likely assume that there are non-trivial fixed costs associated with running a school district police department, so economies of scale could be achieved by just having, say, a county sheriff’s deputy police the school. But we don’t really have the information necessary to make that call, and certainly not from the vantage point of a state capitol or the ivory tower.

So the bottom line: be skeptical when you hear “common sense” pleas to eliminate small local government entities like one-man police forces. There may well be a case for eliminating them, but proponents of elimination cannot just assume that economies of scale are achievable — and they cannot discount local knowledge as worthless.

New Study “Institutions Matter: Can New Jersey Reverse Course?”

The Mercatus Center at George Mason University is releasing a new study, “Institutions Matter: Can New Jersey Reverse Course?”

Authored by myself and Mercatus colleage, Frederic Sautet, the paper examines the history of the public sector in New Jersey, including the relationships between the federal, state, and local governments, discussing how the loss of the “old time fiscal religion” has resulted in unmanageable budget deficits and a weakened state economy.

Years of spending growth, increasing mandates, and expanding use of intergovernmental aid and debt have inflated the size and cost of government, leading to dramatic increases in taxation at all levels. Leaving the state in the midst of the worst fiscal and economic crisis in its history.

Right-click here to download pictures. To help protect your privacy, Outlook prevented automatic download of this picture from the Internet. New Jersey FlagWe find that the state’s recovery hinges on reforming rules for taxing and spending — in short, re-establishing fiscal prudence, and reducing the size and scope of government.

Namely, we recommend the state government:

We will continue to follow the fiscal condition of the state in the coming year through the project’s website,  and our blog, Neighborhood Effects.  A pdf version of the study can be found here.

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.

Federal Transfers Top State and Local Revenues

USA Today reports that the federal government has overtaken sales, property, and income taxes to be the largest source of revenue for state and local governments:

The shift shows how deeply the recession is cutting. Federal stimulus money aimed at reviving the economy and a sharp drop in tax collections have altered, at least temporarily, the traditional balance of how states, cities, counties and schools pay for their operations.

The sales tax had been the No. 1 source of state and local revenue since the mid-1970s, according to the Bureau of Economic Analysis. Before that, property taxes were the primary source. That changed in the first three months of 2009.

Federal grants — early stimulus money plus conventional federal aid — soared 15% in the first quarter to a seasonally adjusted annual rate of $437 billion, eclipsing sales taxes, which fell 2%.

Here’s Len Gilroy on this story. Here are data from the Tax Policy Center on state revenues by category (albeit from 2006). Here are Eileen Norcross and Frederic Sautet on the longer-term ramifications of increasing intergovernmental transfers.

State budgets and the stimulus

As the American Recovery and Reinvestment Act (aka the Stimulus Bill) moved out of the House of Representatives yesterday, Eileen Norcross and Frederic Sautet released a new paper questioning the long-term ramifications of this package on states’ budgets.

While federal grants may provide temporary relief for state budgets, the size and scope of the proposed spending will worsen already-distorted state and local fiscal practices while creating perverse incentives inducing greater public spending with scarce state funds. By fracturing the link between those who benefit (local constituencies) and those who pay (federal taxpayers), ARRA reduces government accountability on all levels and ultimately erodes local control over policy by imposing federal solutions on local problems.

Instead of attempting a short-term fix of amplifying the grant system through an emergency stimulus package, the federal government should work to make state and local governments accountable for their own spending decisions. This means reducing states’ and localities’ reliance on federal funding for local priorities and allowing local activities to be addressed by the appropriate mechanisms: state and local governments and the private and philanthropic sectors.

Also of interest, the Wall Street Journal has a breakdown by state on each of four proposed spending categories: aid to states, school and college modernization, job training, and transportation and infrastructure.

Finally, Nicole Gelinas has some analysis of last-minute changes to the House-approved package as they relate to state and local infrastructure investment.

New Paper on Stimulus and the States

Let me begin with one caveat: this blog is not going to feature excessive self-promotion. A string of press releases do not a blog make.

With that out of the way, I want to bring your attention to a new policy brief by Eileen Norcross and Frederic Sautet entitled “The Main Street Economic Recovery Proposal: Will It Bring Us Out of Recession?” Clearly, stimulus package focusing on “shovel-ready” projects will invariably be played out on the state and local level.

In the paper, Norcross and Sautet recommend:

Instead of engaging in activist fiscal policy, the government should announce a policy of fiscal prudence promoting lower public spending and thereby creating a good context for entrepreneurial activity.

1) Let the price mechanism run its course. Prices in some economic sectors have been artificially inflated for too long. Downward adjustment of prices will release resources from unprofitable sectors to more profitable ones where they are most useful.

2) Restore a climate favorable to entrepreneurial discovery and innovation. In order to discover new business opportunities, entrepreneurs must have the confidence that they can invest and be rewarded for it. But while the institutional environment must reward entrepreneurial activity, it should not socialize losses by subsidizing failure.

Fred and Eileen also wrote about the states and stimulus in November in Forbes.