Tag Archives: New Jersey

Eileen Norcross on News Channel 8 Capital Insider discussing Virginia and the fiscal cliff

Last week I appeared on NewsChannel 8’s Capital Insider to discuss how the fiscal cliff affects Virginia. There are several potential effects depending on what the final package looks like. Let’s assume the deductions for the Child Care Tax Credit, EITC, and capital depreciation go away. This means, according to The Pew Center, where the state’s tax code is linked to the federal (like Virginia) tax revenues will increase. That’s because removing income tax deductions increases Adjusted Gross Income (AGI) on the individual’s income tax filing (or on the corporation’s filing) thus the income on which the government may levy tax increases. According to fellow Mercatus scholar, Jason Fichtner, that could amount to millions of dollars for a state.

On the federal budget side of the equation,the $109 billion in potential reductions is now equally shared between defense and non-defense spending. Of concern is the extent to which the region’s economy is dependent on this for employment. Nearly 20 percent of the region’s economy is linked to federal spending. Two points: The cuts are reductions in the rate of growth in spending. For defense spending, they are relatively small cuts representing a return to 2007 spending levels as Veronique points out. So, these reductions not likely to bring about the major shakeup in the regional economy that some fear. Secondly, the fact that these cuts are causing worry is well-taken. It highlights the importance of diversification in an economy.

Where revenues, or GDP, or employment in a region is too closely tied to one industry, a very large and sudden change in that industry can spell trouble. An analogy: New Jersey’s and New York’s dependence on financial industry revenues via their income tax structure led to a revenue shock when the market crashed in 2008, as the New York Fed notes.

On transportation spending there are some good proposals on the table in the legislature and the executive. Some involve raising the gas tax (which hasn’t been increased since 1986), and others involve tolls. The best way to raise transportation revenues is via taxes or fees that are linked to those using the roads. Now is no time to start punching more holes in the tax code to give breaks to favored industries (even if they are making Academy-award quality films) or to encourage particular activities.

Virginia’s in a good starting position to handle what may be in store for the US over the coming years. Virginia has a relatively flat tax structure with low rates. It has a good regulatory environment. This is one reason why people and businesses have located here.

Keep the tax and regulatory rules fair and non-discriminatory and let the entrepreneurs discover the opportunities. Don’t develop an appetite for debt financing. A tax system  is meant to collect revenues and not engineer individual or corporate behavior. Today, Virginia beats all of its neighbors in terms of economic freedom by a long shot. The goal for Virginia policymakers: keep it this way.

Here’s the clip

The most egregious budget gimmicks of 2012: pension underfunding

Bob Williams at State Budget Solutions has a nice chart that shows by how much states are underfunding their pensions. Budgets are always about tradeoffs. But not funding the pension is similar to skipping credit card payments without cutting into your daily expenses at all (or figuring out how to boost your income).

Here’s the link.

In addition, the article notes all the other ways states  have of papering over deficits – floating bonds, revenue estimates, shifting dates around. This isn’t confined to the usual suspects (Illinois, New Jersey, California). There are plenty of examples to share from across the country.



New Jersey’s double-dipping sheriffs

I spoke yesterday at the Franklin Center’s annual meeting. And I was treated to a very compelling piece of video reporting by NJ WatchDog reporter Mark Lagerkvist. 

What impressed me is not only the quality of the reporting but how Mark dug into the data made available by the state of New Jersey.

He found a story that highlights the kinds of abuses many pension reformers must tackle – double-dipping – or collecting a pension benefit while simultaneously working a government job. In this case, the job didn’t really change  the employee simply figured out a way to quit and get-rehired at a higher salary while cashing out a pension for the previous pay grade. Mark’s reporting delves into the practice among New Jersey sheriffs.

The video says it better than any summary I can give.

View more videos at: http://nbcnewyork.com.


Giving Illinois local governments control over their workers’ pensions

The Chicago Tribune makes a “modest proposal” this week. Discouraged by the inaction of the Illinois General Assembly on state-wide pension reform, the editorial board supports the idea that costs for teacher pensions should be shifted and shared with local governments. Republicans, fearful of property tax hikes, don’t like the notion. But the Tribune makes a good point: the cost shift should be accompanied with the ability of local governments to directly negotiate with their employees minus the influence of Springfield. It’s an interesting idea.

Ultimately, pension reform must proceed according to certain principles that clarify the following:

a) What is the true and full value of the benefit? The market valuation principle.

b) How do you incentivize such a system to properly value, steward, and fund benefits? The principal-agent problem.

c) How do you connect the full employee wage/benefit bill with taxpayers who enjoy the services? The fiscal illusion problem.

Right now, it’s a mess. Government accounting is a still a jumble. (But the real value is always knowable via market valuation.) No entity currently has the incentive to properly value and fund these systems. And in fact, we continue to see risk-taking and the shifting of assets into alternative investments, the issuance of Pension Obligation Bonds, and the deferral of reforms. Politicians have a short-term horizon.

And then there is the problem of “disjointed finance.”

Take the case of New Jersey. Local governments negotiate with their employees over wages. But pension policy is set by the state. New Jersey municipalities get an annual bill to fund their employee pensions based on the state actuary’s calculations. Local officials don’t have any sense of what those obligations look like going forward. The state’s annual funding calculations low-ball what is needed to fund the benefits. Could it be that such opacity leads local governments to offer wage enhancements, or hiring increases, that translate into total compensation packages that they can’t afford?

The Chicago Tribune’s idea only works if Illinois local governments accurately calculate what is needed on an annual basis to fund the pensions they negotiate with their workers and to have a full assessment of the value of compensation packages over time. How is market valuation incentivized? Perhaps Moody’s move to calculate pensions based on a corporate bond yield will have an effect. Or perhaps plans need to be managed by a third-party, as Roman Hardgrave and I suggest in our 2011 paper. 

Tying local costs to local taxpayers is a good idea. Another phenomenon the pension problem has revealed is gradual separation of taxing and spending in American public finance over the course of the past half century. That has produced a growing fiscal illusion in finance – where things seem less expensive than they actually are since the costs are spread over larger groups of taxpayers. Local costs are spread among state taxpayers, and now the worry is that state pension costs and debts will be spread across national taxpayers. At least, it’s been suggested.

In his 2012 budget, Governor Quinn alluded to a federal government guarantee  of Illinois’ pension debt. It’s not a popular idea with Congress at the moment. But it appears to have been part of the political calculations of those who are responsible designing and enforcing the rules that guide Illinois’ budget and determine pension policy.





Tax Holidays in the Dog Days of August

In what has become a common practice in about a dozen and a half states, August is the month for the sales tax holiday. Whether the goal is to encourage consumer spending or ostensibly offer tax relief to families, the three-day holiday waives sales tax on certain purchases – typically school supplies and clothing. Here’s a chart listing the states and the once-a-year exemptions they offer.

What exactly do sales tax holidays accomplish? Some claims:

  • They save consumers money.
  • They increase consumer spending on both tax-free and taxed items. On net, the result is more revenue in what the National Retail Federation calls a “win/win/win” for consumers, retailers and governments.
  • A weekend tax break keeps spending in the local economy. According to Bloomberg BNA Ohio and Michigan first experimented with a tax holiday on cars in 1980. New York picked up the weekend tax holiday in 1997 to entice borough residents to keep their clothes shopping dollars in NYC rather than cross the border to New Jersey’s malls.
  • It is a way for politicians to make good on tax relief without making permanent changes to the code.
The Tax Foundation claims that tax holidays only shift consumer spending and any savings in tax may be offset by higher retail prices. In addition, the “gimmick-y” exemption leads to arbitrary decisions (e.g. backpacks are exempt but briefcases are not – see Virginia). Basically, the one-time break is a way for politicians to crow about tax relief while avoiding more substantive reforms to the code such as broadening the base and lowering the rate of tax.
A 2009 econometric study, The Fiscal Impact of Sales Tax Holidays, by Adam Cole of the University of Michigan finds that sales tax holidays induce “timing behavior” in consumers. There is a reduction in sales and use tax collections by 4.18 percent in the month of the tax holiday. Half of this reduction is attributed to consumers timing their purchases to coincide with the tax-free weekend. Though there is no evidence that this leads to a large substitution of purchases during the rest of the calendar year.
Cole raises two interesting issues for researchers to consider. Do tax holidays produce cross-jurisidictional shopping effects? Secondly, because of their short duration, do tax holidays allow retailers to evade taxes by attributing earlier sales to the holiday weekend?

Marwell and McGranahan (2010) provide another set of questions to consider for those who over-sell the benefits of back-to-school bargains for family budgets. In their working paper, “The Effect of Sales Tax Holidays on Household Consumption Patterns“, the authors ask: Who’s shopping and what are they buying? Their preliminary findings suggest it is primarily upper income households and they are mainly purchasing clothes.

On a purely anecdotal note, I calculate that if our family went shopping during Virginia’s August 3-5 tax holiday we would have saved about $9.00 on backpacks and school shoes. To avoid the back-t0-school crowds we purchased those items at Tysons Corner the weekend before. If that’s the premium for efficient mall shopping, we paid it gladly.


The Ravitch Volker report: State Budget Crisis is Real

The recession of 2008 pulled the mask off of state budget pathologies that had been identified as institutional weaknesses in the decades leading to the crisis.

The “new normal” for state and local governments does not look like the booming 1980s and 1990s but in fact is riddled with many fiscal challenges.  Revenues aren’t what they were before 2008 though they are expected to reach pre-recession levels in FY 2013. The Medicaid and employee benefits bill is rising. The stimulus pushed forward budgetary reforms. These are some of the findings of the Ravitch-Volker Report, an effort of the State Budget Crisis Task Force which assembled in 2010-2012 to diagnose the major problems facing six states: California, Illinois, New Jersey, New York, Texas and Virginia.

Much of the analysis is non-controversial: Medicaid is eating up budgets, as are pensions costs and health care benefits.

Medicaid, currently at 24 percent of state spending, will continue to increase as enrollment, medical inflation and the increasing caseloads that come with higher unemployment increase costs. This is not a surprise. What is new is that the federal government is making it harder for cost-saving measure to be enacted, and “entrenched provider groups in each state resist reductions in Medicaid provider rates….”  I do not believe this is the intention of the authors of the report but the diagnosis of Medicaid’s future highlights the dysfunctional aspects of this federal-state pact which has led to the creation of special interests that benefit from inflating costs.

On the pension front the Ravitch-Volker report points to the the role discount rates have played in the pension funding problems facing the state and local governments, in particular in New Jersey. And they also note the reliance on budgetary gimmicks that may even result in a kind of budgetary “cynicism.” A point I have made in the past.

But the report also makes a few assumptions about the interplay of federal, state and local spending that I think could benefit from an expanded debate. The authors warn that cuts in federal discretionary spending will doom subsidiary governments. On the surface, that’s true. Cuts in aid mean less money in state coffers for education, transportation and other areas. But the larger question is what are the fiscal effects of grants-in-aid between governments? There is the public choice literature to consider on the role of fiscal illusion in finances. And further, does the current model of delivering these services actually work as intended?

Their recommendations are largely sound. Many of them have been made before: more transparent accounting, a tightening of rainy day fund rules (see our recent paper on Illinois), broad-based tax systems should replace narrow ones, the re-establishment of the Advisory Commission on Intergovernmental Relations (ACIR). Abolished in 1995 ACIR was concerned with evaluating the fiscal impact of federal policies in the states. Further the commission recommends the federal government work with the states to help control Medicaid costs, and the re-evaluation by states of their own local needs including municipal finances and infrastructure spending.

The report is timely, contains good information and brings many challenges to the fore. But this discussion can also benefit from a larger debate over the current federal-state-local spending model which dates largely to the middle of last century. This debate is not merely about how books are balanced but how citizens are governed in our federalist system. The Ravitch-Volker report is sober but cautious in this regard. The report sketches out the fiscal picture of the U.S. in broad strokes and offers general principles for states to follow and it is sure to create discussion among policymakers in the coming months.






Is the Localvore Movement a Folly?

Pierre Desrochers, Canadian economic geographer and Mercatus affiliated scholar makes the case that the Localvore’s drive to get people to “eat-locally” is based on fanciful notions of economics and agriculture, in his book, The Localvore’s Dilemma: In Praise of the 10,000-mile diet, co-authored with wife Hiroko Shimizu.

The book goes to the heart of an apparent motivation for food activists, that “sustainable farming” and “eating local” will help the planet. Desrochers and Shimizu disagree. They show that subsistence farming is unsustainable, back-breaking and not environmentally-superior to large-scale methods. Rather than reducing “food miles” (the distance the banana travelled into your cereal bowl) the authors instead make the case for eliminating ag-subsidies. The takeaway: eating globally gets you to a better place, environmentally, than limiting your consumption to the downtown farmer’s market.

I don’t disagree. But this review by Emily Badger at The Atlantic contains some food for thought. She suggests reading, Urban Farms, by Sarah Rich who went out and interviewed urban farmers to understand this growing movement. Here’s one of her findings, quoting Badger’s article:

Politics are all but absent from Rich’s interviews. She visits one urban farmer in Detroit who comes the closest to voicing revolutionary motives. He is concerned about a trash incinerator in his neighborhood, and he views his backyard farm partly as a defiant form of environmental remediation.

“That’s what he’s thinking about, his local garbage system and how messed up it is,” Rich says. “He wasn’t talking to me about Monsanto, or industrial agriculture.”

Throughout her 16 urban farm profiles, Rich found what she describes as very local initiatives, where agriculture just happened to be the medium for doing something positive in the city.

Rich documents many non-political motives for urban farming: a social anchor for the community, beautifying blight, jobs for the unemployed, places for children, opportunities for school kids to learn about plants and science, fresh produce in food deserts.

Does the Localvore movement have to be an either/or proposition? I’m intrigued that Rich went into the field and talked to urban gardeners to see what is driving them. Based on Ms. Badger’s article it isn’t green ideology or government subsidies, but something much more ‘organic and human.’

The pleasures and rewards of a backyard garden.

I think the policy problem Desrochers and Shimizu identify is a real one.  The more idealistic members of the “Food Activist” movement assert that local farms can (at least partially) replace global production to sustain the current population. They insist that large-scale food production is bad for the environment and take an overly romantic view of small-scale subsistence farming. That is folly. But free trade in food should not imply that urban gardening doesn’t have virtues of its own.

I confess my prejudice. Growing up in suburban north Jersey we benefitted from a subdivided acre of land that we shared with my grandmother. My siblings and I helped tend a large vegetable garden, fruit trees, berry brambles and my mother’s ever-expanding herb garden. For a period my father experimented with growing grapes for wine (a project he abandoned upon sampling the results). We learned how to grow, care for, and cook the fruit of our labors.

There is an indescribable gulf between the Jersey tomatoes we grew and the tasteless rubber ball I reluctantly buy in the grocery. We canned, froze and shared the yield of our garden with neighbors. I learned to appreciate food (i.e., not waste it), how to recycle (compost), how to cook, how to propagate raspberries, currants and gooseberries; and for a few summers to stomp on grapes.

Before I was born, my grandmother (who was raised on a farm in Białystok, Poland) kept two chicken coops. I imagine that turned into more trouble that it was worth but nevertheless it was the source of my grandparents’ dinner for a brief time. The exercise of gardening not only taught basic science and refined our palates, but imparted lessons in self-sufficiency, responsibility, stewardship, familial cooperation, gave us spells of serenity, a place of respite and imagination, and the opportunity for generosity. Non-quantifiable.

We managed to grow enough to eat well during the summer and have some to spare for the winter. It would have been tough (impossible) to survive on it alone. And, we made frequent trips to the grocery store for everything else: to buy food that was produced everywhere else. We tended to skip over the produce section between June and September and never bought a tomato.

So, yes to the economics of global food production and subsidy-free agriculture. And yes to the non-quantifiable benefits of working the land no matter how modest the effort.





Virginia and New Jersey wrangle over taxes, spending and pensions

In the past week Virginia and New Jersey have put together their proposed budgets. One thing they have in common: how much to set aside for pension benefits, and how to pay for it? Governor McDonnell of Virginia proposes less spending on education than is sought by the House and Senate. The Governor wants to fund spending with increased fees. The Senate prefers an increase in the gas tax.

Virginia operates with a biennial budget and McDonnell’s two-year $85 billion spending proposal is the largest spending plan in the state’s history. Of the $438 million proposed for education, $342 million is earmarked for teacher’s pensions. Governor McDonnell will make the annual payment (more or less) as calculated by state actuaries and proposes increasing the employee contribution to 6 percent. The Senate rejects increased employee contributions. The House, by contrast, thinks the Governor should go further with structural pension reforms.

In New Jersey Governor Christie will make 2/7ths of the full contribution to New Jersey’s pension system. It’s too little, too late and the needed contribution is already terribly underestimated. In addition Christie’s $32.1 billion budget represents a spending increase of 8.2 percent over last year. There are proposed spending increases for K-12 education and universities, but also cuts to municipal aid for distressed cities, including Camden which has been almost entirely dependent on state aid for decades. It appears optimistic revenue projections figure into the proposal. The Governor proposes a 10 percent cut in income taxes across the board and a restoration of the Earned Income Tax Credit (EITC).

The structural problems in New Jersey’s fiscal landscape remain. And these structural problems are apparent in many other states. It is not a problem easily solved. The means of financing schools – bound up with income taxes, state aid and their effect on property taxes and spending, instituted in 1976, remains in place. Factor in the resistance of governments to confront the real costs associated with employee pensions – a problem shared by all states and  many municipalities. The present problem is that recovering revenues may lead states to feel comfortable again. But that would be misplaced. Instead, lawmakers would do well to view their state’s long-term fiscal trends without the aid of rose-colored glasses.


Tax Foundation Releases New State Business Tax Climate Index

On Wednesday the Tax Foundation released the updated State Business Tax Climate Index by Mark Robyn. Wyoming, South Dakota, and Nevada ranked highest on the index because they have low overall tax burdens and tax policies that introduce minimal distortions to business behavior.

The three states at the bottom of the ranking — New Jersey, New York, and California — were also the worst-ranked states last year. Unsurprisingly, these three states are also experiencing domestic outmigration as individuals and businesses leave for locations with lower tax burdens. A study by Jed Kolko, David Neumark, and Marisol Cuella Mejia demonstrates that the SBTCI is one of the most accurate indexes for predicting economic outcomes.


Illinois had the largest change in ranking over last year’s, dropping 12 spots. Robyn writes on the importance of tax policy in business decisions:

Anecdotes about the impact of state tax systems on business investment are plentiful. In Illinois early last decade, hundreds of millions of dollars of capital investments were delayed when then-Governor Blagojevich proposed a hefty gross receipts tax. Only when the legislature resoundingly defeated the bill did the investment resume. In 2005, California-based Intel decided to build a multi-billion dollar chip-making facility in Arizona due to its favorable corporate income tax system. In 2010 Northrup Grumman chose to move its headquarters to Virginia over Maryland, citing the better business tax climate. Anecdotes such as these reinforce what we know from economic theory: taxes matter to businesses, and those places with the most competitive tax systems will reap the benefits of business-friendly tax climates.

The Tax Foundation is not alone in finding these states relatively lacking in economic freedom. Indexes developed by the Mercatus Center and the American Legislative Exchange Council also ranked these states as among the least economically competitive in the country.

While lawmakers may be tempted to try to improve their states’ rankings in these types of indexes with special business tax breaks or increasing state spending, all three studies demonstrate that the best way to improve a state’s competitiveness ranking is to provide a climate of low, stable taxes that do not favor specific industries.