DECEMBER 15, 2009

Pew Study Says Little about Pennsylvania's Fiscal Health

In his budget mid-year briefing, Gov. Rendell cited, repeatedly, a Pew study on states' fiscal outlook. While it is true that Pennsylvania is in better shape than states like California or New York, in terms of budget deficits, the Pew study says little about Pennsylvania's fiscal health.

For instance, the Pew study gives states low grades if they limit spending increases and tax hikes.

Seventeen states require a supermajority vote by their legislature to enact tax increases, budget bills or both. We looked at supermajority requirements to enact tax increases because finance experts generally agree that this institutional arrangement significantly reduces taxes or constrains a state's ability to generate greater revenue by increasing taxes.

In other words, Pennsylvania is in better shape because it is easier to raise taxes going forward.

Several of the other measures in the Pew report aren't very useful either:

• They are backward looking on economic decline during the recession. Given that, states like Pennsylvania that tend to enter recession and leave recessions late will look better. It also doesn't consider looming costs (e.g. pensions) or state rainy day funds, that I can tell.
• Foreclosure rate is a variable. Making states like Florida, Arizona, and Nevada, that were hit hard by housing crisis look bad. But that is the only sector of the economy they look at, states that didn't have a housing boom (Pennsylvania, Michigan, Ohio) will look better, even though these states - especially the latter two - have been decimated in other sectors of their economy like automotive manufacturing.

Click here for our news release on the Pennsylvania budget mid-year briefing.

posted by NATHAN BENEFIELD | 11:40 AM | 0 comment

NOVEMBER 20, 2009

State Tax Trends

ATR has a new report on state tax trends. In addition to a roundup of state tax changes, the new report highlights trends with policy implications.

While we pointed out previously that residents are fleeing high-tax states to low-tax states, ATR's analysis also finds that the average income of households leaving high-tax states, and of households migrating to low-tax states, is higher than the national average (by 50% and 100% respectively). That is, states attempting to soak "the rich" are actually chasing them away.

ATR also notes that high tax states have an unemployment rate substantially higher than low tax states - in good times and bad, but the gap has grown during the recession.

The report concludes with a number of solutions for addressing budget shortfalls in the coming years. These solutions include

• Defined Contribution Plans provide each worker with his or her own individual, personal retirement account. Government employees can choose the blend of investment vehicles that best serve their unique situation. Best of all (for state budgets), the individual worker has already paid for his or her own retirement when retirement day comes. No structural problems occur as population growth declines. Unfortunately, most states and localities provide defined benefit pension plans for public employees, which finance retiree benefits with subsidized contributions from current workers. These plans are "baked in the cake" of many of today's budget crises.

• Privatization of Infrastructure and State Operations removes the taxpayer burden of paying for improvements and helps cities to save money and create jobs. For example, in 2005, Chicago began a lease of the Chicago Skyway bringing the city $1.8 billion in revenue. The city also leased four parking garages worth $563 million. In recent years states with the most severe budget shortfalls have found privatization to be an effective way to generate new revenue without raising taxes. This year Arizona will raise $735 million through the sale of prisons and other state assets. In July, California authorized the sale of 17 state office buildings and will generate hundreds of millions of dollars alone through the sale of the Orange County Fairgrounds.

• Competitive Sourcing opens up jobs currently done by government employees to private sector competition to save states money and increase efficiency. For example, Gov. Jeb Bush (R- Fla.) saved taxpayers over $550 million by outsourcing government services to private companies. A similar measure was also enacted by Gov. Bobby Jindal (R-LA) this year, and was considered in other states such as Arizona.

• Eliminate "Prevailing Wage" laws to save double digit percentages in state construction and maintenance, amounting to hundreds of millions of dollars. Prevailing wage laws require contractors to essentially pay workers no less than the union wage. As a result, unionized construction companies significantly inflate the cost of any government project.

• Constitutional Limits on Taxes and Spending: If lawmakers wish to end the boom and bust budget cycles and eliminate structural deficits, they will need to promote policies that force the government to live within its means. The best way to do so is to prohibit government spending from increasing faster that the rate of population growth and inflation. Legislation that would require such is commonly referred to as the Taxpayer Bill of Rights. Colorado implemented TABOR in 1992, and as a result kept government growth in check during the boom years of the late '90s, allowing it to weather the first recession of the 2000s while other states were swimming in red ink. Unfortunately, TABOR was suspended in Colorado, and its effectiveness is muted during the current recession.

Click here for the full report.

posted by NATHAN BENEFIELD | 01:51 PM | 0 comment