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Out of Control Policy Blog Archives: 4.8.12–4.14.12

State Tax Collections Rise $62 Billion in 2011

State tax collections increased $62.1 billion—or 8.9 percent—up to $763.7 billion in 2011, according to the U.S. Census Bureau’s recently released 2011 Annual Survey of State Government Tax Collections. See the following figure for a breakdown of the $763.7 billion in state tax collections by category in 2011:

State Tax Collection in 2011 by Category

All 50 states experienced a positive increase in total tax collections; whereas in 2010 only 11 states experienced a positive increase. There are nine states where tax collection increased by 10 percent or greater in 2011, including:

  • North Dakota (+44.5%)
  • Alaska (+22.4%)
  • California (+17.4%)
  • Illinois (+15.3%)
  • New Mexico (+15.1%)
  • Wyoming (+14.1%)
  • Idaho (+10.5%)
  • Colorado (+10.4%)
  • Minnesota (+10.1%)

In an accompanying press release, the U.S. Census Bureau highlights the following findings from the report:

States with the largest percent increase in motor fuels tax revenue were California (+80.3 percent), Alaska (+37.4 percent), North Dakota (+13.1 percent) and Kentucky (+10.6 percent).

Severance taxes—collection for removal or harvesting of natural resources (e.g., oil, gas, coal, timber, fish, etc.)—were up $3.5 billion, a 31.2 percent increase. This followed a 16.4 percent decrease in fiscal year 2010. The largest increases in severance tax revenue were seen in the West.

Revenue on taxes imposed distinctively on insurance companies and measured by gross or adjusted gross premiums (insurance premium sales tax) increased $593.8 million, up 3.8 percent. This followed a 5.3 percent increase in fiscal year 2010. The largest increases in insurance premium sales tax revenue were seen in the Northeast and South.

It’s important to note that state tax collection data does not include: employer and employee assessments for retirement and social insurance purposes; collections for the unemployment compensation taxes imposed by each of the state governments; or tax collections from local governments.

This data is only one piece of the state revenue puzzle. For context, in 2010 state tax collection accounted for approximately one third of total state government revenue. That being said, growing state tax collections suggest an ease to state budget woes. For related research on this topic, see Reason Foundation’s Tax and Budget Policy Research Archive.

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Sales Taxes Aren't Killing Best Buy

A few weeks back, now-former Best Buy CEO Brian Dunn blamed the retailer's $1.7 billion quarterly loss and its decision to close 50 stores nationwide on the fact that its online competitors, Amazon.com in particular, "aren't encumbered by the costs of running physical locations and in many cases don't have to collect sales tax."

Dunn's comments rehash the now-familiar meme that forcing e-retailers to collect sales tax is the silver bullet to saving brick-and-mortar retailers. It gives politicians on all sides cover--for some, it's a way to keep revenues coming in for excessive spending. For others, it's a handy way to wave the flag for local commerce.

But slapping consumers with more taxes isn't going to save retailing. In a short piece this week, BusinessWeek explores the fundamental shifts online retailing has created in consumer behavior. Here's a nugget from the article:

Best Buy’s decline reflects a cultural shift that’s reshaping the retail world. All big-box stores, and Best Buy in particular, thrived in an era when comparison shopping meant physically going from store to store. The effort required of consumers was a kind of transactional friction. With the advent of mobile technology, friction has all but disappeared. Rather than ruminate with a salesperson before making a selection, tech-savvy consumers are more likely to walk into stores, eyeball products, scan barcodes with their smartphones, note cheaper prices online, and head for the exit. Shoppers can purchase virtually any product under the sun on Amazon or eBay while sipping a latte at Starbucks. For traditional retailers, that spells trouble, if not death. “So far nothing Best Buy is doing is fast enough or significant enough to get in front of these waves,” says Scot Wingo, CEO of e-commerce consulting firm ChannelAdvisor.

Certainly e-commerce created competitive problems for Best Buy, but the sales tax advantage e-commerce has was likely the least of them. Brick-and-mortar retailing is facing an out-and-out crisis that's going to require creativity and innovation to solve. Taxing consumers who buy online won't do much toward that end.

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Latest Articles on Reason Foundation

Innovators in Action: Osceola County, Florida Commissioner Frank Attkisson

In the latest installment of Reason Foundation's Innovators in Action series, I interview Osceola County, Florida Commissioner Frank Attkisson.

Osceola County policymakers faced few choices when, admist ongoing county-wide budget woes, the library system alone faced a $3 million budget deficit. In response, the Commission voted to approve the first-ever public-private partnership for libraries in Florida. They ultimately signed a five year contract that netted $6 million in savings with Maryland-based Library Systems & Services Incorporated (LSSI).

While the public-private partnership model is proven in states like California and Texas, this is a major move for Florida and one that is likely to be replicated by other local governments across the state. Here's an excerpt from the interview:

Kenny: The first concern that many people have when it comes to libraries is access. How did the commission address this concern and how might other policymakers address it?

Attkisson: If another commission wants to do this, the boogey man is going to come out and people will try to scare them. Elected officials control these contracts and the public trusts us to deliver value for their money. We (the commission) control the hours and set the standards. We know what it costs and want the private sector to help us realize our vision for our libraries.

The vendor has an option to set up ancillary businesses to provide additional services to users, like a coffee shop. Think about how much has changed in ten years. We didn’t have computers or Internet. Now it’s a given that you’ll have those resources. That’s totally different from the libraries of ten years ago. We were able to leverage procurement to achieve substantive goals.

You have to have the backbone to say it will take 3-6 months to transition. But I’m comfortable that once we do, nobody will want to go back because we’ll have more capability than ever before.

Read the full interview available online here. For more, see Reason Foundation's Innovators in Action 2012 series available online here.

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Pew Finds States Barely Evaluate Tax Incentive Programs

Today The Pew Center on the States published an eye opening report entitled Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth. First, kudos to Pew for conducting this report and asking important questions about state tax policy. The report starts with a refrain commonly seen here on Reason Foundation’s Out of Control policy blog, which is that state governments are strapped for cash and need to both get their fiscal houses in order and foster economic growth.

Many policymakers feel the way to foster economic growth is by supporting politically favored businesses—as opposed to promoting economic freedom—so they pass lavish tax incentive programs totaling billions of dollars across the country in hopes of turning things around. Today’s Pew report addresses a critical follow up question: Do states measure to see if their tax incentives are having an impact? Their answer? Barely.

No state was spared in this analysis because every state has at least one tax incentive program, and most have several. Tax incentives come in the form of tax credits, exemptions and deductions; financial assistance for relocation or workforce expansion; and a variety of other mechanisms. Pew reviewed almost 600 documents and interviewed over 175 government officials and policy experts to evaluate whether or not states gauge the effectiveness of their tax incentives, and if they do, Pew examined how well they do it.

Ultimately, the report finds:

... (N)o state regularly and rigorously tests whether (its tax incentives) are working and ensures lawmakers considers this information when deciding whether to use them, how much to spend, and who should get them. Often, states that have conducted rigorous evaluations of some incentives virtually ignore others or assess them infrequently. Other states regularly examine these investments, but not thoroughly enough.

Since no state met Pew’s expectations for the study, it became a battle to avoid last place. States are evaluated under two criteria, scope and/or quality of evaluation, and are split into three categories listed below.

  • 13 states are “leading the way,” which means they're “meeting both criteria for scope of evaluation and/or both criteria for quality of evaluation.”
  • 12 states are achieving “mixed results,” which means they're “meeting only one of the criteria for scope and/or quality of evaluation.”
  • 26 states (including the District of Columbia) are “trailing behind,” which means they're “not meeting any of the criteria for scope or quality of evaluation.”

Below is an infographic provided with the report detailing where states rank and highlighting four recommended steps for state policymakers:

Evidence Counts Infographic, Pew Center on the States

For a detailed evaluation of state performance, see page 32 of the report available online here. For more, check out Reason Foundation’s Government Reform Tax and Budget Policy Research Archive and State Government Privatization Research Archive for ideas on ways that policymakers can turn things around in their states.

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Discord in the Fed

There is a bit of discord at the Fed. After Minneapolis Fed President Narayana Kocherlakota said earlier this week that the FOMC should consider raising interest rates later this year rather than maintain zero interest rate policy through 2014 (as is the current position of the Fed), vice chairwoman Janet Yellen remarked that ZIRP might actually need to be extended as far as 2015. The former San Francisco Fed President further commented in her speech at the Money Marketeers club of New York University that there has been "a significant shortfall in the overall amount of monetary policy stimulus since early 2009."

Then, at a meeting of the National Economics Club I was attending this afternoon, Philadelphia Fed President Charles Plosser note that when QE2 was launched in 2010 that unemployment was soaring and inflation was nill, and that because unemployment is falling and inflation is picking up that rather than talk about the need for QE3 we should be looking to tighten monetary policy.

After making this remark he backed off a bit and said he wasn't suggesting we should actually tighten monetary policy but rather just take it as a hypothetical response relative to the perceived need for QE3. 

Discord indeed.

At least the Federal Reserve appears to be about as conflicted as the blogosphere is on what to do and when to do it.

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Washington's Road to Economic Decline

I have a column up at Real Clear Markets today about the "long history of bi-partisan bonehead thinking on Capitol Hill about transportation, jobs and the economy."

It is no surprise that in an economic slump, or any other time really, politicians would focus on the jobs "created" by transportation spending. Leaving aside the flawed logic that taking money from one group of people to fund work by others in any real way "creates" jobs. The stopgap transportation bill is a poster child for how Washington has long been thinking about transportation, which explains the decisions it has made that have undermined economic growth in the United States.

I go on to explain how transportation infrastructure really effects the economy, with some emphasis on how disastrous is our federal, state and local government's decisions to allow congestion to continue growing. I conclude:

Our economy needs an oil change in the form of revamping transportation policy to focus on providing an effective transportation system that fuels economic growth rather than political ambitions and the creation of jobs "immediately," as Rep. Pelosi put it. Two years ago, a colleague and I sketched out in some detail what a more effective highway trust fund reform would look like. The most important things we focused on were transportation investments that maximize transportation benefits and mobility, and funding transportation with user fees, not taxes. Our economy depends too much on effective transportation for it to be a political pony to ride.

Read the whole thing here.

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China Can Use Market-Based Solutions for its Congestion Problems

According to a recent article in The Atlantic the car has replaced the bike in the streets of Beijing:

Today the cars have taken over. In fact, Beijing more and more is just another traffic-clogged city with Chinese characteristics. Its bike lanes are rapidly filling with parked cars, auto rickshaws spewing exhaust, and strolling pedestrians.

To many Chinese, bikes are now for losers. The iconic Beijing bicycle is a sorry one-gear affair with a metal basket on the front which breaks so regularly that every street corner seems to have a makeshift fix-it stand.

"There is a quote: ‘I would rather cry in a BMW than smile on a bike,'" says Jinhua Zhao, an urban planning professor at the University of British Columbia who's conducting a study of cycling in Beijing. He’s found that bicycle use in Beijing has dropped from about 60 percent in 1986 to 17 percent in 2010. At the same time, car use has grown 15 percent a year for the last ten years. 

This has caused some bicycle advocates to start waxing poetic: 

The loss of a bike culture is a shame, says Shannon Bufton, the Australian-born founder of an NGO called Smarter Than Car. "It’s like Venice and gondolas. They go together, Beijing and the bike," he says. 

Chinese consumers buy automobiles for the same reasons that American consumers buy them: a growing middle class and urbanization. Over the last ten years more than 300 million Chinese have moved into the middle class. Contrast that with the 310 million people in all of the United States. According to Forbes, by 2030 China will have 1.4 billion middle class consumers compared with 365 million in the U.S. and 414 million in Europe. China’s demand-driven economy is creating a middle class, something most U.S. policy analysts believe is a positive. This large American middle class is one reason that the U.S. has such a strong economy.

As recently as 1985 no more than 20 percent of all Chinese lived in cities. By 2005, the number had climbed to 50%. By 2045, it may reach 75%. 

With more cars comes more congestion. The congestion and the resulting pollution are real problems, but ultimately solvable. China has tried conventional big government solutions to fix its problem without much success. During the 2008 Olympics, its 50,000 rental bikes sat largely unused at kiosks. China’s policy of blocking drivers from entering Beijing one day a week has not reduced congestion. Limiting registrations for new cars and imposing strict driving time restrictions on car owners have proven more successful. But at what cost? Draconian government restrictions limit China’s demand-driven economy 

Building new highways is part of the solution, but it is no panacea either. Beijing is expected to have 7,000,000 drivers by 2015. Each day an average of 1,900 new vehicles enter the capital city. And while seven new highways beginning in Beijing will be constructed by 2015, they will likely only be a short-term solution to the congestion problem. 

China can solve the problem by implementing market-based solutions. For example, single-occupant vehicles could be required to pay a small fee to use a stretch of highway and vehicles with three or more occupants could use the highway for free. Buses can use special express lanes to take a guaranteed congestion-free trip throughout the city. Major arterials could have queue jumpers that allow commuters to pay a modest price to avoid congestion.

Market-based solutions can be implemented on transit as well. To reduce crowding, Beijing’s metro can charge different prices based on the level of congestion. The most popular travel times would have the highest prices. Off-peak hours would have a lower price. The country could use the resulting funds to build new train lines or add extra trains during the most popular hours. If the transit commute was faster and more reliable additional commuters might use it. Pricing also encourages some travelers to make their trip to work slightly earlier or later.

China’s economy is creating a large number of middle-class employees. And these employees are using their wealth to buy automobiles in record numbers. However, arbitrary regulations that do little to reduce congestion are not the solution. And pining for the good-old-days when everybody commuted by bicycle and lived in the lower class won’t help either. China is embracing its own version of Capitalism at a record pace. It is time for the country to use market-based pricing to start solving its congestion issues.

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DOT OIG Uncovers Financial Mismanagement in TIGER Grants

The Office of Inspector General (OIG) of the Department of Transportation has uncovered financial management problems in a significant number of the TIGER stimulus programs. Inspector General Calvin Scovel detailed some of these problems in last week’s testimony before the House Subcommittee on Transportation, Housing and Urban Development.

According to The Fiscal Times:

But federal investigators have uncovered widespread financial management problems with many of the projects. As of early March, federal authorities were investigating 66 cases of alleged false statements, bid rigging, fraud and embezzlement, according to a report by Calvin L. Scovel III, the Department of Transportation’s inspector general. Justice Department lawyers are scouring 47 of those cases for potential prosecution, according to Scovel.

Twenty-five of those cases involve alleged fraud by minority-owned or operated enterprises that received preferential treatment in the awarding of the contracts, while 22 involve allegations of false claims. Investigators are also looking into nine cases of alleged violations of the prevailing wage law, three involving corruption and one case involving embezzlement, according to a report Scovel presented to the House transportation appropriations subcommittee on March 29. A spokesman for Scovel’s office declined to provide further details of the ongoing investigation, but stressed, “We take very seriously any allegations of waste, fraud, abuse or violations of the law.”

The section is part of a larger report on DOT management practices where OIG studied effective stewardship of the department’s resources and enhancing aviation, surface, and pipeline safety. The report states that a number of, “Ongoing and emerging management challenges remain.” The full report is available here. 

Among the findings, FHWA has not yet enhanced the local public agency program that managed projects overseen by cities, counties, and other local entities. The OIG found “persistent risks” including insufficient state oversight, non-compliance with federal labor requirements, and improper processing of contract changes. FTA directed a significant amount of funding to major projects, which had not been adequately monitored. For example, the department awarded $423 million to the Fulton Street project, which “had experienced significant cost increases and delay.” Meanwhile FRA and MARAD are still implementing oversight practices for grants some two years after the first grants were awarded.








False Statements, Claims, Certifications







Disadvantaged Business Enterprise Fraud







Anti-Trust Violations, Bid-Rigging, Collusion














Prevailing Wage Violations







ARRA Whistleblower





















The agency should have expected problems with the TIGER Grants. Any new program, no matter how well designed, brings new opportunities for fraud. And the TIGER program was not well designed; the administration rushed to create it without implementing sufficient checks and oversight. Without additional monitors, the TIGER Grants Program could be a goldmine for corruption.

How can DOT solve these problems? First, FHWA should immediately create a task force to fix the local public agency program. This task force should include state and local agency heads and create interim deliverables and a full-report within a year that details how to improve management and cooperation of local governments. FTA should create a special review team to oversee large projects. The OIG indicated that large transit projects have the majority of problems; creation of a special team over the next six months to monitor only these projects should not be that expensive or difficult. FRA and MARAD need to implement review teams immediately. While resources are always constrained, it is inexcusable that the divisions have been awarding TIGER Grants for two years and still have not implemented oversight practices. If these two divisions have not implemented practices by this August, Congress should reduce the budget for these two divisions. 

Creating new discretionary spending programs is challenging. It is impossible to consider all of the implementation challenges and opportunities for fraud. One of the disadvantages of large government programs, including merit-based programs, is they bring out the crooks. Grant programs need to be created methodically. While the Obama Administration wanted to create its program quickly for economic reasons, a more deliberate creation process would have yielded more benefits and less fraud. Hopefully, future discretionary grant program creators will take note and work to prevent some of the problems of the TIGER grants in any new program.

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Maryland Passes Unprecedented (and Unnecessary?) Digital Labor Law

Maryland legislators just passed an unprecedented digital labor law in Senate Bill 433. The bill would prevent employers from asking for passwords to websites such as Facebook and Twitter. While other states like California and Illinois are exploring similar legislation, Maryland appears likely to be the first to move. However despite its popularity, this legislation may not be necessary after all.

The bill has strong support from the legislature, passing unanimously in the Senate (44-0) and overwhelmingly in the House (128-10). If signed by Gov. Martin O’Malley, SB 433 would specifically prohibit Maryland employers from:

  • Requesting or requiring that an employee or applicant disclose any user name, password, or other means for accessing a personal account or service through specified electronic communications devices.;
  • Taking, or threatening to take, specified disciplinary actions for an employee’s refusal to disclose specified password and related information; and 
  • Downloading specified information or data.

Civil liberties advocates have praised SB 433 for it’s expansive scope and hope future provisions will include college students and athletes. Further, the bill will likely save the state a significant amount of money in legal fees and settlement costs. But was this legislation necessary?

On Friday March 23 Facebook’s Chief Privacy Officer Erin Egan issued a warning that Facebook may take action against employers who demand passwords, either through engaging or taking legal action. Egan explains that these demands violate Section 4, Part 8 of Facebook's Statement of Rights and Responsibilities, which reads: 

You will not share your password, (or in the case of developers, your secret key), let anyone else access your account, or do anything else that might jeopardize the security of your account.

By requesting a job applicant’s Facebook password, an employer is demanding the applicant violate Facebook’s terms of service, for which he or she could be civilly liable (and at minimum risk having his or her account terminated.) Beyond Facebook, any website concerned about this issue can incorporate similar language in their terms of service.

Having this type of language in the terms of service makes sense for websites. At first glance, one might assume this story only impacts a handful of job applicants in Maryland. In reality, Facebook has a vested interest in protecting its reputation and the goodwill of its hundreds of millions of users around the world. Social media is built on a foundation of trust whereby users voluntarily submit personal information—in a trusted environment—in exchange for similar information from other users. If one user’s account is compromised through coercion, then the foundation of trust will crumble.

Ironically, Kevin Rector of The Baltimore Sun reports SB 433 was inspired by the Maryland state Department of Public Safety and Correctional Services, who asked a job applicant to turn over his Facebook password during the application process. The department said the policy had been a factor in the denial of employment of seven out of 2,689 applicants over the course of a year. The department specifically sought use or presence of verified gang signs in applicant accounts, which would prove detrimental in a correctional environment. 

After the American Civil Liberties Union (ACLU) filed a complaint, the department made participation voluntary, however this did not meet the ACLU’s concerns. This led the legislature to take action. Rather than the legislature, Gov. O’Malley might have instead addressed this issue since the state is the employer that was responsible for violating Facebook’s terms of service. 

Federal policymakers are also seeking to get involved. U.S. Senators Richard Blumenthal and Charles Schumer recently called on the U.S. Equal Employment Opportunity Commission (EEOC) and the U.S. Department of Justice (DOJ) to launch a federal investigation into this issue. Their press release cites several federal laws and Supreme Court rulings, such as the Stored Communication Act, Computer Fraud and Abuse Act, Pietrylo v. Hillstone Restaurant Group, and Konop v. Hawaiin Airlines, Inc.

There are two market forces already at work solving this problem. First, applicants who view this requirement as onerous won’t apply to work at the businesses that impose it, and those businesses will suffer in the marketplace due to their lower competitiveness in attracting labor. Second and more importantly, Facebook and other websites ultimately have a strong incentive to take legal action to protect their users. Users will patronize websites that meet their needs, including privacy protection, and they will avoid websites that don’t.

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Ybarra and Gilroy in Virginian-Pilot: Midtown Tunnel PPP needs to move ahead

My Reason Foundation colleague Shirley Ybarra and I have a new op-ed in today's Virginian-Pilot on why the current political gamesmanship over Midtown Tunnel PPP is counterproductive, why it's the most viable path forward to reduce congestion in the Hampton Roads region, and why other states are using similar tolling and public-private partnership strategies to supplement the increasingly insufficient gas tax to get needed projects built.

Here's an excerpt:

Many local officials are trying to delay the $2.1 billion expansion of the Midtown Tunnel. Some are worried about the expected toll rates. Others want the government to build it. It is this never-ending political gamesmanship and short-term thinking that make building critical infrastructure so difficult.

Freeways aren't free. And neither are tunnels.

The possibility of a $1.84 toll for the tunnel during rush hour reflects the costs of building and maintaining this important project. Legislators and pundits suggesting that the government should raise gas taxes and build the tunnel are fooling themselves. Drivers are not about to embrace a 10-cent a gallon, or higher, increase in the gas tax they'll feel every time they go to the pump.

A national Reason-Rupe poll of 1,200 Americans asked voters if they'd rather pay for new transportation projects through higher gas taxes or pay tolls when they use new roads.

Fifty-eight percent of Americans said new roads should be funded by tolls, while just 28 percent said new road capacity should be paid for by tax increases. A whopping 77 percent said they'd oppose raising the federal gas tax.

And let's not forget that Hampton Roads voters shot down a one-cent sales tax increase for transportation at the ballot in 2002, just as Northern Virginia voters did with their proposed half-cent sales tax increase.

More importantly, the gas tax is no longer a viable way to pay for major projects. Cars keep getting better mileage per gallon, which means the tax delivers less and less to government coffers. That Toyota Prius is racking up the mileage on roads while paying less in gas taxes thanks to its fuel efficiency. In fact, electric car owners, like those driving Nissan Leafs, will cause wear and tear on roads while never paying the gas tax.

The government has been promoting and mandating fuel efficiency for decades. As a result, gas tax revenue is dwindling.

Unless the state and feds want to reverse course by banning fuel-efficient and electric cars and mandating Hummers, it's time to face facts: The United States and Virginia need a new long-term, sustainable funding source for transportation. User fees and tolls are the fairest, most equitable way to do that.

The Midtown Tunnel public-private partnership is a great example of why that's the case. The region and state are expected to put in $362 million to build a $2.1 billion project. It is a project Virginia and Hampton Roads simply cannot afford on their own. [...]

Continue reading the rest of the commentary here.

» Reason Foundation's Transportation, Tolling and Public-Private Partnerships research archive

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ALEC Releases 2012 Rich States, Poor States Report

Today, the American Legislative Exchange Council (ALEC) released the fifth edition of its annual Rich States, Poor States report, authored by Arthur Laffer, Stephen Moore and ALEC's Jonathan Williams. As with previous editions, this helpful report provides a current snapshot of state economic conditions, offers some worthy primers on tax policy/research issues, and ranks the states along an index that includes such metrics as income tax rates, property and sales tax burdens, recently enacted tax policy changes, debt service as a share of tax revenue, public employees per 1,000 residents and more.

From the executive summary:

In chapter 1, the authors lay the groundwork for understanding what states must do in order to increase growth and become prosperous. First, they set the stage by identifying the biggest winners and losers in the ALEC-Laffer State Economic Competitiveness Index over the past five years. From there, Messrs. Laffer, Moore, and Williams provide a lesson in economics 101, discussing the merits of supply-side economics, the theory of incentives, and the evidence behind taxpayers voting with their feet—very strongly against high taxes. Finally, this chapter highlights the best policies of the states, from pension reform, to closing budget gaps, to pro-business tax reform, and everything in between. Readers should be on the lookout for Oklahoma, Kansas, and Missouri, where the personal income tax may soon become a thing of the past.

Chapter 2 evaluates the influence several policy variables have on state economies. The authors begin with the personal and corporate income taxes, comparing the states with the highest tax rates to the states with the lowest, or in some cases zero, tax rates. The results speak for themselves. The no income tax states outperform their high tax counterparts across the board in gross state product growth, population growth, job growth, and, perhaps shockingly, even tax receipt growth. This chapter allows readers to see the data and decide which policies they think have the greatest effect on state economies.

In chapter 3, the authors delve into one of the most anti-growth tax policies: The unpopular and economically damaging “death tax.” From what not to do to where not to die, the authors combine anecdotal evidence with the data to show why the death tax is one of the worst possible taxes for state economies. Less than half the states impose death taxes, and that number is quickly dwindling. Ohio and Indiana are leading the effort to eliminate these growth killing taxes, and we expect others to soon follow in their footsteps.

Finally, chapter 4 is the much anticipated 2012 ALEC-Laffer State Economic Competitiveness Index. The first measure, the Economic Performance Rank, is a historical measure based on a state’s income per capita, absolute domestic migration, and non-farm payroll employment—each of which is highly influenced by state policy. This ranking details states’ individual performances over the past 10 years based on the economic data.

The second measure, the Economic Outlook Rank, is a forecast based on a state’s current standing in 15 equally weighted policy variables, each of which is influenced directly by state lawmakers through the legislative process. In general, states that spend less, especially on transfer programs, and states that tax less, particularly on productive activities such as working or investing, experience higher growth rates than states that tax and spend more.

In this year's edition, the top 10 states in the Economic Outlook rankings were (from 1 to 10, in order): Utah, South Dakota, Virginia, Wyoming, North Dakota, Idaho, Missouri, Colorado, Arizona and Georgia. Rounding out the bottom of the list were (from 41-50, in order): Minnesota, New Jersey, Rhode Island, Connecticut, Oregon, Hawaii, Maine, Illinois, Vermont and New York.

For the Economic Performance rankings, the top 10 performing states were (in order from 1 to 10): Wyoming, Texas, Montana, North Dakota, Alaska, New Mexico, South Dakota, Virginia, Oklahoma and Arkansas. The bottom 10 performing states were (from 41 to 50): Minnesota, Wisconsin, Massachusetts, Connecticut, New Jersey, Indiana, California, Illinois, Ohio and Michigan.

Another interesting component of the 2012 report is the intro feature outlining the "10 Golden Rules of Effective Taxation," a reality check of sorts for how tax policy works in real life (not the fantasy world in which the "Buffett rule," for example, is touted as some realistic fiscal solution). Here are the 10 rules, which the report discusses in detail:

  1. When you tax something more you get less of it, and when you tax something less you get more of it.
  2. Individuals work and produce goods and services to earn money for present or future consumption.
  3. Taxes create a wedge between the cost of working and the rewards from working.
  4. An increase in tax rates will not lead to a dollar-for-dollar increase in tax revenues, and a reduction in tax rates that encourages production will lead to less than a dollar-for-dollar reduction in tax revenues.
  5. If tax rates become too high, they may lead to a reduction in tax receipts. The relationship between tax rates and tax receipts has been described by the Laffer Curve.
  6. The more mobile the factors being taxed, the larger the response to a change in tax rates. The less mobile the factor, the smaller the change in the tax base for a given change in tax rates.
  7. Raising tax rates on one source of revenue may reduce the tax revenue from other sources, while reducing the tax rate on one activity may raise the taxes raised from other activities.
  8. An economically efficient tax system has a sensible, broad base and a low rate.
  9. Income transfer (welfare) payments also create a de facto tax on work and, thus, have a high impact on the vitality of a state’s economy.
  10. If A and B are two locations, and if taxes are raised in B and lowered in A, producers and manufacturers will have a greater incentive to move from B to A.

There's a ton worth checking out in this report, including features on the estate tax and a detailed performance comparison for high-vs.-low tax states that merit a thorough read. The full report is available here.

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Barry Ritholtz On Housing Pessimism

Last Friday, Washington Post columnist Barry Ritholtz broke down the pessimist's view on the housing market. With spring comes a traditional uptick in housing data, inspiring memory challenged journalists to wax philosophical about the bottom of the housing market finally being upon us and blue skys forever to come. But here are some reasons why that view is misinformed (regular readers will note these are not new concepts to this blog).

First, the shadow inventory:


"What is shadow inventory? This is important, as lowering the total inventory of houses for sale is how prices stabilize and sales volume moves higher... It includes bank-owned real estate, distressed houses not yet for sale, short sales and delinquencies that have not yet defaulted. Foreclosure properties are also in the shadow inventory. These houses will eventually become part of the total supply for sale. Although there is no official count, estimates of potential shadow inventory run as high as 10 million.

"That’s not all. There’s also a huge overhang of underwater homeowners — whose houses are worth as much as 25 percent less than what is owed. The owners don’t qualify for a mortgage modification. They may be delinquent but aren’t in default. Two-thirds of all U.S. houses have mortgages. Of those, an estimated 21 to 29 percent of the mortgages are underwater, or up to 16 million houses. When prices finally do rise, we can expect many of these no-longer-underwater owners to put their houses up for sale. If only one in three do, that is another 5 million homes in inventory."

Second, home affordability:


"Are houses affordable? Here’s where every discussion of affordability seems to start: the National Association of Realtors Home Affordability Index. In my view, it’s worthless. Why did I come to such a harsh conclusion? The index offers little insight into how affordable housing actually is. In the biggest run up in housing prices in American history, the index never dipped into the level of unaffordable. Imagine that.

"As ridiculous as that sounds, it’s even more absurd when we look at the NAR methodology, which ignores factors such as family savings rates, cash assets, consumer credit, indebtedness, credit servicing obligations, inflation and income gains. The affordability index looks at the wrong things and ignores the important ones. The correct question is not whether the houses are affordable in theory. Rather, it’s whether potential buyers can afford to buy them."



Third, how cheap house prices are:


"Are the prices cheap? Few had forecast the steep drop in median house prices. Some regions that were excessively frothy during the boom — California, Las Vegas, South Florida and Arizona — have seen much greater price drops. Other areas had laws (Texas) or financial conventions (New York City) that mandated significant down payments and other prudent requirements and avoided much of the bloodshed. The conventional wisdom seems to be that prices have stabilized and are overdue to start rising. The data, however, suggest something else. The most recent Standard & Poor’s / Case-Shiller index of national prices (January) shows prices are still falling, about 4 percent year-over-year."

Fourth, asset prices follwing a bubble:


"How do asset prices behave following a bubble? Regardless of the asset class — stocks, bonds, commodities, houses, etc. — assets do not merely stabilize. We have never seen a stock market run up into bubble territory and then revert to fair value. Instead, we careen wildly past that level, to deeply undersold and exceedingly cheap. That is the marvelous mechanism of markets. It is how assets are repriced, distressed holdings liquidated, capital markets stabilized, fools revealed, speculators punished — and money returned to its rightful owner, the prudent investor.

For a lasting recovery, we need to see houses cheap enough that they fall into “good hands” — long-term owners who can afford their mortgage payments. Until that happens, houses will stumble along the bottom of the price range. The nation could easily see another 10 percent to the downside — assuming nothing else goes wrong. This would actually be good news. The government interventions (first-time buyer tax credit, mortgage modifications and foreclosure abatements) have prevented prices from finding their own levels. If they did, houses would be much more affordable, and buyers would come out in droves.

That is how a true housing recovery begins.

Read the rest of the piece at Washington Post here.



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Red-Light Cameras: Are They Legal? Do They Make Intersections Safer?

Larry Copeland of USA Today writes:

The national conversation about red-light cameras keeps simmering while their legal status grows murkier.

At the heart of the debate is this question: Do they save lives by reducing accidents or are they primarily a way for cities to raise money in an era of lagging tax revenue?

Copeland’s article specifically focuses on red-light cameras—a form of photo traffic enforcement—that are installed to take pictures of vehicles responsible for traffic violations in and around stoplights. This includes infractions such as failing to stop at the white line, rolling right turns, running red lights, etc. Over the last decade, use of red-light cameras has exploded from a paltry 25 communities in 2000 up to approximately 555 in 2012, according to the Insurance Institute for Highway Safety (IIHS).

Two issues surround red-light cameras: First, are they legal? And second, do they make intersections safer?

Addressing the first issue is complicated. Constitutional questions around photo traffic enforcement depend on state and municipal statutes, which vary greatly across the U.S.

Nine states have banned red-light cameras, according to the Governors Highway Safety Association (GSHA). Colorado considered joining their company through Senate Bill 12-050, however the bill has been postponed indefinitely in the Senate Committee on Transportation. Meanwhile three of those states (Maine, Mississippi and West Virginia) went so far as to ban all “automated enforcement” systems. At the other end of the spectrum are states like Iowa that have no laws on the books and leave it up to municipalities to decide.

Twenty-four states and the District of Columbia lie in the middle with at least one red-light camera in place. There’s a host of additional regulations, ranging from fine limits to restricting the areas they can be used, that lawmakers have passed to customize their law enforcement. For example, last year Georgia lawmakers required that all intersections with red-light cameras make their yellow light signals at least four seconds long (many were reportedly three seconds long). Intersection infraction revenue decreased so dramatically that several cities removed their cameras. Virginia, a “Dillon Rule” state, requires local officials to get permission from the state legislation before installing red-light cameras.

For states and municipalities that have passed statutes, Copeland notes there have been conflicting rulings on the constitutionality of that legislation in states. In Florida a state judge ruled the state’s camera’s law is unconstitutional. The Washington State Supreme Court ruled local voters couldn’t ban red-light cameras by ballot initiative. A Missouri circuit judge in St. Louis ruled cameras are invalid without validation by the state legislature; then another St. Louis circuit judge reached the opposition conclusion a month later. In 2002, the Colorado Supreme Court ruled that state legislators do have authority over municipal photo traffic enforcement.

So are they legal? There’s no clear-cut answer. Ultimately it depends on the state and municipality in question.

Addressing the second issue is also complicated because there is competing evidence in favor of, and opposed to, whether or not red-light cameras make intersections safer.

In Los Angeles, the Los Angeles Police Department recently announced it would not pursue red-light camera tickets in court after the city shut down its red-light camera program in 2011. As I wrote last August, the Los Angeles City Council recommended the city phase out the program. The City Council was influenced in large part by City Controller Wendy Gruel's audit, which found that the cameras cost the city more money than they generate in revenue and fail to definitively improve public safety. Research conducted by KCBS/KCAL found that neighboring cities Huntington Beach, Montclaire, Upland, El Monte and Fullerton all discontinued their use of red-light cameras.

Policymakers weren’t the only ones fighting red-light cameras. Jay Beeber, a citizen filmmaker-turned activist, spearheaded the fight through Safer Streets L.A. Beeber explained his efforts last year in an interview with reason.tv:

As I wrote here last January, scrutiny of red-light cameras has raged in major Colorado metropolitan areas like Denver and Colorado Springs. In Denver, investigative reporters for four different media organizations (including The Denver Post, Fox 31 Denver, CBS 4 Denver and CompleteColorado.com) took swipes at the cameras finding that they appeared to disproportionally punish minor traffic violations. Separately, Colorado Springs Mayor Steve Bach and then-Interim Chief Peter Carey decided to end the city’s red-light camera pilot program saying it did not meet safety expectations.

On the other hand, IIHS has published research in support of red-light cameras for years, with one of the earliest examples on their website coming in the form of a 1998 Status Report on Oxnard, California (available here). More recently, a 2011 IIHS report entitled, Status Report, Special Issue: Red Light Running (available here) claims:

The rate of all fatal crashes at intersections with signals—not just red light running crashes—fell 14 percent in the camera cities and crept up 2 percent in the noncamera cities. In the camera cities, there were 17 percent fewer fatal crashes per capita at intersections with signals in 2004-08 than would have been expected. That translates into 159 people who are alive because of the automated enforcement programs.

Opponents of red-light cameras form a broad coalition composed of groups ranging from citizen activists to elected officials. Opponents argue that red-light cameras simply shift the behavior of drivers who might run a red light. Given the presence of a camera, drivers will either speed up or slam on the brakes to avoid a traffic violation. Opponents also argue that red-light cameras exist to simply raise revenue, and even more shockingly, sometimes manage to lose money. Instead, they support alternative safety measures like lengthening the time of yellow lights (as described in Georgia above).

So do red-light cameras make intersections safer? The jury is not out, however evidence from cities like Los Angeles, Denver and Colorado Springs suggest they don't make intersections safer. Given drivers’ continued frustration with them, and governments’ continued desire for revenue, the issue is unlikely to go away any time soon.

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