Voice For Liberty

Category: Taxation

  • Federal grants seen to increase future local spending

    graph-1“Nothing is so permanent as a temporary government program.” — Nobel Laureate Milton Friedman

    Is this true? Do federal grants cause state and/or local tax increases in the future after the government grant ends? Economists Russell S. Sobel and George R. Crowley have examined the evidence, and they find the answer is yes.

    This paper is especially important as south-central Kansas starts a comprehensive planning process under a HUD Sustainable Communities Regional Planning Grant — a federal grant. Some officials have justified their votes in favor of the planning grant because the grant is “just for planning purposes.” It does not bind us to future actions that might raise taxes, they say. But this attitude is naive and dangerous.

    The research paper is titled Do Intergovernmental Grants Create Ratchets in State and Local Taxes? Testing the Friedman-Sanford Hypothesis.

    The difference between this research and most other is that Sobel and Crowley look at the impact of federal grants on state and local tax policy in future periods.

    This is important because, in their words, “Federal grants often result in states creating new programs and hiring new employees, and when the federal funding for that specific purpose is discontinued, these new state programs must either be discontinued or financed through increases in state own source taxes.”

    The authors caution: “Far from always being an unintended consequence, some federal grants are made with the intention that states will pick up funding the program in the future.”

    The conclusion to their research paper states:

    Our results clearly demonstrate that grant funding to state and local governments results in higher own source revenue and taxes in the future to support the programs initiated with the federal grant monies. Our results are consistent with Friedman’s quote regarding the permanence of temporary government programs started through grant funding, as well as South Carolina Governor Mark Sanford’s reasoning for trying to deny some federal stimulus monies for his state due to the future tax implications. Most importantly, our results suggest that the recent large increase in federal grants to state and local governments that has occurred as part of the American Recovery and Reinvestment Act (ARRA) will have significant future tax implications at the state and local level as these governments raise revenue to continue these newly funded programs into the future. Federal grants to state and local governments have risen from $461 billion in 2008 to $654 billion in 2010. Based on our estimates, future state taxes will rise by between 33 and 42 cents for every dollar in federal grants states received today, while local revenues will rise by between 23 and 46 cents for every dollar in federal (or state) grants received today. Using our estimates, this increase of $200 billion in federal grants will eventually result in roughly $80 billion in future state and local tax and own source revenue increases. This suggests the true cost of fiscal stimulus is underestimated when the costs of future state and local tax increases are overlooked.

    So: Not only are we taxed to pay for the cost of funding federal and state grants, the units of government that receive grants are very likely to raise their own levels of taxation in response to the receipt of the grants. This is a cycle of ever-expanding government that needs to end, and right now.

    An introduction to the paper is Do Intergovernmental Grants Create Ratchets in State and Local Taxes?.

  • Part of Kansas tax law has something for everyone

    Kansas LegislatureThe just-signed Kansas tax bill contains a future provision that, based on recent research, may satisfy everyone.

    As described by Kansas Legislative Research:

    Future formulaic income tax rate relief could be provided under certain circumstances, beginning as early as tax year 2019, based on the extent to which a specified group of SGF tax sources has increased over the previous fiscal year. Generally, rate relief will be triggered under the formula once that group of taxes exceeds the previous fiscal year’s levels (beginning with FY 2018 growth over FY 2017) by 2 percent or more.

    What will happen — may happen — is that when state general fund tax receipts increase by more than two percent, some of that increase will be used to “buy down” individual income tax rates.

    This is a form of a policy known as tax and expenditure limits, or TELs. These have been implemented in many states, and in many different forms. Kansas has not had a TEL, but starting in fiscal year 2019, we may have one.

    While not specifically promoted as a TEL, this law has the same effect: Instead of spending increased tax revenue, that revenue will be given back to taxpayers in the form of lower rates. Sort of, because the state will spend the first two percent, and then tax rates are reduced by something less than the margin above that.

    This may happen, or it may not. Fiscal year 2019 doesn’t start for five years and two weeks. A lot may happen between now and then, including several elections. The legislature also may ignore laws it doesn’t like, as when it has sometimes violated the law requiring a 7.5 percent ending general fund balance.

    But either way, this TEL has something to benefit everyone. Spending hawks can point to this as an step in reigning in government spending — even if it’s in the distant future.
    state-local-spending-tel-cover

    Those who like government spending can take comfort in this: According to recently released research published by American Enterprise Institute, laws like this don’t have have their intended effect.

    The executive summary for its paper State and local spending: Do tax and expenditure limits work? reads:

    Since 1978, 30 states have enacted formal limitations on taxes, budgets, or outlays as tools with which to strengthen fiscal discipline. These tax and expenditure limits (TELs) vary substantially in terms of their details, definitions, and underlying structures, but the empirical finding reported here is simple and powerful: TELs are not effective.

    A little later:

    The almost-universal weakness of TELs is striking, but the empirical evidence by itself does not explain these findings. In part, it is likely that the limits themselves are the products of the same political pressures and election dynamics that yield fiscal outcomes. Moreover, the competition among political interests that results in budget outcomes also is likely to weaken or circumvent limits that otherwise would be effective. This raises a larger overall question: what are the sources of government growth? Five hypotheses are discussed in this study, the upshot of which is that TELs by themselves are unlikely to affect the demand for or the cost of government spending. …

    It is likely to be the case that such mechanical tools as TELs cannot substitute for the hard work of long-term public education and persuasion about the central benefits of limited government. In the long run under democratic institutions, popular will is likely to impose sharp constraints on the behavior of government; this means that attitudes must be changed through a process of debate and enlightenment.

    So there’s something for everyone: Passage of a law that (on the surface) looks good to one group, but one with little ability to produce its stated goals, which should placate the other group.

  • Derby forms a TIF district

    The city of Derby, Kansas has formed a tax increment financing (TIF) district. TIF is a method of diverting the normal flow of property tax revenue so that it benefits private interests rather than the public treasury.

    In Kansas, cities form TIF districts. Then, any affected county and school district may vote to veto its formation. They have 30 days to do this. If they take no action, they lose their ability to veto, and the TIF district is created.

    The Sedgwick County Commission will consider whether to veto the formation of this TIF district next Wednesday.

    Here are documents related to this project:

    Derby North Gateway TIF Analysis. Analysis of Derby North Gateway Tax Increment Financing (TIF) District, prepared by Sedgwick County finance department.

    Derby North Gateway TIF District Feasibility Study. Redevelopment Project Financial Feasibility Study, Derby North Gateway TIF District, City of Derby, Kansas, March 29, 2013.

    New city taxing district dependent upon Menards. Derby Informer news article.

    For background on TIF, I’ve prepared a collection of resources at Tax increment financing district (TIF) resources.

  • Tax burden in the states

    As Kansas debates tax reform, and as our state is frequently compared to Texas, we should take a look at the two states and their taxes.

    Texas has no income tax. Supporters of keeping Kansas income tax rates high say that Texas has high property taxes in order to “pay for” the zero income tax rate.

    It’s true that property tax rates in Texas are higher than in Kansas, according to 50-State Property Tax Comparison Study from Minnesota Taxpayers Association.

    But what’s not often mentioned is that Texas state and local governments collect less tax from their citizens, compared to Kansas. This means that Texas is not burdened with costly government as is Kansas, and more money is left for taxpayers to spend in the productive private sector. And, spend it how they see fit.

    State and Local Taxes Paid Per Capita, 2010

  • State and local tax burden visualized

    For two decades the Tax Foundation has estimated the combined state and local tax burden for all the states. I’ve created an interactive visualization that lets you compare states and see trends in rank over time.

    In its publication, the Tax Foundation explains:

    For each state, we compute this measure of tax burden by totaling the amount of state and local taxes paid by state residents to both their own and other governments and then divide these totals by each state’s total income. We not only make this calculation for the most recent year, but also for earlier years due to the fact that income and tax revenue data are periodically revised by government agencies.

    Our goal here is to move the focus from the tax collector to the taxpayer. We aim to find what percentage of state income residents are paying in state and local taxes and whether those taxes are paid to their own state or to others.

    The most recent version of the report is located at Annual State-Local Tax Burden Ranking (2010) – New York Citizens Pay the Most, Alaska the Least.

    To use the visualization, click on any state from the map. To add states, use Ctrl+click. Use the visualization below, or click here to open it in a new window. Data from Tax Foundation; visualization created using Tableau Public.

  • Eliminate mortgage interest deduction

    As part of simplification of income taxes, eliminating the mortgage interest deduction should be at the top of the list. This will be difficult to accomplish, as the real estate industry pitches the deduction as a way to help middle-class families afford home ownership.

    The math, however, doesn’t add up. Consider a family of four. Its standard deduction for federal income taxes is $11,900. Itemizing deductions — which is what you must do in order to received the mortgage interest deduction — is beneficial only when the deductions exceed the standard deduction amount.

    With interest rates for a 30 year mortgage at 3.356 percent APR (Wells Fargo 30 year fixed), $11,900 of interest payments implies a mortgage loan of $354,000. For a 15 year fixed loan, it would be $406,000.

    The national median sales price of a house, according to the National Association of Realtors, is $178,600. In many parts of the country like Wichita, it’s much less. The mortgage loan amounts calculated above are beyond the reach of most middle class families.

    But once you start itemizing deductions, most families will have additional amounts to deduct beyond mortgage interest, which means additional tax savings. But families should also be aware that the benefit of these deductions exists only for the amount above the standard deduction threshold. So if a family was able to deduct $14,000, the marginal benefit is only $2,100.

    Then, many people seem to believe that income tax deductions like mortgage interest are deducted from the tax bill. That describes the mechanism of tax credits. Mortgage interest is a deduction from income. After the deduction, there is less income to pay taxes on, and that’s the benefit.

    The amount of the benefit, however, for middle class families is small. Most of these families probably fall into the tax bracket where the marginal rate is 15 percent, meaning that a dollar’s change in taxable income changes taxes by 15 cents. So $2,100 of additional deductions saves $315 in taxes.

    There’s another policy consideration. The mortgage tax deduction incentivizes borrowing to buy a home, not the actual ownership.

    The mortgage tax deduction is seen as promoting home ownership, which has been a goal of government for a long time. A few years ago we saw what happens when government intervenes in markets like housing. Most people are perfectly capable of deciding for themselves whether to be renters or owners. The government should stop social engineering programs that sway people to act one way or another, and the home mortgage interest deduction is a prime example.

  • Tax increment financing district (TIF) resources

    Resources on tax increment financing (TIF) districts. An updated version of this article is here.

    Wichita should reject Bowllagio TIF district. Wichita should reject the formation of a harmful tax increment financing (TIF) district.

    Wichita TIF: Taxpayer-funded benefits to political players. It is now confirmed: In Wichita, tax increment financing (TIF) leads to taxpayer-funded waste that benefits those with political connections at city hall.

    Tax increment financing (TIF) and economic growth. There is clear and consistent evidence that municipalities that adopt tax increment financing, or TIF, grow more slowly after adoption than those that do not.

    Does tax increment financing (TIF) deliver on its promise of jobs? When looking at the entire picture, the effect on employment of tax increment financing, or TIF districts, used for retail development is negative.

    Crony Capitalism and Social Engineering: The Case against Tax-Increment Financing. Randal O’Toole, Cato Institute. While cities often claim that TIF is “free money” because it represents the taxes collected from developments that might not have taken place without the subsidy, there is plenty of evidence that this is not true. First, several studies have found that the developments subsidized by TIF would have happened anyway in the same urban area, though not necessarily the same location. Second, new developments impose costs on schools, fire departments, and other urban services, so other taxpayers must either pay more to cover those costs or accept a lower level of services as services are spread to developments that are not paying for them. Moreover, rather than promoting economic development, many if not most TIF subsidies are used for entirely different purposes. First, many states give cities enormous discretion for how they use TIF funds, turning TIF into a way for cities to capture taxes that would otherwise go to rival tax entities such as school or library districts. Second, no matter how well-intentioned, city officials will always be tempted to use TIF as a vehicle for crony capitalism, providing subsidies to developers who in turn provide campaign funds to politicians.

    Tax Increment Financing: A Tool for Local Economic Development. Richard F. Dye and David F. Merriman. Tax increment financing (TIF) is an alluring tool that allows municipalities to promote economic development by earmarking property tax revenue from increases in assessed values within a designated TIF district. Proponents point to evidence that assessed property value within TIF districts generally grows much faster than in the rest of the municipality and infer that TIF benefits the entire municipality. Our own empirical analysis, using data from Illinois, suggests to the contrary that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.

    The effects of tax increment financing on economic development. Richard F. Dye and David F. Merriman. Local governments attempt to influence business location decisions and economic development through use of the property tax. Tax increment financing (TIF) sequesters property tax revenues that result from growth in assessed valuation. The TIF revenues are to be used for economic development projects but may also be diverted for other purposes. We have constructed an extensive data set for the Chicago metropolitan area that includes information on property value growth before and after TIF adoption. In contrast to the conventional wisdom, we find evidence that cities that adopt TIF grow more slowly than those that do not. We test for and reject sample selection bias as an explanation of this finding. We argue that our empirical finding is plausible and present a theoretical argument explaining why TIF might reduce municipal growth.

    TIF is not Free Money. Randal O’Toole. Originally created with good intentions, tax-increment financing (TIF) has become a way for city officials to enhance their power by taking money from schools and other essential urban services and giving it to politically connected developers. It is also often used to promote the social engineering goals of urban planners. … Legislators should recognize that TIF no longer has a reason to exist, and it didn’t even work when it did. They should repeal the laws allowing cities to use TIF and encourage cities to instead rely on developers who build things that people want, not things that planners think they should have.

    Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth. Paul F. Byrne. Increasingly, municipal leaders justify their use of tax increment financing (TIF) by touting its role in improving municipal employment. However, empirical studies on TIF have primarily examined TIF’s impact on property values, ignoring the claim that serves as the primary justification for its use. This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.

    Tax Increment Financing and Missouri: An Overview Of How TIF Impacts Local Jurisdictions. Paul F. Byrne. Tax Increment Financing (TIF) has become a common economic development tool throughout the United States. TIF takes the new taxes that a development generates and directs a portion of them to repay the costs of the project itself. … Supporters of TIF argue that it is a necessary tool for redevelopment in older communities. Detractors contend that it is used to simply subsidize development, and that variances in tax systems allow some governments to implement and benefit from TIF even if its use harms other levels of government. This study provides an overview of the history and basic structure of TIF. It then analyzes the basic tax components of a TIF plan and compares how various aspects, such as tax capture and tax competition, play out in the standard system of TIF. The study then reviews the economic literature on TIF, and ends with a direct application of how TIF operates within Missouri.

    The Right Tool for the Job? An analysis of Tax Increment Financing. Heartland Institute. Tax Increment Financing (TIF) is an economic development tool that uses the expected growth (or increment) in property tax revenues from a designated geographic area of a municipality to finance bonds used to pay for goods and services calculated to spur growth in the TIF district. The analysis performed for this study found TIF does not tend to produce a net increase in economic activity; favors large businesses over small businesses; often excludes local businesses and residents from the planning process; and operates in a manner that contradicts conventional notions of justice and fairness. We recommend seeking alternatives to TIF and reforms to TIF that make the process more democratic and the distribution of benefits more fair to residents of TIF districts.

    Giving Away the Store to Get a Store. Daniel McGraw, Reason. Largely because it promises something for nothing — an economic stimulus in exchange for tax revenue that otherwise would not materialize — this tool is becoming increasingly popular across the country. Originally used to help revive blighted or depressed areas, TIFs now appear in affluent neighborhoods, subsidizing high-end housing developments, big-box retailers, and shopping malls. And since most cities are using TIFs, businesses such as Cabela’s can play them off against each other to boost the handouts they receive simply to operate profit-making enterprises. … At a time when local governments’ efforts to foster development, from direct subsidies to the use of eminent domain to seize property for private development, are already out of control, TIFs only add to the problem: Although politicians portray TIFs as a great way to boost the local economy, there are hidden costs they don’t want taxpayers to know about. Cities generally assume they are not really giving anything up because the forgone tax revenue would not have been available in the absence of the development generated by the TIF. That assumption is often wrong.

    Do Tax Increment Finance Districts in Iowa Spur Regional Economic and Demographic Growth? David Swenson and Liesl Eathington. We found virtually no statistically meaningful economic, fiscal, and social correlates with this practice in our assessment; consequently, the evidence that we analyzed suggests that net positions are not being enhanced — that the overall expected benefits do not exceed the public’s costs.

  • The rich don’t have enough money

    Even if President Barack Obama gets his way in upcoming tax negotiations, we’ll still be a long way from tackling the deficit.

    The document General Explanations of the
    Administration’s Fiscal Year 2013 Revenue Proposals, Table of Revenue Estimates     holds the details:

    Obama Administration projection of increased tax revenue

    If Obama is successful in his plan to increase taxes on upper-income taxpayers, it will bring in — according to this estimate by the Treasury Department — $56 billion in 2013. If additional tax expenditures are eliminated, revenue could increase by $83 billion. Both of these numbers are projected to rise in future years.

    To place these numbers in context: In fiscal year 2012, which ended just one month ago, the federal government spent an estimated $3,500 billion. The largest tax revenue increase Obama hopes for is 2.4 percent of this.

    Considering only the deficit from 2012, estimated at $1,100 billion, the $83 billion tax hike is 7.54 percent. But that’s only the deficit, which is the amount we borrow, not the amount we spend.

    These tax increases are not going to solve our problems with the federal budget. That’s assuming that the tax hikes will not cause economic harm.

    The federal budget is so out of balance compared to the size of the economy that even the wildest dreams of liberals won’t balance the budget. The Tax Foundation has calculated from IRS data that if government taxed 100 percent of the income earned by those who earn over $1 million, it would raise $709 billion. That’s not really close to last year’s deficit of $1,100 billion.

    And then, why would these people work?

  • Wichita’s $60 million gift to Spirit Aerosystems — not

    When I read that Wichita had invested nearly $60 million in its Spirit AeroSystems plant, I thought I must have been napping during a city council meeting. Instead, the lede of the story in the Tulsa World newspaper was a misstatement of the mechanism of Industrial Revenue Bonds (IRBs).

    The News reported “News that the city of Wichita is moving to invest nearly $60 million in its Spirit AeroSystems plant has Vision2 backers warning that Tulsa’s aerospace jobs are at risk of poaching by other cities.”

    A Tulsa television news report offered similar reporting: “… after the City of Wichita, Kansas offered roughly $60 million in incentives to try and steal Spirit Aerosystems away from Tulsa.”

    When news stories cover IRBs, the stories usually focus on the amount of the bonds, as in these two examples. That’s unfortunate, as the amount of the bonds is really a minor component of the story.

    You see this misunderstanding revealed in comments left to newspaper articles reporting the issuance of IRBs, where comment writers complain that the city shouldn’t be in the business of lending companies money.

    This confusion hides the reason why IRB transactions take place, which is tax avoidance. That’s the real story of Industrial Revenue Bonds: Companies escape paying the property and sales taxes that you and I — as well as most business firms — must pay.

    Reading the city council agenda packet regarding the IRB issue tells the story. The city is not lending Spirit money. In fact, no one is, according to the city document: “Spirit AeroSystems, Inc. intends to purchase the bonds itself, through direct placement, and the bonds will not be reoffered for sale to the public.”

    Also, the city has no obligation to pay the bondholders should Spirit default. This is a moot point in this case, as the issue of the bonds is also the buyer. But this is the case with all IRBs.

    It’s not uncommon for the issuing company to buy the bonds. So why issue the bonds? The agenda packet has the answer: “The bond financed property will be eligible for sales tax exemption and property tax exemption for a term of ten years, subject to fulfillment of the conditions of the City’s public incentives policy.”

    City documents didn’t give the amount of tax Spirit will avoid paying, so we’re left to surmise. Bonds could be issued up to $59.5 million. Taxable business property of that value would generate an annual tax bill of around $1.8 million per year, but Spirit would not pay that for up to ten years. If all the purchased property was subject to sales tax, that one-time tax exemption would be $4.3 million. These are the upper bounds of the tax savings Spirit Aerosystems may receive. Its actual savings will probably be lower, but still substantial.

    These numbers are the economic benefit of the bonds to Spirit, and the opportunity cost of the bonds to taxing jurisdictions. The $60 million “investment” or “incentive” reported by two Tulsa news sources is incorrect.

    Industrial Revenue Bonds, a confusing program

    IRBs are a confusing economic development program. It sounds like a loan from the city or state, but it’s not. The purpose is to convey tax avoidance.

    Here’s language from the Wichita ordinance that was passed to implement the bonds: “The Bonds, together with the interest thereon, are not general obligations of the City, but are special obligations payable (except to the extent paid out of moneys attributable to the proceeds derived from the sale of the Bonds or to the income from the temporary investment thereof) solely from the lease payments under the Lease, and the Bond Fund and other moneys held by the Trustee, as provided in the Indenture. Neither the credit nor the taxing power of the State of Kansas or of any political subdivision of such State is pledged to the payment of the principal of the Bonds and premium, if any, and interest thereon or other costs incident thereto.”

    So no governmental body has obligations to pay the bondholders in case of default. But this language hints at another complicating factor of IRBs: The city actually owns the property purchased with the bond proceeds, and leases it to Spirit. Here’s the preamble of the ordinance: “An ordinance approving and authorizing the execution of a lease agreement between Spirit Aerosystems, Inc. and the City of Wichita, Kansas.”

    Other language in the ordinance is “WHEREAS, the Company will acquire a leasehold interest in the Project from the City pursuant to said Lease Agreement.” There’s other language detailing the lease.

    We create this imaginary lease agreement — and that’s what it is, as it doesn’t have the same purpose and economic meaning as most leases — for what purpose? Just so that certain companies can avoid paying taxes.

    The city does have another program that allows it to exempt these taxes under some circumstances without having to issue bonds. In this case the goal of the program is laid clear: tax avoidance.

    IRBs are a confusing program that obfuscates the actual economic transaction. That’s not good public policy, whether or not you agree with the concept of selective tax abatements as economic development.

    Similarly, a principle of good tax policy is that those in similar situations should face the same laws. IRBs are contrary to this.

    While we can understand that citizens — with their busy lives — may not be informed or concerned about the complex workings of IRBs, we should expect more from our elected (and paid) officials. But we find often they are not informed.

    As an example, in 2004 the Wichita Eagle reported: “In July, the council approved industrial revenue bond financing and a $1.7 million property tax abatement for Genesis Health Clubs. Council members later said they didn’t realize they had also approved a sales-tax break.” (Kolb goal : Full facts in future city deals, September 26, 2004)

    Here we see Wichita City Council members not aware of the basic mechanism of a major city program that is frequently used. This is in spite of an informative city web page devoted to IRBs which prominently states: “Generally, property and services acquired with the proceeds of IRBs are eligible for sales tax exemption.”

    Yes, that page was active in 2004.