Wednesday, October 7, 2015

Fred Thompson: The OTIM: New & Improved

Fred Thompson with another dispatch:

I had thought about making this month’s contribution to Oregon Economics on the looming teacher shortage in Oregon or the misunderstandings reflected in the public reaction to the Secretary of State’s audit of the $3 billion that citizens and businesses owe the State, but when I went looking for numbers to back up my analysis on the first topic I found I was too late to say much of anything new. Educators have been predicting a crisis for the past two years and even PBS has covered the topic, although they haven’t taken account of the implications of improving job prospects elsewhere for teacher recruitment and retention. As for responding to the audit’s reception this is probably not the best place for that.

Consequently, I decided to comment on the Legislative Revenue Office’s (LRO) roll out of the updated Oregon Tax Incidence Model (OTIM), which was presented by LRO’s head, Paul Warner, to the House Interim Revenue Committee during legislative days at the end of September. I’ll briefly describe the model and the simulations run by the LRO for the committee, showing how OTIM works. (Disclosure, I am a member the Oregon Tax Incidence Modeling team’s academic advisory board.)

Paul Warner Testifying

The Oregon Tax Incidence Model is dynamic, general-equilibrium, simulation tool based on a dynamic-scoring model developed for the California State Department of Finance, modified by the LRO and academics from Oregon State University and the University of Washington. OTIM sits on an Impact Analysis for Planning (IMPLAN) software platform, using current (2012) state-level data from the Departments of Revenue and Employment. The model estimates the long-term equilibrium effects of tax changes on state income and output in aggregate and by industry, state, local, and federal tax revenue, and tax incidence by income group. The recent update is the first comprehensive overhaul of the OTIM since 2001.

The LRO reported on the simulated effects of three “revenue-neutral” tax changes. The first looked at the effects of adopting a 0.4 percent gross-receipts tax like Ohio’s Commercial Activities Tax, offset by an increase in the personal-income-tax standard deduction to $14 thousand for a single person and $28 thousand for a joint return. The second looked at a 0.5 percent gross-receipts tax offset by a ‘homestead property-tax exemption” of $125 thousand and the third at restoring property tax assessments to Real Market Value (the situation prior to the enactment of Measure 47) offset by a ‘homestead exemption’ of  $200 thousand. All three of these changes would almost certainly tend to make Oregon’s state and local tax system, arguably the most progressive/least regressive in the nation, even more progressive. However, I’ll focus on the first of the simulations because its results are probably more reliable than are the other two and, in any case, more defensible, since they are, in fact, pretty straightforward.

The following Table shows the gross effects (in millions of dollars) of a gross-receipts tax, offset by an increase in the standard deduction.

Note that the main effect is to increase economic activity, although not by a lot. This is primarily a result of a redistribution of income to households with higher propensities to spend and, thereby, somewhat increased aggregate demand. Since the model starts where we are now, i.e., with some economic slack, it predicts that the tax changes will result in increased economic activity rather than higher prices.

The distributional consequences of this change are shown in the following graphics. They reflect the design of Oregon’s existing personal income tax system and the effects of a gross-receipts tax under the proposed changes. They are fairly noteworthy.

What’s a gross-receipts tax? Ohio’s commercial activity tax (CAT) is, for example, a tax imposed on gross receipts from all business activities, including most commercially provided services. The CAT applies to most businesses located within the state and also to out-of-state businesses that have ‘minimum contacts’ with the state, but not to non-profit organizations, governmental entities, public utilities, dealers in intangibles, financial institutions, or insurance companies. While not exactly sales taxes (gross-receipts taxes are levied at each stage in a product or service’s value chain creating effective rates for some goods that are many times higher than others), it is not unreasonable to treat gross-receipt taxes as if they were (as does the OTIM) or to presume that their cost will fall entirely to consumers, more or less proportionally to purchases of goods and services that are subject to the tax. The income-tax consequences of increased standard deductions are estimated directly from household tax records, understanding that most high-income taxpayers will continue to itemize rather than take the standard deduction. Hence, like everyone else, they will pay their share of the gross-receipts tax, but would not benefit from the personal-income-tax break (that is also true of low-income households, since they seldom pay income taxes under the status quo).

This is both useful and reliable information. Perhaps the most important point made by the OTIM is that the benefits produced by this tax change are due entirely to the increase in the standard deduction. It also tells us that paying for such a tax cut by gross-receipts tax would not wipe out its gains altogether. Nevertheless, it’s also clear that the net effect would be fairly small.

Moreover, there are policy relevant tax facts that the OTIM doesn’t address. In this case, no estimate is made for the increased administrative cost associated with collecting a new tax. Chances are that the incremental cost would not exceed increased collections, but that is by no means certain (and, in any case, this increase depends on the persistence of a sluggish economy). Furthermore, the model is silent about the dead-weight efficiency costs (compliance and misallocation of resources) a gross-receipts tax would impose upon the economy. Based on Washington’s dissatisfaction with its gross-receipts tax, it is not unreasonable to assume that these are significant, if not necessarily substantial.

Finally, the OTIM is a computational dynamic model, not a stochastic one. It doesn’t tell us what the effect of tax changes will be with respect to the volatility of the economy (in this case almost certainly trivial) or on the volatility of revenues. One thing we know for certain is that revenue volatility is driven primarily by the progressivity of the tax system. This change would make the tax system more progressive, ergo it should increase revenue volatility. That’s not necessarily a bad thing, of course, but it has implications for expenditure smoothing via saving or borrowing that should be addressed prior to a move in this direction.

Tuesday, September 8, 2015

Fred Thompson: The Laboratories of Democracy Are Open; Where Are the Scientists?

Another dispatch from Fred Thompson

Writing in The New York Times, Duke University Professor Aaron Chatterji slams the states’ performance as “laboratories of democracy,” arguing that they look ever less likely to generate the innovative policies we need to address “the grand challenges of the day.”

IMHO Chatterji is talking out of his hat. Clearly, he doesn’t know much about the scope of state policy experiments. Moreover, I think he misunderstands what Louis Brandeis meant by laboratories of democracy.
Frankly, I am interested in how state policies affect outcomes. This kind of learning is relevant to state practice and can often be extrapolated to the federal level. That states adopt different policies and practices makes it possible for us to suss out how they work. For example, much of what we know about the effects of minimum-wage policies comes from the study of interstate variations in minimum-wage levels and their consequences for employment, prices, etc. In fact, my research relies heavily on interstate policy differences.

However, policy learning wasn’t Brandeis’ main concern when he identified the states as laboratories of democracy. His project was the democratic process itself. Like John Dewey, Brandeis wanted to create governing institutions that would promote dialogue and social learning and, thereby, individual intelligence, empathy, and “civic courage,” which he believed could develop only where discussion and responsibility are present in politics and everyday life. He also believed that rigid hierarchies, combined with excess size retarded progress by repressing dialogue and learning. State and local governments were the natural venues for his project. As Oregon Professor Gerry Berk explained:
Like the populists, [Brandeis] stressed the effects of corruption and power on the rise of big business… Like the progressives, [he] stressed the dynamic nature of applied science in modern industry…. The reformer’s task, Brandeis thought, was to weave these strands together into a coherent vision of the future. In this narrative, republican ends (equality, citizenship, and democracy) would be realized through scientific means (experimentation, measurement, and evaluation). But scientific ends (efficiency, invention, and technical mastery) would also be realized by republican means (deliberation, individual development, and honorable rivalry). This was the republican experimentalist solution to the conflict between the populist and progressive positions.
Berk argues that Brandeis’ agenda reached its peak during the 1920s via the associational movement, but with the possible exception of the Department of Agriculture’s system of cooperative extension, that movement is dead and largely forgotten.

The view of the states as policy laboratories, challenged by Chatterji, owes more to journalist David Osborne’s highly publicized 1988 book, Laboratories of Democracy, than to Brandeis. And, indeed, in the era preceding the Great Recession, the states were clearly the main source of public-policy innovation in America. While Washington was mired in gridlock, the states tackled tough problems across a whole range of policy areas. For example, Washington copied the states on welfare and Obama-care is largely Massachusetts’ Romney-care writ large.

The Great Recession hammered the states hard. As a result one very careful observer of state policy, Alan Ehrenhalt, Governing magazine’s senior editor, concluded that: “it may be unrealistic to consider states major innovators in public policy any time in this decade … the ‘laboratories of democracy’ will be closed, or at least inactive, for quite a while.” But, by May 2013, only a few years later, he was forced to eat his words, announcing that: “there is no denying that the past few years have seen extraordinary events in state government…; the states have been innovating. Some of them have been innovating like mad.”

Ehrenhalt cited three major innovations in his article: California’s Proposition 2, which amends the state constitution to require the Governor to deal with revenue volatility by smoothing state spending, making mid-term spending and revenue targets part of the state budget process, requiring the state to set aside revenues each year – for 15 years – to pay down specified state liabilities, and substantially revising the rules governing the state’s rainy day fund; Wisconsin’s rewriting of its labor compact with public employees; and Kansas’s cockeyed decision to phase out the state income tax. But he could have just as easily cited state leadership on gay-marriage, state carbon-tax and marketable emissions rights schemes, or Oregon’s experimentation with weight-use-mile commercial-fuel taxes and GPS monitoring of highway usage. State policy innovation is not simply a matter of cutting taxes and spending, redirection of education funds to private or charter schools, or even repudiating policies handed down from Washington. It is also a matter of boosting minimum wages and using IT to improve service quality at DMV offices and to reduce tax evasion and even over payments. It is widespread and protean.

Brandeis’ ideal may have never been realized, but state level policy experimentation remains alive and well. The important fact remains: one need not like a policy experiment to learn from it.

Friday, August 28, 2015

Kickers, Rainy-Days and Rising Seas

The news that $400 million will be returned by the State of Oregon to taxpayers has aroused me from my hibernating slumber.  Plus, it is going to be a rainy-day so it all just seems too perfect an opportunity to miss to moan about our ridiculous revenue policy in the state.  Fred Thompson and I have written in these pages extensively about the Kicker and its folly.

The kicker system is one-sided - in unexpectedly good revenue years the government has to shed excess revenue, but in unexpectedly bad revenue years the government has no way to make up of the lost revenue.  This system ensures the state will always have to endure painful and grossly inefficient cuts during lean times.  Which is just stupid.

Economies are cyclical, revenues are cyclical too (no matter how you rearrange the tax structure - sales taxes don't help).  What a good manager does (just like any household) is create a system where highly variable revenues don't cause highly variable spending.  A good analogy is a realtor who has an unexpectedly exceptional year - prudence requires stuffing some of that money in a savings account to have ready for those unexpectedly bad years.

So why doesn't Oregon behave the same way?  It is not a crazy thought - many states have rainy-day funds that are very effective in smoothing out fiscal spending.  The kicker should cause us to think about how we manage our budget as a state and our woeful performance on a vast number of metrics regarding public education as well as the condition of our roads should be enough to convince us that what we are doing is not working.

Conveniently, we are also seeing, quite dramatically the effects of a warmer planet.  It is too late to stop the immediate impacts like dramatically rising sea levels (something not inconsequential for a coastal state) but folly not to try and address the root cause.Similarly, we also need to repair and maintain our fragile transportation infrastructure.  Both of these facts seems to provide the perfect opportunity to sell a rainy-day fund and to sell a carbon tax by highlighting the good work that could be done with the revenues.

So I will restate a basic policy proposal I made a few months ago:

1. Convert the kicker into a permanent rainy-day fund for the state.

2. Institute a carbon tax with revenues dedicated to transportation infrastructure (including mass transit) and public education.

3. End the ban on self-service gas to lower the cost of retail gas and help offset the impact of the carbon tax.

Seems like a good referendum, eh?

Friday, July 24, 2015

Income Inequality and Max Lines

CityLab, the Atlantic's blog about urban issues, has a nice set of visualizations about income along fixed-route transit lines inspired by The New Yorker's New York City Subway Project.   Portland is one of the cities featured and here is a look at the line that represents perhaps the most income inequality - mostly because of the Washington Park stop that 'serves' the West Hills (ave. income $146,779) shortly after serving the Old Town neighborhood (ave. income $18,540).

Go there and click on the others for comparison as well as comparing across Atlanta, Chicago and Washington, DC.

Wonder how the installation of fixed-route transit affects gentrification of the neighborhoods served?  Well here is another CityLab article looking at a study that argues that gentrification is a small causal effect.

Thursday, July 23, 2015

Fred Thompson: Must Frankenfoods be Labeled?

Fred Thompson with another contribution:

 I get a lot of posts on Facebook about GMOs (genetically modified organisms). Most call for mandatory labeling of genetically modified foodstuffs. I have been reticent to speak out against it in this forum because, strictly speaking, my objections aren’t based on economic analysis. Indeed, the strictly economic arguments made against mandatory labeling by its opponents look to me to be weak, at best, and, at worst, paternalistic nonsense.

Rather, this looks to me like a free speech issue, which, perhaps, first of all comprehends the right to be silent. Now, I am a reasonable guy. I am willing to restrict first amendment rights to protect the public health and safety. But that willingness is grudging. You must show (provide plausible scientific evidence) that the restriction really would promote public health and safety, which opponents of GMOs cannot do. This is the Constitutional law doctrine of strict scrutiny, which the standard test the courts invoke when the rights enumerated in the first eight amendments to the Constitution are infringed.

OK, you say, but you have a right to be informed about what you buy. The Uniform Commercial Code grants you that right, which ought to override mere commercial speech protections. Not a bad argument, say I. But, then, the question arises, is there a less intrusive (in the sense of encroaching on speech rights) way to satisfy your need to know? And, in this case there is. Sellers of GMO-free foodstuffs can satisfy your need for information by voluntarily labeling their products GMO-free.

Of course, I have some sympathy for the organic farmer who notes that they were there first – that their ilk have been producing GMO-free foods for thousands of years. It’s not their fault that the need for labeling has arisen. Presumably, however, it’s their customers who want this information, not the GMO indifferent, let alone the GMO lovers. Besides, as those who advocate mandatory labeling in this instance, almost certainly, correctly argue, the costs of labeling are trivial. I have heard some advocates of mandatory labeling claim that it is very hard (costly?) to prove a negative, but those who would want an exemption from the labeling requirement under mandatory labeling would probably still bear the cost burden (not the GMO users/producers). The only difference is that, under mandatory labeling, if the labeling regulations were effectively enforced, it’s likely that the GMO-free farmers (and their customers) would also bear the cost of the governmental regulatory apparatus.

Wednesday, July 1, 2015

Type 1, Year 1

Exactly one year ago, my older son was diagnosed with Type 1 Diabetes (T1D).  As with all such diseases, this one came completely out of nowhere.  It started typically, excessive thirst and frequent urination, and ended up with a four-day stay in the hospital.  He was healthy before and remains healthy to this day, in fact we caught it early enough that he was never sick with ketoacidosis, the potentially fatal complication from excessive sugar in the bloodstream.  We were lucky in that respect. 

The reality of a life with T1D is difficult, it means a lifetime of careful management of blood sugars, of always thinking carefully about what you are eating and how to dose the appropriate amount of insulin, of carefully managing the carbohydrate demands of exercising muscle tissues when he plays soccer. But the emotional toll is far worse. A parent never, ever wants to hear that their child has a potentially fatal autoimmune disease and, as an adult you mind immediately wanders to the next 10, 20, 50 years of your child’s life and you feel overwhelmed and panicked.  I spent a week in tears, trying to me strong in front of my son, but feeling crushing panic, sadness and despair inside.  I would take bathroom breaks to go and cry. 

Amazingly the center of strength in the family was my son himself.  Well, I imagine it is not amazing to anyone who has dealt with a similar issue – they know firsthand how amazingly resilient are kids.  He cried exactly once – when he was told the diagnosis – and has never felt sorry for himself save for a couple of moments here and there when the burden of having to deal with diabetes when his friends do not becomes too big a drag.  But from day one he took charge of his own care, began administering his own injections, calculating his carbs and testing his blood sugar.  He has risen to the challenge and his determination not to let it derail him has been an inspiration to us all. 

 In the past year I have never stopped marveling at how well he has dealt with such a life-changing event.  Modern medicine and technology has helped.  He now has a sophisticated insulin pump that attaches directly to his body and allows him to be active and avoid needles, injections and having to carry around too much equipment.  He can even swim with it, which is good because he likes to swim more than anything.  We have, as a family, adjusted to the new reality and are now used to counting carbs, making sure he has his bag with supplies and emergency glucagon and helping with pump changes that occur every three days. 

As an economist I marvel at how difficult this diagnosis must be for families without excellent insurance, stable jobs and local medical expertise.  We are incredibly fortunate to have the time, the resources and the help near at hand.  Something like this makes one appreciate the need for universal access to health insurance.  This is a disease that is unpreventable.  A bad RNG as my son calls it, referring to the random number generator code that determines the bonus prizes he gets in his favorite video game.  [This has led to the discussion of how it is not possible to program true randomness, and whether there is any such thing in the world anyway – but I digress] 

I have learned to be patient with those who don’t know the difference between Type 1 and Type 2 Diabetes, as I was completely ignorant of it prior to my son’s diagnosis as well.  For the record, they are entirely different diseases common only in the fact that they both involve your body’s ability to deal with sugar.  T1D is an auto-immune disease where, for reasons still unknown, your body’s immune system decides to attack the cells in your pancreas that produce insulin – eventually destroying them all. Insulin is the hormone that allows your body to process the sugars in the bloodstream and move them to the cells where they are converted into energy.  The key with T1D is that the body processes the insulin just fine; it just doesn’t make any itself.  My understanding of T2D is that the body commonly does not process insulin effectively so even though the pancreas is making it, the body cannot metabolize the carbohydrates.  Thus, while people with T1D can essentially eat as they normally would, taking insulin injections to match the amount of carbs, people with T2D often have to heavily restrict carb intake.  So yes, my son can have the cake at the birthday party, but thanks for asking. 

I write this all here because after a year of minimal blogging I felt I should explain the inactivity.  My inattention to the blog has a lot to do with time – management of my son’s diabetes at first was very time consuming.  It also has to do with energy, when my son switched to his pump I was waking up three times in the night to check his blood sugar for three months.  But largely it has to do with priorities.  I am chair of the OSU economics department, I am a full-time professor, I have numerous ongoing research projects, I am writing a textbook and I am, most importantly a dad who puts his kids ahead of anything else.  So the blog suffers and I regret it, but not that much.  I keep it alive because I do hope to return to regular blogging someday – it is something I enjoy a lot. 

In the meantime, I hope you can all enjoy the podcast Jeff Alworth and I have begun.  This allows me to take a two-hour lunch break and record a conversation primarily about beer but also about the business and economics of brewing.  Please check it out. 

I thank you all for your support of this blog.

-Patrick Emerson