Tuesday, December 17, 2013

Oregon's Recovery Continued in November: Unemployment Falls to 7.3%

Oregon's unemployment fell to 7.3% in November on the strength of 5,400 added jobs (on a seasonally adjusted basis). This drop in the unemployment rate occurred even with the labor force growing.  As the two graphs above demonstrate, we have been in steady recovery mode for an extended period and though we still have some way to go, we are doing well.

So what is the bad news?  Hard to say, the continued weakness in Europe is still a drag be we have moved away from outright crisis there.  Asia appears to have stabilized as well at least for now but the booming BRICS have cooled off.  All this suggests to me both continued slow growth and a evening out at something less than the pre-crash level of employment.  

Wednesday, December 11, 2013

Fred Thompson: The Latest Tax Plan

Fred Thompson checks in again:

Recently, two very able young legislators, Sen. Mark Hass and Rep. Tobias Read, authored a blueprint for state/local tax reform in Oregon. This is quite remarkable. Who can remember a major reform emanating from the sapless branch of our state government, not forced upon it by popular initiative?

The centerpiece of Hass-Read proposal is 5 percent sales tax combined with a substantial cut in personal income tax rates. They claim that adoption of their proposal would create 50,000 new jobs and raise nearly $500 million a year in net tax revenue. Frankly, I believe that the need for and the benefits claimed for this proposal are greatly over estimated. But that isn’t the subject of this blog. There is no need to beat a dead horse; the response to the main part of the Hass-Read proposal has been overwhelmingly negative, albeit largely uninformed. Rather, I want to speak to one of its elements, which has been given a generally positive reception, the $50,000 homestead exemption.

Chuck Sheketoff, executive director of the Oregon Center for Public Policy, for example, claims that Hass and Read “rightly recognize that property taxes take a disproportionate share of income from low- and middle-income households. So their plan includes a long sought-after homestead exemption to lower the property taxes of those with the least ability to pay them.” This claim reflects two very serious misunderstandings: first, that property taxes “take a disproportionate share of income from low- and middle-income households” and, second, that a homestead exemption is a good way to deal with the perceived inequities of property taxes.

No matter how you measure income, if property owners pay the tax, property taxes are inherently progressive. Real property ownership is much more unequally distributed than income. Ten percent of property owners (mostly corporations, which are owned almost entirely by the top quintile of taxpaying households and well over half by the top 1 percent) own 58 percent of the taxable property in Oregon by value (versus 35 percent of taxable personal income). The bottom 10 percent of those who own any property at all, own less than 1 percent of the total property value. Moreover, forty-plus percent of potential taxpayers in Oregon own no taxable property; very, very few have no income (think Phoebe and Joey from Friends rather than June and Ward from Leave It to Beaver).

In response, Chuck observes that “property taxes are not based on ability to pay – thus they are regressive. Two homeowners with homes of the same value and same property taxes … where the homeowners have different incomes make this clear. Exempting the first $50,000 of assessed value of property that is taxpayer’s owner occupied principal dwelling as proposed … would be good for low- and middle-income households. Who says it wouldn't?”

Chuck is clearly confusing horizontal and vertical equity. Tax progressivity is concerned with vertical equity, i.e., the income elasticity of tax payments. Where property taxes are concerned the best evidence is that the elasticity is > 1 (progressive). That the correlation between income (ability to pay) and tax payments is imperfect is a matter of horizontal equity. (Property taxes do poorly on that measure where AGI is the independent variable; they do about as well as income taxes where the Haig-Simons income definition – income equals household consumption plus the change in its net assets, the definition preferred by economists – is used; and somewhat better using permanent or lifetime income. In other words, these definitions affect the degree of covariance of income and property tax payments, but not the slope of the logged relationship, which measures vertical equity.) Besides, given the fact pattern Chuck cites, exempting the first $50,000 of assessed value of property would not affect the progressivity of the property tax. (The proposal could have a positive effect on the progressivity of the property tax, overall. I think there is a good that it would. However, you really cannot tell without running the numbers).

Ultimately, the progressivity of the property tax depends upon its incidence, which is debated, and not just the distribution of property ownership. According to the Institute for Taxation and Economic Policy, the bottom income quintile in Oregon pay an average of 4.4 percent of their income in property taxes while the top 1 percent pay only 1.9 percent. ITEP is probably wrong about that. In the first place they assume more of the tax is shifted forward to consumers than do most economists. Second, they ignore most of the property taxes paid by businesses and therefore business owners. I have a great deal of respect for ITEP's "Who Pays?" They have taken on a question nearly everyone else has ducked and I think their relative state rankings are probably pretty much spot on.

But the key issue here is whether property taxes are paid by property owners or by consumers/renters. ITEP assumes that a substantial portion of the tax is shifted forward to renters/consumers. Most of my colleagues do not agree. That doesn't mean ITEP is wrong, but on this point that they are wrong seems more likely than not. As for my second point, given that they were looking at all 50 states using Census and US tax data, I don't see how they had any alternative, but so far as we are talking about a specific state and tax, it’s not right.

There are inequities associated with property taxes, especially where homeowners have low or fixed incomes, cannot deduct their property tax payments from their income taxes, and do not fold their property tax payments into their mortgage payments. But many of the objections to property taxes go to their inconvenience (e.g., property wealth is not easily convertible into disposable income) or sound like special pleading (home ownership is different from owning other assets). As an economist, I would insist that anyone, who owns an asset, can convert it to cash, either by selling it or borrowing against it. I am not persuaded by the claim that if you sell your home, you won't have anywhere to live. If you take the standard deduction on your personal income tax, you are probably financially better off selling and renting (for a business that's comparable to a sale and lease back arrangement); if not, a reverse mortgage is currently a very attractive option, but there are a panoply of mortgage-backed, tax-deductible debt instruments available to property owners.

As for being different from other assets, homes are, but that is an argument for, not against, property taxes. Where residential property is concerned, the implicit cash flow accruing to homeowners, in the form of rents avoided, is exempt from income taxation. This exemption was vouchsafed when the personal income tax was established, in part, because state and local governments had already claimed the property tax base, by subjecting the returns to property ownership, and generally those returns alone, to a wealth tax (in this particular case it is easier to measure wealth, property value, than income, rents avoided, although they pretty much amount to the same thing). Fortunately, nearly everyone concerned avoided the double taxation that would have resulted if the feds had taxed the returns to real property or states/local governments had subjected financial assets to property taxes. The resulting division of tax powers is arguably one of the glories of America’s unique system of federalism.

So, how would I deal with the inequities of the property tax? Rather than exempting the first $50,000 of assessed value of property across the board, I’d address the fairness problem directly by linking the benefit to the personal income tax, which would make it a lot easier to calibrate its distributional properties to the precise ends sought. For example, the state could grant a tax credit equal to $750 (indexed for inflation) multiplied by their property tax assessment ratio (TAV/RMV) to homeowners who take the standard deduction on their personal income tax. Not only would this be targeted at the folks most unfairly treated by the property tax and have better distributional consequences than an across-the-board exemption, it would shift fiscal responsibility to the state where it belongs rather than further depriving local governments of resources.

Friday, December 6, 2013


Yes, a very good jobs report and, yes, still some way to go.  The US Unemployment rate dropped to 7% on the back of 203,000 new jobs created.  There is not much to dislike about this report, only hope that we can finally sustain the momentum.

Still, this graph from The New York Times Economix blog shows how much we lost and how slow we have been to recover…and were aren't there yet.

But even more interesting is the appearance our favorite state economist, Josh Lehner, makes again in the NYT blog for this fascinating graph which suggests that while our recovery might be slow compared to past US recessions, compared to other recoveries from crises, we are not doing too bad at all.

Go Josh!  In fact, bypass the NYTimes in general and go straight to Josh's post with has it all in three beautiful graphs.  

Thursday, December 5, 2013

Nelson Mandela, 1918 - 2013

Extraordinary man. Made the world a far better place.  May he rest in peace.

Monday, December 2, 2013

Oregon's Class Size Problem

As noted by The Oregonian's Betsy Hammond: "Oregon's student-teacher ratios, long some of the highest in the nation, rose to dramatic new highs of about 22 students per teacher in 2012-13, the state reported last week."  Here is the accompanying graphic (pity there are not national averages to compare):

But does this matter?  As with most things in social science the issue will never be entirely settled, but the weight of the evidence is solidly in the 'yes' column, something on which I have written extensively.

In fact the metric I think is probably the most appropriate that is directly ties to funding is the contact hours per student, which is the combination of school days and hours divided by class size.  Both of which appear to be important empirically.