Tuesday, May 26, 2015

Fred Thompson: The Political Economy of Oregon’s ‘Clean-Fuels’ Program

Another dispatch from Fred Thompson:

A quick Google search suggests that the phrase “politics makes for strange bedfellows” first appeared in an ancient Sanskrit text and was probably in fairly wide usage when Charles Dudley Warner in My Summer in the Garden (1870) punned “raspberries are sprawled all over the strawberry-beds: so true is it that politics makes strange bedfellows.

Economics has its own special version of this trope, which goes to an explanation of the shape and kind of government regulation of business, especially at state and local levels: bootleggers-and-Baptists coalitions. In the canonical example, bootleggers and Baptists partnered to provide the support needed to keep the Deep South legally dry after the repeal of the Eighteenth Amendment in 1933. The Baptists were ‘agin drinkin’ and the bootleggers needed the states to protect them from legal competition to stay in business. Moreover, both found it easy to demonize their opponents, the liquor lobby.

Nowadays the most common example of this phenomenon occurs where industry partners with environmentalists to obtain a special competitive advantage. Here in Oregon, it is perhaps best exemplified by the so-called ‘Clean-Fuels Program,’ which joins the environmentalist good guys with ‘local clean fuels producers’ against out-of-state fossil fuel interests.

The best thing about this Program is that it will raise motor fuel costs. Clearly the way to discourage carbon emissions is to make them more expensive, which the Clean Fuels Program does, albeit in a very roundabout way.

Beyond increasing prices at the pump, the efficacy of Oregon’s Clean Fuels Program depends upon the aggressive deployment of biomass on the assumption that the use of biofuels is carbon-neutral, that plants pull CO2 back from the air when they grow, offsetting the carbon emitted from burning them as fuel, which is all true. But diverting a cornfield or a forest to produce energy means not using it to do something else, like make food or store carbon. Consequently, using biomass to produce energy could change land uses, food supply and ecosystems without actually affecting climate change.

Supporters of the Clean Fuels Program correctly note that it does not require any deployment of biomass, nor does it score fuels with the assumption that all bio-fuels are carbon neutral. As the Oregon Environmental Council explains: “The Clean Fuels Program ... gives the oil industry options to either blend low-carbon biofuels or purchase credits from clean fuel providers for fuels ... propane, natural gas, sustainable biofuels, biogas and electricity,” which on the face of it sounds like a pretty smart arrangement,

However, whether it is or not depends on the carbon scoring. Unfortunately, the scoring used by DEQ (which they wanted to change but were prevented from doing so) ignores the ecological opportunity cost of alternative fuels.

It is also the case that the local producers supporting this program are almost entirely in the biofuels/biomass business. Moreover, they strongly opposed the DEQ’s rescoring to better account for ecological opportunity costs. Consequently, most of the purported gains from the Clean Fuels Program come from substituting biofuels for fossil fuels. Scoring of electricity is equally biased since it ignores the fact that, at the margin, electricity is produced by burning fossil fuels. None of the other options available are currently competitive with gasoline/diesel fuel, which is a pity.

IMHO, Oregon, like BC, needs a carbon tax, but getting there is far more likely via substitution of motor fuel taxes. In Oregon a portion of taxes collected on motor fuels is earmarked for county roads and municipal streets and thoroughfares, but that proportion has been cutback to protect state-responsibility highways, and municipalities and counties have very few degrees of freedom with respect to increasing revenue. Clackamas County, for example, has 1400 miles of county roads, they have enough money to budget for about half of the routine maintenance needed to keep to roads from getting worse. It costs about 25K/mile to chip coat the roads to fill fissures, which, if left open, allow the roads quickly to deteriorate. A badly deteriorated road can cost as much as $400K/mile to rebuild. Only 20% of the roads are in good or better condition. The rest are in fair to poor condition.

The legislative leadership had worked out a compromise that might have been practicable – a substantial increase in motor-fuel-taxes, combined with indexing it to inflation, and further study of applying the weight-use-mile tax to personal vehicles (which is now monitored on commercial vehicles using GPS devices), in return for allowing the so-called ‘clean-fuels’ law to lapse. Then the young Turks in the D party rammed thru an extension of the ‘clean fuels bill’ in the face of 100 percent R opposition and that of a handful of Ds, on the assumption that the Rs would have to hold their noses and pass an increase in motor fuels taxes anyway, that their allies at the municipal and county levels as well the Association of Oregon Industries would demand it. Right now the Rs are hanging tough and refusing to support an increase unless the Ds repeal the ‘clean-fuels’ bill. We'll see how that turns out. In theory, Ds need only one R defection in the Oregon House to get what they want and there are Rs in Portland metro who should cave. I say, in theory, because there are also Ds who are predisposed to defect in the other direction, folks who would rather have the clean-fuels bill than a transportation package.

I don’t doubt that the Oregon Economic Council are the good guys. But this is not good legislation and the OEC’s business allies aren’t necessarily good guys either (for that matter, neither are a lot of the supporters of a transportation package). The question isn’t really who to get in bed with, but what’s the greater good for Oregonians.

Tuesday, May 19, 2015

Oregon April Unemployment Falls to 5.2% on 7,200 New Jobs

Wow.  Another stellar jobs report out of Salem.  7,200 new jobs in April on a seasonally-adjusted basis led by health care, manufacturing, and professional and business services. Yay, finally, no more cheerleading about the great growth in leisure and hospitality.

[Ed. note: use of the serial or 'Oxford' comma, discouraged by my grade school teachers, has apparently become the norm based on the bridges comma worksheet my third grader brought home yesterday.  I shall adjust the Oregon Economics Blog style guide accordingly.  However, old habits die hard and let's just say this blog is 'lightly' edited, so don't expect me to be to beholden to all the latest fads in grammar!]

Where was I?  Oh, yes, jobs = good.  The April unemployment rate is now down to pre-recession numbers matching the rate of July 2007.

So what of the future?  Well, Oregon, which relies heavily on trade is still benefitting from the strong link with Asia and the forecast is brightening in the short and medium run (though I am still a long run skeptic, but in long-run I mean a time period I am unlikely to see)  Which leads us to the TPP.  I am in favor. Partly this can be explained by my being an economist and understanding the fundamental gains from trade that benefit all participants.  But I am also an international development economist that believes that the future of growth and prosperity in the lower income world comes from economic integration with the high income world.

Thursday, May 14, 2015

Time to Sound the Drum for a Rainy Day Fund...and a Few Other Things

The latest Oregon budget forecast predicts a $473 million kicker refund to Oregon taxpayers.   This when Oregon's economy is going strong and we could finally start to address things like having the lowest high school graduation rate in the country:

This blog has sounded off about the kicker many times before, with both and Fred Thompson and I arguing for its demise, and in it's place a permanent and significant rainy day fund to stabilize state spending.  Doing so would allows us to better achieve things like protect and enhance our transportation infrastructure that at serious risk of significant deterioration.

If I were governor, this would be my agenda:

1.  A bill that would convert the kicker to a rainy day fund.

2. A bill that instituted a carbon tax for all carbon fuels, including gas, and used proceeds to fund transportation infrastructure with rebates for low-income households. Included in this bill would be a repeal of the ban on self-service gas to offset the increased price at the pump.

3. A budget that significantly increased funding for K-12 education dedicated to class size reduction and an increase in contact hours.

4. I would also increase funding for public research universities (conflict of interest alert!).

To me, these are the three pillars of a sound long-term state economy: solid transportation infrastructure, an talented and educated workforce, and an active and innovative research and development infrastructure.

Tuesday, May 12, 2015

Fred Thompson: Oregon’s State and Local tax System Is Exceptional

Another contribution from Fred Thompson:

Previous blogs have focused on Oregon’s personal income taxes, property taxes, the apportionment system for business income, the weight-use-mile tax, now paid only by commercial vehicles, but under study for personal vehicles as well, local user fees, and the lack of a sales tax, all of which make Oregon weird and semi-wonderful.

Most people who pay attention to tax matters know that Oregon’s tax eccentricities have given it the nation’s most progressive state and local revenue system and one of its more expansive, that Oregon’s economic growth over the past fifteen years has outstripped the nation by a wide margin, and that its overall tax/fee burden over the same period has been relatively restrained. It is less commonly known that the administrative costs of our tax system are also among the lowest per-dollar-collected in the county, but that is also true, as is that fact that more of our state and local tax payments are offset by the IRS than in any other state. This post will note a couple of our fiscal idiosyncrasies, which aren’t so well known, but which probably deserve greater attention than they get.

Oregon is one of a handful of states with a death tax (estate and/or inheritance tax)

Our estate tax generates approximately $200 million each biennium, approximately 1.4 percent of General Fund revenues. It is tied to the federal estate tax and levied on the net assets (all real and tangible property in Oregon plus stocks, bonds, business interests, retirement plans, IRAs, etc. regardless of their location) of deceased Oregonians (residents) in excess of $1 million (the feds exclude $3.5 million). The state rate is progressive and tops out at 16 percent. We also have an inheritance tax, which is levied on the real/tangible property located in Oregon formerly owned by deceased non-residents. It doesn’t generate much revenue (less than $40 million per biennium). In both cases, it is suspected that the tax gap (the difference between legal liabilities and actual payments) is quite large, but at present we have no way of knowing this for sure.

The estate tax is one of the most progressive aspects of our tax system. If we are serious about this tax, we must make an effort to understand it better, perhaps in cooperation with the handful of other states that collect this tax.

At the other extreme, Oregon’s most regressive and discriminatory tax by far is state-sponsored gambling. We know that most of the state government’s gaming revenue (more than $1 billion in the 2015-17 budget cycle) comes from about 100,000 or so problem gamblers.  While there is relatively little Oregon-specific information on the identity of these folks, evidence from elsewhere suggests that they are disproportionately poor and ill educated. It is also the case that it costs the state almost as much to collect this revenue (not including the payout to winners) as the state nets, which is damn inefficient.