Fred Thompson: Should Oregon Take the Lead on Carbon Taxes?

There are two kinds of tax buffs: monomaniacs and standpatters. The monomaniacs want to replace existing taxes with some theoretically superior, often untried alternative: land taxes, consumption taxes, or increasingly these days, wealth taxes. The standpatters generally believe that existing taxes, whatever they are, are pretty much OK, although they might allow for some tinkering at the margins. I am pretty much a standpatter.

Carbon taxes, however, simply make too much sense to be ignored, even by a standpatter like me. Taxes are generally nasty. When you tax something, you get less of it. Most of the things we tax are good things: employment, savings, investment, consumption, etc. Taxing them means that we get less of these good things. But Pollution is a bad thing. As Dale Jorgenson, Richard Goettle, Mun Ho, and Peter Wilcoxen explain in their book Double Dividend: Environmental Taxes and Fiscal Reform in the United States, taxing pollution means you get less of the bad stuff and, at the same times, get revenue that can be used to reduce the nastiness of the existing tax system. Moreover, the authors of Double Dividend don’t rest their case on this obvious point, they simulate the effects of environmental taxes on the U.S. economy using a highly plausible model that takes account of the heterogeneity of producers and consumers, as well as expectations about future prices and policies, to show that environmental taxes can be made to produce win-win outcomes for almost everybody in America.

Can we afford a carbon tax that would properly address the climate change problem? Mikhail Golosov, John Hassler, Per Krusell, and Aleh Tsyvinski, in an article forthcoming in Econometrica  “Optimal Taxes on Fossil Fuel in General Equilibrium,” make an equally plausible case that an optimal carbon tax would not seriously threaten economic growth. That, indeed, it would be no higher than the current carbon tax rate in Sweden, for example.

On Thursday, February 6, from 5-7 PM, I’ll be attending a panel discussion on “Should Oregon Take the Lead on Carbon Taxes?” The event is free and will be open to the public at Portland State University, Smith Memorial Student Union, Room 296/298. Participants will include: Michael Armstrong, Senior Sustainability Manager, City of Portland Bureau of Planning and Sustainability, Yoram Bauman, Standup Economist, Carbon Tax Expert, and Former Lecturer, University of Washington, Jackie Dingfelder, Former Oregon State Senator and Portland State University Ph.D. Candidate and Jenny Liu, Assistant Professor of Urban Studies and Planning and Assistant Director, Northwest Economic Research Center, Portland State University. I hope to see you there.

Minimum Wages

This graphic, from the Wall Street Journal, appears today in anticipation of President Obama's likely State of the Union mention tonight.  Here is the same data presented in a handy map:

Oregon and Washington, as you probably know, lead the pack in terms of the minimum wage (something I always remind myself when shelling out $12 for a burger and fries at a brewpub).

The question is: is the minimum wage a good way to address income inequality or poverty?  Most economists would probably agree with the premise that it isn't.  Policies that do a better job of targeting income transfers to low wage workers, like the Earned Income Tax Credit, are much, much more effective at reaching the target population.  But is it a good second-best policy (i.e. one that might not be as efficient but is politically possible and does a reasonable job of doing what we want)?  This is a big and open question and where you'll find the most active debate among economists.

Soccernomics: Income Inequality in US Pro Sports

The Harvard Sports Analysis Collective (yes, there is such a thing) has done an interesting little analysis of sports salaries and finds that the MLS is actually mid pack in terms of one measure of income inequality: the Gini coefficient.

This is interesting in itself - the league with a tight salary cap and legions of low paid employees is actually more unequal than the NBA?  Can it be?  Well, the Gini in this case is a little deceiving.  Fortunately the HSAC has also plotted out the Lorenz curves for each league.

What you see here is that the MLS curve is relatively flat and then has a huge upswing at the end.  Without getting into the details, this tells us that there are lots of relatively equally low-paid players in the MLS and a very few extremely well compensated ones (the Thierry Henris and Clint Dempseys of the league).

The astute econ majors will note that when Lorenz curves cross (as they do for the MLS with the MLB and NFL, for example) that the Gini is not a good relative measure of inequality.  It becomes more subjective.  So we can see from the bottom graph that the top graph is not really informative. But the MLS dynamic is really about how many players earn low five-figure salaries, so when the big stars come in to the league under the designated player rule which allows their outsized salaries not to count against the salary cap.  Whereas in leagues like the NBA the minimum player salary is high enough to maintain an income distribution that is more equal.  Perhaps this is a comment on the relative strength of the players unions?  The MLS players union has the challenge of representing players whose sport does not yet generate the television ratings to generate large revenues and thus significant movement on minimum player salaries seems unlikely for the foreseeable future.  

Oregon December Unemployment falls to 7%

A little voice in my head says 'go for the low hanging fruit' in an attempt to breathe life in to my moribund blog.  So here it is, my pithy take on yesterday's jobs report from the State of Oregon.

Like the national picture, the unemployment rate fell, in Oregon's case to 7%.   Unlike the national picture, it did so on very strong job creation: Oregon added a seasonally adjusted 4,400 jobs in December and a revised 4,300 in November.

My take is that the state is doing a very good job pulling itself out of the recession even while construction still lags.  What then could put a damper on? Well a severe drought would not help, nor does continuing trouble at the Port of Portland.  Still, the long slog out of the pit continues.

Okay, so maybe it is not very pithy after all...

Economics Instructor Needed

You know things are bad with your blog when you mother asks you if everything is okay because you haven't posted in over a month.  Yes mom, I am fine but crazy busy.  The title of the post is but one reason why.  My apologies to my legion many handful couple of devoted fans mother for my lack of attention to the blog.  I have not entirely given up but adding the department chair duties and authoring a textbook to my normal workload has taken a toll.

Anyway, to the news at hand:

The Economics department at Oregon State is in need of a replacement instructor for the current term as well as for Spring and Summer terms as well.  Minimum qualification is a Master's degree in economics.

You can view the job posting and apply here, and you are welcome to contact me or the department office for further information.

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.  

Picture of the Day: Head Above Water

From the Economist:

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.

Jobs!

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.  

Nelson Mandela, 1918 - 2013

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

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):

Oregon's pupil-teacher ratio 

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.

Soccernomics: Timbers are Third Most Valuable Franchise, Who is Laughing Now?

There was some predictable guffawing round about the time Merritt Paulson was contemplating selling the Beavers baseball team and trying to get the city on board with the plan to convert Civic Stadium to a soccer-specific facility.  Soccer, they said, is never going to make it in America, what a stupid investment.

I defended him and the deal at the time and I have never regretted it.  But I was especially offended at the characterization of Paulson as a rich-boy rube that is going to take a bath on the MLS deal and take the city down with him.  Well, it has been a couple of years so let's take a look at where this whole cockamamy MLS-in-Portland thingy stands.

Forbes yesterday released its list of the most valuable MLS franchises and, yes, the predictable ones are at the top, Seattle and Los Angeles, but look which team is number 3:

The Timbers had an estimated revenue of $39 million in 2012 on operating income of $9.4 million.  If memory serves Paulson paid $20 million for the franchise fee for the Timbers, now the franchise is values at $141 million and on Tuesday MLS announced the newest franchise will be Orlando City who will pay $70 million.    Seems like a pretty shrewd investment - the Timbers could probably be easily sold for nine figures today - just four short years and a five fold return on investment (okay, there was a lot of other money spent on the stadium and such but still...).

Oh and on the field?  The Timbers are playing in the Western Conference Finals for a spot in then MLS cup on Sunday.  Go Timbers!

Picture of the Day: Life Expectancy

Form the OECD via the Wall Street Journal:

The US is a year and a half below the OECD average.  Given how much we spend per-capita on health care, this is surprising, but when you thing about our private system on top of an ever increasing unequal distribution of income, perhaps not.  Plus, we are fat and eat a lot of bad food.

Anyway, the really shocking aspect of this is the abysmal situation in South Africa - 13 years below even India.  

Oregon October Jobs Numbers

Oregon lost 500 jobs on a seasonally adjusted basis after posting two very solid monthly gains 3,300 in September and 5,600 in August.  Government employment continues to drag on the overall recovery with government jobs declining by 1,000.

The Oregon unemployment rate fell to 7.7% (there was a loss of over 9,000 from the labor force) which is only slightly above the national rate of 7.3%.

So, not much new to say, Oregon has had a sustained recovery for quite a while now but the recovery can't seem to get out of second gear.  The sequester, dysfunctional federal government and continues weakness in Europe are not helping.  But at least the trehttp://www.olmis.org/pubs/pressrel/1113.pdfnd is upward....

Commuting Alone: The Answer

Last week I posted a graphic from the Wall Street Journal about how much commuting alone has increased in the US since 1980.  This struck me as at odds with the narrative of the new urbanism and the reclamation of urban cores in the 21st century.   I lamented not seeing the 2000 numbers and posited that the big move in the graph was more about 1980s and 1990s sprawl.

Well, fortunately, friend of the blog Josh Lehner looked it up and...sure enough the big jump was in the 80s and 90s.  In fact, the public transportation percentage has actually increased since 2000 as has the telecommuters.

So now you know.  Thanks Josh.

Econ Careers: Mergers and Acquisitions

This AP story, picked up by OregonLive, made me think of the oft asked question from prospective Econ majors: "what can I do with an econ degree?"  The story is about how the US Dept. of Justice has reversed course and is now ready to give its blessing to the US Airways - American Airlines merger:

The Justice Department says it has reached an agreement to allow American Airlines and US Airways to merge, creating the world's biggest airline.

The agreement requires the airlines to scale back the size of the merger at Washington's Reagan National Airport and in other big cities.

In August, the government sued to block the merger, saying it would restrict competition and drive up prices for consumers on hundreds of routes around the country.

The airlines have said their deal would increase competition by creating another big competitor to United Airlines and Delta Air Lines, which grew through recent mergers.

The settlement reached Tuesday would require approval by a federal judge in Washington. It would require American and US Airways to give up takeoff and landing rights or slots at Reagan National and New York's LaGuardia Airport and gates at airports in Boston, Chicago, Los Angeles, Dallas and Miami to low-cost carriers to offset the impact of the merger.

What happened in the interim? Well, a lot of economists made a lot of money.  You see every big M&A gets scrutinized by the government and a lot of economists employed by the DOJ analyze the impact of the proposed deal on consumers and the companies themselves hire big economics consulting firms like NERA to do their own analysis.

In the end lots of economists and lawyers get involved and try to hash out a compromise.  Some times they can't and they try and hash it out in court, but usually this happens: the economists and lawyers agree to a plan that satisfies the DOJ that there will not be undue impacts on consumers.

Clearly in this case there DOJ was concerned that the merger would leave quite a few markets with too little competition and so a remedy was agreed on.

The economic consulting business is booming and the salaries are fantastic - something to think about if you are considering the Econ major.

Picture of the Day: Commuting Alone in a Car

The Wall Street Journal has a fascinating look at commuting trends.  Here is the graphic that shows how much driving alone has increased since 1980 and how much public transit has fallen (despite all the fixed rail investments during this period).  But the really striking decline is in carpooling - I wonder why?:

I wish, however, this graph was done for the period 2000 to 2012 as well.  I would like to know how much is 80s and 90s sprawl and how true is the theme of new urbanism  in reality.  Anyone want to link to such data?

Fred Thompson: Is your Property Tax Bill too High?

NOTE: I am in Brazil again for a short time to put a bow on the dual research projects I have going here - so once again the blog gets short shrift.  Luckily, Fred Thompson is back to save the day...

Recently our property-tax bills arrived. Many Oregonians were stunned by the increase from last year. There were two reasons for this year’s big jumps in property taxes, one legitimate, the other arguably less so. The legitimate reason is that a lot of homeowners (nearly 40 percent in Portland) are subject to Measure 5 compression. (Measure 5 compression sets in where combined statutory property tax rates for general government exceed 1 percent and/or statutory tax-rates for education exceed .5 percent and the property’s assessment ratio ≥ Measure 5 limit/STR.) Where that is the case, property taxes vary directly with real market values. If you’re subject to Measure 5 compression and the value of your home went up fifteen percent this year, your property taxes probably did too. Sorry about that! But your property tax bill is probably still a lot less than it would be if you were paying the statutory rate on your property.

The bad reason lies in how some county assessors have interpreted Measure 50. Among other things, Measure 50 stipulates that your assessment will be the market value of your property or 103 percent of last year’s assessment, whichever is less. You all know what has happened to home prices in Oregon over the last five years. According to the Case-Shiller home price index, median home prices maxed out at 187 in July 2007, dropped to a low of 130 in March 2012, and have subsequently recovered to 155 in June 2013. In many Oregon communities, the fall in house prices led to reductions in assessments.

Raw Case-Shiller Home Price Numbers 

For example, let’s say that in 2008 your home’s market value was $155,000 and its Measure 50 assessment was $125,000 and in 2009 its value dropped to $130,000. Consequently, your Measure 50 assessment would have increased to $128,750 and your tax bill would have gone up approximately three percent. Now let’s say that its value dropped to $125,000 in 2010 and remained there for three years. In that case, your tax bill would have gone down a bit in 2010 and stayed put in 2011 and 2012. Finally, let’s say your home’s value increased back to $145,000 this year. You would expect, given Measure 50, your assessment would go up three percent from $125,000 back to $128,750 and, therefore, your tax bill would too. That’s what the Oregon constitution says: “For tax years beginning after July 1, 1997, the property’s maximum assessed value shall not increase by more than three percent from the previous tax year.”

However, some assessors interpret the Constitution to mean that the maximum allowable assessment continued to compound at the rate of three percent per annum even when declining market values caused actual assessments to dip below that level. In which case, they reassessed your home to $144,900 and your tax bill went up more than 15 percent this year.

This outcome violates the logic of Measure 5, which sought to stabilize tax bills, fairness, since it penalizes property taxpayers with the highest effective property-tax rates, and the plain language of the law. It’s just not right.