Category Archives: State & Local Finance

State Budgets Aren’t Accounting for Obamacare Repeal

Source: Mattie Quinn, Governing, January 23, 2017

In planning their finances for the year, governors are counting on health care to remain the same. But if it doesn’t, states could suddenly be on the hook for billions of dollars.
Related:
State Budgets Will be Challenged Under House Republican ACA Plan
Source: Lynn Hume, Bond Buyer, February 17, 2017
(subscription required)
The finances of states and health care providers could be hurt by the House Republican plan for repealing and replacing the Affordable Care Act, Fitch Ratings and S&P Global Ratings said in recent reports.

Paying the State Use Tax: Is a “Nudge” Enough?

Source: John E. Anderson, Public Finance Review, Vol 45 Issue 2, 2017
(subscription required)

From the abstract:
To improve use tax compliance, twenty-seven states have added a line to their income tax returns where taxpayers can report taxable sales. This article reports results of a behavioral study of a postcard “nudge” sent to income tax filers in one of those states, Nebraska, to encourage self-reporting of liability. The research question is whether the informational nudge was sufficient to alter self-reporting behavior. Data indicate that the nudge more than doubled the likelihood of use tax reporting and nearly doubled the amount of revenue collected, but the rate of use tax reporting remains extremely low. Probit models reveal that use tax reporting rises with income at a decreasing rate. Selection models are also estimated because of positive selection bias in the selection of the treatment group. Taken together, the results indicate that an informational nudge is not likely to be sufficient to substantially change use tax reporting behavior.

State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data

Source: Xavier Giroud, Joshua D. Rauh, US Census Bureau Center for Economic Studies Paper No. CES-WP-17-02, January 11, 2017

From the abstract:
Using Census microdata on multi-state firms, we estimate the impact of state taxes on business activity. For C corporations, employment and the number of establishments have corporate tax elasticities of -0.4, and do not vary with changes in personal tax rates. Pass-through entity activities show tax elasticities of -0.2 to -0.3 with respect to personal tax rates, and are invariant with respect to corporate tax rates. Reallocation of productive resources to other states drives around half the effect. Capital shows similar patterns but is 36% less elastic than labor. The responses are strongest for firms in tradable and footloose industries.

Softening Investment Expectations Signal Accelerating Budget Pressure from Pensions

Source: Thomas Aaron, Timothy Blake, Moody’s, Sector InDepth, State and Local Government – US, February 16, 2017
(subscription required)

State and local governments have held down annual pension contributions with high assumed discount rates, which in turn reflect high assumed returns on their pension assets. Generally, the higher the assumed discount rate, the lower the annual contribution requirement. Facing investment conditions that increasingly suggest lower future returns, however, the California Public Employees’ Retirement System (CalPERS, Aa2 stable) and many of its national peers are gradually lowering their assumed discount rates. Such moves will generally result in governments making higher pension contributions, incrementally improving their discipline in funding their pension promises earlier in time. But these higher contributions also mean that budgetary pressure from pensions, already on the rise in many cases, is accelerating. Meanwhile, pension investment volatility risk remains high.

State Fiscal Support for Higher Education: Fiscal Year 2016-2017

Source: Center for the Study of Education Policy at Illinois State University and the State Higher Education Executive Officers, February 2017

From the press release:
This year’s Grapevine survey tentatively points to a modest national 3.4% increase in state support for higher education from fiscal year 2015-16 (FY16) to fiscal year 2016-17 (FY17), though an exact figure awaits a budget resolution in Illinois. There, legislators enacted only a partial FY17 budget that funded higher education through December 2016, and an agreement for augmenting those funds through the rest of the fiscal year has not yet been reached. This continues an ongoing budget impasse that left Illinois without a state budget in FY16, when funding for higher education was also limited to partial stopgap monies. In all, Illinois higher education funding remains sharply curtailed. Stopgap monies appropriated in FY16 amounted to only 17% of funding allocated in fiscal year 2014-15 (FY15), the last fiscal year for which Illinois enacted a full state budget. Stopgap monies allocated so far in FY17, although an increase over the partial funding amount appropriated in FY16, amount to only 29% of FY15 funding.

In the remaining 49 states, FY17 fiscal support for higher education represent an overall one-year increase of 2.7% from FY16: 39 states registered increases ranging from 0.2% to 10.5%, and 10 reported decreases ranging from 0.4% to 8.8%. The 2.7% increase for these 49 states is lower than the 4.1% increase registered from FY15 to FY16 in last year’s survey. Slumping energy prices appear to have taken a toll in at least some states, including Alaska, Louisiana, New Mexico, Oklahoma, and Wyoming—states with a high economic stake in the oil and gas sector and that reported the largest declines in higher education funding between FY16 and FY17.

Cost Sharing Among State Defined Benefit Pension Plans: Approaches to managing risk and cost uncertainty

Source: Greg Mennis, Pew Charitable Trusts, January 2017

From the overview:
A number of states with defined benefit, or traditional, pension plans have enacted policies that retain the core elements of the plans while sharing the risk of cost increases—as well as potential gains—between public employees and employers. These mechanisms for sharing costs can help reduce volatility and investment uncertainty while preserving the ability to pay promised pension benefits.

For most public sector defined benefit (DB) plans, the cost of providing these benefits fluctuates, depending on investment performance, inflation, salary growth, life spans, and workforce demographics. Cost volatility can strain state or local budgets or lead to underfunded pension plans if policymakers have not provided sufficient contributions.

In response to the budget strains and funding challenges, some states have looked to alternatives to traditional pensions, including defined contribution, cash balance, and hybrid plans. Still, most state and local governments continue to offer DB plans, though many now use cost-sharing mechanisms to reduce budget uncertainty. Employees continue to receive guaranteed lifetime benefits and in some cases see gains, such as higher cost of living adjustments (COLAs), from strong investment returns….

….This map and table highlight strategies used by large state pension plans to share cost increases with members. Looking at the benefits offered to new workers in 102 primary state retirement plans, Pew’s public sector retirement systems project identified 28 plans in 16 states that use formal cost-sharing mechanisms to manage risk….

The Economic Effects of Public Financing: Evidence from Municipal Bond Ratings Recalibration

Source: Manuel Adelino, Igor Cunha, Miguel A. Ferreira, Centre for Economic Policy Research (CEPR), CEPR Discussion Paper No. DP11811, January 2017
(subscription required)

From the abstract:
We show that municipalities’ financial constraints can have a significant impact on local employment and growth. We identify these effects by exploiting exogenous upgrades in U.S. municipal bond ratings caused by Moody’s recalibration of its ratings scale in 2010. We find that local governments increase expenditures because their debt capacity expands following a rating upgrade. These expenditures have an estimated local income multiplier of 1.9 and a cost per job of $20,000 per year. Our findings suggest that debt-financed increases in government spending can improve economic conditions during recessions.

What everyone should know about their state’s budget

Source: Urban Institute, 2017
[tool was funded by the Laura and John Arnold Foundation]

State and local governments educate schoolchildren, train the future workforce, care for the sick and elderly, build roads, patrol neighborhoods, extinguish fires, and maintain parks. In short, they’re pretty important. But few Americans understand where their state and local tax dollars go and to what effect. It’s not just the amount of money spent that matters, it’s why that money is spent the way it is.

Through this web tool, we aim to fill that knowledge gap. The tool allows users to get under the hood of their government and understand not only how much a state spends but also what drives that spending.

To do this, we apply a basic framework to all major areas of government spending. The framework says that state spending per capita is both a function of how many people receive a service and how much that service costs the state for each recipient. ….

…In this tool, you’ll see the spending per capita breakdown for all states and the District of Columbia across all major functional categories. It allows you to see how each state ranks, and you can sort by any factor you choose. (One frequent outlier is DC; though included in the rankings, it often functions more like a city than a state) We’ve included some annotations to guide you along the way. By exploring the tool, you’ll gain a sense of how much each state spends on any given area and why states spend what they do. ….

Fairness Matters: A Chart Book on Who Pays State and Local Taxes

Source: Institute on Taxation and Economic Policy (ITEP), 2017

From the overview:
There is significant room for improvement in state and local tax codes. Income tax laws are filled with top-heavy exemptions and deductions. Sales tax bases are too narrow and need updating. And overall tax collections are often inadequate in the short-run and unsustainable in the long-run. In this light, the growing interest in tax reform among state lawmakers across the country is welcome news.

Too often, however, would-be tax reformers have proposed policy changes that would worsen one of the most undesirable features of state and local tax systems: their lopsided impact on taxpayers at varying income levels. Nationwide, the bottom 20 percent of earners pay 10.9 percent of their income in state and local taxes each year. Middle-income families pay a slightly lower 9.4 percent average rate. But the top 1 percent of earners pay just 5.4 percent of their income in such taxes. This is the definition of regressive, upside-down tax policy.

State and local tax systems add to the nation’s growing income inequality problem when they capture a greater share of income from low- or moderate-income taxpayers. Further, state tax systems that ask the most of families with the least are not well-suited to generate the revenues needed to fund schools, health care, infrastructure, and other public services that are crucial to building thriving communities. This problem is particularly acute in the long run since regressive tax systems depend more heavily on low-income families that face stagnating incomes while taxing the superrich, whose wealth and incomes continue to grow, at lower rates.

As the information in this chart book helps illustrate, it does not have to be this way. States vary considerably in the fairness of their tax codes, and pursuing policies adopted by states with the least regressive tax systems is a proven strategy for reducing tax inequity.

Evidence from states shows why Trump’s brand of Carrier-style dealmaking won’t work

Source: Joshua Jansa, The Conversation, January 9, 2017

In late November, President-elect Donald Trump announced that he had reached a deal with Carrier to keep about 800 manufacturing jobs in Indiana from moving to Mexico. After the announcement, we learned that the Indiana Economic Development Corporation would give US$7 million in tax credits and grants to Carrier’s parent company in exchange for keeping the jobs in the state.

Trump proudly praised the agreement as a “great deal for workers” and said that it was part of a larger approach to keep jobs at home, saying “this is the way it’s going to be.”

Having the chief executive of the United States negotiate individualized deals with corporations is certainly a new approach to economic policy nationally, though it is not without precedent. In fact, state governments have been negotiating targeted incentives with corporations for decades.

My research focuses on why states use incentives to attract and retain investment from corporations and whether they are effective. My work, as well as that of many others, shows that these deals do not create the jobs and economic growth they are purported to…..