Category Archives: State & Local Finance

STAMP is an Unsound Tool for Gauging the Economic Impact of Taxes

Source: Institute on Taxation and Economic Policy, May 2014

From the Citizens for Tax Justice summary:
When anti-tax groups working in the states need a data point to help them argue in favor of their newest tax cutting idea, they often look to the Beacon Hill Institute (BHI). BHI is housed in the economics department at Suffolk University, but its mission is more ideological than academic: providing research to voters and policymakers that promotes a “limited government” and “free market” perspective. The cornerstone of BHI’s research is a computerized economic model it calls the State Tax Analysis Modeling Program (STAMP).

To a casual observer, STAMP may appear to be a rigorous model worthy of consideration. But new research from the Institute on Taxation and Economic Policy (ITEP) explains in great detail the myriad ways in which STAMP is rigged to portray tax cuts as hugely beneficial to state economies, and tax increases as an inefficient drag on economic growth.

The broad ways in which STAMP fails to accurately gauge the impact of taxes on state economies include:
– STAMP underestimates the economic importance public service such as education and infrastructure to both the short- and long-term health of state economies.
– STAMP assumes that workers, consumers, and businesses are hypersensitive to tax changes, causing private sector economic activity to boom (or bust) as a result of modest changes in after-tax incomes and prices.
– STAMP depicts tax changes as having an instantaneous impact on the economy, even when that impact involves long-run issues such as migration, property value changes, and business formation.
– STAMP assumes a simplistic, perfectly efficient marketplace where everybody who wants a job already has one. This assumption simplifies the math behind the model, but is a poor reflection of the economy that actually exists today.

ITEP’s report also describes a number of instances where STAMP’s findings have been contradicted by academic researchers and state revenue officials. In one particularly implausible analysis, for example, STAMP actually found that cutting Rhode Island’s sales tax rate by more than half would not only benefit the state’s economy—it would actually raise $61 million in tax revenue.

In another analysis, STAMP predicated that roughly 40,000 jobs would be created by a tax cut enacted in Kansas. Since that analysis was released, Kansas’ economy has underperformed and the state actually saw its credit rating downgraded because of slow economic growth and lagging tax revenues….

Will Utilities Pay Price For Fracking?

Source: Sara Jerome, Water Online, May 20, 2014

Water utilities can expect a major financial hit as the fracking industry grows if the controversial process contaminates the water supply, according to one ratings agency. Fitch Ratings said in a recent report that if water is contaminated by fracking chemicals, the agency “would expect a serious blow to a utility’s revenues, with losses concurrent with other growing direct and indirect costs. This would lead to debt service coverage reductions, liquidity strains and possibly the need for additional leverage.” That’s because the burden for cleansing water of fracking chemicals would fall on water utilities, rather than oil and gas companies.

Federal Grants to States Up Since 2008

Source: Pew Charitable Trusts, May 22, 2014

Federal grants to states are about 18 percent higher overall, after adjusting for inflation, than they were in federal fiscal year 2008, when the recession began. Federal stimulus aid to states resulted in a temporary spike during and immediately after the recession. That aid has been almost entirely phased out, but total grants to states remain above prerecession levels. Medicaid increases are the main driver of this upward trend, while funding for other programs such as education and transportation is declining.

Long-Term Impact of Medicare Payment Reductions on Patient Outcomes

Source: Vivian Y. Wu and Yu-Chu Shen, Health Services Research, Early View, first published online: May 20, 2014
(subscription required)

From the abstract:
To examine the long-term impact of Medicare payment reductions on patient outcomes for Medicare acute myocardial infarction (AMI) patients…..

Principal Findings:
We found that while Medicare AMI mortality trends remained similar across hospitals between pre-BBA and initial-BBA periods, hospitals facing large payment cuts saw smaller improvement in mortality rates relative to that of hospitals facing small cuts in the post-BBA period. Part of the relatively higher AMI mortalities among large-cut hospitals might be related to reductions in staffing levels and operating costs, and a small part might be due to patient selection.

We found evidence that hospitals facing large Medicare payment cuts as a result of BBA of 1997 were associated with deteriorating patient outcomes in the long run. Medicare payment reductions may have an unintended consequence of widening the gap in quality across hospitals.

State Tax Revenue Grows, but a Full Recovery Eludes 26 States

Source: Pew Charitable Trusts, May 19, 2014

Nationally, total state tax revenue has recovered from its plunge during the Great Recession, thanks to factors such as North Dakota’s oil boom and tax increases in Illinois, California, and elsewhere. But the recovery is uneven. Tax collections in 26 states had not fully rebounded by the final quarter of 2013, after adjusting for inflation.

A 50-state ranking shows that tax receipts in five states were more than 15 percent below their previous adjusted peak level: Alaska (-59.9 percent), Wyoming (-27.6), Florida (-20.2), New Mexico (-17.9), and Louisiana (-15.2). Where tax revenue remains below its previous peak, policymakers are more likely to face tough tradeoffs in balancing state bud

As Court Fees Rise, The Poor Are Paying The Price

Source: Joseph Shapiro, NPR, May 19, 2014

…A yearlong NPR investigation found that the costs of the criminal justice system in the United States are paid increasingly by the defendants and offenders. It’s a practice that causes the poor to face harsher treatment than others who commit identical crimes and can afford to pay. Some judges and politicians fear the trend has gone too far.

A state-by-state survey conducted by NPR found that defendants are charged for many government services that were once free, including those that are constitutionally required. For example:

• In at least 43 states and the District of Columbia, defendants can be billed for a public defender.
• In at least 41 states, inmates can be charged room and board for jail and prison stays.
• In at least 44 states, offenders can get billed for their own probation and parole supervision.
• And in all states except Hawaii, and the District of Columbia, there’s a fee for the electronic monitoring devices defendants and offenders are ordered to wear.

These fees — which can add up to hundreds or even thousands of dollars — get charged at every step of the system, from the courtroom, to jail, to probation. Defendants and offenders pay for their own arrest warrants, their court-ordered drug and alcohol-abuse treatment and to have their DNA samples collected. They are billed when courts need to modernize their computers….

….Findings of this investigation include:
• Defendants are charged for a long list of government services that were once free — including ones that are constitutionally required.
• Impoverished people sometimes go to jail when they fall behind paying these fees.
• Since 2010, 48 states have increased criminal and civil court fees.
• Many courts are struggling to interpret a 1983 Supreme Court ruling protecting defendants from going to jail because they are too poor to pay their fines.
• Technology, such as electronic monitors, aimed at helping defendants avoid jail time is available only to those who can afford to pay for it……

Managing Prison Health Care Spending State Health Care Spending

Source: State Health Care Spending Project, October 2013 (updated in May 2014)

From the overview:
This report examines state spending on inmate health care and the factors driving costs higher. It also reviews strategies that some states have used to control these expenses while protecting public safety and maintaining or improving the quality of care that prisoners receive. This report was updated in May 2014 to reflect revised North Carolina and Oregon spending data published by the Bureau of Justice Statistics after our report’s initial release.

State Budget Update: Spring 2014

Source: National Conference of State Legislature, 2014

Entering the final months of fiscal year (FY) 2014, the outlook for state budgets is stable. Revenue performance is positive, and expenditure overruns are relatively modest. Overall, most state officials anticipate slow and steady improvement in state finances through the remainder of the fiscal year.

This report is based on data collected in the spring of 2014 from legislative fiscal officers in all 50 states, the District of Columbia and Puerto Rico. It includes information on:
– Revenue outlook for the remainder of FY 2014;
– Areas of spending over budget; and
– A summary of state fiscal situations.
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State and Local Government Finance: The New Fiscal Ice Age

Source: D. Roderick Kiewiet and Mathew D. McCubbins, Annual Review of Political Science, Vol. 17, May 2014
(subscription required)

From the abstract:
The Great Recession that began in late 2007 had devastating consequences for the fiscal health of state and local governments, and many remain in a precarious financial position. Several cities have declared bankruptcy, and more will do so in coming years. The future, however, promises no long-term relief. Due primarily to the aging population of the United States, state and local governments are allocating large and increasing shares of their budgets to expenditures on Medicaid and on retirement benefits that they have promised to their past and current employees. As these expenditures consume more of their budgets, there is less to spend on transportation, parks and recreation, education, public safety, and all the other services that these governments provide. We are thus experiencing the onset of a New Fiscal Ice Age, a period in which a given level of tax revenue purchases a considerably lower level of current services.
Research Findings

Curtailing the Subsidy War Within the United States

Source: Edward Alden and Rebecca Strauss, Council on Foreign Relations, Policy Innovation Memorandum no. 45, May 2014

From the summary:
Each year, U.S. state and local governments spend tens of billions of dollars to lure or retain business investment. The subsidies waste scarce taxpayer dollars that could better be used to strengthen public services such as education and infrastructure, or to lower overall tax burdens to create a more favorable investment climate. No state wants to dole out such subsidies, but most fear losing jobs to competing states if they refuse. States should take steps to curb subsidies, beginning with greater disclosure and cost-benefit analyses, and building up to a multistate agreement that creates strong disincentives for continuing subsidies. Existing international arrangements provide models and tools for achieving this….

….Rarely do the benefits of these subsidies exceed the costs. In highly mobile industries, like film production, the subsidies do lure business from other states, but any job creation is short-term and film crews are usually imported. In many other industries, subsidies have less influence on location decisions; manufacturers, in particular, require local networks of suppliers and employees with specialized training. Local governments usually lack the sophistication to negotiate successfully with big companies, so they end up subsidizing businesses that would have invested in the state regardless. Public money is wasted that could have gone to lower the overall corporate tax rate or to more productive investments like education and infrastructure—assets that matter more for most business location decisions than one-off tax breaks…..