Category Archives: State & Local Finance

State and Local Governments’ Fiscal Outlook: 2014 Update

Source: U.S. Government Accountability Office (GAO), GAO-15-224SP, December 17, 2014

From the summary:
Fiscal sustainability presents a national challenge shared by all levels of government. Since 2007, GAO has published simulations of long-term fiscal trends in the state and local government sector. These simulations have consistently shown that state and local governments face long-term fiscal pressures. Absent any policy changes, the sector will face an increasing gap between expenditures and receipts in future years. Closing this gap will require state and local governments to make policy changes to assure that receipts are at least equal to expenditures.

GAO’s model uses the Bureau of Economic Analysis’s National Income and Product Accounts as the primary data source and presents the results in the aggregate for the state and local sector as a whole. GAO’s model shows the level of receipts and expenditures for the sector until 2060 based on current and historical spending and revenue patterns. The model assumes that the current set of policies in place across state and local government remains constant to show a simulated long-term outlook.

Thomas Piketty and Inequality: Legal Causes and Tax Solutions

Source: Paul L. Caron, Emory Law Journal Online, Vol. 64, 2015

From the abstract:
Thomas Piketty’s Capital in the Twenty-first Century has acted as an accelerant fueling the fiery public debate over increasing inequality in America and around the world. Piketty makes the provocative empirical claim that the rate of return to private capital inevitably exceeds the rate of economic growth (r > g) and thus leads to growing concentrations of wealth among the richest members of society. Piketty has spawned heated debates in newspapers, magazines, and blogs, which soon will continue in academic journals and law reviews. Shi-Ling Hsu is one of the first out of the gate with The Rise and Rise of the One Percent: Considering Legal Causes of Wealth Inequality, 64 Emory L.J. Online ___ (2015) (http://ssrn.com/abstract=2477991).

Hsu focuses on the interesting question of how law and legal institutions foster inflated returns on capital (Piketty’s r). He also makes the important point that lawmakers often conflate Piketty’s r with g (public economic growth), resulting in laws that boost the former with little discernible impact on the latter. The bulk of Hsu’s argument is devoted to explaining how five areas of American law contribute to “the legal enrichment of the one percent”: financial regulation, antitrust law, oil and gas subsidies, transition relief, and electric utility regulation. He concludes with a plea for greater federal funding of education to fuel greater economic growth and bridge the deepening inequality chasm in America.

Hsu’s essay is a significant contribution to what is certain to be an energetic debate over the implications of Piketty’s work. The need to examine the impact of legal rules and institutions on both private capital returns and public economic growth will be an enduring contribution to future scholarship on the extent, consequences, and reduction of income and wealth inequality. I offer here two modest reactions to Hsu’s essay: (1) recent inequality research has shifted the focus of high-end wealth concentration from the Top 1% to the Top 0.1% (and even the Top 0.01%), with important implications for the work of both Piketty and Hsu, including (2) the inquiry into whether policymakers should intervene before the fact to re-shape the distribution of the benefits and burdens of economic activity (Hsu’s approach) or instead redistribute wealth after the fact (Piketty’s approach).

In a recent essay, Joseph Bankman and I argued that tax scholars need to focus more of our work on how policymakers should address the federal government’s unprecedented (and growing) fiscal imbalance. California Dreamin’: Tax Scholarship in a Time of Fiscal Crisis, 48 U.C. Davis L. Rev. 405 (2014) (http://ssrn.com/abstract=2518607). In Piketty terms, s (spending) > r (revenues). We proposed that California’s recent tax increases on the wealthy should provide a template for the nation to bring r more into alignment with s.

Piketty’s pioneering work provides added impetus for deploying the tax system in this effort. Increasing the tax burden on the wealthy would both raise revenue to meet the nation’s spending needs and redistribute wealth to alleviate Gatsby-level inequality in America. Hsu’s proposed focus on the distributional impact of laws and legal institutions may prove to be helpful in the long run but a chimera in the short term as the nation’s fiscal and inequality challenges demand solutions that only the tax system stands ready to provide. In short, raising taxes on the wealthy would both increase r (revenues) to better match s (spending) and decrease r (private capital returns) to better match g (public economic growth).

California Dreamin’: Tax Scholarship in a Time of Fiscal Crisis

Source: Joseph Bankman, Paul L. Caron, UC Davis Law Review, Vol. 48 no. 1, November 2014

From the abstract:
This essay makes three claims about the current state of tax law and academic tax scholarship in America: (1) the federal budget imbalance, caused by the failure of both political parties to raise the tax revenues needed to fund the nation’s spending priorities, is unsustainable and threatens our nation’s future; (2) tax scholars need to shift our focus from technocratic work to systemic solutions to the existential threat posed by this fiscal gap; and (3) California’s response to its seemingly intractable budget problems provides a template for resolving the federal budget stalemate in Washington, D.C.

Two years ago, both California and the nation were imperiled by long-term, structural, budget imbalances. California has reduced that peril by raising (already high) personal tax rates on the wealthy. The political success of that approach suggests that at the national level, Americans might be willing to support higher rates to maintain government services and move toward fiscal solvency.
The fiscal crisis highlights a problem with the dominant conception of legal tax scholarship. Under that conception, scholarship is (or should be) apolitical and confined to subjects about which the writer can demonstrate mastery. Unfortunately, the most pressing problem in the field is inescapably political and requires the scholar to address some issues about which no one can master. If we hew to a restrictive definition of scholarship, we limit our voice on a subject about which we have much to say.

Tax Breaks and Inequality: Enriching Billionaires and Low-Road Employers in the Name of Economic Development

Source: Philip Mattera, Kasia Tarczynska and Greg LeRoy, Good Jobs First, December 2014

From the press release:
Taxpayer subsidies awarded to corporations by state and local governments, supposedly to create good jobs and growth, are instead fueling economic inequality by going to companies that are owned in whole or part by billionaires, and to low-wage employers. Indeed, about one-third of the individuals in the Forbes 400 are linked to 99 taxpayer-subsidized companies, including every one of the 11 wealthiest individuals and all but two of the richest 25. Subsidies have also gone to 87 companies that pay low wages. More than $21 billion in taxpayer dollars have been awarded to these two sets of firms. Seven retailers appear on both lists….

2012 Census of Governments: Finance — Surveys of State and Local Government Finances

Source: U.S. Census Bureau, December 16, 2014

From the press release:
Between 2007 and 2012, total expenditures for state and local governments increased by 18.2 percent, from $2.7 trillion to $3.2 trillion, while total revenue declined 1.1 percent over the same five-year period, from $3.1 trillion to $3.0 trillion, according to new U.S. Census Bureau data from the 2012 Census of Governments released today.

Two major contributors to the decline in total revenues were employee retirement revenue, which includes earnings on investments and contributions, (dropping 67.7 percent, from $533.3 billion to $172.0 billion) and interest earnings (falling 44.6 percent, from $91.9 billion to $50.9 billion)….

The findings are from the 2012 Census of Governments: Finance — Surveys of State and Local Government Finances, which shows revenues, expenditures, debt, and cash and security holdings by level and type of government. Level of government includes state, local, and state and local combined. Type of government includes state, county, city, township, special district and school district.

Outstanding state and local government debt grew faster than both revenues and expenditures during this time frame, climbing 22.2 percent from $2.4 trillion in 2007 to $2.9 trillion in 2012. Cash and security holdings declined 1.7 percent, from $5.4 trillion in 2007 to $5.3 trillion in 2012.

Higher Education: State Funding Trends and Policies on Affordability

Source: U.S. Government Accountability Office (GAO), GAO-15-151, December 16, 2014

From the summary:
From fiscal years 2003 through 2012, state funding for all public colleges decreased, while tuition rose. Specifically, state funding decreased by 12 percent overall while median tuition rose 55 percent across all public colleges. The decline in state funding for public colleges may have been due in part to the impact of the recent recession on state budgets. Colleges began receiving less of their total funding from states and increasingly relied on tuition revenue during this period. Tuition revenue for public colleges increased from 17 percent to 25 percent, surpassing state funding by fiscal year 2012, as shown below. Correspondingly, average net tuition, which is the estimated tuition after grant aid is deducted, also increased by 19 percent during this period. These increases have contributed to the decline in college affordability as students and their families are bearing the cost of college as a larger portion of their total family budgets.

Broken prison labor program fails to keep promises, costs millions

Source: Michael J. Berens and Mike Baker, Seattle Times, December 13, 2014

First of a three part series.

….Promises
State contends that prison labor:
Saves taxpayers money
Does not harm private-sector companies
Boosts employment for inmates after release
Makes prisoners less likely to reoffend
Reality
All these claims are unproven or untrue …..

….Correctional Industries’ backdoor funding
By law, state agencies must buy furniture from Correctional Industries (CI). – $16.4 million revenue
CI capitalizes on this by charging hefty markups. – 17% profit margin
With the markup and required agency buys, CI profits. – $2.8 million profit

Related:
Part 2: How the state lost $1 million in a cutthroat mattress-recycling scheme

Sticker Shock: Calculating the Full Price Tag for Youth Incarceration

Source: Amanda Petteruti, Marc Schindler, and Jason Ziedenberg, Justice Policy Institute, December 2014

From the summary:
Thirty-three U.S. states and jurisdictions spend $100,000 or more annually to incarcerate a young person, and continue to generate outcomes that result in even greater costs. Our new report, Sticker Shock: Calculating the Full Price Tag for Youth Incarceration, provides estimates of the overall costs resulting from the negative outcomes associated with incarceration. The report finds that these long-term consequences of incarcerating young people could cost taxpayers $8 billion to $21 billion each year.
Related:
Executive Summary
Appendix
Press Release
FACTSHEET: The tip of the iceberg: What taxpayers pay to incarcerate youth (Citations)
FACTSHEET: U.S. Youth Incarceration in an International Perspective

Building Bulwarks Against the Breakdown of Retirement Benefits for Public Sector Employees

Source: Amanda Cuda, HR News, Vol. 80 no. 11, November 2014
(scroll down) (subscription required)

….Recognizing that cutting subsidies and payments cannot stand as the only way to address pension problems without risking employees’ financial security, some public sector organizations are looking at innovative ways to lessen their spending….