Category Archives: economy

A tax gift, if we want it

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The U. S. Supreme Court has shown it can change its mind and a new ruling that lets states collect sales taxes from out-of-state internet retailers gives Missouri government a new opportunity as well as some new issues to confront.

All reasons for NOT collecting taxes on out-of-state internet sales seem to have been eliminated by the court’s narrow decision to throw out a 1992 ruling saying out-of-state internet merchants would not have to collect state sales taxes and pay them to the purchaser’s state unless the company had a substantial presence in a state.

That ruling in the early days of internet commerce put brick and mortar businesses in Missouri and other states at a disadvantage and they’ve been aggravated for years that the legislature hasn’t corrected the problem.  The legislature has said its hands have been tied by the 1992 ruling.

The ropes are off now.  We’ll be interested to see if state leaders next year call for passage of a law requiring collection of that sales tax.  There is no doubt the state could use the money.

The legislation will not be easy to write although the court ruling does provide some hints about what will work.

It would not be surprising to hear some voices claim—as they have in the past—that imposing sales taxes on internet merchants would be a tax increase on purchasers and therefore not something the state should lay upon the shoulders of taxpayers who have avoided sales taxes on certain purchases up to now.  We’ll have to see if that lame argument still has any legs in a state that continues to rank in various studies in the lower third of all states for overall tax burden.

The court ruling makes it harder to justify saying, “We’re pro business” while maintaining a sales tax policy that puts our home-town merchants at a sales disadvantage to businesses that exist on our computer screens.

And where do we get the idea that the computers on our desks or in our pockets are not some kind of a “physical presence” in our state? Let’s be honest and admit that the internet long ago became more a physical presence in our lives than Wal-Mart. We don’t have to drive across town to buy something on the internet, after all.

Checking out through Paypal is no different from checking out at the local counter.  The buyer doesn’t  physically stick a credit card into a slot at a cash register with Paypal.  But internet merchants do have a cash register right in front of us—the computer that is a very real physical presence. My brick and mortar house becomes an internet merchant’s physical presence in my town and my state every time I check out with Paypal or some similar system.  (Ohio tried to address the issue with a law saying the use of cookies on consumer’s computers by internet retailers constitutes a “presence.” The retailers are fighting the idea in court.)

The danger, as some might see it, to requiring sales taxes to be collected on internet purchases is that state revenue might increase to the point that some lawmakers will decide to once again ease the overall tax burden on Missourians again.

That idea is getting pretty old. And shaky.

Political commentator Josh Barro, a former staffer at the Tax Foundation (considered a conservative think tank) who contributes to Business Insider, observes in a new article that the court decision reminds states of the Constitution’s Commerce Clause that says states cannot unduly burden or discriminate against businesses from other states.

South Dakota, which brought the lawsuit, avoids that pitfall by providing those retailers with computer software that makes it easier for them to pay sales taxes.  It does not require those retailers to deal with the state and every political subdivision within it that charges sales taxes.  The money goes to a central state agency.  Our Department of Revenue, which collects sales taxes collected by our local businesses and then sends proper amounts to local governments, would fill that role with internet sales taxes.

Missouri has not joined the twenty-or-so states that have signed on to the Streamlined Sales and Use Tax Agreement.  Those states have agreed to some common rules dealing with their sales taxes.  This ruling might encourage a new legislature (The 2019 General Assembly will have new leadership and several dozen new members) to take a new look at the SSUTA as it considers what to do to capitalize on the ruling.

One of Barro’s former colleagues at the Tax Foundation, Joe Henchman, says, “If you want to be absolutely sure that your statute is valid under these rules, you should try to emulate South Dakota as much as possible.”  So that’s a starting point.

Barro makes an important observation that some Missouri leaders seem to have been going against for some time: “It is important for a tax system to be adequate—that is, revenues should grow on pace with the economy, so the government can keep pace with the demand for services as the economy grows.”

He notes tax-free purchases from internet retailers distorts the behavior of purchasers by encouraging them to buy online when they otherwise would buy at a local store, thus reducing local tax collections and that means “the government either has to cut back on services or it has to raise taxes on something else.”   The resulting erosion of sales tax income at the state level has put a heavier burden on property taxes and “taxpayers have revolted against increases in this inflexible tax, voting to impose caps that have in some states kept revenue growth well below economic growth.”

Add to that the penchant government has to lower various taxes under the philosophy that lower taxes will mean more jobs that will stimulate the economy and you can get a state that reduces services that industries and employers would like to see before they commit to creating jobs.

So Missouri has an opportunity because of the court ruling.

Justice Anthony Kennedy, writing for the majority in the Supreme Court decision, estimates the ruling could mean eight to thirty-three Billion dollars in annual tax revenues for the states.  The federal Government Accountability Office thinks Missouri’s share would be $180-275-million a year in state and local sales taxes.

Missouri could do a lot with that amount of money at the state and local levels.  Except—

We have the crippling Hancock Amendments.

Those parts of our state constitution put a ceiling on how much new taxes can be collected without a statewide vote.  State Auditor Nicole Galloway, a little more than a year ago, estimated that taxes at the statewide level could not increase by more than $94-million without such a vote. We’re not sure how much of the figure from the GAO would go to the state and how much would go into local government revenue accounts, but Hancock appears to put a cloud over the issue at the state level.

Before the passage of what was called Hancock II, the state had to make refunds to income tax payers if state revenue growth exceeded the original Hancock limits. The state did make those refunds for a couple of years before adopting the first of a series of tax cuts to make sure the state did not to go to the inconvenience of mailing out checks.  The state hasn’t come close to hitting the refund threshold since Hancock II. In fact, Auditor Galloway says Missouri is four BILLION dollars under that limit now.

Will voters support the new authority given Missouri by the U. S. Supreme Court to collect more than $94-million in internet sales taxes?  Will collecting six or seven or eight cents per dollar from an out-of-state internet seller increase state revenue so much that a statewide vote will be required, giving Missourians a chance to reject the proposal?  The GAO and the state auditor have put forth figures indicating that vote might be needed.

We have had about two decades of leadership telling voters their taxes are too high. We’ve seen voters who travel to the polls on increasingly bad roads that go across increasingly crumbling bridges refuse to support gas tax increases to make their journey smoother and safer. And the legislature has taken steps year after year to reduce the state’s financial ability to “keep pace with the demand for services as the economy grows.”

The court has presented Missouri with a gift.  Will Missourians decide to leave it unopened?

(You can read Josh Barro’s article at https://amp.businessinsider.com/supreme-court-wayfair-internet-sales-tax-decision-good-for-consumers-2018-6)

Keeping their own money

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There’s nothing wrong, really, with letting taxpayers keep more of their money.  And there’s something to the idea that letting taxpayers spend more of their own money generates a better economy.

Let’s open a discussion on this topic because, as in much of government, things are seldom as simple as they seem. The question today focuses on WHEN many taxpayers can spend more of their own money to fuel a growing economy and whether some steps seem to run counter to that goal.

There’s an overlooked segment of the economy that seems to this amateur economist  disadvantaged by the way the idea is carried out.  We mention them, not because we particularly disagree that more tax reductions are needed but because some people might become even more disadvantaged when the state lets them keep more of their own money.. We invite your participation in this discussion (there should be a box at the bottom of this entry for your comments).

We’ll be mixing some apples, oranges, pears, and peaches in our comparisons but we’ll excuse ourselves to suggest a point.

Here’s one of many places to start the discussion.

Any discussion of the size of government has to involve what government’s role should be.  Our United States Constitution says it is “to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,” general wording that leaves plenty of room for definition, discussion, and disagreement—and there HAS been plenty of all of that in the 230 years or so since those words were written.

Let’s narrow our focus to “promote the general welfare.”  Most of us at this meeting probably would agree that one of the major factors in achieving this goal is education.  Thomas Jefferson told Littleton Walter Tazewell in 1805 that “every member of society” should be able “to read, to judge, and to vote understandingly on what is passing.”  From such sentiments by Jefferson and others emerged the concept of an education system open to everybody, financially underwritten by everybody for the common good.

Our Missouri Constitution requires a certain minimum percentage of state tax collections to be set aside for elementary and secondary education.  However, there is no requirement for support of higher education and the state’s commitment to higher-ed has dwindled markedly.

A 2015 report by the State Higher Education Executive Officers Association found that since the 2008 recession, state and local funding per fulltime college student had declined almost 28 percent at a time when enrollment had increased by 20 percent.  Missouri, at that time, was found to be twenty percent below the national average in per-student funding.  State funding for higher education has taken some hits since then as anticipated tax collections have fallen below anticipated levels because of withholdings and vetoes to keep our state budget balanced.

Those actions do not necessarily mean that state government has become anti-higher education. The higher education budget is a huge pot of money and when it is necessary to make significant general funding reductions, those responsible for balancing the budget look at the biggest pots of money to make the biggest impact.  They can’t, for example, cut spending by $200-million by making big cuts in agencies with total budgets of $20-million.

So higher education becomes one of the usual targets.

And that means the institutions have to charge students more for their educations, bringing us to the nub of our observation. The Federal Reserve System says student debt has become the second largest kind of debt in the country.  The Institute for College Access & Success thinks fifty-seven percent of Missouri college graduates in 2016 left school with an average student debt of $27,532.   The same organization said the average debt of new college graduates increased at double the inflation rate between 2004-2014.

We’ve seen figures from the University of Missouri-Columbia saying forty-nine percent of incoming students take out loans averaging $7,059 per student to get through their freshman year.  The figure includes both private and federally-backed loans. And the loan amounts pile up on each other each year until graduation or drop-out.

There are those who wonder if the return on investment makes that student debt worthwhile.  Some of those students just walk away from paying off the debt. Of the 5,465 UMC students who began paying off their college debts after graduating in 2013, 4.2% had defaulted on their loans just three years later.  That’s lower than the national average but not something to be especially proud of.

Since we’re talking about education, we looked at the average salary for Missouri teachers.  Indeed.com put out an updated list on January 3.  The state requires school districts to pay salaries of at least $25,000.  The average elementary teacher salary in this survey was $36,847 which the survey said was twenty percent below the national average.

If the average elementary teacher salary is a little shy of $37,000 (before taxes and retirement withholdings) and the average college student debt is $27,532, it seems pretty clear that the economic impact of these teachers is severely reduced. They cannot fully contribute to the economy because their disposable income is reduced for many years by debt payments.

A Missouri State Teachers Association study for 2015-16 says the state requires districts to pay teachers with a master’s degree and ten years of experience at least $33,0001.  The average maximum salary in this study for a teacher with a master’s plus ten years’ experience was $48, 873.

We think we have the figures straight. Feel free to correct us if we have confused ourselves.  But if we were a teacher with a $27,000 student debt we’d have to seriously consider whether we want to borrow even more money to get an advanced degree that would increase our average salary only $11,000 with ten years experience—-at a time when we also might be starting a family that someday will want to go to college.

Or should we give up on a profession we might love (and you better love, really love, being a teacher to walk into a classroom of twenty children from all economic and social conditions every morning and try to teach them “to read, to judge, and to vote understandingly on what is passing.”) and go sell insurance or real estate or something with much less stress but much better benefits?

We’ve drifted away from our point. But here it is: Teachers—and other college graduates who come into the real world saddled with a lot of college debts—cannot be a significant part of economic growth as long as significant parts of their incomes pay off the debts they incurred because tax reductions have led to less broad public support for “the general welfare” of the state.  “Their own money” cannot be spent in a consumer-driven economy because it is spent to pay for the higher education that is increasingly needed in our changing world but is suffering from declining public financial support caused to a great degree by a desire to let Missourians keep more of their own money.

Irony is an incongruity between what result is expected and what the actual result is. This situation seems to fit that definition.

We’ve seen a news story that some of our lawmakers are studying college affordability.  Their job is not an easy one, especially when it is politically popular to limit resources that might alleviate the problem they want to address.  But it’s good that they are looking into these issues including the degree to which new efforts to let people keep their own money are to a significant degree counterproductive for thousands of others.

We wish them well in their difficult task.

Waiting for the Nobel Prize

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Today we want to recognize an important first step in re-shaping economic thinking so significantly that reducing or eliminating the national debt could be done easily, a concept so brilliant that—if appropriately expanded—could merit international recognition.

The tax bill recently approved by the House of Representatives in Washington proposes to tax graduate student tuition waivers.  For those of us who never got far enough in our higher education to be offered those waivers or who came along before they were widespread in higher education, here’s how they work:

A University tells a student pursuing a master’s degree or a doctorate they will not have to pay tuition if they help teach or do research beneficial to the university.  The university pays those students a small stipend for their work so they can eat and pay their rent.

The House bill wants to consider the tuition waiver as income.   And to tax it.

It is a matter of considering money a person never has and does not spend as income and then levying an income tax on those never-had and unspent funds.   Think of the possibilities!

Paying a tax on the raise you did not get could provide millions of deficit-reducing dollars to the federal government.  Paying a tax on a stock dividend that did not materialize would add even more.  Considering the difference between what you wanted on a car trade-in and what the dealer gave you as income and taxing that amount would add to the deficit-reducing federal income.

Here’s one we thought of the other day when we went to Columbia where the gas price that day was nineteen cents less per gallon than the price in Jefferson City.  We used our grocery store gas rewards card to knock another forty cents a gallon off of the fuel we put in our tank.  Think how much the federal government could collect if it considered supermarket gas refunds as part of our personal income.

Soon the pre-holiday price reductions we are seeing in our stores will give way to the post-holiday sales prices.  If Congress were to take the simple step of taxing the hundreds of millions of dollars that are not spent because of those pre-and-post-holiday price reductions, the annual federal deficit could be eliminated and bites could be taken out of the total national debt.

The car companies are offering multi-thousand dollar incentives to clear their lots of 2017 models.  If Congress were to consider those price reductions as income and tax it, another important debt-reduction step could be taken.

Think of how much money is saved every single day by people who shop at the day-old bread counter at the grocery store.  It might seem like pennies for each loaf, but when applied nationally and for an entire year, taxing the savings on all of those loaves of day-old bread will add up to millions of dollars a year in tax collections.

Oh, and here’s a biggie.  An industry that decides to build a factory, a warehouse, or any other facility in a foreign country instead of in the United States because it can save millions of dollars in construction and operation costs:  If those savings were considered corporate income and taxed—even at the proposed lowered corporate tax rate—the economic benefit would be enormous.

And—oh, wait, there’s one more and it’s particularly appropriate at this time of year.  Further, it’s pretty comparable to the tuition waiver.   We are awash in online and catalog offers to provide customers with a benefit if the customer provides something of value to the merchant in return for which the merchant waives a fee or charge.  Give us money, says the merchant, and we will give you a sweater but we will waive the shipping charge.  Since the customer receives the benefit–a sweater—but spends no money to receive it, the shipping charge is thus income and can be taxed as such, just as a graduate student receives a benefit—an education—by providing something of value to the university (teaching or research assistance) but does not pay the equivalent of a “shipping charge” to get it and therefore faces paying income taxes on money never possessed or spent.

Think of the incredible benefits this economic philosophy of turning unspent dollars into taxable income could provide if applied widely, assuming the federal government doesn’t just increase spending to or beyond the amount of additional funds it would collect.  Congress could wipe out the national deficit and it could provide billions of dollars that could trickle down throughout America in programs and services beneficial to the poor, the hungry, the sick.

And to graduate students.

We’ll be watching for next year’s announcement of the Nobel Prize for Economics to see if this great advance is deservedly rewarded.

The gauge

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For years and years The Missourinet has gotten a monthly economic report called The Rural Mainstreet Economic Index. The survey contacts dozens of purchasing managers who fit in the middle of the supply and demand cycle and bank CEOs in rural areas who keep an eye on local financial trends. It covers several Midwestern states but it also provides breakouts on a state-by-state basis. The index measures whether the strength of the economies in each state and has been useful in reporting on the strength of Missouri’s economy that cannot be measured only by looking at the monthly employment/unemployment reports from the state.

The index is compiled by Creighton University economist Ernest Goss, who heads the school’s Institute for Economic Inquiry.  He’s also worked with the Congressional Budget Office and NASA—among others.

Ernie Goss’ index is a nonpartisan gauge but it’s only one of the gauges used to measure the economic status of Missouri.

Your friendly observer has seen numerous proposals made, and many passed, that promise big economic improvements and job growth. Some have focused on preventing companies from moving to other states. Some have focused on making Missouri a more welcoming climate for industries IN other states.  Some have aimed at keeping people in certain professions from fleeing to other places where they won’t face big lawsuits. Some are tax incentives. Some of these issues and their accompanying justifications are before the legislature again this year.  Economic development is, after all, a highly competitive business and Missouri needs to be a force on this playing field. People here do have to work and they prefer to work at good jobs.

In all the years of watching these mostly well-intended efforts we have never seen a nonpartisan assessment of the results. Is Missouri an any greater magnet for jobs because of these efforts?  Are the jobs being created actually improving the economy?  Why is this or that working or not working?  Do some efforts need to be repealed because they’re ineffective instead of getting new programs layered on top of them?  Various interest groups have persuaded or tried to persuade the legislature to pass laws that will allow them to flourish—or so they claim.  Have those programs actually allowed them to flourish?  Or have they just protected those groups from competitors? Is passing economic development legislation without taking steps to finance the infrastructure system to support economic development enough?

We need more than Dr. Goss’ surveys to gauge whether all of the things passed have worked or whether familiar ideas are realistic.  We have competing groups offering competing evaluations and assessments. The Missouri Chamber of Commerce and the Missouri Budget Project see economic growth and funding for public programs through distinctly different lenses, for example.

But suppose the heads of the economics departments at our state and private universities formed an informal Council of Missouri Economic Assessors that could regularly release studies indicating how well various initiatives of the state are working. Not a council of advisers.  A council of economic assessors. 

There is no question Missouri must be competitive.  But could we reach a point where the value of new initiatives is less than their costs to public services and programs?  When everybody else is doing the same thing Missouri is doing, are promises of positive results of a new policy hollow?

Economic development initiatives are seldom intended to produce instant results.  We recall that the special incentives offered to Ford to keep its production lines moving at Claycomo did have a pretty immediate impact.  But most of the others envision something long-term.   How long is long enough?

How many times have we heard how many governors say in one way or another what Governor Greitens says in his first state budget message: “Missouri’s budget is suffering from reduced revenue due to poor economic growth.”  How many times have we heard governors say, as Governor Greitens says in his message, that the governor “is committed to making the budget cuts necessary to balance the state’s budget and retain Missouri’s AAA credit rating.”

Underlying all of this are the questions of whether these job-growing efforts are really beneficial to working Missourians, creating employment or opportunities for meaningful employment for those without jobs and whether these steps wind up undermining other capabilities citizens should be getting.

Maybe a Council of Economic Assessors isn’t the unaffiliated body we need to tell us if all of these efforts are paying off and to what degree.  But an educated non-affiliated review of these efforts could be a gauge of where we are, where we might be going if we maintain this course, and whether there are additional facets of the issue that need support, too.

We’re just tired of hearing year after year the repetition of the phrases “job creation,” “withholding,” “triple-A bond rating,” “job-killing tax increases,” “cut,” and “poor economic growth.”  And we’re pretty sure a lot of the people at the capitol on both sides of the aisle are fatigued, too.  Isn’t it time a governor didn’t have to worry about retaining Missouri’s AAA credit rating?

We’ve thrown an idea out there. You might have a better one and we hope you share it.