October 2007 Archives

The Federal Reserve Bank of Boston just released its October 2007 issue of their New England Economic Indicators. After looking over the data, I noticed several disturbing trends in Maine's economy.

First, bankruptcies are up 109.3 percent from Q2 2006 to Q2 2007--the largest percentage jump in New England. The current level stands at 678 filings in Q2 2007.

Second, the percent change in nonagricultural employment is the slowest in New England at 0.5 percent from August 2006 to August 2007.

Third, growth in total private employment has reversed itself since hitting its peak of 515,200 in June 2007. It has since fallen to 512,700 in July 2007 and again to 511,800 in August 2007.

Fourth, on the other hand, government employment is up since June 2007 growing from 104,500 in June, to 105,300 in July, to 106,600 in August (the highest level since August 2006).

Fifth, the "shadow government" education and health services industries also continue to grow from 114,200 in August 2006 to 116,600 in August 2007.

Sixth, Maine's unemployment in the last two months have moved above the national average--4.8 percent versus 4.6 percent.

Seventh, correspondingly to point six, the number unemployed has increased 31,700 in June to 34,100 in August while the Civilian Labor Force shrinks from 712,300 in June to 707,100 in August. The higher number of unemployed indicates that it is getting harder to find a job and the lower number in the Civilian Labor Force means people are dropping out of the labor force altogether. A duel sign of a weakening economy.

Eighth, Total Merchandise Exports are down from the recent peak of $718 million in the third quarter of 2006 to $619 million in the second quarter of 2007.

Finally, the total economic activity index has stalled since June at 147.5.

With the national economy on the brink of recession due to the lackluster housing market, it appears Maine's economy may already be heading down the recessionary path. When the legislature reconvenes in January, the first order of business should be to pass a sizable tax cut in order to stimulate Maine's economy in the short term and to boost economic competitiveness in the long term. In a recent report MHPC has laid out a plan of action to cut and reform income taxes by over $218 million--this would be a good start.

As the campaigns for federal offices in Maine start to heat up leading to the November elections in 2008. Lets reflect on an important campaign item that the 2008 election will be critical to its fate--the expiration of the 2001, 2002, 2003 and 2004 tax relief packages in 2010. Thanks to complex federal budget rules, these tax relief packages are set to "sunset" in 2010 which means the tax code will revert to its pre-2001 status. For almost all Mainer's this will mean a significant federal tax hike.

Let's review some of the provisions:

1) Reductions in the marginal tax rate. Marginal tax rates were cut across-the-board and a new, low tax bracket of 10 percent was created. To put these rate cuts into perspective--the top marginal rate fell from 39.6 percent to 35 percent, or 4.6 percentage points. That is the equivalent of cutting Maine's top marginal rate by more than half to 3.9 percent from 8.5 percent. Imagine the uproar if the reverse was proposed in Augusta where they wanted to raise the state rate to 13.1 percent from 8.5 percent. That's exactly what will happen, though at the Federal level, if the sunset is not extended, preferably indefinitely.

2) Reductions in the capital gains rate.

2) Increase in the child tax credit to $1,000 from $500

3) Marriage penalty relief.

4) The federal estate tax elimination and, subsequently, the elimination of many state estate taxes. Not in Maine of course.

5) And a whole host of other tax provisions from increased IRA contribution limits, increased adoption credits, AMT relief, child day care credits, increase in the dependent care tax credit, etc.

Not all of these provisions are good tax policy, such as all the tax credits, but it puts money back into the pockets of taxpayers which is the most important consideration. However, the Congressional Budget Office forecasts that between 2010 and 2011, federal individual income tax revenue will increase by $205 billion--mostly due to the expiring tax relief provisions. Maine's economy is already suffering from its own home-grown tax burden, we certainly do not need the federal government piling on new taxes as well. Keep this in mind come November 2008.

The Brunswick Times Record, which last week became one of the first daily newspapers in Maine to editorialize against the state's current school "reorganization" effort, was kind enough to publish an op-ed I sent them arguing against the proposed Bath/Union 47 consolidation plan, which goes before voters there in a couple of weeks. The plan has already been the subject of one of our Issue Brief reports.

Looking to be fair and balanced, the Times Record also published a response to my piece, from one of the members of the Bath-area team that developed the merger proposal. The author, though, seemed far more interested in personal attacks than in refuting my main argument that the Bath area merger plan will eliminate school choice in the region while driving up property taxes and school spending. My piece is variously described as "grossly inaccurate," "misleading," and "incorrect" despite my having used state Department of Education data for my piece. The author concludes that my statements "clearly lack credibility" and that I should just "stay out of our business".

Good to know that people are free to disagree with the all -knowing, all-powerful Bath-School Union 47 Transition Team! Let's hope the people of Union 47 vote down this proposal, which would deal a severe blow to the cause of school choice in Maine.

Today, Maine taxpayers were shielded from a potential tax increase. The failure of U.S. House of Representatives to override George W. Bush’s veto of the expansion of SCHIP will prevent a subsequent increase in the Maine General Fund Budget.

MHPC researchers Tarren Bragdon and J. Scott Moody had estimated that the passage of the SCHIP bill would have resulted in a $25 million annual increase in Maine Medicaid costs. The SCHIP bill would have expanded resulting in more matching funds for the states. Those funds would have created an incentive for Maine Legislators to increase state spending in order to receive the new federal money.

Federal delegations need to recognize that they are doing a disservice to their home states by supporting fiscally irresponsible bills like SCHIP. Federal bills like SCHIP create incentives for state legislators to also behave in a fiscally irresponsible manner. It is in the best interest of taxpayers that these federal bills never get the chance to wreak havoc on state budgets.

With the Growsmart summit nearly upon us, I came across another myth that is being portrayed by the Brookings report--the myth of government-directed economic clusters. The Brookings report states that ". . . Maine must innovate in how it nurtures the development of its industrial clusters, the prime seedbed of future job-creation . . . the full catalytic potential of Maine's clusters remains to be unleashed . . . To this end, Maine should establish the Maine Cluster Development Fund to catalyze the growth-producing collaboration in selected industrial clusters." (p. 103)

But where's the evidence that government can jump-start these clusters? According to the October 11th edition of The Economist magazine, they conclude in an article titled "The Fading Lustre of Clusters" that "The best thing that governments can do to encourage innovation is to get out of the way."

More specifically about clusters, the article goes on: "Another problem is that EU officials, like government bureaucrats everywhere, are obsessed with creating geographic clusters like Silicon Valley. The French have poured billions into poles de competitivite; and Singapore, Dubai and other are doing much the same. There are dozens of aspiring clusters worldwide, nicknamed Silicon Fen, Silicon Fjord, Silicon Alley and Silicon Bog. Typically governments pick a promising part of their country, ideally one that has a big university nearby, and provide a pot of money that is meant to kick-start entrepreneurship under the guiding hand of benevolent bureaucrats. It has been an abysmal failure." (emphasis added)

Could it be that Maine's newspapers are beginning to turn against the school district consolidation effort? The Brunswick Times Record published the following editorial on Wednesday, calling for a halt to the consolidation processes so that better alternatives can be developed.

Beyond repair
10/17/2007

A more productive tact would be to place the whole process on hold.

Read the full editorial on the Times Record Webpage.

Good to know folks are reading our stuff. The following Letter to the Editor, appearing in today's Bangor Daily News, borrows heavily from our report on the Sinclair Act.

A lid on consolidation

Since John Baldacci and Susan Gendron opened the Pandora’s box of school consolidation, much that has been written about it has been confusing, contradictory and subject to constant change. Maine Heritage Policy Center’s Aug. 23 report has been a breath of fresh air. It reminds readers of the 1957 Sinclair Act and spells out its unintended consequences and their relevance to us today.

Many of us are concerned that we’ll lose meaningful control of the schools our precious children attend. Let’s see. The Sinclair Act caused a 50 percent drop in the number of local school boards. As regional school units blend large and small districts, citizens in small districts may totally lose representation to large districts that may not share their communities’ values.

The Sinclair Act caused Maine to lose 40 percent of its schools. Susan Gendron says our schools can’t be closed outright. If an RSU votes to shut down a school, a community can keep that school open if it can pay the increased costs of doing so. Can your town? Said costs are determined by Susan Gendron with no process of appeal.

The rationale for consolidation is that too large a percentage of the educational dollar is spent on administration. It’s an attempt to cut this so more can be spent on actual teaching. This is what they were trying to do in 1957. So why did spending on school administration then go up by 40 percent from 3.4 percent to 6.7 percent of overall education costs? Inquiring minds want to know.

I know education spending can’t go on the way it has forever. But let’s put a lid on this nightmare of a plan and really involve the people of Maine in creating a rational alternative.

Julia Emily Hathaway
Veazie

Florida has 1.4 million fewer residents than New York but almost 14 times more people buying insurance on their own, not through their employer, in the individual market.

In 2006, New York had just 57,000 people purchasing insurance in the individual market, thanks to community rating and guarantee issue in the individual market. New York’s individual policies start at $609 per month for an individual and $1,828 per month for family coverage.

By comparison, Florida has 790,000, according to the latest figures. Individual insurance premiums in Florida start as low as $35 a month for a 25-year-old man or $44 a month for 25-year-old female, according to ehealthinsurance.com.

Senator Hillary Clinton has talked about taking NY’s destructive guarantee issue and community rating regulations nationwide as part of her universal coverage plan. The facts show these regulations will reduce coverage not expand it.

Last month, The Maine Heritage Policy Center released model health care reform legislation that would give Maine families the right to choose the same affordable health plans available to those in the Sunshine State.

On October 19th, Growsmart will be hosting its annual Maine Summit. As such, I thought it would be appropriate to reexamine some of the data that was provided to us in the Brookings report that preceded the first Growsmart Summit. As I reported in one of our Issue Briefs, "Inconvenient Truth," the Brookings Institution attempted to portray an inaccurate view of Maine's economy. Specifically, they claimed that "Maine's per capita income now stands at an all-time high relative to the U.S. average" (pg. 32) I have updated the chart from my report to see if my original criticism of the Brookings report is still valid. Unfortunately for Maine, it is.

The chart below shows that since 2003, Maine's per capita income has steadily fallen against the national average and in 2006 stands at 87.2 percent. Since 1985, only one year has Maine been lower against the national average and that was in 2000 at 87 percent. As such, Maine is perilously close to falling to a level against the national average not seen in 21 years.

Overall, Maine has the 39th highest level of per capita income in the country--only a few spots above the dreaded "bottom ten" joining such poorly economic performing state such as Mississippi, West Virginia and Louisiana. The 39th ranking is the lowest since 1983.

Click "continue reading" to view chart.

Today's Morning Sentinel and Kennebec Journal feature a story on the Sinclair Act which makes use of quite a bit of MHPC research, as in the following clip:

Bob Whytock said Cony High School in Augusta, where he was a teacher and coach, was big enough to stand alone after Sinclair, but smaller communities lost their voice as local school boards merged with bigger communities.

Per-pupil spending on administration grew 406 percent (in 2002 dollars) from 1950 to 1980, and the number of people working for the Maine Department of Education tripled, Bowen said.

Read the complete article at the Maine Today webpage.

Today the Tax Foundation released their 2008 State Business Tax Climate Index. Unfortunately, it is more bad news for Maine. Maine's ranks as the 41st best business tax climate (or, conversely, the 10th worst) dropping one spot from number 40 in 2007. More details to come as I digest this report.

And apparently the folks at the Tax Foundation are working over-time. As I blogged yesterday, the Tax Foundation annually updates their Federal Tax Burden and Expenditure paper after the release of key data from the Census Bureau. While the paper is not yet out, they did issue a press release today with the overall data. In FFY 2005, Maine received $1.41 in federal expenditures for every $1.00 sent to Washington--the 13th highest ratio in the country. Again, more details to follow as I digest this second report.

Today, the U.S. Census Bureau released their 2005 Consolidated Federal Funds Report. In a nutshell, the report tracks federal expenditures to the 50 states and territories. The report is based on the federal fiscal year. Between 2004 and 2005, federal expenditures increased in Maine by nearly $500 million--see the first Chart below--to $11.356 billion from $10,865 billion.

The second chart shows the change in spending by major expenditure category. Of the $500 million increase, "procurement" ($206 million) and "retirement and disability" ($179 billion) make-up the vast majority. Federal procurement in Maine consists mostly of purchases by the Department of Defense, namely Bath Iron Works and Portsmouth Naval Shipyard. Retirement and disability consists of Social Security and Medicare payments.

Every year the Tax Foundation takes this Census data and publishes their "Federal Tax Burdens and Expenditures by State" report. In the report they found that Maine receives $1.40 for every $1.00 sent to Washington in FFY 2004--up from $1.35 in FFY 1994. I will report the latest figures once they become available from the Tax Foundation. Also, I will be publishing some other interesting finding from the Census report in the near future.

Click "Continue Reading" for the charts.

The Maine Department of Education has gone out of its way to insist that all is well with the current school district consolidation effort. The movement to repeal the bill, though, is spreading. In the past two days, two separate school boards, in South Berwick and in the Camden-Rockport area, have adopted resolutions in support of a repeal.

According to Foster's Daily Democrat, the SAD 34 board drafted a letter this week advocating for repeal of the law. The Village Soup Times reports that the Five-Town CSD school board voted 9-2 to adopt a resolution in support of the repeal as well.

These developments come on the heals of similar action by the Mount Desert Board of Selectman, and the suggestion from a Cape Elizabeth School Board member that school leaders there tell the state to "Go to Hell"

Supporters of the consolidation law, who are getting harder and harder to come by, would love to characterize resistance to the new law as being limited to a few rural parts of the state, but the news suggests otherwise.

I post this story because I think this may be the first time the word "nightmarish" has shown up in the newspapers in a story about current efforts to consolidate Maine's school districts. To hear the Department of Education tell it, all is going well as the regional committees begin work developing the Regional School Units. Every day is another quote from someone at the Department talking about how excited they are that everyone seems to be moving forward.

This excerpt from the Lincoln County News story tells a different tale:

School board member David Howell said the “merger� is going to cost Bristol something, but who knows how much. “Supposed we say, ‘no’ we are not going to play, so far the Legislature implies a penalty of 50 percent of the state subsidy, and that is $150,000, and that’s a bargain. I don’t advocate taking positions that involve a penalty, but this may be the best way out. We need to keep that reality in mind as we go through all this.�

Through the meeting process, said Beaver, nobody has pointed out the advantages of consolidation. “The state is the only winner,� she said.

Read the whole story here.

Blue Cross and Blue Shield just released a study on HSA plan participants compared to traditional plan participants.

The BCBSA 2007 CDHP Member Experience Survey showed that HSA plan members were:

• twice as likely to participate in an exercise program than those enrolled in non-CDHP products (12 percent vs. 29 percent)
• 3 times more likely to use smoking cessation (20 percent vs. 6 percent)
• 3 times more likely to seek assistance for stress management (22 percent vs. 8 percent)
• twice as likely to access nutrition and diet programs (27 percent vs. 12 percent)
• better at achieving improved outcomes as a result of participating in wellness and prevention programs - improved overall health (37 percent vs. 25 percent), quit smoking (14 percent vs. 1 percent) and improved fitness (49 percent vs. 33 percent)
• more likely to track health expenses (63 percent vs. 43 percent)
• saving for future health expenses (47 percent vs. 18 percent)
• did not forgo medical care at rates different than non-CDHP subscribers
• equally likely to renew their health plan next year

In total, Blue Cross and Blue Shield companies have at least 3.1 million CDHP enrollees and at least 1.7 million members with HSA eligible products. In addition, it was reported that:

• 45 percent of employers with an HSA plan now contribute to the employees' account (up from 37 percent in 2005)
• HSA members have a similar age distribution except for 18-24 age cohort (11 percent vs. 6 percent) and 55-64 (10 percent vs. 19 percent)
• Have similar distribution by self-reported health status
• Had a 32 percent reduction in ER usage

Clearly, consumer directed health plans are having an impact on the members’ health and their (and their employers’) bottom line.

The Portland Press Herald today ran a story on the new $1 fee levied on oil changes in Maine. The money from the fee will be used to clean-up contaminated waste-oil sites throughout Maine.

The purpose of the fee is clear, but what is not clear is why this is being called a "fee?" Fees are something we pay when there is a direct good or service being provided. For instance, I may pay a park entrance fee in order to enjoy the beauty and serenity of the park. However, what good or service am I getting for this "oil change fee." Sure, I will derive some minuscule benefit of a cleaner environment, but I doubt that I will ever visit the cleaned-up sites in person.

One useful analogy is to look at the "gas tax." I pay the gas tax every time I go to the pump, yet it is unlikely I will ever derive the full benefits of the taxes I pay. There will be roads built and maintained in Maine that I may never see or use but I still helped pay for their construction. Whenever, funds are used to benefit society in a general manner, the funds used are extracted by a "tax." This "oil change fee" fits the analogy of the "gas tax" more so than the "park entrance fee."

My final conclusion is that is an "oil change tax." Perhaps I will follow-up on this later to see how the U.S. Census Bureau defines this as a tax or fee . . .