Recently in Taxation Category

In Sunday's Portland Press Herald, economist Charles Lawton made some rather dubious claims about the economic impact of transfer payments.  He states: "In short, the reason for the rising share of transfer payments in Maine's total personal income is not their rapid growth rate.  Rather it is the slower growth rate of earnings from employment.  In a word, it's the jobs, stupid.  If the nation as a whole can grow employment earnings by nearly 150 percent over an 18-year period encompassing two recessions while more than doubling the volume of transfer payments, there is no reason Maine can't do the same--at least no theoretically necessary reason to the detrimental effects of transfer payments."

Whoa, hold on Tex.  I am not even sure where to begin on that one.  First, Dr. Lawton should read my study on "Why Taxes Matter."  In fact, transfer payments do come at the expense of earning. Earnings, government employment excluded, are generated by the private sector. Transfer payments come from taxes which are paid from the private sector. If transfer payments grow, then taxes to pay them must go up. Throw in the deadweight losses from the higher taxes, and the private sector--earnings and jobs growth--suffer.  There is one "theoretically necessary reason for detrimental effects."  And empirical reasons as well.

Dr. Lawton also downplays the enormity of the transfer payment problem in Maine.  While he likes to talk about the national average, Mainers can only wish they were even close to the national average.  In my new study on Maine state government spending--"Maine Spends too Much . . . But Where?"  The study shows that Maine state government spending on "Public Welfare" (Medicaid, TANF, etc.) and "Health" (WIC, state clinics, etc.) rank the highest in the country as a percent of income.  In fact, Maine spends nearly double the national average on Public Welfare and more than three times the national average on Health.

One last point--though I'm sure there are others I am forgetting.  In another recent paper--"Maine's Dwindling Private Sector Economy"--I show that there is a clear relationship between the size of a state's private sector and its overall economic well-being.  Transfer payments crowd out the private sector to the detriment of all Mainers.  Of course, we don't need complex graphs to tell us that.  Just look over the border.  New Hampshire has the 2nd largest private sector in the country and the 9th highest per capita personal income in the country.  Alas, Maine is the polar opposite. 

Harvard economist Greg Mankiw illustrates in a recent blog, "My Personal Work Incentives," why taxes matter--the classic "labor-leisure" trade-off.

One of the greatest economic and policy differences between Maine and New Hampshire is the level of spending on personal current transfer receipts (PCTR).  This type of spending includes Social Security, Medicaid/Medicare and other welfare programs.  Overall, Maine's PCTR totalled $8,784,996,000 in 2007 while New Hampshire's PCTR totalled $6,445,554,000--or $2.3 billion lower (click "continue reading" to view charts).

While Maine's policy-makers cannot control Social Security or Medicare spending, they do control other important programs such as Medicaid and other types of welfare.  These state level programs account for half the difference in 2007.  The difference in Medicaid spending alone is nearly $1 billion with Maine spending almost $2 billion to New Hampshire's $1 billion.  Maine also spent $110 million more in food stamps.  New Hampshire only spent $63 million total in food stamps.

And keep in mind that New Hampshire's economy, as measured by personal income, is nearly $10 billion bigger than Maine's with almost exactly the same population.

No, the Maine legislature did not clandestinely meet in the middle of the night to raise the cigarette tax.  Rather, New Hampshire increased their cigarette tax by 25 cents on Wednesday to $1.33 per pack.  For all the Mainers who engage in cross-border shopping, the tax savings on cigarettes just went down.  However, Maine's cigarette tax is still significantly higher at $2 per pack.

On Wednesday (October 2), the Census Bureau released the 2007 data on federal expenditure by state--called the Consolidated Federal Funds Report.  All data is expressed in federal fiscal years.  The report shows federal expenditures in Maine climbing 7.9 percent to $11.85 billion in 2007 from $10.979 billion in 2006.  Maine's growth rate exceeded the national average of 4.3 percent.

Driving this trend is the growth in "Retirement and Disability" category which grew 7 percent to $4.254 billion in 2007 from $3.977 billion in 2006.  Maine's growth rate in this category also exceeded the national average of 5.9 percent.  Another tell-tale sign of Maine's rapidly aging population.  See attached chart for federal expenditures in Maine by category.

"Grants to State and Local Governments" was another fast growing category at 4.6 percent versus the national average of 0.4 percent.  The majority of this category is made up of matching funds for Medicaid.

It's here!

Maine people now have the ability to actually see the Public Information needed to understand how the State of Maine spends tax dollars.

This new Web site is a searchable, downloadable database of Maine's Payroll, Pension and other Spending accounts for 2006 and 2007. 

Search by category to see what your Tax Dollars buy.  Do research on state vendors and the state agencies who buy their goods and services.

 -  Curious about how many Maine State employees make more than the Governor? 

 -  Want to know how much the State of Maine buys from New York companies?

 -  Ever wonder what Maine spends on airline tickets?

 

It's easy to find out at MaineOpenGov.Org 

On Thursday, the Bureau of Economic Analysis released new personal income data for the 2nd quarter of 2008. While Maine's personal income grew 1.6 percent; 1.18 percentage points of that growth came from government transfers--Social Security, Medicare, Medicaid, etc. In other words, 74 percent of the growth came from transfers which is the second highest percent behind Rhode Island's 82 percent. This is not real economic growth. Massachusetts and New Hampshire had the lowest portion due to government transfers at 54 percent and 55 percent respectively. However, all growth rates are somewhat inflated due to the federal stimulus rebate checks.

The growth in government transfers has negatively impacted Maine's private sector share of income.  The chart below shows that Maine's private sector fell to 66.1 percent of personal income--the second lowest level since 1929.

Not surprisingly, Maine is not the only northeast state to worry about its competitiveness with New Hampshire.  Vermont also struggles with many of the same issues that Maine does . . . high taxes, too many regulations, anti-business political climate, etc.

Thanks to MHPC's sister free-market organization in New Hampshire--the Josiah Bartlett Center--I have become aware of this very interesting study by the Atlantic Institute for Market Studies based in Halifax, Nova Scotia.

The author of the study is Dr. Art Woolf from the University of Vermont and is titled "A River Divides It: A Comparative Analysis of Retailing in the Connecticut River Valley of Vermont and New Hampshire."  From the executive summary:

"This study examines the nature and extent of changes in retailing activity in the border counties of Vermont (Essex, Caledonia, Orange, Windsor, and Windham) and New Hampshire (Coos, Cheshire, Sullivan, and Grafton) over the past 40 years.  The border counties have exhibited similar rates of population growth over that period of time, but the economic growth rates of the two regions have diverged significantly . . . New Hampshire's border county stores are able to offer lower prices to consumers than their Vermont counterparts primarily because of Vermont's sales tax.  The study also presents evidence that Vermont's bottle deposit law has affected the location of larger supermarkets in the border region . . . the study finds that, if Vermont had not implemented its sales tax, Vermont's border counties would have 1,900 more retail jobs and $322.7 million more in retail sales than existed in 1997."

The only thing I would add to the study is differentials in excise taxes, especially cigarette, alcohol and gasoline, also add to the tax differential driving cross-border shopping and business relocation.

While this question has tasked the human brain for hundreds of decades, the answer to a similar question is much more apparent:

Which came first - the Taxes or the Spending?

Even though it may seem the case... the most aggressive politicians don't intentionally raise taxes faster than they can spend the money.  (It DOES happen occasionally, when tax rates are so high the revenues outpace expectations - creating that ear-to-ear grin on a politician's face when they can jump in front of a TV camera and claim to have a "surplus" to spend!)

But no.  There's no "surplus."  There's never a "surplus!"  And there won't be a "surplus."   

Here's why:   "It's the Spending, Stupid!"

But how did it get this way?

Ross Perot liked to repeat: "politicians buy your votes with your money," a statement that has been true since at least the Roman Republic.  The worst part of this observation by the little guy from Texas, is that there is always another election - with more votes to buy, more promises to fund forever, and more taxes to raise!

Government Spending is a financial sink-hole because it includes the checks written today and, more importantly, the promises to write exponentially more and larger checks in the future.  It's the long-term interest on bonds that paid for short-term projects.  It's hiring someone who can never be fired.  It's paying lifetime retirement and health benefits for someone who stops working in their forties.  It's "entitlement" programs that create multi-generational recipients who become trapped in dependency with no incentive to become self-supporting and no time-limits on their monthly checks.  It's paying millions of dollars studying moths' flight patterns, thorns on rose bushes, and hiring rooms full of psychologists to determine that, yes: teenagers without adult supervision will experiment with sex and alcohol.

Here in Maine, most people seem to agree that our tax dollars are wasted in criminal-theft proportions... then send the same politicians back to Augusta with one more chance to "fix" things. 

Pssssssst:  Unless Maine's elected leaders are bound by law to control spending, they will not. 

Please don't be fooled when politicians float "trial balloons" about shuffling lower Income Tax rates with higher Sales Taxes, increased Fees, higher Permit Costs or simply passing off more Maine taxes on tourists and seasonal residents.  The words are meaningless if they don't control spending.

So Spending does come first. 

And Spending must be controlled before we can touch taxes

Recently, Fraser America released a new study titled "Measuring Entrepreneurship: Conceptual Frameworks and Empirical Indicators."  After reading through the study I noticed a wide deviation between Maine and New Hampshire on several entrepreneurial metrics:

1)  Venture capital invested (by destination) per capita, 2005:  Maine ranked 10th from the bottom at $2.36 while New Hampshire ranked 7th highest at $90.19.

2)  Total industrial R&D expenditure (performing) as a percentage of GDP, 2003:  Maine ranked 18th from the bottom at 0.5 percent while New Hampshire ranked 8th highest at 2.8 percent.

3)  Total academic R&D expenditure (performing) as a percentage of GDP, 2003:  Maine ranked 3rd from the bottom at 0.19 percent while New Hampshire ranked 15th highest at 0.52 percent.

4)  Number of patents granted (all types) per 1,000 people, 2005:  Maine ranked 23rd from the bottom at 0.121 while New Hampshire ranked 9th highest at 0.413.

Note: Ranks are out of 60 since it includes all U.S. states and Canadian Provinces.