Poverty & Social Welfare

December 17, 2020 5:06PM

Instead of New Taxes, Maybe High‐​Cost Places Should Try… Lower Costs

As my Cato colleague Chris Edwards and I have been documenting here recently, COVID-19 has accelerated the longer‐​term migration of many Americans from expensive cities like New York and San Francisco to places with lower taxes and a lower overall cost of living. Examining changes to LinkedIn members’ zipcodes and various cost‐​of‐​living metrics, Bloomberg’s Misyrlena Egkolfopoulou today provides more evidence of the “Expensive Exodus”:

City inflows 2020

Citing these and other data, as well as various anecdotes, Egkolfopoulou concludes that cost of living — especially housing — is playing a “major role” in movers’ decisions:

[S]ome of the most expensive urban areas [are] seeing the biggest population loss versus previous years. Outbound moves in the Bay Area rose 8% in May‐​September, compared with the same period in 2019, while Seattle and New York both experienced a 7% increase… Meanwhile, Jacksonville, Raleigh, Charlotte, Nashville and Phoenix were among cities with the most inbound moves, according to the Webster Pacific and United Van Lines data.

High cost cities
Housing costs

She adds that tax policy is another important driver:

…Covid‐​19 is accelerating a decision that was being made by scores of others even before the pandemic. While cost of living, lifestyle, property prices and jobs influence the moves, the cities that are attracting the most people are in states with lower or zero local income tax rates.

Cities taxes

As Edwards and I have noted, these migration trends pre‐​dated COVID-19 but have been amplified for wealthier Americans who are more likely to be working from home during the pandemic and have the means to change addresses relatively quickly. While their departure from expensive “superstar” cities has been cheered by some, the University of Toronto’s Richard Florida warns that this trend could have a serious impact on local budgets: “A whopping 80% of New York City’s income tax revenue, according to one estimate, comes from the 17% of its residents who earn more than $100,000 per year. If just 5% of those folks decided to move away, it would cost the city almost one billion ($933 million) in lost tax revenue.” He remains optimistic about superstar cities’ long‐​term prospects but warns that, if these places’ “policies don’t change, their budgets will suffer in the meantime, and their least‐​advantaged people and neighborhoods will bear the brunt of it as budget cuts and austerity measures eliminate key services.” Because Florida blames much of the current exodus on the 2017 federal tax law’s limitations on deductions for state and local taxes (SALT), which once gave high‐​tax cities “a fighting chance against their lower‐​tax rivals,” he suggest that city and state governments develop “new revenue models that account for the locations of both the people and their businesses” to counter the “effect of new remote technology on state and local taxes.”

However, that approach would seem to ignore the many non‐​tax reasons why wealthier Americans — now unburdened by a physical office — are leaving costlier places (though the SALT deduction is indeed likely playing a role). Most notable in this regard is housing: beyond the home price data noted above, for example, St. Louis Fed’s Regional Price Parity (RPP) indices, which allow economists to compare living costs across state metro areas, shows that rent differences between out‐​migration states and in‐​migration states are in most cases quite substantial:

FRED - Rents

A novel “revenue” solution also elides the far more straightforward policy approach that high‐​cost states and cities could undertake: attacking costs head‐​on through less‐​punitive taxes (on both income and goods), less regulation (especially for housing), better governance, and more personal freedom. As Edwards notes in his 2018 paper, such policies could not only dissuade current residents from leaving, but also attract new people and investments.

These places can’t change their weather, but they can certainly improve their economic climate.

December 2, 2020 3:44PM

Walter Williams, RIP

Walter E. Williams portrait

As if 2020 wasn’t bad enough, today comes the sad news that Walter Williams has died at 84. He was a scholar who made an impact on the public debate, and a great teacher of economics. I’m old enough to remember when he was just breaking into public view in the mid‐​1970s. In fact, this past weekend I was trying to prune some of my old files, and I found Walter Williams clips in several of them, including a study, “Youth and Minority Unemployment,” published by the Joint Economic Committee, and a full‐​page ad in the Wall Street Journal, sponsored by the SmithKline Corporation, featuring his essay “Minimum Wage, Maximum Folly.” As editor of New Guard magazine, I published his article “How Big Government Hurts Minorities” in 1978. And he was for many years an adjunct scholar of Cato, where he contributed to Regulation and Cato Journal and gave many lectures.

After early stints as a cab driver, a soldier in Korea, and a probation officer, Walter focused on education and got a Ph.D. in economics from UCLA in 1972. From 1973 to 1980 he taught at Temple University in Philadelphia before moving to George Mason University for the rest of his career.

In 1982 he published a book of original research and provocative ideas, The State Against Blacks, which Don Boudreaux describes in today’s Wall Street Journal as “an eloquent, data‐​rich broadside against occupational licensing, taxicab regulations, labor‐​union privileges and other fine‐​sounding government measures that inflict disproportionate harm on blacks by restricting the employment options and by driving up the costs of goods and services.”

His work in these areas and his outgoing, engaging, effective style of communications brought him broader public attention. He appeared in Milton Friedman’s PBS series “Free to Choose” in 1980. He became a frequent guest host on the Rush Limbaugh Show. (I was fortunate enough to hear him conduct a rare live interview with his friend and mentor Thomas Sowell on one of those appearances.) He was the subject of a few columns by William Raspberry, the first black op‐​ed columnist for the Washington Post. As I recall, in many such columns, including this one, Raspberry would give Williams or Sowell plenty of space, then conclude that he just couldn’t quite buy the argument. But the columns had a great impact in getting those ideas a hearing on the most important “ideas” page in Washington.

In 1989 the Cato Institute and Praeger published Walter’s book South Africa’s War against Capitalism. In it he showed, with detailed economic and historical analysis, that South Africa’s apartheid regime was not “capitalist,” as its critics often believed. Rather, “South Africa’s apartheid is not the corollary of free‐​market or capitalist forces. Apartheid is the result of anticapitalistic or socialistic efforts to subvert the operation of market (capitalistic) forces.”

People often lumped “Sowell and Williams” together, since they were both African‐​American economists with a strong free‐​market bent. But they really were very different. Sowell was, and still is at age 90, a private and reserved scholar, the author of more than 40 books on topics including Marxism, race and ethnicity, education, ideology, and economics. Williams was a much more public‐​facing intellectual: An engaging teacher of Econ 101, in a classroom or on the lecture circuit. A missionary for sound economics and clear thinking, happy to engage in public debate. A newspaper columnist and frequent radio/​TV guest or host.

Walter Williams challenged a lot of conventional wisdom during his almost 50 years in the public eye. He will be missed.

November 17, 2020 11:48AM

Will High‐​Tax “Superstar Cities” Finally Need to Consider — Gasp! — Their Residents?

As my Cato colleague Chris Edwards documented here a couple weeks ago, interstate migration data from the U.S. Census Bureau indicate that state tax policy affects where Americans, especially wealthy ones, are choosing to live and work. The following charts (roll over the dots to find your state) confirm Chris’ initial impressions: in 2018 there was a strong, statistically significant (p‐​values < 0.01) relationship between (1) personal state tax burdens — as measured by either the Tax Policy Center or the Tax Foundation — and (2) net interstate migration (ratio of inflows to outflows):

The charts paint a pretty clear picture: as a state increases taxes on high earner residents, it tends to lose them to other, lower‐​tax states. As Chris notes, moreover, high state tax levels don’t necessarily mean high quality government services. In other words, many Americans aren’t getting what they pay for.

The data above are from 2018, but there’s no reason to think that these trends have reversed since then. In fact, the seismic forces unleashed by COVID-19 this year will very likely amplify Americans’ ability to have “superstar city” jobs but live in lower‐​tax jurisdictions, and many are choosing to do just that. In particular, two separate NBER papers from June found that the pandemic significantly increased the share of Americans working remotely; that remote work was concentrated in states like Maryland, Massachusetts, and New York with higher shares of high wage “information work” (tech, management, professional, etc.) jobs; and that many companies expect their remote work exceptions to remain in place long after the COVID-19 crisis ends. Anecdotal evidence backs this up, as large companies like Microsoft (and others) have decided to make formerly‐​temporary “work‐​from‐​anywhere” policies permanent.

In turn, a new Upwork survey of more than 20,000 people finds that between 6.9% and 11.5% of U.S. households — totaling approximately 14 to 23 million Americans — are planning a move due to the growing availability of remote work caused by COVID-19, consistent with the news reports that Chris cited (and many, many others). As a result of these trends, Upwork economist Adam Ozimek estimates that near‐​term migration rates (between counties or states) could be three to four times what they were in previous years.

Remote work and migration

The survey further finds that major cities will see the biggest out‐​migration effects, with many movers planning to relocate far from their current location and motivated by reducing their cost of living (here, housing costs):

Remote work and major cities
Remote workers moving far away

These trends could have dramatic implications for the future of work, U.S. real estate markets, and, perhaps, state and local policy. As Ozimek concludes, the results “should make us optimistic that remote work work has the capacity to help lean against housing and affordability issues across the U.S. by enabling businesses and professionals to access talent and opportunities beyond their local markets.”

Among those “affordability issues,” though unmentioned by Ozimek, is tax policy. For the last several decades, certain “superstar” cities and their surrounding states could increase wealthy residents’ tax (and regulatory) burdens with relative impunity because these places were home to jobs and even entire industries that were unavailable elsewhere in the country. As a result, high wage workers in, say, tech, finance, or law had little choice but to live in New York, Chicago, San Francisco or Washington, DC — and bear their high costs (and other headaches) — because that’s just where the jobs were.

In recent years, however, this dominance has been diluted, as remote‐​work technology has improved or as dynamic but lower‐​cost cities like Charlotte, Denver, Atlanta and Dallas, as well as smaller places like Boise or Durham, have chipped away at the traditional champions’ professional advantages. Prior to COVID-19, these factors produced small but significant interstate migration from costlier jurisdictions to cheaper ones, but the “superstars” still maintained their overall allure. As such, cities and states been able to continue imposing onerous and poorly‐​thought‐​out measures like San Francisco’s recently‐​enacted “Overpaid Executive Tax.”

If COVID-19 and the remote‐​work explosion turn the trickle of superstar city/​state out‐​migration into a river, those days may be numbered. As Ozimek put it, “[e]xpensive places used to have a monopoly on the access to their valuable labor markets, and as work goes remote, they no longer do.” Superstar cities and their states would be wise to recognize this changing balance of power and adapt their tax and regulatory policies accordingly.

November 6, 2020 12:59PM

Looking at 2020 Initiative Results: A Pretty Good Day for Liberty

The presidential contest may not be officially decided for days yet, but lower down on the ballot, it looks like a very good election for libertarians and other supporters of limited government.

The War on Drugs took a major hit. In fact, every initiative to legalize drugs passed, including proposals to legalize medical marijuana in Mississippi, recreational marijuana in Arizona, Montana, New Jersey, and South Dakota, to decriminalize hallucinogenic plants in Washington, DC, as well as a far‐​reaching measure to decriminalize all drugs – including cocaine, heroin, and LSD – in Oregon.

Voters also preferred lower income tax rates, with Coloradans voting to decrease the state income tax, and even Illinois voters rejected a graduated income tax.

There were victories on several civil liberties fronts as well. Michigan voters approved Proposal 2, amending the state constitution to protect electronic data and communications in the same way the law protects our homes and papers from unreasonable search and seizure. In Alabama, voters removed racist language from their state constitution, while in Mississippi, voters approved a new state flag without Confederate symbolism, and Nevada voters removed a ban on same‐​sex marriage. These later changes were largely symbolic, of course, but symbols matter.

And, to top it off, the first Libertarian was elected to a state legislature in a generation, with Marshall Burt in Wyoming.

As usual, California had several high profile ballot measures. Cato’s Project on Poverty and Inequality in California was watching several of them closely.

Possibly the biggest question put to California voters, Prop. 15, would have changed property tax rules for commercial properties, resulting in an overall tax increase of $7.5–12 billion. At the time of writing, the outcome of Prop. 15 is probably too close to call, in keeping with tight polling ahead of the election.

Ahead of the election, we were looking closely at Prop. 22, which would make significant changes to 2019’s Assembly Bill 5. AB 5 would have required employers in many industries to classify workers as employees, rather than independent contractors, making them subject to additional requirements including mandated benefits and minimum wages. It would be an oversimplification to reduce AB 5 to a battle over app‐​based rideshare companies like Uber and Lyft – the law affects workers in numerous other industries, from yoga teachers to newspaper deliverers – but the rideshare industry played a significant part in the AB 5 debate from the beginning. Prop. 22 looks set to pass by a relatively wide margin, and will exempt rideshare companies from AB 5’s mandates. There are two main takeaways from this: first, voters have shown that they like the new services that tech companies are providing, and don’t want new regulations to prevent them from accessing those services. Admittedly, there’s some level of ambiguity here – California’s Prop. 24 looks set to institute new data regulations on tech companies – but the calculus on Prop 22 was simple: if it passed, rideshare companies would dramatically pull back, if not leave entirely, from California. Second, now that numerous industries have received carve‐​outs from AB 5, whether at the ballot box (as rideshare did) or in the legislature (like musicians did) or in the original bill (like lawyers did), California’s legislators should go back to the drawing board. Retroactively installing loopholes in a law encourages the worst excesses of crony capitalism, even if the original law was a bad one. There’s a path forward on rules for independent contractors, but it requires legislators to admit that they got it wrong – and got on the wrong side of voters – the first time around.

Two other initiatives we were watching failed by quite large margins. Prop. 20 and Prop. 21 were both repeats of earlier ballot initiatives: Prop. 20 would have rolled back the criminal justice reforms enacted by 2014’s Prop. 47 and 2016’s Prop. 57. Props. 47 and 57 were major reforms to the criminal justice system, and contributed to a significant enough reduction in the number of incarcerated people that California is in a position to close two state prisons in the near future. Prop. 21 is a slightly‐​modified version of 2018’s failed Prop. 10, and would have allowed local governments much more authority to enact rent control policies. So far, it looks like Prop. 21 will fail by a narrower margin than Prop. 10 did, which could mean that voters are either more concerned about rent increases now, or that they were receptive to some of the changes in the initiative’s drafting. Either way, California voters have held the door firmly shut to new local rent control policies, just a year after the legislature enacted a statewide cap on rent increases.

One last proposition is worth discussing as well: Prop. 25 was a referendum on SB 10, which would have eliminated cash bail and replaced it with a risk assessment system. It looks like Prop. 25 – that is to say, SB 10 – has failed, and California’s bail system will remain as‐​is for now. It’s worth noting that criminal justice reformers were split on the changes. Some argued that the new risk‐​assessment system may have some of the same problems as the existing system. The law wasn’t very specific about how to determine who is released or held in jail before a trial, and some reformers were concerned that those determinations would reflect racial biases. Given that SB 10 managed to pass in the first place, it’s clear that there’s desire for reform, but legislators should take this as a time to start over, and perhaps more clearly and intentionally design a new system that takes into account lessons learned from other states, instead of punting hard questions to the executive or judicial branches.

The major upshot of Tuesday’s results in California is that the legislature may return to several major issues next year, including AB 5 and cash bail reform. The defeat of rent control shows what voters don’t want, but housing is still clearly a pressing issue for the state. It’s also clear that our work on Cato’s California Project is cut out for us: as legislators and local officials continue to wrestle with these important issues, they will need a diverse set of well‐​considered perspectives, Cato’s California Project will contribute to that conversation.

November 5, 2020 2:29PM

Are Foster Care Agencies Entitled To Religious Accommodation?

Yesterday the Supreme Court heard oral argument in Fulton v. City of Philadelphia, the case over whether Philadelphia can exclude from its foster care program agencies like Catholic Social Services that decline to certify home studies for gay couples. Here’s the reaction of my colleague Ilya Shapiro in a statement:

In the biggest case the Supreme Court has heard since Amy Coney Barrett joined the bench, it was heartening to see the justices struggle to do right by religious believers, members of the LGBTQ community, and, perhaps most importantly here, the kids in desperate need of fostering and adoption. Unlike how many commentators have characterized the case, Fulton v. City of Philadelphia doesn’t present a direct clash between religious liberty and equality principles. As Justice Kavanaugh pointed out, no gay couple has ever been turned away by Catholic Social Services, there are 30 agencies providing screening and placement services, and CSS has no problem referring adoptive parents to those agencies. Moreover, the relevant city contract allows for exemptions from the relevant antidiscrimination provision at the sole discretion of a commissioner—so why not use that wiggle room here? This case is different both from the direct government provision of a service or license (as in Obergefell) or the thorny issues surrounding “public accommodations” (as in Masterpiece Cakeshop). There should be a way for CSS to continue to provide its valuable services, and for the rights of same‐​sex couples to be observed, without either cutting away First Amendment freedoms or Fourteenth Amendment equal protection. It’s a good thing that at least a majority of the Supreme Court is likely to find that path.

I’m on pretty much the same page as Ilya policy‐​wise. What makes this such a knotty case is that constitutional principle doesn’t always map well onto good policy. As I wrote in February when the Court agreed to hear Fulton:

It’s far from clear on what issues the Court will choose to resolve the case.

It might focus on whether the city of Philadelphia overstepped the Court’s Masterpiece Cakeshop guidance by showing improper animus against religion, and if so whether it matters (as the Third Circuit thought it did) that the city would have turned away a secular agency that followed the same placement policy. Or, with more dramatic implications, the Court might revisit its Employment Division v. Smith precedent, which holds that the Constitution affords no right to religious exemption from otherwise neutral and generally applicable laws.

Deciding the case on the basis of one‐​off Masterpiece Cakeshop animus would allow the Court to dodge the issues for now. But the plaintiffs’ evidence on that point was found insufficient by courts below. Another off‐​ramp would be to accept the plaintiffs’ theory that signing off on a home study counts as compelled speech, but that one — along with a number of the other arguments for the Fulton side — doesn’t work well if you accept the city’s description of CSS’s role as that of a city contractor standing in the city’s shoes in performing a service the city could might instead have performed directly itself.

Perhaps for that reason, conservative Justices repeatedly probed the question of whether the city’s rules might be recharacterized as a form of licensing as opposed to terms in a contracting relationship. Would it make a difference in such a classification if the government had taken over a formerly private category of services?

The Justices spent relatively little time on the looming presence of Employment Division v. Smith, which many religious liberty litigators seek to overturn. Justice Amy Coney Barrett got straight to the point, though, when she asked advocate Lori Windham, “What would you replace Smith with? Would you just want to return to Sherbert v. Verner?” In some ways Smith already seemed half‐​dead, however, as the Justices debated whether the city was acting on behalf of a compelling enough government interest and had exhausted possible accommodations.

To my mind, the best policy approach in cases like these is a pluralist one in which a variety of high‐​quality foster care agencies are made welcome, while the city makes sure all qualified families have agencies happy to serve them. Such a multi‐​door or choice‐​based system would be more easily advanced through concepts of voucherization. In particular, Prof. Robin Fretwell Wilson of Illinois has suggested voucherizing the home study phase of the process, which is the sticking point for CSS. And yet an affirmative obligation to voucherize a complicated service is probably beyond this (or any?) Court’s view of what the Constitution requires. Justice Brett Kavanaugh — who may be in a position to assemble a majority — seemed instead to have in mind a search for minimalist common ground, even if only enough of it to last one case. 

October 6, 2020 3:57PM

The Reality of Incomes, Taxes and Redistribution in America

As my Cato colleague Chris Edwards mentioned last week, the Congressional Budget Office on Friday released its annual report on trends in U.S. household income, means‐​tested transfers, and federal taxes between 1979 and 2017 (the most recent year for which tax data were available). The CBO report is, as usual, chock‐​full of interesting information, but today I’d like to focus on three findings that challenge common claims regarding taxes, middle class incomes, and wealth redistribution in the United States.

First, and echoing Chris’ post from last week, the CBO shows that total annual federal taxes — income, payroll, corporate, and excise — paid by the richest Americans (households making around $300,000/year or more) have basically doubled since 1979. Over the same period, the middle classes have paid almost the same amount of federal taxes, and the poorest Americans’ federal tax burden has all but disappeared.

Second, the average value of means‐​tested transfers (cash payments and in‐​kind benefits from federal, state, and local governments) has increased for all income groups since 1979, but has grown dramatically for lower‐​income Americans:

According to the CBO, the significant growth in means‐​tested transfers between 1979 and 2017 has primarily been driven by (1) expanding eligibility for middle‐​income groups; and (2) spending on Medicaid (“the largest—and fastest growing—means-tested transfer program”) due to an almost‐​fivefold increase in enrollees (from about 20 million in 1979 to 94 million in 2017) and an increase in average per capita benefits from $1,700 to $5,500 (in 2017 dollars). This trend, of course, is consistent with other data showing the extent to which entitlements have increasingly consumed federal spending in recent years.

Third, the CBO report shows that both median household incomes and average group incomes have enjoyed real (inflation‐​adjusted) gains since the early 1980s, with the aforementioned progressivity of the United States’ tax/​transfer systems playing a big role.

As shown in Figure 3 above, real median household incomes after taxes and transfers saw a 61.1 percent increase between 1979 and 2017. Importantly, the taxes and transfers analyzed by the CBO once subtracted from middle class market incomes but began to supplement them in the mid‐​2000s — a trend my colleague Ryan Bourne noted here a few years ago. By 2017, these taxes and transfers added $3300 (7.7 percent) to median market incomes.

Similar trends apply to average incomes:

As Figure 4 shows (click on various groups to highlight or exclude them), the poorest American households’ average incomes bottom out in 1983 and then grow by approximately 95 percent through 2017, aided substantially and increasingly by taxes and transfers. By 2017, in fact, well over half of these households’ annual income comes from the government. Furthermore, an increasing number of American households (on average) became net recipients of government benefits: the bottom two quintiles paid less in federal taxes than they received in transfers every year since 1979 (with total net benefits increasing substantially through 2017), but they were joined in 2002 by third quintile households (with real market incomes starting around $60,000 per year). By 2017, taxes and transfers added $6,300 to this group’s average market income of $61,700 — a 10.2% gain. The net tax/​transfer burden in 2017 was also much lower — though still net negative — for the fourth quintile of households than it was in 1979, while the top income group saw only modest relief (paying a slightly smaller share, but larger amount, of income to the government on net) over the same period.

As Bourne noted back in 2017, the CBO data are imperfect — for example, excluding state and local taxes and showing only averages (which can hide costs and benefits that certain taxpayers face). Nevertheless, the CBO’s new report adds to the growing body of empirical literature refuting common myths about middle class incomes and the progressivity of the U.S. system. One can (and in my opinion should) question whether that system is delivering the optimal mix of total wage and non‐​wage compensation to American workers, or the whether the significant and increasing redistribution that we employ has proven effective. But those questions don’t change the underlying facts presented by the CBO — facts that are light‐​years away from much of the populist and anti‐​capitalist hysteria we hear right now.

October 2, 2020 5:02PM

Federal Tax Changes Since 1979

The Congressional Budget Office released a report today on changes in income, benefit payments, and federal taxes by income group since 1979. The following are three tax charts from the report. The CBO included individual income taxes, corporate income taxes, payroll taxes, and excise taxes.

The first chart shows that tax rates have fallen the most at the bottom end. Average tax rates are total taxes paid by each income group divided by that group’s income as defined by CBO. CBO says, “Average federal tax rates declined most sharply among households in the lowest quintile, falling from a peak of 12.1 percent in 1984 to 1.3 percent in 2017.” The tax rate on the top 1 percent has varied, but by 2017 was roughly where it was almost 40 years earlier. Since then, the 2017 GOP tax bill cut income taxes for all groups.

a

The second chart shows that individual income taxes are highly skewed. Payroll taxes are proportional across the bottom and middle groups but drop at the top end. Note, however, that payroll taxes fund Social Security, and that program’s benefits are calculated in a progressive manner.

b

The third chart shows that the share of overall federal taxes paid by high earners has increased over time. CBO says, “The share of federal taxes paid by households in the highest quintile increased from 55 percent in 1979 to 69 percent in 2017.” The share of taxes paid by the top 1 percent increased from 14 percent in 1979 to 25 percent in 2017.

c