Tax and Budget Policy

September 13, 2019 4:13PM

Minding Money by Migrating

Americans are moving from higher-tax states to lower-tax states. Of the 25 highest-tax states, 24 had net out-migration in 2016. Of the 25 lowest-tax states, 17 had net in-migration, as I discuss in this study

State-local taxes are 14.7 percent of personal income in the largest outflow state, New York, but they are just 7.5 percent in the largest inflow state, Florida. Florida’s government costs half as much as New York’s and the services are probably just as good. Florida is warm and sunny, so why not move?

Bloomberg reported yesterday:

Billionaire Carl Icahn is planning to move his home and business to Florida to avoid New York’s higher taxes. … The move is scheduled for March 31 and employees who don’t do so won’t have a job.

… Hedge fund billionaires have relocated to Florida for tax reasons for years—David Tepper, Paul Tudor Jones and Eddie Lampert being among the most prominent. But Florida officials have been aggressively pushing Miami as a destination for money managers since the Republican-led tax overhaul.

The Republican overhaul in 2017 likely accelerated interstate migration because it increased the relative tax pain of living in high-tax states.

We don’t yet have hard data on the migration impact, but there is a stream of articles with anecdotal evidence. The Wall Street Journal reported this week:

. . . Financial planners say that as high-net-worth taxpayers finalize their 2018 returns to meet the October tax-extension deadline, they expect many residents of New York, New Jersey, California and other relatively high-tax states will decide to spend more time in Florida, Texas, Nevada or other states that don’t collect income taxes, or move there outright.

“People are just starting to see the effect,” says Daniel Bernard, an attorney with Twomey Latham in Riverhead, N.Y. “Over the coming months we’re going to see a lot more people looking to establish Florida residency.”

Ed Wollman, a founding partner who handles taxes and estates with Wollman, Gehrke & Associates in Naples, Fla., says a New York City snowbird couple with taxable income of $500,000 would pay about $50,000 in state and city income taxes. A couple with the same taxable income in Illinois would escape a tax bill of close to $25,000 by moving to a no-income-tax state, he says. In New Jersey, the savings would be nearly $32,000, in California more than $46,000 and in Connecticut more than $32,000.

… In Texas, estate attorney Virginia Hammerle of the Hammerle Finley Law Firm in Lewisville reports an influx of snowbird clients wanting to move their tax residences from California and the East Coast. “This has become a very hot topic,” Ms. Hammerle says. “I’ve had clients who tell me they realize savings of $50,000 to $100,000 annually.”

Map of migration between states in the U.S.

September 12, 2019 1:22PM

Federal Spending Tops $5 Trillion

The Congressional Budget Office and the Office of Management and Budget both project that federal government spending will be about $4.6 trillion in fiscal year 2020.

In fact, federal spending in 2020 will be about $5.2 trillion. Reporters and budget wonks (including me) nearly always use the lower CBO and OMB numbers when discussing total federal spending, but they are the wrong numbers.

The $4.6 trillion figure is “net” outlays, but actual total spending is “gross” outlays at $5.2 trillion. The difference is “offsetting collections” and “offsetting receipts.” These revenues to the government are netted against spending at either the program level, agency level, or government-wide level. Some examples are Medicare premiums, national park fees, and royalties earned on mineral deposits. There are hundreds of cash inflows to the government that are deducted from spending before reaching the widely reported net figure.

The details on offsets are buried in chapter 15 of OMB’s Analytical Perspectives, which was released in March. OMB expected 2020 gross spending to be about 12 percent larger than net spending and offsets from the public to be about $560 billion. Thus, gross federal spending will be about $5.2 trillion.

Net outlays in 2020 will be about 21.0 percent of gross domestic product, while gross outlays will be about 23.5 percent. The latter is a better measure of the share of the economy controlled by federal legislators through spending programs.

Politically, reducing federal spending reported to the public with a half trillion in offsets is a sneaky way for Washington to hide some its massive footprint. To increase transparency, CBO and OMB should highlight gross outlays in their main budget tables and charts where the figures would be more visible to reporters and the public.


September 3, 2019 3:25PM

New York Times on Opportunity Zones

The Tax Cuts and Jobs Act of 2017 included capital gains tax cuts on investments in chosen areas called “opportunity zones.” There are about 8,700 O Zones across the country, which were selected by state governors based on rules in the federal statute.

O Zones are a bad idea and should be repealed. They actively divide the nation between winner and loser communities. They replace equal justice under law with differential treatment based on political pull. The main winners likely are landowners within the zones, not poor households.

Business investment and low capital gains taxes are good things. But tax policy should aim to create equal treatment for investments across the economy to maximize growth and fairness while minimizing corruption.

If cities want to subsidize investment in particular neighborhoods, they can do so. But O Zones create a dangerous precedent of using federal taxing power to micromanage local economies. The Republican O Zone law parallels failed Democratic efforts since the 1960s to top-down plan cities with federal spending subsidies.

Policymakers who want to fix particular neighborhoods in their hometowns should run for city hall, not the federal legislature. Even better, they should put their money where their mouths are and start businesses in poor neighborhoods themselves to create growth and opportunities.

The New York Times investigated O Zones in a lengthy article on the weekend. The article probably focused too much on the cultural aspects of wealth. It associated O Zones with high-end condos, rooftop pools, yoga studios, pet spas, shrimp tempura tacos, and sweeping views of Biscayne Bay.

Nonetheless, the main theme of the NYT piece was spot-on. O Zones were supposed to help low-income households, but they appear to be mainly benefiting developers, investors, lawyers, accountants, consultants, lobbyists, and other intermediaries. This is a common problem with government efforts at aiding poor communities. In addition to the program beneficiaries noted by the NYT, I would add landlords who owned property in O Zones when the legislation passed.

O Zones are discussed further here, herehereherehereherehere, and here.

Here are some highlights from the NYT article:

The stated goal of the tax benefit — tucked into the Republicans’ 2017 tax-cut legislation — was to coax investors to pump cash into poor neighborhoods, known as opportunity zones, leading to new housing, businesses and jobs.

The initiative allows people to sell stocks or other investments and delay capital gains taxes for years — as long as they plow the proceeds into projects in federally certified opportunity zones. Any profits from those projects can avoid federal taxes altogether.

“Opportunity zones, hottest thing going, providing massive new incentives for investment and job creation in distressed communities,” Mr. Trump declared at a recent rally in Cincinnati.

Instead, billions of untaxed investment profits are beginning to pour into high-end apartment buildings and hotels, storage facilities that employ only a handful of workers, and student housing in bustling college towns, among other projects.

Many of the projects that will enjoy special tax status were underway long before the opportunity-zone provision was enacted. Financial institutions are boasting about the tax savings that await those who invest in real estate in affluent neighborhoods.

… Sean Parker, an early backer of Facebook, helped come up with the idea of pairing a capital-gains tax break with an incentive to invest in distressed neighborhoods. “When you are a founder of Facebook, and you own a lot of stock,” Mr. Parker said at a recent opportunity-zone conference, “you spend a lot of time thinking about capital gains.”

Starting in 2013, Mr. Parker bankrolled a Capitol Hill lobbying effort to pitch the idea to members of Congress. That effort was run through his Economic Innovation Group. In addition to Mr. Parker, the group’s backers included Dan Gilbert, the billionaire founder of Quicken Loans, and Ted Ullyot, the former general counsel of Facebook.

The plan won the support of Senators Cory Booker, Democrat of New Jersey, and Tim Scott, Republican of South Carolina. When Congress, at Mr. Trump’s urging, began discussing major changes to the federal tax code in 2017, Mr. Parker’s idea had a chance to become reality.

Mr. Scott, who sponsored a version of the opportunity-zone legislation that was later incorporated into the broader tax cut package, said it was “for American people stuck, sometimes trapped, in a place where it seems like the lights grow dimmer, and the future does, too.”

… But even supporters of the initiative agree that the bulk of the opportunity-zone money is going to places that do not need the help, while many poorer communities are so far empty-handed.

Some opportunity zones that were classified as low income based on census data from several years ago have since gentrified. Others that remain poor over all have large numbers of wealthy households.

… In some cases, developers have lobbied state officials to include specific plots of land inside opportunity zones. In Miami, for example, Mr. LeFrak — who donated nearly $500,000 to Mr. Trump’s campaign and inauguration and is personally close to the president — is working with a Florida partner on a 183-acre project that is set to include 12 residential towers and eight football fields’ worth of retail and commercial space.

In spring 2018, as they planned the so-called Sole Mia project, Mr. LeFrak’s executives encouraged city officials in North Miami to nominate the area around the site as an opportunity zone, according to Larry M. Spring, the city manager. They did so, and the Treasury Department made the designation official.

… Financial institutions are not even trying to make it look as if their opportunity-zone investments were intended to benefit needy communities. CBRE, one of the country’s largest real estate companies, is seeking opportunity-zone funding for an apartment building in Alexandria, Va., which CBRE is pitching to prospective investors as “one of the region’s most affluent locations.”

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August 16, 2019 10:15AM

On Oren Cass and Industrial Policy

A lot of “national conservatives” and those sympathetic to their economic goals have been pushing for the federal government to adopt an explicit “industrial policy.” Chief among them has been Oren Cass, a thoughtful scholar at the Manhattan Institute, whose writings on the dignity of work I’ve written briefly about before.

Though a lot of his arguments echo those heard historically or in other countries, his specific case is worth addressing directly, as it seems to be resonating in conservative circles. So today I’ve published an extensive critique of his recent speech at the National Conservatism conference as a Cato commentary.

In short, I’m disappointed by the lack of empirical grounding to his arguments. And I think he makes a fundamental mistake in assuming that, even if an industrial policy was feasible and could be faithfully executed, it would generate both “stable employment” for low-skilled workers and high productivity growth.

I conclude:

Oren Cass asserts that markets cannot generally allocate resources efficiently by industry. Yet he provides no meaningful metrics to show this is the case, nor shows why his policies would deliver better outcomes. His two main claims about the benefits of a manufacturing sector — “stable employment” and “strong productivity growth” — are directly contradictory. A plethora of evidence suggests as countries’ get richer due to automation and technological improvements, they demand relatively more services, and so the industrial sector declines in employment terms.

It would hurt, not improve, general economic performance to try to create stable employment in manufacturing industries given these trends, and would be particularly foolish given the likely rising demand for high-end manufacturing and services (healthcare, education, insurance, finance, etc.) as the global middle-class develops.

You can read the whole piece here.

August 7, 2019 11:22AM

Tax‐​Hike Decade Looms

The Democratic presidential contest is revving up the tax policy debate. The candidates are calling for higher taxes on corporations, capital gains, wealth, and much else. In the second round of debates, New York Mayor Bill de Blasio said he wants to “tax the hell out of the wealthy,” and that is a common sentiment in his party these days.

The tax issue had faded after Republicans passed their Tax Cuts and Jobs Act in 2017. Most people did not notice they received a tax cut, and Republicans have been lousy salespersons for their reform.

Going forward, taxes will reclaim center stage, but rather than tax cuts, there could be endless battles over tax hikes. Today’s surfeit of soak-the-rich ideas from Democrats may be just a prelude to major thrusts at hiking middle-class taxes down the road.

To read the rest, see The Hill.


August 2, 2019 3:35PM

Private Pay Growth Tops Federal in 2018

The Bureau of Economic Analysis has released data on worker pay for calendar 2018. The data show that compensation for U.S. private-sector workers grew faster than for federal civilian government workers last year.

Average wages for private workers increased 3.2 percent in 2018, outpacing the increase for federal workers of 2.7 percent. Total compensation (wages plus benefits) for private workers increased 3.2 percent in 2018, topping the increase for federal workers of 2.9 percent

That is good news for private-sector workers, but their pay still falls far short of pay for federal workers, on average. Federal workers had average wages of $94,463 in 2018, or 49 percent more than the private average of $63,306. Federal workers had average total compensation of $135,971 in 2018, or 80 percent more than the private average of $75,381.

Experts agree that federal government workers have a large advantage in their gold-plated benefits packages. Federal pension and health benefits are excessively generous.

The chart shows the growth in average federal and private-sector compensation since 2000. Federal compensation grew much faster than private compensation until a brief federal wage freeze under President Obama. But since the freeze ended, federal compensation has resumed its upward trajectory. Over the past five years, federal compensation has grown 18 percent compared to growth of 13 percent in the private sector.

This study examines federal compensation issues in detail, and the underlying BEA data are in section 6 tables here.

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July 31, 2019 11:52AM

New Budget Deal Reveals Need for Federal Balanced Budget Amendment

The recent budget deal that was agreed to by President Trump and Congressional leaders has fiscal conservatives livid. This deal raises discretionary spending caps by over $300 billion over two years and effectively repeals the budget caps that were established as part of the Budget Control Act in 2011. The frustration of budget hawks is certainly understandable. While the rest of the budget has grown in recent years, non-defense discretionary spending has actually fallen in constant dollars since 2011. However, seasoned observers of fiscal policy knew it was unlikely to last. After all, there is plenty of evidence that legislatures, including Congress, have been unable to place effective long term limits on the growth of spending.

Indeed, after triple digit budget deficits became commonplace in the 1980s, Congress adopted the Gramm Rudman Hollings Act in 1985. This piece of legislation established declining deficit targets every year and triggered automatic spending cuts if those targets were not met. Half the cuts were to come from defense spending, and half the cuts were to come from domestic programs. While Gramm Rudman Hollings did result in some short term spending cuts, its main outcome was creative accounting. Congress often pushed spending into future fiscal years to create phantom spending cuts to stay within the deficit targets. When the economy slowed down, the deficit targets became too difficult to reach, and the legislation was scrapped in 1990.

Additionally in the aftermath of the 1970s tax revolt, many state legislatures enacted tax and expenditure limits (TELs) which placed annual limits on the growth of expenditures, revenue, or tax revenue. However, a significant body of academic research finds that these limits were an ineffective tool at reducing the growth of government. Even California’s experience is instructive. The passage of Proposition 13 in 1978 gave Golden State taxpayers some much needed property tax relief. However, in subsequent years other taxes – including taxes on income, sales, alcohol, and tobacco – all increased dramatically. California now has one of the highest tax burdens in the country.

Fiscal conservatives should revisit pursuing a balanced budget amendment to the U.S. Constitution. Regardless of the results of elections, Congress has shown no ability to place effective long term limits on spending. A balanced budget amendment or another constitutional fiscal limit might be the only effective long-term strategy to limit the growth of government. America’s long term fiscal outlook looks especially bleak due to rapidly growing entitlement programs. Indeed, a balanced budget amendment might as well be the only strategy to get Congress to seriously discuss reforming rapidly expanding programs like Social Security, Medicare, and Medicaid and shore up America’s fiscal future.