The Center's work on 'States in the Recession' Issues


Why Money Doesn’t Walk

October 20, 2014 at 11:24 am

We’ve shown that interstate differences in tax levels have little effect on whether and where people move, contrary to claims by some tax-cut proponents.  The related claim — that people who leave a state take their incomes with them, harming that state’s economy — isn’t true either, our new paper explains.

The vast majority of people can’t take their income with them to a new state because they work for someone else.  When people leave a state, they usually also leave their job.  The income they made in that job then typically goes to the person who gets that job next; it doesn’t leave the state.

For example, consider a California sales representative who is transferred to Nevada.  What you might call “income migration” (or “money walks”) analyses would suggest that California’s economy is weakened because the sales representative moved away and took her income with her.  In reality, her income stayed with her employer and was then transferred to her replacement.  California’s economy was not harmed.

Income migration analyses also ignore the income gains for other in-state small businesses when business owners move away.  For example, if a New York doctor in private practice retires and moves to Florida, his or her patients ― and their payments ― will go to some other New York provider, increasing that provider’s income.  Also, the owner of a successful business who leaves will often sell it to someone who will continue to operate it.

Moreover, income migration analyses effectively assume that people’s incomes stay the same after they leave a state, even if they don’t find a job in the new location or moved there to retire.  That assumption further skews their results.  For example, when someone from New Jersey retires to Florida, income migration analyses claim that New Jersey’s economy lost income equal to the person’s pre-retirement salary, even though that person’s income probably would have declined even if he or she had stayed in New Jersey.

To be sure, some income does automatically follow a person when he or she leaves a state — pensions, Social Security, and investment earnings, for example.  But that represents a relatively small share of total taxable income — under one-fifth in most states.  And, as with other forms of income, much of such income that is “lost” to a state when people move out is replaced by income “gained” when others move in.

Policymakers should focus their attention on the policy choices most likely to grow the incomes of their current and future residents, and not be distracted by misleading claims about income migration.  The chief policy prescription that the income migration concept is used to justify — deep cuts in (or outright repeal of) state income taxes — would likely prove self-defeating, leading to deteriorating schools, roads, public safety, and other services that make states places where businesses want to invest and where the engineers, managers, and other personnel they need to hire want to live.

Do’s and Don’ts for Stronger State Economies

June 24, 2014 at 1:24 pm

A number of proactive fiscal policies can prime states for a more prosperous future, our updated guide explains.  They include:

  • Target economy-boosting investments.  Research shows that investing in services like education, transportation, and health care promotes economic growth and job quality in the long run.  Maintaining and improving these services requires resources.  States should scrutinize existing spending to find savings, raise revenue when necessary, and bring their revenue systems in line with a 21st century economy, such as by broadening the sales tax base to include more services.
  • Improve fiscal planning.  Strong fiscal planning helps states determine the resources needed to sustain, beyond any one budget year, investments critical to economic growth. That’s why policymakers should budget for the future:  lay out a clear roadmap, ensure that budget impact analyses are credible, and create mechanisms to trigger needed mid-year course corrections.
  • Help struggling families.  Years after the official end of the Great Recession, millions of Americans continue to struggle.  Helping people meet basic needs and move up the economic ladder is critical to a state’s long-term success.  States can do this by protecting and expanding Earned Income Tax Credits, which help low- and moderate-income working families keep more of what they earn to pay for things that help them stay on the job, like child care and reliable transportation. States also should properly fund their unemployment insurance systems and protect supports for the neediest families through Temporary Assistance for Needy Families (TANF).

On the flip side, our guide also recommends that states:

  • Avoid ineffective strategies and gimmicks.  Several states have enacted or considered deep income tax cuts in the name of promoting economic growth.  But these tax cuts typically provide the largest benefits to high-income people, while doing little to nothing for everyone else.  Bad choices in good economic times, these tax cuts are even more unwise when revenues have just barely surpassed pre-recession levels.  The result is less money for services that are fundamental to economic growth, as well as increasingly skewed tax systems in which the lowest-income people pay the biggest shares of their incomes in taxes.

Mapping Higher Ed Funding Cuts and Tuition Hikes

June 4, 2014 at 9:58 am

Most states in the past year have begun to restore some of the cuts they made to higher education funding after the recession hit.  In almost all states, however, higher education funding remains well below pre-recession levels, as we explained in a recent paper.  The large state funding cuts have led to both steep college tuition increases and spending cuts that may diminish the quality of education for students.

Consider that, nationwide, after adjusting for inflation:

  • The average state is spending $2,026, or 23 percent, less per student than before the recession; and
  • Annual published tuition — the “sticker price” — at four-year public colleges has risen by $1,936, or 28 percent, since the 2007-08 school year.

Click on the map below to learn more about how higher education funding and tuition have changed in each state since the recession.

A highly educated workforce is more crucial than ever to the nation’s economic future.  To rebuild states’ higher education systems in the coming years, policymakers in many states will need to raise revenue or, at the very least, avoid shortsighted tax cuts, which would make it much harder to invest in higher education.

Higher Ed Cuts, Tuition Hikes Worsen Low-Income Students’ Struggles

May 7, 2014 at 2:46 pm

State cuts to higher education have led colleges and universities to make deep cuts to educational or other services, hike tuition sharply, or both, as we explain in our recently released paper.  These tuition increases are hitting low-income students particularly hard, lessening their choices of schools, adding to their debt burdens — and likely deterring some from enrolling in school altogether.

Annual published tuition — the “sticker price” — at four-year public colleges has risen by $1,936, or 28 percent, since the 2007-08 school year, after adjusting for inflation.  This has accelerated longer-term trends of reducing college affordability and shifting costs from states to students.  These trends have exacerbated struggles for students from low-income families, in several ways.

Tuition increases are likely deterring low-income students, in particular, from enrolling.  College cost increases have the biggest impact on students from low-income families, research suggests.  Pronounced gaps in college enrollment among higher- and lower-income youth already exist, even among prospective students of similar ability (see chart).  Rapidly rising costs at public colleges and universities may widen these gaps further.

Tuition increases may be pushing lower-income students toward less-selective schools, reducing their future earnings.  Perhaps just as important as a student’s decision to enroll in college is the choice of which school to attend.  Even here, financial constraints and concerns about cost push lower-income students to narrow their list of potential schools and ultimately enroll in less-selective institutions, the research shows.  That choice has long-lasting effects, as disadvantaged and minority students who attend elite colleges make more than their counterparts who attend less-selective schools.

Higher overall costs mean higher post-graduate debt levels.  Federal financial aid also has risen in the last several years, helping many low-income students cover much of the cost of recent tuition hikes.  The overall cost of attending college has risen for these students, however, because room and board costs have increased, too.  As a result, the net cost of attendance at four-year public institutions for low-income students increased 12 percent from 2008 to 2012, after adjusting for inflation.  And this means that low-income students are  borrowing more.  In 2008, the median debt level for a low-income student graduating from a public four-year university was just under $17,600.  By 2012, that number had increased 17 percent to nearly $20,700.

The Lasting Effects of State Higher Ed Cuts

May 2, 2014 at 3:16 pm

Almost all states continue to fund higher education well below pre-recession levels, as I explained yesterday and we describe in a new paper.  These lower funding levels mean that colleges and universities have generally cut educational or other services, raised tuition to cover the gap, or both — steps that may diminish education quality at a time when a highly educated workforce is more crucial than ever to the nation’s economic future.

Indeed, since the recession, higher education institutions have:

  • Raised tuition.  Public colleges and universities across the country have increased tuition to compensate for declining state funding and rising costs.  Annual published tuition — the “sticker price” — at four-year public colleges has risen by $1,936, or 28 percent, since the 2007-08 school year, after adjusting for inflation.  Average tuition at public four-year institutions, adjusted for inflation, has increased by more than 60 percent in six states, more than 40 percent in ten states, and more than 20 percent in 29 states.  In Arizona, tuition at four-year schools is up more than 80 percent (see chart).
  • Cut spending, often in ways that may diminish access and quality and jeopardize outcomes.  Tuition increases have compensated for only part of the state funding cuts.  Public colleges and universities have cut faculty positions, eliminated course offerings, closed campuses, shut computer labs, and reduced library services, among other cuts.  For example, since 2008, the University of North Carolina at Chapel Hill has eliminated 493 positions, cut 16,000 course seats, increased class sizes, cut its centrally supported computer labs from seven to three, and eliminated two distance education centers.

Over the past year, as states have started to restore funding for public higher education, tuition hikes have been much smaller than in recent years.  Tuition at public four-year institutions rose in 38 states in the 2013-14 school year, but the average across all states was a modest $120 or 1.4 percent after inflation.