Migration Data Refute Theory That Taxes Drive People to Move

May 8, 2014 at 12:03 pm

Differences in tax levels among states have little to no effect on whether and where people move, contrary to claims by some conservative economists and elected officials, as we explain in a new paper.

For decades, Americans have been moving away from the Northeast, the industrial Midwest, and the Great Plains to most of the southern and southwestern states, regardless of overall tax levels or the presence of an income tax in any state.  They’ve moved in large part for employment opportunities in the Sunbelt and, secondarily, for less expensive housing — and, for many retirees, a warmer, snow-free climate.

Several anti-tax advocates have been especially visible and vociferous in advocating state personal income tax cuts, arguing that personal income taxes are leading individuals and families to relocate from the 41 states that levy them (and particularly from those that levy them at somewhat higher rates) to the nine states that don’t have income taxes.  They assert that large numbers of people are consciously “voting with their feet” — leaving high income tax states for low- or no-income-tax states largely because they want to retain more of their wages and salaries rather than pay them in state and local taxes.

In fact, relatively few Americans move from state to state (see chart), and few report that they moved because they think their taxes are too high or considered state and local tax levels in deciding where to live.  What’s more, overwhelming evidence shows that those cases are sufficiently rare that they shouldn’t drive state tax policy formulation.

Accordingly, policymakers in states like Kansas, Michigan, Nebraska, Ohio, and Wisconsin that have already cut or are considering cutting their income taxes should harbor no illusions that such a move will stem — let alone reverse — their states’ longstanding net out-migration trends.  To the contrary; if deep tax cuts result in significant deterioration in education, public safety, parks, roads, and other critical services and infrastructure, these states will render themselves less — not more — desirable places to live and raise a family.

Click here to read the full paper.

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 Problems With the House Approach to Tax Extenders

May 7, 2014 at 1:09 pm

As the House plans to vote this week on a permanent, unfinanced extension of a corporate tax break — the first of several such bills that the Ways and Means Committee has approved — our new report outlines the problems with this approach.  Here’s the opening:

The House on May 7 is expected to consider a bill to permanently extend — and expand — the research and experimentation tax credit, the first of six bills that the House Ways and Means Committee recently approved to make permanent various “tax extenders.”  There is widespread bipartisan support for continuing the research and experimentation credit, as well as some of the other extenders (so named because Congress routinely extends them for only a year or two at a time).  But the Way and Means bills, which wouldn’t offset the costs of making these provisions permanent (by, for instance, scaling back or eliminating other tax subsidies that litter the tax code), are seriously flawed, as they would:

  • Undo a sizeable share of the savings from recent deficit-reduction legislation.  At a combined ten-year cost of $301 billion (or $310 billion over 11 years, 2014-2024), the six bills would give back two-fifths of the $770 billion in revenue raised by the 2012 “fiscal cliff” legislation.  If policymakers go further and make permanent all of the roughly 80 extenders, the ten-year cost would rise to about $560 billion, cancelling nearly three-quarters of the “fiscal cliff” savings (see chart).

  • Constitute a fiscal double standard.  Failure to pay for making the extenders permanent would contrast sharply with congressional demands to pay for other budget priorities, from easing the sequestration cuts to providing permanent relief from cuts in doctor payments under Medicare to restoring emergency federal unemployment insurance.
  • Leave out other priorities.  The process to date cherry picks several of the most heavily lobbied corporate tax extender provisions, while leaving behind expired provisions for hard-hit homeowners, teachers, and distressed communities, as well as alternative energy.  Moreover, the push for permanence would mean that these corporate provisions would leap-frog over more important tax provisions that are scheduled to expire in coming years — notably key improvements to the Earned Income Tax Credit and Child Tax Credit for low-income working families and the American Opportunity Tax Credit for college students.
  • Bias future tax reform efforts against reducing deficits.  If policymakers make the extenders permanent in advance of tax reform, a future tax reform plan would no longer have to offset the extenders’ cost to achieve revenue neutrality (much less meet the more appropriate goal of raising revenue to reduce deficits).  This would free up hundreds of billions of dollars in tax-related offsets over the decade that policymakers could then channel towards lowering the top tax rate, while still claiming revenue neutrality, even though deficits would be higher.
  • Violate budget enforcement rules.  Both last December’s Murray-Ryan deal and the House-passed budget resolution require policymakers to pay for any tax extenders that they continue or for any new tax cuts.  The Ways and Means bills violate this requirement and also undercut a widely touted feature of the House-passed budget — its claim to balance the budget in 2024 — by adding to deficits.

Click here for the full report.

Five Things Wrong With the House Bill to Fund Housing Assistance

May 6, 2014 at 5:15 pm

Update, May 8: We’ve updated this post to correct the figure for the House bill’s funding cut relative to the 2014 level: the cut is $510 million.

The House Appropriations Committee will vote tomorrow on a 2015 spending bill for the Department of Housing and Urban Development (HUD) that cuts funding for rental assistance and anti-homelessness programs by $510 million below this year’s level, despite rising housing affordability problems.  Here are five major problems with the bill:

  1. Likely provides too little money to renew all of the Housing Choice Vouchers that low-income families will use this year.  The bill’s $328 million funding increase to renew existing vouchers would only cover the cost of new vouchers that Congress funded in 2014 for homeless veterans and families that recently lost other housing assistance.  It wouldn’t be enough to continue all vouchers funded in 2014 unless local housing agencies freeze the dollar value of their vouchers despite rising rents in many markets, forcing cash-strapped residents to pay even more to remain in their homes.  (The President’s budget boosts voucher renewal funding by twice as much as the House bill.)  Moreover, the bill locks in place the loss of at least 40,000 housing vouchers that were  cut last year due to sequestration and not funded this year.
  2. Cuts voucher administrative funding but doesn’t help agencies cut administrative costs.  While cutting funding by $150 million below this year’s level (and $360 million below the President’s request), the bill includes no changes to streamline agencies’ administrative functions, such as allowing them to check the incomes of elderly and disabled individuals on fixed incomes less frequently.
  3. Deepens the underfunding of public housing.  The bill cuts funding by $290 million below the inflation-adjusted 2014 level, which already falls well short of what agencies need to operate public housing developments and address pressing repair needs.  The cut would increase the risk that living conditions will deteriorate in public housing units, most of which house seniors and people with disabilities.  (The bill also omits an important Administration proposal to expand the Rental Assistance Demonstration, which enables agencies to leverage private investment to help renovate public housing.)
  4. Stalls recent progress on reducing homelessness.  The bill funds homeless assistance at $2.1 billion, the same level as in 2014 and $300 million below the President’s request.  Homeless assistance grants have contributed to a significant drop in the number of people with serious disabilities experiencing long-term homelessness, and the President’s budget would make further progress toward eliminating chronic homelessness.  One positive feature of the House bill is that it would fund 10,000 new vouchers for supportive housing for homeless veterans.
  5. Reduces funding for new affordable housing.  The bill cuts funding for the HOME block grant, which helps rehabilitate or construct rental properties and assist low-income homeowners, by $300 million below the 2014 level.  And it doesn’t include the President’s requested funding for rental assistance for 5,000 new supportive housing units for seniors and people with disabilities.

In fairness to the House committee, it’s working under spending limits for non-defense discretionary programs that are too tight.  (Adding to the problem, the Congressional Budget Office’s estimate of the 2015 receipts for the Federal Housing Administration’s mortgage insurance program — receipts that can offset program spending — are much lower than the Office of Management and Budget’s estimate.)  But Congress needs to overcome these accounting problems and do better to help low-income families keep a roof over their heads.

House Fiscal Double Standard in Action

May 6, 2014 at 3:35 pm

The House will vote this week to add $156 billion to budget deficits over the period 2014-2024 by expanding and making permanent the lapsed corporate tax credit for research and experimentation (R&E) without offsetting the cost.  Meanwhile, House Speaker John Boehner continues to oppose legislation to restore emergency jobless benefits that lapsed in December unless “it is paid for and includes something to help create jobs.”

I addressed this fiscal double standard in my latest US News & World Report post, contrasting the House Ways and Means Committee’s passing of bills that would make permanent the R&E credit and five other lapsed corporate tax breaks with Speaker Boehner’s refusal to take up the Senate-passed emergency unemployment insurance bill.

As a low-cost temporary measure, a renewal [of jobless benefits] would add only trivially to future deficits and debt, even if it weren’t paid for — although, in fact, the Senate bill offsets the costs. The corporate tax breaks, in contrast, will do little or nothing for the recovery, while the resulting deficits will hamper economic growth for years.

…Earlier this year, when he was wearing a tax reformer’s hat and not pushing through these tax cuts, Ways and Means Committee Chairman Dave Camp, R-Mich., embraced the principle that any provisions worth having in the tax code should be offset by scaling back inefficient tax breaks elsewhere.

That’s sound long-run fiscal policy. The economic cost of borrowing to finance tax cuts typically outweighs the economic benefit of even a relatively well-regarded tax break like the credit for business research and experimentation. In contrast, scaling back an inefficient tax break ipso facto helps make the economy work better.

Extending the tax breaks without paying for them is unsound long-run economic and budget policy, and it will do little or nothing for job creation in the short run, when the economy needs stronger demand for goods and services to create jobs.  On a bang-for-the-buck basis, analysts typically estimate that corporate tax breaks generate well under 50 cents of additional demand for goods and services per dollar of budgetary costs while policies like jobless benefits, which put money in the hands of people who will spend it, generate well over a dollar.

The chart below and the conclusion of my US News post sum it up:

[A] House Republican majority that says it’s all about job creation and reining in “out of control” deficits is enthusiastic about tax cuts that won’t create jobs and will make deficits worse, but it dismisses emergency jobless benefits that will create jobs and won’t make deficits worse.

Sources:  Deficits: Congressional Budget Office cost estimates of H.R. 4438 and Senate EUC Extension Act; Bang-for-the-Buck: Testimony of Mark Zandi, Moody’s Analytics (R&E credit is CBPP estimate based on other corporate provisions in Zandi testimony)

Click here to read my full US News post.