More Evidence That You Can’t Lure Entrepreneurs With Tax Cuts

February 14, 2014 at 11:42 am

Cutting state taxes to attract entrepreneurs is likely futile at best and self-defeating at worst, a new survey of founders of some of the country’s fastest-growing companies suggests.  The study, which is consistent with other research, should be required reading for state policymakers — especially those in Michigan, Missouri, Nebraska, Ohio, Oklahoma, South Carolina, and Wisconsin who are pushing for large income tax cuts.

The 150 executives surveyed by Endeavor Insight, a research firm that examines how entrepreneurs contribute to job creation and long-term economic growth, said a skilled workforce and high quality of life were the main reasons why they founded their companies where they did; taxes weren’t a significant factor.  This suggests that states that cut taxes and then address the revenue loss by letting their schools, parks, roads, and public safety deteriorate will become less attractive to the kinds of people who found high-growth companies.  (Hat tip to urbanologist Richard Florida for calling attention to the study.)

As I wrote last year on why studies show state income tax cuts aren’t an effective way to boost small-business job creation, “Nascent entrepreneurs are not particularly mobile.  Rather, they tend to create their businesses where they are, where they are familiar with local market conditions and have ties to local sources of finance, key employees, and other essential business inputs.”

I also argued that state tax cuts could be counterproductive, impairing states’ ability to provide high-quality services that make a state a place where highly skilled people want to live.

The new survey provides further evidence for these arguments.  It found that:

  • “The most common reason cited by entrepreneurs for launching their business in a given city was that it was where they lived at the time.  The entrepreneurs who cited this reason usually mentioned their personal connections to their city or specific quality of life factors, such as access to nature or local cultural attractions.”
  • “31% of founders cited access to talent as a factor in their decision on where to launch their company. . . .  A number of founders also highlighted the link between the ability to attract talented employees and a city’s quality of life.”
  • “Only 5% of entrepreneurs cited low tax rates as a factor in deciding where to launch their company” and only 2% mentioned “business-friendly regulations” and other government policies.  The report’s authors concluded, “We believe that the lack of discussion of these factors indicates that marginal differences in these areas at the state or municipal level have little influence on great entrepreneurs’ decision-making processes.”

Kansas, North Carolina, and Ohio have cut personal income taxes significantly in the last two years, and in each case the governor argued that it would give a big boost to creating or attracting new firms.  This new study provides more compelling evidence that that’s the wrong approach.  Let’s hope other states don’t start down the same dead-end path.

Budgeting for the Future: An Interview With the Author

February 13, 2014 at 12:01 pm

We have released a major new report that ranks states on their use of ten proven, common-sense budget tools, such as regularly estimating revenues and spending for the next five years (not just the budget year) and tracking the cost of individual tax breaks.  We found that although all states budget for the future to some extent, no state does it nearly as well as it could.

Here, we talk with Vincent Palacios, one of the paper’s authors, about the report — and how these tools are working in states across the country.

Question:  Why does it matter whether states budget for the future?

Vincent Palacios:  A state’s budget decisions today have long-lasting consequences.  But all too often there is considerable pressure to focus just on the budget for the next year.  Better planning — in which policymakers take the long view — can help states build a stronger economy and weather tough economic times.  For instance, long-term planning can reduce uncertainty for businesses about the taxes they’ll owe and services they’ll receive, and can help states avoid short-sighted budget decisions that end up being costly in the future.  So long-term planning really helps states operate more effectively and efficiently, and invest in services like education and infrastructure that are essential to our economy.

Question:  What surprised you about the findings?

Vincent Palacios:  We were genuinely surprised that after all the data were collected, no regional or political patterns emerged in how states do their long-term planning and budgeting.  State rankings really cut across preconceived notions of red states and blue states.  For example, Connecticut and Tennessee lead the pack, while Illinois and Alabama are among the states with the most room for improvement.  Then again, we think that goes to the point that budgeting for the future is not a partisan issue.  These are practices we can all agree on.

Question:  These ideas do seem like common sense.  So why haven’t more states implemented them?

Vincent Palacios:  Well, on a practical level some states might not be implementing these tools because their agencies are short staffed or because of competing priorities.  In other states, agencies or the legislature might not want to share budget information for political reasons.  Finally, some of the changes require an authorizing statute, such as establishing or strengthening a rainy day fund, and legislators’ agendas are already crowded.  Yet many states could easily improve their practices just by publishing the information they’re already producing — the low-hanging fruit, so to speak.

Question:  States are still under tremendous budgetary pressure as a result of the recession and slow recovery.  Is this the right time to make these changes?

Vincent Palacios:  Absolutely.  During bad times, it’s especially important to consider the future impact of tax and spending decisions.  For one thing, long-term forecasts can give early warning that short-term fixes could cause lasting harm, like taking on too much debt or neglecting maintenance of roads and bridges.  And some of the changes that we are recommending could have softened the blow of the recession.  For example, some states make it difficult to use the funds they have saved for a rainy day.  Allowing use of these funds without a super-majority vote or removing onerous replenishment rules would have made it easier to tap these reserves when states needed them most.  The bottom line — for states still struggling with this sluggish economic recovery — is that most of the changes we’re suggesting are not costly; some can even save money.  For example, putting sunset provisions — think expiration dates — in place for tax expenditures would force the legislature to review their cost and effectiveness regularly and could save a state money when it eliminates those that don’t make the grade.

Click here to read the full report and here for the state fact sheets.

Don’t Believe the Hype About New Cuts to Medicare Advantage Rates

February 13, 2014 at 9:16 am

The federal government is expected later this month to announce the preliminary 2015 payment rates for private “Medicare Advantage” plans that serve some Medicare beneficiaries.  The health insurance industry’s trade association, America’s Health Insurance Plans (AHIP), has launched a preemptive campaign against the expected rates, implying that the announcement will likely include new payment cuts proposed by the Administration — on top of the cuts that health reform and other current law provisions already require.

In reality, as was the case last year, the Administration likely won’t propose any new payment reductions.  It will likely just announce how it will apply existing law, reflecting the combined impact on Medicare Advantage payment rates of health reform and the continued slowdown in growth in Medicare costs.

The expected announcement from the Centers for Medicare & Medicaid Services (CMS) will provide preliminary information on Medicare Advantage payment rates and policies for 2015 (CMS will likely finalize the rates in April).  Changes under health reform in how much Medicare pays Medicare Advantage plans — which began phasing in cuts to the overpayments that such plans receive in 2012 — will again affect the rates for 2015, just as they did last year.  And as it does every year (including pre-health reform), CMS will take into account the estimated per-beneficiary cost of providing Medicare services when calculating the preliminary rates.

As we have noted, Medicare spending has grown slower in recent years than originally estimated and is expected to continue growing slower than previously projected, due to lower-than-expected costs per beneficiary.  If CMS again revises its per-beneficiary cost assumptions downward, those revisions would lower 2015 preliminary payment rates but they would not constitute any new cuts.

Medicare Advantage insurers are continuing to lobby to repeal or scale back the health reform provisions that rein in excessive Medicare Advantage payments over time and require all insurers (not just Medicare Advantage plans) to pay an excise tax to help pay for the health reform’s coverage expansions.  Their preemptive attacks on CMS’s routine payment notice could advance that effort by creating the incorrect impression that the Administration is trying to make further cuts in reimbursements to Medicare Advantage plans.

These health reform provisions, however, are sound, and the Administration and Congress should resist any attempts to undermine them.

Delaying Health Reform’s Employer Responsibility Requirement No Reason to Delay Individual Mandate

February 12, 2014 at 12:32 pm

Senate Minority Leader Mitch McConnell called again for a delay in health reform’s individual mandate (which requires most Americans to obtain health coverage or pay a penalty) in response to the Administration’s decision to delay, for certain smaller firms, the employer responsibility requirement until 2016.  That remains a decidedly harmful and politically motivated idea.

As we explained last fall, a delay in the individual mandate is a central piece of the ongoing effort to dismember health reform, and it would produce significant harm.  It would have caused 11 million more Americans to remain uninsured in 2014 — erasing 85 percent of the expected coverage gains — and raised premiums in the individual market for many others, according to the Congressional Budget Office (CBO).

Delaying the individual mandate also would disrupt the health insurance marketplaces just as they are getting fully established.  For example, it would probably lead many healthier uninsured people, who would have bought marketplace coverage, to instead wait until they got sick to buy it.  That, in turn, would make the pool of people with marketplace coverage older and sicker, forcing insurers to set their premiums much higher for 2015 than for 2014 (a year in which they assumed the individual mandate would be in effect).  Some insurers might withdraw from the marketplaces entirely for 2015.

Indeed, that’s a likely goal of those who seek a delay in the individual mandate.  A year from now, they would demand another one-year delay and then another — or even outright repeal.  They would likely argue that health reform has failed, even though delaying the individual mandate would cause the results they would likely cite as evidence, like sharply limited coverage gains and higher premiums than under current law.

Moreover, there’s no comparison between the relatively modest effect of delaying the employer mandate for some employers for another year and the serious harm from delaying the individual mandate.

The Urban Institute, for example, expects that this week’s Administration decision on the employer requirement likely won’t have much impact on successful implementation of health reform.  And CBO estimated that the Administration’s earlier delay in the employer responsibility requirement (from 2014 to 2015 for all employers subject to the requirement) raised the number of uninsured by less than 500,000 people in 2014 — a far cry from the 11 million more people who would have been uninsured this year if we delayed the individual mandate.  To assume that delaying the individual mandate would produce similar effects as delaying the employer requirement would “be dangerously wrong,” Urban warned last year.

House Changes to Military Pensions Would Violate Key Principle of Recent Budget Deal

February 12, 2014 at 8:00 am

The House voted yesterday to undo the military pension savings in December’s Murray-Ryan budget deal and offset the cost by extending the sequestration budget cuts for mandatory programs by one year, from 2023 to 2024.   That was a mistake.  The bill upends a key feature of the agreement, which Congress adopted with a large, bipartisan vote — that policymakers should not pay for higher defense funding by cutting domestic programs.

The budget agreement trimmed annual cost-of-living adjustments (COLAs) by one percentage point for military retirees under age 62.  Once they reach 62, they’ll receive their full benefits, including a catch-up for the years of lower COLAs.  Census data show that over three-quarters of those affected are working in second careers and that nearly 60 percent of them are in the top fifth of the income distribution.

The omnibus appropriations bill that Congress approved last month exempted disabled retirees and survivors under age 62 from the planned cut.  That’s appropriate because they’re less able to work than others who retire early from the military.  This change would also align military pensions more closely with federal civilian retirement, which pays no COLAs before age 62 except to disabled retirees, while retaining most of the provision’s savings.

The new House-passed bill, in contrast, exempts current members of the armed forces and current military retirees from the COLA reduction, which would only apply to those who join the military starting this year.

This “grandfathering” effectively eliminates the ten-year savings that was integral to the Murray-Ryan deal’s careful balance.  The military pension provision helped pay for boosting defense funding above sequestration levels in 2014 and 2015.  These savings, plus higher user fees, covered the cost of the defense increase in the budget deal, upholding the key principle that Congress should not cut domestic programs to pay for higher defense funding.

The House bill violates that principle by replacing the military pension savings with a continuation of the sequestration cuts of mandatory programs, virtually all of which are domestic — such as Medicare, the Commodity Credit Corporation, and the Social Services Block Grant.  That sends the wrong signal, potentially opening the door to further cuts in domestic programs as a way to shift more money to the Pentagon.

The budget deal’s COLA changes to military pensions don’t take effect until the end of 2015, so Congress has ample time to consider alternatives.  Furthermore, a congressionally established commission is reviewing military compensation and retirement issues and is expected to issue recommendations in February 2015, so Congress could consider these recommendations and then make decisions on changes in military pensions on a more informed basis.  That’s the appropriate way to consider changes in this area, as the Pentagon and the Joint Chiefs of Staff have pointed out.