Archive for the ‘Economic Impacts’ Category

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Bend Bulletin: Energy credit is under fire

Thursday, November 12th, 2009

578-dynamo-9393img_0236The following is based on and excerpted from the Bend Bulletin.

A number of Oregon companies, nonprofits and government agencies in Oregon have benefited from the Business Energy Tax Credit, known as BETC, or “Betsy.”

Critics of the BETC say that program is too generous and that it does not deliver on its promises of economic development.

Oregon Governor Kulongoski’s spokeswoman Anna Richter Taylor said the governor is focused on improving the program, as evidenced by new rules governing the program. “The governor agrees that it’s time to review the program and its economic benefit to the state,” she said.

For proof of that benefit, BETC supporters point to a February 2009 study done for the energy department by the Portland consulting firm ECONorthwest. Among its conclusions: that $73 million of tax credits in 2007 created 900 more jobs than if the money had been spent on other state-funded programs.

But Eric Fruits, a conservative economist who teaches at Portland State University, is not impressed. Using Oregon’s public records law earlier this year, he obtained an earlier draft of the report that did not paint the same picture of unblemished success.

Instead, the draft ECONorthwest report showed that for some types of BETC spending, the money would have produced more jobs if invested in other state programs.

Fruits also obtained a Jan. 16 e-mail from the study’s author, Stephen Grover, noting the mixed results, and asking the Energy Department’s then-assistant director whether he should change the report. He offered to combine categories in the final draft, thus making the negative results go away.

In the end, that’s what happened. The final report showed only positive impacts of the program.

Asked about the e-mail, Grover said the changes were intended to correct for potential inaccuracies. He said that such changes are common in presenting a report.

But when directed to Fruits’ blog, which details the changes to the draft, Sen. Chris Telfer, R-Bend, called it “disappointing.” “You’ve got my blood boiling now,” she said.

Read the full story in the Bend Bulletin (registration required).

Posted in Economic Impacts, Energy, Government, Press | Comments Off

Hoodwinking our way out of recession: Oregon DHS uses economic sleight of hand to sell a billion dollars of new taxes

Wednesday, November 11th, 2009

Oregon's New Taxes - Economics International Corp.

Over the next four years, Oregonians will face $2.4 billion in new taxes.

In January 2010, Oregonians will vote on ballot measures that will raise personal income taxes by $847 million and raise corporate income taxes by $530 million over the next four years. The campaigns for and against these new taxes ensure that nearly every Oregonian will know about them by Christmas.

$1 Billion in Taxes on Health Insurance and Hospital Care

Less well known are the massive tax increases—$1.0 billion—affecting health insurance and hospital care provided in Oregon. These new taxes are set in stone. There will be no vote and they go into effect soon.

Oregon HB 2116 (PDF) raises taxes through a tax on hospitals and a tax on health insurance providers. The figure above shows that the hospital tax is projected to raise $307 million in 2009-11 and the health insurer tax will raise $105 million in 2009-11. In 2011-13, the increased hospital taxes will amount to $450 million and the health insurance tax will amount to $154 million.

State Agency Fudges Employment Impacts—Again

Such huge tax increases in the middle of one of the worst recessions in memory will slow Oregon’s recovery from the current recession and damage employment growth in the state.

That is why it is so surprising that Oregon’s Department of Human Services (DHS) has reported to Oregon Business magazine that the tax increases will boost employment in the state by 3,600 jobs.

In response to a public records request, DHS has provided documents describing how the agency came up with results that are contrary to fundamental economic analysis.

As it turns out, the agency employed the Broken Window Fallacy to its benefit. The agency counted only the estimated additional money that would flow into the state from Federal sources, such as matching funds.  The agency did not account for the tax money that will be extracted from taxpayers by the State of Oregon. Thus, the agency considered only the benefits of the program, but did not consider the costs.

This is not the first time that state agencies have cooked to books to fudge the economic and fiscal impacts of its tax policies.

The Bend Bulletin (registration required) has picked up these stories and provides a summary of the recent rounds of economic sleight of hand.

Note: This post has been revised since it was originally published.

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Posted in Economic Impacts, Government, Health Care | 1 Comment »

Impact of Minimum Wage Indexing on Employment and Wages: Evidence from Oregon and Washington

Wednesday, April 22nd, 2009

Employment Impacts of Minimum Wage on Oregon and Washington

Minimum wage increases are a hot-button issue in many states. As such, minimum wage increases are politically challenging to implement. To avoid the knock-down/drag-out fights associated with minimum wage increase, several states—including Oregon and Washington—have introduced minimum wage indexing. With indexing, the minimum wage increases automatically each year based on some measure of inflation. As a result, Oregon and Washington have some of the highest minimum wage rates in the country.

Now that Oregon’s economy is in a tailspin, with record unemployment and business closures, the legislature is considering HB 3053 that would halt increases in the minimum wage during an economic downturn.

A study by Eric Fruits for the Employment Policies Institute measures the effect of minimum wage indexing on employment and wages in Oregon and Washington.  The study finds that minimum wage indexing imposes employment costs with no measurable income benefits. In particular:

  • Higher minimum wages in Oregon and Washington are associated with reduced employment.
  • Younger members of the labor force—age 25 and younger—are more likely to be adversely affected by increases in the minimum wage and minimum wage indexing. The figure above shows that Oregon and Washington would have significantly lower unemployment if the state minimum wage rates were equal to the lower Federal rate.
  • Higher minimum wages have no statistically significant impact on wages of Oregon and Washington hourly wage earners.

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Costs of cap-and-trade in Oregon: Testimony to the Oregon Senate

Thursday, April 9th, 2009

If passed, Oregon SB 80 would establish a greenhouse gas cap-and-trade scheme for the State of Oregon. The Oregon Senate Committee on Environment and Natural Resources will have a public hearing on SB 80 on Thursday April 9, 2009 at 3:00 P.M. in Hearing Room C.

The following is the written testimony submitted by Eric Fruits regarding the costs of Oregon SB 80.

In September 2008, I co-authored a comprehensive analysis of the economic and fiscal impacts on Oregon of meeting the ambitious greenhouse gas reduction goals outlined in the proposed amendments to SB 80. In February 2009, I submitted testimony on the economic and fiscal impacts associated with the cap-and-trade scheme introduced in SB 80. I have attached my past testimony and the report I co-authored.

This letter summarizes my earlier testimony and presents new evidence of the substantial costs associated with trying to meet Oregon’s aggressive greenhouse gas emissions reduction goals.

  • Oregon’s economic output would be $48.3 billion lower; 90,000 fewer people would be employed; and state and local government revenues would be $4.4 billion lower (Pozdena & Fruits, 2008).
  • Subsequent independent research supports our findings: a 1 percent decline in carbon dioxide emissions is associated with a 0.74 percent decline in GDP (Annicchiarico, et al., 2009).
  • Recent research calculates that for every “green” job created via subsidies and tax breaks, 2.2 jobs elsewhere in the economy are destroyed (Álvarez, 2009).

There is no avoiding the substantial costs of SB 80. Households, businesses, and the public sector will have steeper power bills and will pay more to engage in nearly every activity.

Today, businesses are shrinking, closing shop, or exiting the state. Oregon now has its highest unemployment in 25 years and one of the worst unemployment rates in the country. Higher energy prices under SB 80 will worsen an already dire economic situation.

It is now evident that hopes of creating new “green” jobs funded with tax credits and subsidies paid by existing Oregon businesses and consumers is a losing proposition where more jobs are lost than created. Projections of increased employment under SB 80 are built on unrealistic assumptions and flawed models that produce counterintuitive results that have been refuted by real world observations.

Sources cited:

Álvarez, G. C. (2009). Study of the effects on employment of public aid to renewable energy sources. King Juan Carlos University, Madrid, Spain.

Annicchiarico, B., Bennato, A. R., and Costa, A. (2009). Economic growth and carbon dioxide emissions in Italy, 1861-2003. MPRA Paper No. 12817.

Fruits, E. and Pozdena, R. J. (2008). Oregon Greenhouse Gas Reduction Policies: The Economic and Fiscal Impact Challenges. Cascade Policy Institute. Portland, OR.

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USA Today on stimulus and stimulus skepticism

Wednesday, April 1st, 2009

usat_logo2USA Today ran a front page story on the the impacts of early stimulus projects. While the story focused on the businesses and families that hope to benefit from the stimulus spending, there was one dissenting skeptic:

Eric Fruits of Economics International in Portland, Ore., warns that stimulus spending may not revive the economy in the long run. “Borrowed money has to be repaid. A job today may come at the cost of someone not having a job in two or three years,” the economist says.

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Posted in Economic Impacts, Economy, Environment, Press, Transportation | Comments Off

BETC: Do Oregon’s energy tax credits help or hurt the economy?

Monday, February 23rd, 2009

Just a Picture of a Bike RackTomorrow morning, Oregon’s House Revenue Committee will be taking public input on a bill to limit the state’s business energy tax credits.

Oregon’s Business Energy Tax Credit program (BETC) gives a tax credit to businesses, nonprofits, and other organizations to spend money on projects intended to reduce energy consumption. If a business has no tax obligation, it can sell its credits to another business to help reduce the buyer’s tax obligation. As a result, businesses, governments, and nonprofits have an incentive to label standard business practices as energy conservation projects. For example, an employer that puts in bike racks or subsidizes its employees’ bus passes can qualify for the credit.

A recent study by ECONorthwest (PDF) released by the Oregon Department of Energy concluded that BETC’s tax credits produced more economic output and employment than spending on other state funded programs, such as K-12 education. While the BETC program may be associated with increased employment, the jobs associated with 2007-08 tax credit projects have wages that are approximately 11 percent lower than if the money were spent on other state funded programs.

Everyone lines up for a trough full of money

As reported earlier, the State of Oregon projects that the BETC program will cost the state $144 million in tax revenues in 2009-11 fiscal years (approximately $72 million a year), and climb to more than $80 million a year after that.

The ECONorthwest study, however, shows that these projections may be too low. In the first 10 months of 2008, more than $156 million in tax credits were given away, or more than twice the state’s projections for the upcoming two years.

It’s not all good news: Some tax credits hurt employment

The final draft of the ECONorthwest study would give the impression that all BETC projects boost economic activity.  However, an earlier draft of the report obtained by a public records request found that some categories of projects reduced economic output and employment. The earlier draft showed:

  • Commercial renewables projects such as wind and solar projects were associated with 29 fewer jobs and $420,000 less in wage income than if the tax credit money were spent on other state funded programs.
  • Industrial conservation projects—ranging from bus passes to energy efficiency equipment—produced 6 fewer jobs and $1.8 million less in wages than if the tax credit money were spent on other state funded programs.  The annual incomes of jobs associated with industrial conservation projects were approximately 6 percent less than if the tax credit money were spent on other state funded programs.

How to make the bad news go away

To help support the Oregon Department of Energy’s contention that the BETC program produces economic benefits to the state, the author of the ECONorthwest study offered to bury his more bothersome findings by combining them with programs that had net benefits.  In an email obtained by a public records request, the study’s author writes to the Department of Energy:

“Here is the draft economic impact report for the 2007-08 BETC/RETC programs. Note that in the commercial and industrial sections, sometimes the impacts are slightly negative. Let us know if you want us to combine categories and not show this additional detail separating commercial and industrial (when commercial and industrial are combined, the net impacts are positive).”

In the end, the final draft did combine the categories, and no negative economic impacts are reported. Instead, the final draft only hints at the possibility:

In some cases, certain sectors in the economy might show a negative net impact as employment or economic output decreases relative to the Base Case.

Some trivia

Note that the firm that wrote the study also employs the Revenue Committee vice-chairman as a policy analyst and the author of the report is, in effect, one of the committee vice-chairman’s bosses.

A solution: Broad based tax breaks

As noted earlier, targeted tax breaks such as BETC are ineffective as a tool of economic growth. Spending and investing will occur only if households and firms face low, but stable, tax rates.  Rather than a targeted tax break in which approval is based on the whims of the Oregon Department of Energy, the BETC should be replaced with broad based permanent reductions in state personal and business income tax rates.

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Posted in Economic Impacts, Energy, Government | 1 Comment »

The high costs of cutting carbon emissions: McKinsey & Co.

Tuesday, January 27th, 2009

McKinsey: High Costs of Cutting CarbonAccording to a report by consulting firm McKinsey & Co., the world can keep global warming in check if nations spend trillions of dollars on energy efficiency, clean power and forestry projects over the next 20+ years.

In addition to typical annual capital investments, the report concludes that beginning in 2011, additional investments of $475 billion a year would be required to keep global temperatures 2 degrees Celsius below pre-Industrial temperatures. By 2026, the cost would rise to $1.2 trillion a year.

The net present value today of the additional expenditures between 2011 and 2030 would be approximately $7.3 trillion. That is bigger than China’s economy today and equivalent to the economies of Japan and India combined.

Citation:
Dinkel, J., Enkvist, P.-A., Nauclér, T., and Pestiaux, J. (2009). Pathways to a low-carbon economy: Version 2 of the global greenhouse gas abatement cost curve. McKinsey & Company.

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The economic growth-carbon emissions connection: New evidence

Monday, January 26th, 2009

co2_and_gdpResearch by Eric Fruits and Randall Pozdena found that economic output, energy use, and carbon dioxide emissions have been tightly cointegrated historically. They calculated that a 1 percent decline in carbon dioxide emissions would be associated with a 0.71 percent decline in gross domestic product (GDP), a widely used measure of national income.

A recent working paper using a time series covering more than 140 years found almost exactly the same relationship. The authors conclude that changes in carbon dioxide emissions and changes in GDP are cointegrated. They calculate that over the long run, a 1 percent decline in carbon dioxide emissions would be associated with a 0.74 percent decline in GDP.

Citation:
Annicchiarico, B., Bennato, A. R., and Costa, A. (2009). Economic growth and carbon dioxide emissions in Italy, 1861-2003. MPRA Paper No. 12817.

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The high costs of climate change policies: Oregonian

Saturday, January 24th, 2009

OregonianEric Fruits has an op-ed in the Oregonian on the economic and fiscal costs associated with Oregon’s proposed policies to halt climate change.

Oregon is a leader in climate change legislation. The state has adopted one of the most ambitious greenhouse gas emissions reduction goals in the world. Although Oregon is big in leadership status, it is small in size. Even if all Oregonians dropped their energy consumption to zero–or doubled it–the Earth’s climate would never know it. Thus, policies to substantially reduce greenhouse gas emissions in the state run the risk of being virtually “all pain, no gain.”

There is no getting around it: both carbon taxes and cap-and-trade programs raise energy prices. If either program is put into effect, households, businesses, and the public sector will have steeper power bills and will pay more to drive their vehicles. Meeting the goals would mean Oregon’s economic growth would be cut almost in half. In turn, state and local governments would collect $4.4 billion less in revenues.

Numerous businesses are shrinking, closing shop, or exiting the state, leaving Oregon with almost double digit unemployment. Higher energy prices under a carbon tax or cap-and-trade program will only make things worse.

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Economic and fiscal impacts of Oregon’s greenhouse gas policies

Friday, January 23rd, 2009

Eric Fruits GHG PresentationEric Fruits presented at the first Cascade Policy Institute Legislative Leadership Forum for the 2009 legislative session.  The topic was Oregon’s Greenhouse Gas Reduction Policies: Projected Economic and Fiscal Impacts (PDF). Some highlights from the presentation:

  • Oregon has one of the world’s most ambitious greenhouse gas reduction goals: A 40 percent reduction per person by 2020.
  • There is a strong relationship between economic activity and carbon emissions: A 1% decrease in carbon emissions is associated with 0.71% lower GDP.
  • Technological advances cannot fully mitigate the costs of a 40 percent reduction in GHG emissions. Replacing capital is expensive and take years.  Households and firms would have to face years of significantly higher energy prices before investments in more energy efficient technologies replace existing technologies.
  • Meeting Oregon’s greenhouse gas reduction goals will slow the state’s economic growth:
    • Output would be $48.3 billion lower because of the State’s GHG emissions targets,
    • 90,000 fewer people would be employed,
    • State and local government revenues would be $4.4 billion lower.

Citation:

Fruits, E. and Pozdena, R. J. (2008). Oregon Greenhouse Gas Reduction Policies: The Economic and Fiscal Impact Challenges. Cascade Policy Institute.

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