Posts Tagged ‘Economic Impacts’

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 »

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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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 »

Obama’s economist Christina Romer: Changing economics to please the boss

Sunday, January 11th, 2009

j04344031An earlier post noted that Obama’s chief economist, Christina Romer, co-authored an analysis of the President-elect’s stimulus proposal.

The analysis was little more that applying some “rules of thumb” to come up with a conclusion that increasing government spending created more jobs (even in the long run) than cutting taxes.  Romer & Bernstein’s rules of thumb ended up guessing that over four years tax cuts equal to 1 percent of GDP would reduce output by one-tenth of one percent.

Just two months ago, Romer co-authored a statistical study (PDF) that came up with a different answer: Tax cuts equal to 1 percent of GDP would increase output by 3 percent over three years. The author’s note, “The effect is highly statistically significant.”

Let’s summarize:

  • November 2008 — “Statistically significant” — 1% tax cut associated with 3% GDP increase.
  • January 2009 — “Rules of thumb” — 1% tax cut associated with 0.01% GDP decrease.

To be fair, one economist suggests a reason for Romer’s different conclusions is that one must distinguish between tax cuts that are meant to turn a recession into a recovery and tax cuts that are not in response to a recession.

Citation:

Romer, Christina D. and David Romer, “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks,” working paper, University of California, Berkeley, November 2008. (PDF)

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Obama’s economists: Government spending is better that cutting taxes, maybe

Saturday, January 10th, 2009

pages_from_45593e8ecbd339d074_l3m6bt1te-3President-elect Barack Obama made public Saturday an analysis (PDF) by his economic advisers, Christina Romer and Jared Bernstein. The analysis estimates that a $775 billion plan of tax cuts and new spending would create 3.5 million jobs over the next two years.

In the executive summary Romer & Bernstein state plainly their conclusion that government spending creates more jobs than tax cuts.

Tax cuts, especially temporary ones, and fiscal relief to the states are likely to create fewer jobs than direct increases in government purchases.

But, in Appendix 1, Romer & Bernstein admit that they have no idea what impact tax cuts would have on jobs.

For tax-based investment incentives, we used the rule of thumb that the output effects correspond to one-fourth of the effects of an increase in government spending with the same immediate revenue effects. This implies a fairly small effect from a given short-term revenue cost of the incentives. But, because much of the lost revenue is recovered in the long run, it implies a fairly substantial short-run impact for a given long-run revenue loss. We confess to considerable uncertainty about our choice of multipliers for this element of the package .

Romer & Bernstein base most of their conclusions on some rules of thumb (the term is used five times in the report). Bernstein is a social worker rather than an economist, so he can be excused for not being up to speed on economic impact models. Romer, on the other hand has published several papers on tax policy and macroeconomics. One would think she would have applied some rigorous economic modeling to analyze a three-quarter of a trillion dollar package.

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