Thursday, February 26, 2015

Job growth in urban cores

I found this Upshot article in the New York Times about emerging trends between cities and suburbs fascinating for a variety of reasons. According to the article, employment outside of city centers rapidly outpaced central cities up until 2007. However, the scale has tipped slightly in the other direction with inner city employment rising more rapidly than suburban employment growth. Notably, new urban jobs are more highly skilled and high-paying while working class jobs “are more likely to be suburban” Increased urban growth presents new opportunities for efficient urban, walkable, and transit-oriented communities. However, these hot real estate markets increase land prices making development more expensive. Those costs get passed on to the buyers, and the risk is that cities will become havens for the wealthy and inaccessible to the middle and working class. New York and DC seem to exemplify this exclusivity, where cost of living squeezes out the middle class. The potential for compounded socioeconomic stratification – wealthy, educated households in exclusive urban districts– is a concern. However, the benefits of strong cities outweigh the disadvantages. As the article states, a weak or economically frustrated urban core can burden the whole metropolitan area. Further, the dense cluster of employment can facilitate efficient travel and transportation systems as opposed to more polynucleated urban areas that tend to be more auto-friendly and environmentally damaging. No doubt these shifts will affect state and local budget as constituencies - service needs - evolve.

Tuesday, February 24, 2015

Property Tax and Non-Profits

Non-profit organizations are often exempt from paying property taxes on real estate or buildings they own.  Among these exempt organizations are not-for-profit hospitals and colleges.  The National Bureau of Economic Research estimated that the aggregate value of property tax exemptions for not-for-profit hospitals alone totaled $1.7 billion in 1994[i].  Some hospitals have since expanded into outlying, suburban communities where the cost of acquiring real estate is low, putting further pressure on municipalities to fund police, fire and other required services[ii]

In exchange for exemption from property taxes, many not-for-profit hospitals contribute funds to what’s known as the PILOT program, or “payments in lieu of taxes.”  Non-profits make voluntary payments to the program, which is then distributed back to municipalities to help pay for public services like police and fire.  However, the PILOT program has been criticized for a lack of transparency and an “ad hoc” process for calculating the amount of the payment that results in underpayments and huge variability among similar non-profits[iii].   Ultimately, the PILOT program was found to have “negligible revenue potential” despite tax-exempt properties ranging from 12 percent of the property tax base to as high as 60 percent of the total property tax base (if state government properties are included). 

The overarching reason for property tax exemption for non-profit organizations is commonly believed to be because non-profits are “contributing to the general welfare and [are] providing social goods.[iv]”  A 2010 court case called into question whether property tax should be exempt for good intentions.  The Illinois Supreme Court upheld the denial of property tax exemption to Provena Hospitals upon finding that the total “charity care” provided by the hospital amounted to only 0.723 percent of its revenue in a given year[v].  The court found that the vast majority of the facility’s funds came through private insurance, Medicare and Medicaid, or as direct payment from the patient, a funding structure not easily distinguishable from for-profit hospitals. 

Thomas J. May, the tax assessor for Hennepin County in 2008,commented on an earlier Minnesota court case that found that a daycare facility was no longer tax-exempt because they “weren’t giving enough away.”  May noted difficulties in distinguishing non-profits from for-profits from an assessor’s view largely because “there are so many different types [of non-profits], and many of them are doing the same thing for-profit groups that aren’t exempt are doing.[vi]”  In order for the daycare facility to be considered a non-profit or a “purely public charity,” the court ruled that it would need to charge “charity” customers less and that its rates would need to be lower than its competitors.


Tuesday, February 17, 2015

Business Climate Warming up in Michigan

Historical context:
During the Great Recession, Michigan experienced levels of unemployment much higher than any other state in the union, as well as beating the national average.  The nation watched as federal stimulus dollars went to bailing out the Motor City’s biggest employers: Ford, GM, and Chrysler. Michigan and some of its most prominent cities are still fighting back from the downward spiral that occurred in 2009. Although the current unemployment rate is about half of 2009 highs, Michigan still has a higher rate of unemployment than the national average.

Laying the framework:
Governor Rick Snyder, well known for using his private sector experience to inform policy solutions, believes one way to catalyze the return to prosperity for the state is to create a more welcoming economic climate for businesses. Snyder says, “The role of the government is not to create jobs, it’s to create an environment for success.” Snyder signed into law substantial adjustments to the Michigan Business Tax in 2012.

The Harbinger: The Michigan Business Tax was a morass of multiple kinds of taxes on business property, operations, and transactions and a myriad of tax credits and incentives. In 2012 efforts were made to simplify the structure and decrease the amount of taxes businesses would have to pay. Those in favor of the changes to the Business Tax believe it was the right mechanism to enhance the state’s business climate, making Michigan a more attractive locale for businesses to establish themselves and hire Michigan residents as employees. Opponents claim the burden has merely shifted to individuals with high risk of little fruitfulness. Michigan is now taxing retirement income and decreasing the earned income credit. Those most affected by these changes are the low and middle classes.

Business taxes were decreased by 24 mills for industrial personal property and combined with a 35% tax credit; overall, Michigan businesses would have to pay 65% less in personal property taxes. Commercial personal property tax rates were also decreased by 12 mills or 23%.

Present Day Implications:
Prop 1 was a law that was approved by Michigan voters in fall of 2014 that will phase out personal property taxes businesses pay for office and industrial equipment. The phase out will mature over a decade and will benefit small and big business alike. Manufacturing companies, like the Big Three in Detroit, donated $8 million to support the proposal. The proposed plan aims to encourage growth and investment in the private sector by saving businesses money over time. Regionally, Michigan was the odd man out because it still enforced the personal property tax. The phase out is estimated to cost Michigan up to $600 million a year but businesses will still have to pay about $100 million per annum and the remaining gap will be repaid to the state through funds businesses have to pay as previous tax credits expire.

Local governments will instead receive funds from the state use tax, another type of property tax, to provide local services.

Links for more information:

Map of 2009 unemployment rates in U.S.:

MI unemployment rates as of Dec 2014:

Figures on how much auto companies borrowed and paid back:

Ramifications of Michigan Business Tax adjustment:

Governor Mark Dayton’s Gas Tax proposal

For the past month, Governor Mark Dayton has been highlighting his plan to add $6 billion dollars for transportation funding over the next 10 years by proposing a 6.5% wholesale gas tax. The gas tax would have floor of $2.50 per gallon, which equates to about 16 cents per gallon of additional tax. There would be no ceiling, so as the price per gallon increased so would the tax.

Dayton recently outlined 600 road and bridge projects that his transportation bill would fund, in which 72% of the projects are in Greater Minnesota while 28% are in the metro. These include 2,200 miles of state road and 330 bridges.

Currently the Minnesota stands at 28.5 cents. The gas tax remained stagnant at 20 cents per gallon from 1988 to 2008. In 2008, Minnesota started phasing in a 5 cents increase in the gas tax along 3.5 cent debt service charge. The 8.5 cent total rise was phased in over a four year period starting July 1st, 2008 until July 1st, 2012.

Gas taxes are mostly viewed as an equitable way to fund transportation since the people that use the roads the most would be paying the most. Additional gas taxes are also easily implemented since they already exist, so it administratively feasible. However, politically it will be a tough sell since this will noticeable tax, especially with the heavy media coverage. Also, Republicans control the House which adds to the difficulty of pass this transportation budget.

A drawback, however, would be that lower-income people who drive a long way to work (specifically rural areas in Greater Minnesota) would be paying a disproportionate amount of their income to the gas tax. Also, policy makers need to take into account the rise in more fuel efficient and electric cars. These cars will be using the roads and bridges but paying relatively little in the ways of a gas tax.  

On a related note, Humphrey Professor, Jay Kiedrowski wrote an op-ed for MinnPost on Feb 9th, 2015 where he agreed that it was time for Minnesota to raise their gas tax in order to repair roads and bridges and relieve congestion in the metro.

Wednesday, February 11, 2015

The Sordid Story of Prop 13, TIF, and the Death of Redevelopment in California

Many argue that America’s tax revolt began with the election of Ronald Reagan in 1980, but the movement really began in California in 1978 with the passage of Proposition 13. The measure affected virtually every activity in the state, but decades later, it would fuel the demise of California's redevelopment agencies.

Redevelopment agencies in California had used tax-increment financing (TIF) as a tool since the 1950s. In the late 1970s, however, the tax landscape changed in two ways: federal funding for urban revitalization dried up and the voters passed Howard Jarvis’ Proposition 13 (or, the People’s Initiative to Limit Property Taxation), reluctantly accepted by Governor Jerry Brown.

Prop 13 proved to be a monumental shift in local government revenues and expenditures.  The measure rolled property tax assessment values back to 1976 levels, and capped the possible valuation growth at 2%. Moreover, the practice óf annually reassessing property was scrapped in favor of a system in which property was only reassessed on sale, where property taxes would begin at 1% of value and remain subject to the 2% valuation increase cap.

The measure sent shockwaves through local governments. Schools, which had been primarily funded by local property tax (and had been among the best in the nation) saw precipitous decline in spending per pupil. After Serrano v. Priest, the state was required to backfill all school funding that could not be met by local property tax.

In the world of redevelopment, local governments were forced to switch tactics. Suddenly, encouraging or subsidizing housing projects became cost inefficient. The use of TIF skyrocketed as cities engaged in bidding wars in pursuit of retail development and their now-juicy sales tax dollars. As tax revenue became scarcer, competition between state and local governments increased.

In the coming decades, cities turned to TIF to keep local tax dollars out of state hands. Redevelopment agencies drew more and more ambitious borders for their TIF districts and extended the lives of the districts about to expire – at one point, the entirety of downtown Los Angeles was placed in one of nine TIF districts. With all new property tax dollars going into the coffers of redevelopment agencies, even less local money was left to fund schools which left an even larger burden to fall on the state.

This shell game came to an end in 2011. In the midst of a budget crunch, lawmakers in Sacramento looked jealously at the massive war chests that redevelopment agencies had accrued. 33 years after Jerry Brown had watched voters pass Prop 13, he found himself in the governor’s office under pressure to right the sinking ship that was the California budget. He dissolved local redevelopment agencies and ordered their funds to be divided among a variety of successor agencies. TIF died along with them.

In September 2014, however, Governor Brown resuscitated TIF in the form of Enhanced Infrastructure Financing Districts, which are limited to explicitly public projects, infrastructure, and low-income housing rather than job or retail. Given that Proposition 13 is untouchable in California, creative financing tools like TIF – although they can be abused – are necessary to facilitate redevelopment throughout the state.

Tuesday, February 10, 2015

Illinois’ fiscal cliff

According to the New York Times, Illinois has the “country’s worst-funded public pension system, … billions in unpaid bills and the worst credit rating.” The financial woes of the state have been called “staggering” and Moody’s ranks the state as the most troubled in the country. The new Republican governor, Bruce Rauner, faces a Democratic senate but many hope both sides will compromise in the face of such gloomy financial straits. Rauner will soon unveil his proposed annual budget, which is expected to address the current pension crisis.

Before the formal budget proposal, Rauner’s first step has been to bar unions from requiring all workers to pay dues, a relatively aggressive move targeted at the public sector.  This new prohibition would affect about 6,500 workers who are not in unions but pay fees to them and benefit from the collective bargaining agreements they produce. He believes this will undo a “corrupt bargain” that is costing Illinois taxpayers and has reasoned that the existing setup is unconstitutional.

Teacher pension reform is a large discussion topic (at least in some circles). The Illinois Policy institute thinks that the state has no business paying teacher pensions, and this should be a local action. However, this calls into question the various levels of wealth at the local level – would wealthy localities have an easier time paying their teachers? Some argue that the “body of government that approved [pension] costs – the school districts – should be held accountable” and not the state (devolution principle).

With a state unable to pay for its programs, it could cut spending (services) or raise taxes. Some argue that tax hikes will cause business or residents to flee (“voting with their feet”), reducing revenues further. This could perhaps incite a downward spiral for the state (leading to a decrease in the state’s credit ratings, increasing the difficulty of obtaining financing to pay its outstanding debts, and so on).

As an alternative to traditional pensions, Federal employees switched to a 401-K type model  in the 1980s. Some have proposed Illinois switch to this model to deal with the pension costs. However, changing the status quo will be politically difficult as entitlements have become naturalized (ie. taken for granted). Budget hearings with the public will be held through May. Many strong opinions can be expected, but what viable strategies will actually be proposed to balance Illinois' budget? 

Interesting link that calls itself an “interactive almanac of U.S. politics":

Monday, February 9, 2015

The public investment in transportation

Recently, the Metro in Washington D.C. has some trouble. Their ridership is declining, which is partially caused by the cut in federal transit benefit from $250 per month to $130 in 2014. The loss of customers in Metro leads to the decline of fare revenue. The committees of Metro in D.C. plan to cut the metro service and raise the transit fare to balance their budget. On the other hand, the maximum monthly pre-tax deduction for parking in D.C. area is increased to $250 in 2014. Public investment into roads/bridges is more popular than that of public transit/metro.

Thinking the nature of service, externalities, and social equity, public investment into metro/public transit should be paid more attention to roads/bridges. The service of metro/public transit is closer to public goods (assuming that the gov’t can provide as many buses/subway lines as possible), while the use of roads/bridges is more like common-pool goods (assuming that no toll fee is implemented).  According to the nature of these two services, metro/public transits should be provided by government and the use of roads/bridge should be regulated. 

Furthermore, the externalities of these two services are very different. The increased use of public transit/metro has positive externalities; while the increased use of cars has negative externalities. It is found that increased use of public transit can decrease the emissions of air pollutants and greenhouse gases; while the use of automobiles is one cause of urban air pollution. If the social equity concern is considered, the public transit can benefit more to low-income people. 

From the perspective of government, fiscal return of public investment might be more important. To finance metropolitan infrastructure is a big challenge for local governments now. Both roads/bridges and public transit/metro needs money to maintain and upgrade the system. However, the investment into roads/bridges can encourage the automobile use, which creates more fuel tax revenue. The earmarked fuel taxes are the main revenue source to maintain the transportation system. In comparison, the public transit/metro needs more money from government to support their service. The fiscal return of roads/bridges is bigger than that of public transit/metro.

Linking back to the theory of fiscal federalism, local service is better provided by local government, given the complete information and representative issues. However, in the case of Metro in D.C., it is unknown that the policy made is reflected by the residents or it is from middle-higher class group.


The transit benefit: “The IRS allows private-sector workers to take up to $130 monthly out of their wages, before taxes, to cover public-transit fares. Federal employees who use public transportation can get a subsidy of up to $130 monthly without a pay deduction.”--From Washington Post Feb 7, 2015

Blogs on Metropolitan Infrastructures from Brooking Institute:

Tuesday, February 3, 2015

Budget Crisis in Scranton, Pennsylvania

In order to understand the potential ups and downs of a budget process and the serious implications it can have on city operations, I direct your attention to the fiscal crisis that plagued the City of Scranton, Pennsylvania in 2012 – the repercussions of which are still being felt today.

Scranton, which has been losing population since the mid-twentieth century when two of its main industries - anthracite coal mining and garment making - also severely declined, has experienced its share of financial troubles. However, in the summer of 2012, the City’s financial problems escalated to unprecedented levels: it did not have enough money to make payroll for its 400 employees. Mayor Chris Doherty slashed all city employees’ salaries, including his own, to the state minimum wage of $7.25 per hour, in an effort to try to close the budget gap.

In 2012, the City had more than $300 million in debt and a budget deficit of $16 million for that year alone. To offset the City’s cash flow crisis, the Mayor proposed raising taxes; the City Council, however, opposed such a proposal, instead offering the suggestion of borrowing money to cover the gap and failing to enact the Mayor’s proposed budget. Both proposals have their issues, as increasing property taxes may both burden existing residents and dissuade potential residents from relocating to the city, further exacerbating the dwindling tax base. Borrowing money, however, only kicks the can down the road - and may prove an increasingly difficult task, as lenders are hesitant to become involved with the City.  

So, I ask: What can a city in Scranton's position do to significantly improve its financial health?

Whatever the solution may be, it must not simply be short-term. Rather, it must comprehensively address the “underlying issues, including grossly underfunded pension systems, unsustainable debt and excessive collective bargaining contracts” that have significantly hampered budget development. PA Independent

Here’s a short video clip from MSNBC explaining the situation. And here are some additional news articles: