Tuesday, March 31, 2015

How much does a commute cost?

(by Parker Evans, Lizzy McNamara, Noah Wiedenfield, and Shawn Kremer)

With roads and bridges in the state of Minnesota facing nothing less than a crisis, discussions of alternatives to traditional methods of funding have cropped up. This challenge has received a considerable amount of press in the Twin Cities of late, including two opposing editorials published by the Star Tribune. One option open to Minneapolis is congestion pricing, which can take the form of road pricing, HOV lanes and other fee-based strategies. Arguably the most interesting of these is called cordon pricing. While all congestion pricing methods is an attempt to better align the costs of roads with the users of roads, cordon pricing arguably goes the furthest by imposing a fee on vehicles entering part of the city – generally the downtown district, where congestion is the highest. While such a scheme in Minneapolis might have some tangible benefits for residents, serious concerns must be taken into account as well.

Given the lack of political in the United States, the handful of examples of cordon pricing that the Twin Cities can draw from are global ones. The most famous example from London utilizes many advantages that Minneapolis doesn’t have – namely a convenient border in the Ring Road and a compliant, centralized bureaucracy. Stockholm’s might be a better model. The Swedish capital faced serious pushback from its surrounding suburbs (an arrangement Minneapolis should be quite familiar with), and was forced into a deal in which a chunk of the revenues would go toward road funding in the suburbs, rather than entirely to public transit.

When judging the merits of cordon pricing, efficiency holds up as a strong measure. Drivers using the public good that is our freeway system during rush hour do not account for the negative externalities they create with their contribution to the larger congestion and subsequent pollution. Stockholm-like limits on fees, variable pricing, and effective technology can reduce compliance costs and enhance efficiency further.

Equity is a murkier matter. While the tax is certainly regressive, insofar that its charge is a larger percentage of a lower income, the cost would ideally be variable and correlated strongly to the benefit received (although some might view it as a penalty not incurred). Similarly, the scheme doesn’t fare well in terms of adequacy – the fees will not, and are not intended to, support the full public cost of installing the road. Moreover, it will likely take some time to dial in the variable pricing arrangement before the “optimum” level of traffic is attained.

Of course, the most challenging aspect is feasibility. Not only are administrative costs high due to installation and coordination of state DMVs, but political feasibility is not realistic. Even progressive strongholds like San Francisco and New York City have turned down federal funds to help implement a similar program, and with no American guinea pig to turn to, Minneapolis is likely not chomping at the bit to anger its residents or suburbs
Colorado Marijuana Tax
Alyssa Chiumento, Luke Hanson, Brynn Saunders

Although the use, sale and possession of cannabis remains illegal under federal law, recently several states have made exceptions – mainly for medicinal use, but a few states for recreational purposes.  Colorado and Washington were the first adopters of the recent push for marijuana legalization; voters in both states approved non-medicinal marijuana use in November 2012.  In Colorado, pot is taxed in several layers:  a 15% excise tax on cultivators; a 10% special sales tax; a 2.9% standard sales tax; and possible additional local sales taxes which can total up to 30% in markups

As a necessity for those who consume it (there aren’t any substitutes), marijuana is relatively inelastic.  Therefore, the rationale behind Colorado imposing such a large tax is that behavior will change little because people need it, just like tobacco.  People who use marijuana will continue to buy it in light of the fact that there aren’t any substitutes and their behavior is unlikely to change.

           As with most other excise taxes, the tax on marijuana is regressive, since low-income users pay more as a share of their income than high-income users.  Additionally, recreational users pay a substantially higher amount in taxes than medicinal users.  In this way, the horizontal equity may be less than ideal.  Yet there is an argument to be made that those who are legitimately suffering should not have to pay an exorbitant tax on medicine that helps them deal with their pain. 

The marijuana tax also enjoys high political and administrative feasibility, despite its high visibility that results from multistage taxation and lots of national media exposure. This high feasibility is due largely to two things: the tax’s potential for exportation (one state-commissioned study shows that 90% of the recreational marijuana sold in some ski towns was purchased by tourists) and the low administrative and compliance costs associated with sales tax collections. Currently, Colorado benefits from being one of only a few places in the world in which marijuana sales and use are legal. If the situation remains as such, the potential for tax exportation will also remain quite high.

The revenue raising capacity of the marijuana tax is quite robust after one year of legalization. Colorado generated $63 million in tax revenue in year one. The marijuana tax revenues have been steadily increasing during the first year of legalization. The Colorado Department of Revenue keeps continual updates of their monthly marijuana tax revenues. The latest projections by the Colorado Legislative Council anticipate the total marijuana tax revenue to exceed $94 million within next two years. Although the revenue seems quite robust currently, the stability of this revenue could be called into question as other states introduce legalization. As more states legalize recreational marijuana, Colorado could lose out on the revenue gained by outstate residents purchasing marijuana in Colorado.

In addition to the four evaluation criteria, it is important to consider Colorado’s unique tax legislation, the taxpayers’ bill of rights, or TABOR. For more information, listen to this NPR story.

And for a lighter take on the issue, check out this story by CNN’s Anderson Cooper.
An itemized receipt for purchase of recreational marijuana in Denver, Colorado.

Monday, March 30, 2015

Minnesota Cigarette Excise Tax

By: Carly Minster, Derrick Parker, and Kangkang Tong  

Historically taxing cigarettes has been a tool for increasing state revenue and to deter people from usage, and it serves this very purpose in Minnesota. The cigarette tax is an excise tax, a tax on specific products like alcohol or tobacco. The cigarette tax first appeared in Minnesota in 1947 at $0.03 per pack.  Many entertainment mediums glamorized smoking like the “Raleigh Cigarette Program,” a comedy show featuring Red Skeleton but a cultural shift began when doctors noticed negative health effects from smoking during the early 1950s. The Minnesota cigarette tax steadily rose over the years to the current rate of $2.90 a pack. Also during this time smoking bans were put into place in the majority of public spaces which include hospitals, school zones, restaurants, and public parks. Compared to other states, Minnesota’s cigarette tax is an accepted revenue generator. The highest cigarette tax is located in Massachusetts, at $3.51. Missouri has the lowest cigarette tax at 17 cents per pack. The tobacco tax is fairly easy to collect which makes it relatively efficient. As long as tax rates are not raised too high, people will continue to pay the rates and not travel to neighboring states to get cigarettes for a cheaper price. But there may be some concern about black markets since law enforcement in Minnesota has already prosecuted a few cases.
The cigarette tax is regressive: disproportionately affecting low income populations since the total purchase cost of a pack of cigarettes would account for a larger portion of a small income. One such population is the elderly that often live on a fixed income comprised of just retirement or entitlement benefits. Ideally this would discourage lower income users from continuing to use cigarettes but this is not always the case. Policy makers would hope, from a public health standpoint, that the sustainability of a cigarette tax would be impossible for long-term. But the tax has been a stable source of revenue during recent decades, in part because it is difficult for people to quit once they get addicted. That is partly why it is so feasible, both economically and politically. Politicians can sell the tax on its health merit while knowing that the state coffers will be filled by those addicted to smoking.


  1. For a synopsis of the bill: http://www.house.leg.state.mn.us/hrd/pubs/ss/sscigtax.pdf
  2. Does the tax change behavior?: http://www.startribune.com/lifestyle/health/208965591.html?page=1&c=y
  3. History of tobacco use in U.S.: http://archive.tobacco.org/resources/history/Tobacco_History20-1.html
  4. For some brief history on the tax and concerns about its affect on low income populations: http://watchdog.org/84280/mn-plans-2-billion-tax-increase-ushers-in-smoke-and-tax-era/
  5. Historical data on cigarette tax revenue: http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=403&Topic2id=80

Sunday, March 29, 2015

Intergovernmental Grants

Intergovernmental Grants are special because they are only used for education. These grants are provided by the federal government so state and local governments can help fund their schools. Some grants that are available are categorical, matching, general revenue sharing and general aid to education. That is the definition of an intergovernmental grant.
The effect of intergovernmental grants is harder to understand. The main reason is because only about 8% of spending comes from the Federal Government. The rest is left to states and local governments. This is a power the Constitution has left for States to preside over. So in the end, intergovernmental grants are just a small leak that can help or hinder K-12 education.
President Obama recently revealed a plan based on Tennessee’s program that guarantee’s two years free at any community college as long as the student maintains a 2.5 GPA. This would involve intergovernmental grants to all 50 states, allowing for students to continue their education pass high school to get an Associates’’ Degree at the college of their choosing. The government would cover 75% of the cost of college and states would cover the rest. Many people see this as simply a convenient way for the government to make college free. I see it as a way to increase the human capital that is so desperately needed in this knowledge based economy. No we don’t need more history and philosophy majors but becoming a plumber takes more know-how today than it did 50 years ago. Many of the technology and tools take theory to understand how to use them correctly. I don’t think that the President is going about this the right way. Call a spade a spade and advocate for free education because that is one of the few ways that people can move up in today’s society.

Amount spent per student per year (not adjusted for cost of living)

Tsang, Mun, and Henry M. Levin. "The impact of intergovernmental grants on educational expenditure." Review of Educational Research 53.3 (1983): 329-367.

Tuesday, March 24, 2015

State Park User Fees

This past weekend, I purchased an annual vehicle sticker that grants me access to all of the state parks in Wisconsin. Thinking back to our class, I decided to do a little bit of research regarding the way that Minnesota and Wisconsin fund their state parks.

Governor Dayton has recently proposed raising the daily vehicle admission fee by $1 to $6, and to raise the annual vehicle fee by $5 to $30. If approved, the change would raise an estimated additional $2.3 million over the next two years. This would be the first increase since 2003. The annual operating budget for Minnesota’s state parks is currently about $34.6 million, and about one third of this budget comes from park user fees, such as the vehicle admission stickers and camping fees. The remaining operating costs are covered by state tax dollars. Dayton has also proposed increases from the general fund, which, when combined with the increase in vehicle admission fees, will generate an additional $4.6 million and $4.9 million in fiscal years 2016 and 2017 for the state’s park system. This is still short of the needed operations funding, but would narrow the gap from the current appropriation.

Meanwhile, Governor Walker has recently proposed making Wisconsin’s state parks self-sufficient, eliminating all state tax revenue and instead funding the system solely through entrance and campsite fees. Cuts in state tax revenue of $4.6 million, roughly 28 percent of the system’s operating budget, would be made up for by raising campsite fees by $2 and raising vehicle admission stickers by $3 to $28. The idea of selling the naming rights of the state’s parks has also been considered as a possible revenue source. Wisconsin’s parks would also have to rely more on volunteers and cut back on services. Unlike Dayton’s proposal, which has generally received bipartisan support, Walker’s recommendation has been met with fierce criticism.

I came across numerous different numbers regarding the number of parks, acres, miles of trails, annual visitors, and estimated economic impact in each state. Generally speaking, Minnesota has a larger park system yet has fewer annual visitors than Wisconsin, making it perhaps more feasible for Wisconsin to rely more on user fees. The economic and cultural impact in both states is tremendous, as visitors spend money in communities nearby the parks (in the form of food, fuel, gasoline, supplies, etc.) and value the chance to enjoy the great outdoors through a variety of activities.

It should be noted that Illinois does not charge user fees at all, operating their state parks completely through state funding.  Wisconsin’s governor is proposing the exact opposite, while Minnesota is somewhat in the middle between the two extremes. What do you think is best?

The Next Round of Detroit's Water Shut-offs

March marks the one year anniversary of Detroit's notorious residential water shut-offs. During summer 2014, the City of Detroit shut off water to thousands of households (33,000 consumers by year's end) as a result of over $175 million in uncollected charges (triplepundit.com). Detroit's 2013 bankruptcy set the stage for the financial struggle of its water utility. The Detroit News summarizes the results of the shut-offs: the "aggressive [shut-off] campaign angered residents, activists and civic groups, spurring protests over the city’s treatment of delinquent water customers." An emergency management team created payment plan options to assist those in need and enrollment is now over 25,000. About 3,800 have applied for financial assistance from the Detroit Water Fund while over half of those applicants qualified.

Recently, a new round of water shut-off notices has sparked new concern. Some news sources put a positive spin on these notices, stating that the notices serve to bring people to the municipality to learn about their payment or grant options. The recent bout of shut-off notices is due to a glut of delinquent accounts which were unable to be shut-off during the winter season (when water service must be maintained to avoid pipe bursts). Although residential water shut-offs loom in light of the notices, the City states that it will target businesses before residential accounts. The Detroit Water and Sewage Department will target the nearly 10,000 accounts that have been deemed "illegal hookups" (buildings that have been shut off at a water meter but still showing water usage). 

It is easy to take water charges - and water usage - for granted. In light of such hot-button antics in Detroit, it is interesting to consider how water charges fare with the class's tax evaluation criteria of equity, efficiency, feasibility, and adequacy. 

The UN criticized the shut-offs of 2014, stating that water is a human right. A Detroit judge disagreed with their assertion. In a bankrupted City with an underfunded water authority, what are the appropriate outcomes of water charge delinquency

Monday, March 9, 2015

Maine Governor Looking to Get Rid of State Income Tax

    Taxes, they are the life blood of the modern day bureaucracy. In the United States, the income tax has one of the largest tax bases of any tax available. Every dollar you make must be reported to the IRS. Some states administer an income tax separate from the IRS, Maine is one.
    There are many Governors who think they can just do away with the income tax in their state. Maine Governor Paul LePage is one who believes that the income tax is “becoming an obsolete form of taxation”. He plans on reducing the income taxation rate from 7.95% to 5.75%. The Governor will fill that gap with an increase in the sales tax. His fear is that Maine may not be able to “compete nationally and internationally” for business. The fear stems from people moving from Maine for states with lower income tax rates. The problem with this fear is that living arrangements are extremely sticky. This also requires people to understand that the taxes their paying is high relative to neighboring states. That is a pretty big assumption considering what people know about their own tax code. Not to mention the research a person has to do to make sure the local tax rates they are going to pay does not nullify their move.
    There is anecdotal evidence that supports LePage fears however. Boris Johnson, Mayor of London and arguable a very productive citizen, renounced his American citizenship because of the tax headache. The IRS aggressively pursued him for back taxes and Boris ended up paying a lump sum to settle his case. The problem with this evidence, which I realize there are a lot, is that Britain has higher income tax rates than the United States. The point being it is not the tax rate that people don’t like but what the government does with it.

2. Maine’s Governor Wishes to Cut Income Tax Rate to Zero, Replace with Consumption Tax http://www.forbes.com/sites/travisbrown/2015/01/30/the-most-ambitious-tax-reform-plan-of-2015-comes-from-maine-governor-paul-lepage/


4.The long arm of the IRS: An Englishman’s home


Sunday, March 1, 2015

Georgia Republicans introduce bill aimed at creating jobs by lowering income tax and raising sales tax

The so-called “More Take Home Pay Act” lowers the state income tax from 6% to 4% over several years, while increasing the state sales tax from 4% to 5%.  The GOP says the tax reform – House bill 445 – would result in an increase of 14,000 jobs for the state based on computer model projections carried out by Georgia Tech University.  It is estimated that a household earning the state’s median income of $48,000 would take home an extra $400$1,200, depending on the source.  The higher sales tax would hit low-earners the hardest, by an estimated $50 per month, since the sales tax would be expanded to include groceries, among other items. 

Not surprisingly, the proposed bill has received ire from the left.  They contend that the reduction in income tax will disproportionately affect the wealthy, while lower- and middle-income Georgians will be hit hardest by the increase in the sales tax.

The bill is a renewed attempt at tax reform that was stymied in 2011 despite support from an independent commission of economists and business executives.  Democrats in the House rallied and eventually killed the bill the last time, and have begun raising the same objections since the bill’s introduction this year.

In supporting the bill, Speaker David Ralston mentioned competition with other states as a contributing factor:  “We need a tax structure that encourages families to save and businesses to invest so that Georgia can remain competitive with our neighboring states.”  Under the proposal, a sales tax rate of 5% would be lower than all but Alabama, Louisiana and North Carolina; a 4% income tax rate would be lower than all other Southern states except Florida and Tennessee, which have no income tax.

Republican congressman Jason Spencer knows passing the bill will be an uphill battle, saying that “once you’ve given people that [food tax] exemption, you can’t take it away.”

The chair of the economics department at Georgia Tech, who is responsible for the projections of the bill’s impact on job creation, also remains skeptical about the new proposal passing, saying that “tax reform is really hard…and it takes a long time.”

Kentucky considering amendment to allow local option sales taxes

Not all states allow local governments to levy local option sales tax; right now thirty seven do. Kentucky is currently considering House Bill 1, known as LIFT (Local Investments for Transformation). It would only allow local communities to levy a tax equal to or less than a penny and the sales tax increase would have to have a pre-determined end date. The funds raised would have to be used for voter-approved infrastructure projects. (Kentucky legislators announce local-option sales tax as 2015 House Bill 1) The bill died during last year’s session. It has passed the House, but faces a hurdle in the Senate.

Last week, an association called Kentucky Industrial Utility Customers sent a letter of opposition to Kentucky lawmakers. The companies represented by the association claim that the new law would place too big of a burden on their energy costs – to the tune of $24 million a year. Residential power bills would be exempt from a local option sales tax, but industrial power bills would not. The association sending the letter apparently represented two of the largest employers in Louisville, Ford and General Electric, as well as 28 others. The letter immediately put the passage of the bill into question.

Only a day later, however, General Electric released a statement that they were actually in support of the bill. Instead, a GE spokeswoman said that the companies should have requested an accommodation, rather than put forth a “broad-side attack on the bill.” But there is also opposition to allowing corporations to get an exemption, especially since corporate income taxes have fallen substantially over the last several decades.

Next week is the final full week of the 2015 session. There is opposition in the Senate to the companion bill that would spell out the rules for implementation. However, the amendment to the constitution could pass without the companion bill.