There aren't always easy answers to policy questions
A big part of my job is answering policy-related questions. Some can be handled quickly, some take longer. Others require an in-depth study. But there are some that I just can’t answer.
Here are a few that came up recently.
How many jobs are actually at wind farms in Michigan? Wind energy was pitched as the next big thing, but wind farms probably don’t require many workers once they are established.
Why did lawmakers not close the school retirement system in 2012? I know that it was not the illusory transition costs issue that some claimed. Lawmakers made some major reforms — including to retiree health care benefits — but the plan remained open and I don’t know why they refrained from taking that additional step.
Why isn’t more attention being paid to the state income tax rate? The rate was supposed to be lowered after the 2007 tax hikes, but the reductions went away during the 2011 tax reforms. These rates have a much larger impact on the state budget — and each and every family budget — than the much-discussed pension tax.
How do public electric utilities actually make money? In a regulated market, it is not likely by selling more electricity to customers.
Why aren’t there more independent advocates for policies? We meet with a lot of member-driven groups to talk about our work. Their leaders seem to find it strange that the Mackinac Center has views on policy issues and connects with people who have similar views, instead of having members that determine our stances.
What is the proportion of Michigan residents who believe that agriculture is the state’s second-largest industry? Industry spokesmen have made that claim for a while, but the agriculture’s economic importance is much smaller than you would expect.
Why have there been corruption charges against Detroit Public School employees? The district’s been under state-appointed emergency managers for some time now, and the law is designed to fix mismanagement. After all, you can’t steal thousands from your employer unless your employer is mismanaging millions.
Why don’t municipal interest groups promise something in return for more money? They’ve been asking for more money from state taxpayers as far back as I can remember, yet I don’t recall them ever saying how they would use this additional money to benefit people. Promising to improve services seems like a more effective tactic.
The history of transaction taxes in America
The United States Postal Service puts out many beautiful stamps. One current “forever stamp” isn’t as nice to look at, but you should still consider using it the next time you decide to send some snail mail. It commemorates the repeal of the Stamp Act in 1766.
If you’re like me, you probably have a vague memory of learning about the Stamp Act in grade school. Back then I wondered why it was such a big deal that the colonists had to pay more for stamps, because when I thought of stamps, I thought postage stamps. But for the American colonists, the Stamp Act was most akin to what people today call a “transactions tax.” It required the colonists to pay a tax on almost every legal transaction.
In the age before instantaneous communications, business transactions required more legal documents than they do today. Suppose you wanted to sell your crops back in the 18th century. How would a potential purchaser know that the crops actually existed, or that you had not already promised to sell them to someone else? It was not possible to pick up a phone or check online — verification could only be made by a certified document asserting both your ownership of the crops and their availability for sale.
Such documents were common and used extensively. The free flow of credit, goods and services depended on them. Land transactions, which were frequent and important in the “land of opportunity,” were particularly dependent on these legal documents.
By taxing these types of documents (requiring them to have a stamp affixed as proof of payment of the tax), the Stamp Act imposed a cost, often a high one, on most business transactions, since most transactions couldn’t happen without these certified documents.
It not only made participating in the economy more costly, but it made the colonists more dependent on the English Crown. And this dependency was a feature, thought the Crown — not an unfortunate side effect. As legal scholars Justin DuRivage and Claire Priest recount, one colonial leader, Jared Ingersoll, mistakenly believed that if Parliament only knew how many transactions would be taxed, they would lower the tax: “I very well knew the information I must give would operate strongly in our favour, as the number of our Law Suits, Deeds, . . . & in short almost all the Objects of the intended taxation & Dutys are so very numerous in the Colony that the knowledge of them would tend to the imposing of a Duty so much the Lower as the Objects were more in Number.”
But Britain saw the imposition of this tax as a way to better control the colonies and protect against them rivaling English power. As England’s Junior Treasury Secretary said at the time, the Stamp Act would act as “some Check to those enormous Grants and Conveyances, which are so detrimental to the Colonies.” DuRivage and Priest put it this way: “Authoritarian imperial reformers in Britain had long expressed concern that colonial settlement and expansion needed to be restrained lest the colonies challenge Britain’s economic supremacy within the empire.”
So take this time to recall the importance of the Stamp Act as a transaction tax, and its centrality to the American Revolution. Then consider why people today would still want to restrain economic activity in order to control it out of fear that a successful economy poses a threat to the ruling class. Then, as nice as the planets or national parks stamps are, give a thought to using these commemorative stamps instead.
Research from Michael Thom analyzes a variety of programs
Last year Michigan lawmakers wisely did away with what was once the most generous film incentive program in the nation. Mackinac Center research showed that despite giving film producers half a billion dollars from 2007 to 2013, there were no signs that the film industry in Michigan was actually growing. Essentially, the program amounted to a taxpayer handout to a select few movie production studios. And now there’s new research that suggests these programs aren’t benefiting other states’ economies either.
The evidence comes from an article published in the American Review of Public Administration written by Michael Thom, a professor at the University of Southern California and graduate of Michigan State University. He analyzed 15 years’ worth of data from more than 40 states and found that film incentive programs, on the whole, have no significant impact on wages, employment, gross state product or film industry concentration in a state.
Thom also carefully analyzed the different types of film incentives offered by states, such as sales tax waivers, lodging tax waivers, transferrable tax credits and refundable tax credits, and tested each of these separately. In doing this, he found some positive effects for particular types of incentives, but the impacts were tiny. For instance, transferable tax credits had a small effect on film industry employment, but no effect on wages. And refundable tax credits had a positive effect on wages for film industry workers, but it was only temporary. Corroborating Mackinac Center research, there wasn’t any evidence that these types of incentives created new jobs.
Film incentives are a relatively new experiment among taxpayer-funded economic development programs. In 2003, there were only five states with such programs — now there are more than 40, and states are handing out close to $2 billion in subsidies to movie studios. Like Michigan, other states are beginning to wise up to the futility of film incentives, and this recent research should cause more states to rethink these programs.
Time to question the benefits of the Regional Transit Authority
The other day, I attended a public hearing of the Regional Transit Authority of Southeast Michigan in Northwest Detroit. The Mackinac Center’s analysts haven’t dug deeply into the RTA’s plans and assumptions surrounding its $4.6 billion millage request on November’s ballot. But the rhetoric from the RTA leadership in attendance was troubling — even before we look at the numbers.
Longtime Detroit radio host Mildred Gaddis broadcast from the event for her show on WCHB-AM 1200, interviewing RTA representatives and taking questions from the audience and social media. Virtually all the questions focused on either service concerns — Would the buses get better in a specific neighborhood? How much will the fares be? — or questions around employment, union representation, economic benefits, choice of contractor and other job-related topics.
One question notably absent until I gave Mildred a card asking about it, was whether Detroiters need to be taxed even more than they are now to receive improved transit services. My colleague James Hohman recently pointed out that Detroiters already pay the highest effective property taxes in the nation, a burden to which the RTA’s 1.2 mill property tax would only add.
High property taxes are a challenge for homeowners and business owners in any community. But in Detroit, high tax rates combine with a deeply broken property tax assessment system to destroy neighborhoods and lives. Roughly one in three homes in Detroit has been foreclosed on in the past decade, pushing people out of their homes and creating real and pervasive human suffering. To add insult to injury, these homes too often stay vacant, become blighted and join the long list of homes to be demolished. Detroit is spending hundreds of millions of dollars to knock down houses that could and should have remained Detroiters’ homes.
We’re literally taxing people in Detroit so much that they lose their homes, then asking other taxpayers to pay to knock down those homes. How can we defend this intellectually or morally?
As we respond to the many challenges facing Detroit, it won’t do to give a simplistic response like “the answer is this, or it’s that.” But one point of agreement has to be that Detroiters are simply taxed too much and receive too little. They’re not alone in this regard, but in too many of the city’s neighborhoods, squeezing residents for tax revenues has crushed the community.
It’s time to say: “Enough is enough.” Detroiters and others in Wayne, Oakland, Macomb and Washtenaw should look at what benefits the RTA is offering. Then they should question whether the benefits justify adding to the tax burdens of all homeowners and business owners, especially those whose burdens are already more than they can bear. Regional transit supporters point out that other metro areas spend more on transit than we do, but none of those other regions have the same challenges as Southeastern Michigan in general and the city of Detroit specifically.
Improving the coordination of our region’s transit systems doesn’t need to cost us $4.6 billion over 20 years, doesn’t need to add to the property tax-driven blight in Detroit and doesn’t need to create another layer of bureaucracy over the existing regional transit systems. Let’s be SMART — pun intended — about transit funding and whether imposing more burdens is the best way to create jobs and opportunity in our communities.
Noteworthy proposals to amend the state constitution
The House and Senate are on a summer break, so rather than votes this report contains some recently proposed constitutional amendments of interest. To become law these require a two-thirds vote in the House and Senate and approval by voters.
House Joint Resolution GG: Add “sex” to constitution’s ban on denying equal protection
Introduced by Rep. Marcia Hovey-Wright (D), to place before voters in the next general election a constitutional amendment to add “sex” to “religion, race, color or national origin” in the state constitution’s ban on denying equal protection under the law on the basis of these characteristics. This is already in the state civil rights law, but not in the Constitution of 1963. Referred to committee, no further action at this time.
House Joint Resolution II: Ban lawmakers offices in same building with a lobbyist
Introduced by Rep. Bill LaVoy (D), to place before voters in the next general election a constitutional amendment to prohibit legislator’s Lansing offices from being in the same building where a lobbyist has an office. The measure in part represents a protest against the Senate's plan to sell the body's current office building and move into a new building that contains some lobbyists' offices. Referred to committee, no further action at this time.
House Joint Resolution JJ: Limit legislature’s session dates
Introduced by Rep. Edward McBroom (R), to limit legislative sessions each year to January 1 to June 15, plus an additional 21 days starting in September. This is approximately the schedule the House and Senate have followed in recent years. Referred to committee, no further action at this time.
House Joint Resolution LL: “Taxpayer Bill of Rights” spending cap (TABOR)
Introduced by Rep. Martin Howrylak (R), to place before voters in the next general election a constitutional amendment to cap annual state government spending increases at the rate of inflation plus increases in the state population, with any amount over that returned to taxpayers. Referred to committee, no further action at this time.
House Joint Resolution MM: Make it easier to fire civil servants
Introduced by Rep. Kevin Cotter (R), to place before voters in the next general election a constitutional amendment to limit the power of a state civil service commission and give state government department heads the authority to discipline or dismiss an employee “for conduct that directly and negatively impacts the department's ability to accomplish its statutory duties in a fair, timely, equitable, and transparent manner.” Employees would retain the ability to appeal to the civil service commission, which would retain its authority to reverse the action if it is deemed arbitrary or capricious. Reported from committee, pending before the full House. See also House Bill 5677.
House Joint Resolution NN: Revise allowable School Aid Fund uses
Introduced by Rep. Kristy Pagan (D), to place before voters in the next general election a constitutional amendment to eliminate a provision that allows tax revenue earmarked to the state “School Aid Fund” to be used for higher education, including state universities and community colleges. In other words, tax dollars earmarked to this fund could only be spent on K-12 public schools. Referred to committee, no further action at this time.
SOURCE: MichiganVotes.org, a free, non-partisan website created by the Mackinac Center for Public Policy, providing concise, non-partisan, plain-English descriptions of every bill and vote in the Michigan House and Senate. Please visit http://www.MichiganVotes.org.
MLive covers defeat of anti-competition bill
Gov. Rick Snyder vetoed a bill last week that would have made it illegal to repair vehicles using aftermarket auto parts, and that’s a win for consumers.
Mackinac Center policy analyst Jarrett Skorup spoke with MLive after the veto, explaining that many studies have found aftermarket parts — an auto part made by a different company than the original equipment manufacturer — are just as safe as their often more expensive counterparts.
“Consumers should have that choice in deciding which auto parts they want to use,” Skorup told MLive.
Skorup explained the bill and the problems with it in a recent blog.
Competition between parts manufacturers is good for consumers and repair facilities. It makes parts better, helps keep down the costs for consumers and can even put downward pressure on the cost of auto insurance. Legislators should be encouraging more competition, not less.
Read the full MLive article here.
Says revenue has been cut
Michigan State University professor David Arsen recently appeared on public radio to discuss the findings of his new research into the causes of school district financial distress.
Arsen’s research lays most of the blame for growing deficits and shrinking fund balances at the feet of state policymakers. In an accompanying article he co-authored with two other education professors and an economist, he argues that these policies exacerbate the declining enrollment trend experienced widely across Michigan and “reinforce a fierce downward spiral,” particularly in high-minority urban districts.
Dozens of school districts have at one time been under close watch by the Michigan Department of Education because of their shaky fiscal foundations. Some districts that have come under emergency financial management, like Muskegon Heights and Highland Park, have experienced somewhat better fiscal outcomes than others, like Detroit Public Schools. Financial hardships led to the dissolution of Inkster and Buena Vista school districts in 2013.
In trying to explain the phenomenon, Arsen claimed, “Statewide, overall inflation-adjusted revenue per pupil has declined by about 25 percent since 2002,” he told Michigan Radio host Lester Graham.
However, the claim falls apart under the weight of closer scrutiny.
Arsen’s article includes a graph to reinforce the point that “statewide general fund revenue per-pupil has declined by roughly 25 percent since 2002.” The graph cites “Bulletin 140” (presumably Bulletin 1014) from the Michigan Department of Education as the source for the comparison with 2013, the most recent year of data used in the analysis.
Bulletin 1014 does not include significant chunks of K-12 funding that pay for non-general fund programs, such as those used for special education, nor does it include money used to purchase property or to finance school construction. As the Mackinac Center has pointed out before, Arsen’s data source also leaves out revenues collected by intermediate school districts — more than $2.6 billion in 2014-15.
A holistic view of Michigan K-12 education funding provides a less frightening picture. Adjusted for changing dollar values, the state’s public school coffers grew dramatically from 1995 to 2002. Since that time, figures have fluctuated modestly, resulting in a largely flat trend. In the following 13 years, real per pupil revenues grew by about 1 percent, a far cry from Arsen’s claim.
The omission of ISD revenues is particularly startling because those funds are predominantly used to provide center-based programs for special-needs students. Arsen and his colleagues identify inadequate state reimbursement of special education programs as a driving factor behind declining school district fund balances.
Another culprit Arsen points to is the method used to count students for the main funding formula. Districts count students for state aid payments based on a “90-10” weighted enrollment average — 90 percent of students from October of the current school year and 10 percent from the previous February. The balance has shifted several times over the years, at one point based on a 50-50 split.
Arsen and his colleagues say the current arrangement harms districts that are losing students; they specifically blame state policies that allow families to leave for public charter schools or other nearby districts. Getting 10 percent of funds based on last year’s students is not enough to cope with continuing financial obligations districts face, they argue. (Funny how seldom one hears the inverse argument made when enrollments are growing.)
The article presumes districts not only deserve greater protection as students leave for greener pastures, but also that they need the protection to stave off emergency financial measures. Recent evidence suggests the topic deserves a closer look.
Days after Arsen’s interview, The Detroit News reported that the number of Michigan school districts on the state’s financial watch list has decreased from 41 to 23. Less than one-third of the 23 districts are in measurably worse shape compared to the previous year.
These trends emerge even as Michigan’s annual public school enrollment continues to decline (although the decline has slowed a bit) and while the rate of students enrolling across district lines through Schools of Choice grows. And the 90-10 accounting rule for state funding continues.
The state could benefit from discussions about improving equity in the school funding formula and ensuring a greater share of dollars reach students where they choose to be served.
But let’s also not forget that just injecting more resources into public schools is unlikely to make much of a difference when it comes to boosting student achievement, as a recently published Mackinac Center study suggests. And let’s proceed with a fuller understanding of the financial picture, wary of policy prescriptions that avoid hard questions of how schools can adapt to serve students better.
A response to a critique of ‘School Spending and Student Achievement in Michigan: What’s the Relationship’
In a critique of our recently published study on the relationship between school spending and academic achievement, Bruce Baker, a professor at Rutgers University, raises technical concerns that lead him to question our empirical methodology and qualitative conclusions. The nature of his comments suggests that a select group of previous research, which stand in contrast to our research in both empirical approach and qualitative findings, are methodologically superior and show a positive relationship between spending per pupil and student achievement. We address both the general and technical concerns Baker raises and describe why our research improves over the earlier papers by Papke and Roy.
Baker seeks to make the case that Michigan school districts today are not significantly higher-funded nor more equitably funded, in order to enhance the possibility that earlier findings by Papke and Roy about the impact of funding on relatively low-spending districts still might apply to most of Michigan school districts. First, making additional adjustments to financial data, using an apparent labor cost model, he contends that “Michigan per-pupil spending has risen slightly over time.” Yet the Census Bureau data cited in his analysis shows an unadjusted overall per-pupil spending increase of 14 percent.[i]
Second, Baker looks at deviations of district-level per-pupil spending as “a way of looking at resource equity.” But his analysis lumps together all revenue Michigan districts receive: local, state and federal. A superior approach would exclude federal revenues, which fall outside the purview of state policymakers (whom our study is trying to educate), and focus instead just on local and state revenue allocations. When looking at these two sources of revenue, the evidence strongly suggests that from the resources that state policymakers command Michigan school districts are funded more equitably than they have been in the past.
In the 2007-08 school year, coinciding with the first year of academic and financial data analyzed in our study, the Legislature reinstated a formula that gives the lowest-funded districts twice the per-pupil foundation allowance increase of standard-funded districts. With the exception of a tiny percentage of the state’s “hold harmless” districts, the inflation-adjusted gap in school aid funding between the top and bottom is more than four times smaller.[ii]
To estimate the impact of per-pupil spending on student academic performance in Michigan, we use a regression model based on panel data from Michigan public schools covering grades kindergarten through 12 over the period 2007 to 2013. Since our data varies along two dimensions, years and schools, we are able to incorporate year and school fixed effects in the estimations, which is standard in econometric analysis using panel data. These fixed effects are important to control for unobservable variables that may lead to a spurious relationship between school spending and educational outcomes. Such variables include baseline measures of school quality and rates of student free-lunch eligibility.[iii] The exclusion of either of these fixed effects can result in spurious findings.
Papke uses panel data to test the relationship between aggregate spending and pass rates on the math test for 4th graders. In her analysis, she uses school fixed effects in the Ordinary Least Squares regression models, but excludes year fixed effects. By excluding year fixed effects in her panel estimation procedure, her findings are at risk of being spurious because of the omitted variable bias problem. To address this problem of omitted variable bias, Papke employs an Instrumental Variable estimation strategy and uses the foundation allowance as an instrument, which was imposed by Proposal A to assign a specific per pupil spending amount to each district in Michigan. However, Hyman, in a 2014 working paper, tries to replicate Papke’s econometric model and finds that the foundation allowance variable is a poor instrument in the IV framework, which makes her IV findings less reliable. Also, Hyman could not find a statistical relationship between education spending and math achievement for 4th graders when he includes more control variables in Papke’s main empirical model to control for omitted variable bias, which suggests that Papke’s model was econometrically flawed.
Roy evaluates the impact of Proposal A on 4th grade math and reading scores using panel data on 520 school districts over the period 1993-2001. He finds that in districts with the relatively lowest school spending per student, reading and math scores both improved after Proposal A was implemented. However, most of these estimates are weakly statistically significant, and Roy further finds that districts with relatively higher school spending per student experienced a reduction in math and reading scores. Although his empirical model includes district fixed effects, he excludes year fixed effects. The exclusion of year fixed effects could possibly explain why Roy finds these seemingly conflicting quantitative results.
The concerns of Baker are addressed with a thorough consideration of the literature that points to a statistical relationship between school finance and student achievement, and an explanation of our empirical framework. In Papke and Roy, both papers suffer from omitted variable bias that leads to less reliable findings. This is further supported by Hyman who could not successfully replicate Papke’s results, which suggests that Papke’s econometric methodology suffers from misspecification. We are careful of the omitted variable bias in our empirical methodology, and we include both year and school fixed effects in the estimations to potentially eliminate this bias.
Our study’s methodology and findings are just as robust if not more so than the previous work done on the relationship between school spending and student achievement in Michigan. Taken in the context of the broader scope of academic literature we identified, these results cast doubt on the idea that continued K-12 funding increases alone will drive measurable improvements to student achievement in Michigan.
Papke, L. (2005). The Effects of Spending on Test Pass Rates: Evidence from Michigan. Journal of Public Economics, 89, pp. 821-839.
Hyman, J. (2014). Does Money Matter in the Long Run? Effects of School Spending on Educational Attainment. Working Paper.
Roy, J. (2011). Impact of School Finance Reform on Resource Equalization and Academic Performance: Evidence from Michigan. Education Finance and Policy, 6, pp.137-167.
[i] U.S. Census Bureau data, http://www.census.gov/govs/school/. 1993 per-pupil spending figure of $5,967 adjusts to $9,619.75 in 2013 dollars, compared to $10,948 in actual per-pupil spending for 2013. See http://www.bls.gov/data/inflation_calculator.htm for inflation adjustments.
[ii] Senate Fiscal Agency, http://www.house.mi.gov/hfa/PDF/Briefings/School_Aid_BudgetBriefing_fy15-16.pdf, Figures 8 through 8d. House Fiscal Agency (the 1994 gap of $2,300 adjusts to $3,713 with inflation, making the $848 gap for 2014-15 more than 4x smaller); http://www.house.mi.gov/hfa/PDF/Briefings/School_Aid_BudgetBriefing_fy15-16.pdf, slides 25 through 28 (the 1994 gap of $2,300 adjusts to $3,713 with inflation, making the 2015-16 $778 gap more than 4x smaller).
[iii] Student racial demographics were only available for a limited set of years in the analysis. Though not included in the official regression analysis, a test of adding these effects to the smaller sample of years revealed no discrepancy in our findings about the impacts of spending on student achievement.
Judge Rhodes points out oversight in op-ed
In a recent Detroit News op-ed I wrote about a practice called “release time,” where union officials are kept on government payrolls and allowed to do union work on the taxpayer’s time. This happens in many school districts across the state.
Detroit Public Schools provides release time for union officials, but the union reimburses most of these expenses, an important point that I did not clarify but should have. In a letter to the editor, Judge Stephen Rhodes called out this oversight and he is correct.
The information I reported was based on Freedom of Information Act responses from the State of Michigan and DPS. The state identified seven DPS employees who were on union release time. DPS reported being reimbursed for the president of the Detroit Federation of Teachers.
His salary in 2015 was $89,381, according to state records, and the district reported being reimbursed for a total of $108,322. This appears to cover his salary and health benefits, but not the full contribution taxpayers must make towards funding his pension — which amount to about 36 percent of an employee’s salary. So, the full cost of the union president’s release time may not be completely reimbursed, and taxpayers are at least in part funding this arrangement.
Judge Rhodes also objected to me calling DPS “the worst offender” when it comes to school districts granting this privilege to union officials, because many other school districts do not even receive partial reimbursement. Detroit still stands out because they have seven union officials on release time when no other district reports having more than two.
New York Times covers fight to allow people to work
The New York Times has a good write-up on occupational licensing laws across the United States. Many of these laws are needless and make it more difficult for individuals to find gainful employment. But there is some bipartisan work being done to reform them. From the story:
The Obama administration and the conservative political network financed by the Koch brothers don’t agree on much, but the belief that the zeal among states for licensing all sorts of occupations has spiraled out of control is one of them. In recent months, they have collaborated with an array of like-minded organizations and political leaders in a bid to roll back licensing rules.
When it comes to tax policy, conservative-leaning states typically have less burdensome rates. Not so when it comes to licensing mandates on individuals, however, as the Times notes:
The most regulated states, paradoxically, are red. “Even Republican governors with Republican legislatures in pretty conservative states have still found it extremely difficult to effect change,” said Dick M. Carpenter, strategic director of the Institute for Justice. “When there is an effort to dial back legislation, then the licensed industry turns out with huge counterattack. This is the same story that plays out in every state.”
Michigan is in the middle of the pack when it comes to its licensing burden, but it is among the most onerous in the Midwest. Over the past few years, however, the state has dropped licensing requirements for eight occupations – more than any other state in the country. The list includes dietitians and nutritionists, ocularists (makers of artificial eyes), immigration clerical assistants, school solicitors, community planners, auctioneers, interior designers, and carnival workers. A state report from the Office of Regulatory Reinvention calls for many more occupational licenses to be eliminated.
This is relatively small potatoes, but still a step in the right direction. Going forward, legislators should roll back more of these licensing mandates that prevent people from working until they get permission from the government.