Lower tax burden generates more money

Pasadena Star News

By: Cynthia Kurtz

Posted: 5/28/2014 

When the California Legislature talks about taxing the rich, State Sen. Bob Huff likes to say "There is nothing as mobile as a millionaire and his money." It does seem that there would be a tipping point at which people would take dramatic steps - like moving - to protect their money. 

How do we know when we have hit that tipping point? We grumble about taxes, the high costs of living, and doing business in California. But California is a great place to live. Do people really move money because of public policies? Is there a measurable difference in the wealth of a state that can be tied to taxes and economic policy? These questions have been topics of much recent debate.

Author Travis Brown recently searched for the numbers to answer these questions in his book, "How Money Walks." Using Internal Revenue Service tax-payer data files from 1995 to 2010, he examined which states gained adjustable gross income (AGI) - the income reported on tax returns - and which states lost AGI. Then he examined the personal income tax structure in each state to see if there was any correlation between the movement of money and tax policies.

What he found is that during those 15 years, Americans moved $2 trillion - yes that is trillion with a "T" - between states. That's equal to the GDP of California, $2 trillion is a lot of money.

It wasn't just that the money moved around. After all, people do move for a variety of reasons. But there were clearly winning and losing states. Some states had substantial net gains in AGI and others experienced net losses. 

The winning state hands down, was Florida with a net gain of $86.4 billion. That figure represented money that had moved to Florida from other states not natural growth from residents already within Florida. Where did the money come from? $16.8 billion came from New York and $10.2 billion from New Jersey plus a number of other states.

There may be a variety of reasons that people - wealthy people - move their dollars but let's examine the tax rates. Florida has no income tax. The overall state and local tax rate equals 9.3 percent. Taxes per capita equal $3,728. Florida ranks 27th in the National Tax Burden rankings. 

By comparison New York has a top income tax rate of 8.83 percent; a state and local tax rate of 12.8 percent; taxes per capita of $6,375, and is #1 in the nation in the tax burden ranking. New Jersey is not far behind with a top income tax rate of 8.97 percent; state and local tax burden of 12.4 percent; taxes per capita of $6,689 and ranks #2 on the national tax burden list..

How did our own Golden State do? Unfortunately, we were right behind New York as the second largest net loser. California lost $31.8 billion AGI over 15 years primarily to Nevada, Arizona, Oregon, Texas and Washington - all states with substantially lower taxes. That equals over $2 billion per year of lost income. California, with a top income tax rate of 13.3 percent; state and local tax burden of 11.2 percent; taxes per capita of $4,934 ranks #4 on the national tax burden list.

Clearly, taxes make a difference. Millionaires and their money are mobile. That lost income negatively affects all Californians. We can do better.

Calculating GDP can be a tricky matter

Pasadena Star News

By: Cynthia Kurtz

Posted: 5/21/2014 

When someone says "GDP" we know the reference is to Gross Domestic Product. You hear the term being bantered about all the time as a way to compare a country's output, determine its economic health, and even judge its standard of living. How effective is the GDP at making these comparisons?

The answer is "it depends." There are different ways GDP can be calculated and different ways to use it as a comparison. Let's start at the beginning. There are two basic approaches to calculating GDP: Income or Expenditure.

The Income approach for GDP is the sum of everyone's earnings. The formula is W + R + i + PR = GDP. W is wages or labor income including salaries, benefits and unemployment insurance; R is rental income from properties and patents; i is interest income received by households and PR are profits made by companies after paying for the costs of doing business.

The more common Expenditure approach is a sum of everything we spend. In this case the formula is C + G + I + NX = GDP. C is consumer spending - the total sales of all products and services; G is government spending; I is industry investment - meaning how much businesses spent on capital; and NX is net exports - the total value of goods exported minus the total value of goods imported. 

The numbers used in these formulas depend on a number of factors. The Official Exchange Rate (OER) compares a country's output using its own currency over a set period of time such as one year or one quarter. The OER method tells you the "size" of the economy but it can be manipulated. For example, China pegs the value of the Yuan so it is always lower than the dollar. That means the costs of goods are lower in China so the GDP will be lower.

Another arguably more useful method is Purchasing Power Parity (PPP) which takes into account exchange rates and inflation. The value of each of the numbers in the formula must be determined in like currencies. Keeping with our China example, the value of everything sold in China would be adjusted to what it would cost in the United States. In 2012 the China GDP using PPP was $4 trillion more than what was computed using the OER method.

Finally, there is the GDP per Capita. This is what economists use to compare standard of living. Here is where population comes into play. A country could have a high GDP but when divided by the number of residents, a very low average economic output per person indicating a low standard of living.

While the outcomes of using either the Income or Expenditure approach should be similar, the rankings of individual countries can change dramatically when changing the inputs using the ORE, PPP or GDP per Capita. According to the CIA World Fact Book, in 2013 the United States had the largest economic output using PPP data, but dropped to second behind the European Union using OER data and to fourteenth in GDP per Capita.

Bobby Kennedy is credited with saying "the GDP measures everything except that which makes life worthwhile." Income disparity, population health and quality of life can't be adequately measured by GDP.

GDP is a good way to get a read on emerging economies and watch how well public policies are working in countries which are attempting to build a stronger economic base. So I agree it isn't necessarily so very important to be at the top of each of the GDP rankings. Still there is something comforting about seeing our country consistently at or near the top.

State's job losses a complicated issue

Pasadena Star News

By: Cynthia Kurtz

Posted: 5/14/2014 

By now everyone has heard the news - Toyota is moving 3,000 jobs out of Southern California to Texas. Is this just part of the normal evolution of a business or is it a sign that California has lost its competitive edge? The answer seems to depend on whom you ask. 

The Los Angeles Times ran an article claiming Toyota’s departure is simply a business decision to consolidate three corporate offices in a place closer to its manufacturing facilities. The article went even further saying that “taxes, regulations and business climate appear to have had nothing to do with Toyota’s move.”

The article cited statistics and experts. Based on a study conducted by the Public Policy Institute of California, companies leaving the state accounted for less than 2 percent of jobs losses in California. The study covered 1992 to 2006 but experts don’t think the percentage has changed greatly since 2006. 

Good Jobs First, a national policy resource center also downplayed the idea that California is losing jobs because of its business environment. They contend that jobs are created by existing businesses not by companies moving from other states.

On the very same day and at the other end of the political spectrum, the Wall Street Journal proclaimed that the South is beating California when it comes to being a competitive locale for business. It quoted Jim Lentz, Toyota’s chief executive for North American. He admitted that the $40 million in relocation benefits that Texas offered wasn’t the deciding factor in the decision to move. Primarily, Toyota will be consolidating closer to its other operations in order to improve management efficiency. However, in comparing California to Texas, he did note the latter’s business friendly environment, affordable housing and zero income tax.

The Journal article cited specific policies as contributing to California’s overall job losses. Comparing California to Tennessee - where Nissan moved a few years ago - and Texas where more than two dozen California companies have moved since 2011, they found that right to work laws in those states keep labor costs lower, real estate is cheaper due to less restrictive zoning and environmental regulations, taxes are lower, energy costs are 33 percent lower and gasoline is 70 to 80 cents per gallon less expensive.

Who should we believe? Actually both perspectives hold some truth.

The Public Policy Institute‘s study show that a low percentage of job loss is due to companies leaving is true. Although one has to question the idea that the numbers haven’t changed since 2006. Everything in business has changed since 2006. But even if the number has doubled or tripled, it is still a small percentage. 

Good Jobs First is also right. More jobs are created by growing them at home than by attracting new companies into a state. But you also need to keep the companies you have! A loss like Toyota does not total just the 3,000 Toyota jobs being lost. It must also count its vendors, the suppliers around Torrance, the entire supply chain of materials and services they use including the lunch places next door. These small and medium size businesses create a vast number of new jobs but they stop creating jobs when the corporations they support move away.

There are many factors that go into a company’s decision to move. Consolidation to gain more efficiency is certainly one of them. But companies also look at the cost of labor, land, regulations, taxes, and energy. The list of reasons why CA is less competitive is too long. 

The idea that our good weather, good colleges and universities, and an innovative spirit are going to carry us through no matter the consequences of our regulatory and tax policies is dangerously naive. Rather than explain Toyota’s decision away, let’s use it as an opportunity to make California better and attractive to homegrown as well as outside companies.