Civitas proposes taxing churches and orphanages

Churches, orphanages, and other charities currently don't have to worry about the tax man in North Carolina. They aren't charged income or corporate taxes; they can avoid sales and use taxes by claiming refunds, and certain sales by the organizations are exempt from sales tax.

However, these institutions will have to worry if the John W. Pope Civitas Institute succeeds in its proposal to raise and expand NC's sales tax.

Civitas calls for "repealing current exemptions, preferential rates, and refunds" for the sales tax. The current NC tax code allows for several refunds; the refunds and their estimated FY 2012 values are shown in the table below. The biggest refund category is for non-profit organizations, including "churches, orphanages and other charitable or religious institutions."

Civitas tax proposal and senior citizens

The proposal by the John W. Pope Civitas Institute to eliminate North Carolina's income, corporate, and franchise taxes and replace them with a new business tax, a transfer tax on real estate, and a higher and expanded sales tax has a curious omission.

The proposal acknowledges that the changes would be regressive--would reduce tax obligations for wealthy households that have extra money that they can save and increase obligations for poorer households that spend most of their money on consumption goods.

The proposal doesn't mention the impact on retirees--probably for the reason that retirees would suffer disproportionately.

Civitas proposes taxing insulin, artificial arms and legs

How cruel is the proposal by the John W. Pope Civitas Institute to replace North Carolina's progressive income, corporate, and privilege taxes with expanded sales, franchise, and real estate transfer taxes? It could literally cost amputees their artificial arms and legs and diabetics their insulin.

The sales tax elements of Civitas's proposal include increasing the tax rate from its current level of 6.87 percent on average (4.75 percent at the state level and 2.00-2.50 percent at the local level) to 8.05 percent and expanding the tax base. The largest part of Civitas' tax base expansion (and the largest gain in anticipated revenues) comes from "repealing current exemptions, preferential rates, and refunds" (p. 4). Civitas provides almost no detail for what these "exemptions, preferential rates, and refunds" include, leaving the impression that they are just a bunch of loopholes.

Every other year, the North Carolina Department of Revenue (NC DOR) compiles a list and estimates the value of tax "expenditures" (the value of exemptions, deductions, special rates, etc.) throughout the state's tax code. The latest estimates come from 2011 and generally provide estimates of the value tax "breaks" for 2011-12. An examination of these items reveals why Civitas was silent on these details.

The table below lists some of the items that would be included in Civitas' proposal.The table also lists the NC DOR estimate of the value of the state taxes saved in 2011-12 under the existing 4.75% rate and an estimate of how much the 8.05% Civitas sales tax would cost.

"All I need is a miracle" -- growth in the no-personal-income-tax states

Earlier this week, I analyzed a proposal that the John W. Pope Civitas Institute has made to eliminate the corporate, personal, and business franchise taxes that North Carolinians pay and to replace these with a higher and expanded sales tax, a business license fee, and a real estate conveyance fee (a real estate sales tax). The proposal would shift the responsibility for paying taxes away from North Carolina's wealthiest households and most prosperous corporations and towards its poorest households and smaller businesses.

Civitas acknowledges that the tax proposal would be regressive but claims that it would lead to greater economic growth. As evidence it cites the experiences of states that do not assess personal income taxes and of those that do not assess corporate income taxes. These states experienced higher growth in their Gross Domestic Products (GDPs) than other states.

As I wrote in the earlier post, this contention is correct, but it is hardly evidence of the effect of the states' tax policies. For example, total GDP is influenced by the number of people in a state, and GDP growth is influenced by population growth. Each of the no-personal-income-tax (NPIT) states experienced above-average population growth. Several of the states have other things that make them unique. Below I analyze the growth rates for the states, highlighting some of their characteristics.

Civitas' immiserating tax scheme

Charge them for the lice
Extra for the mice
Two percent for looking in the mirror twice
Here a little slice
There a little cut
Three percent for sleeping with the window shut

Taking inspiration where it can (and probably recommending that the poor pay a tax for that too), the John W. Pope Civitas Institute has released an audacious proposal to reduce rich North Carolinians' payments by having everyone else pay more in taxes for food, medicine, and rent.

Specifically, Civitas recommends eliminating the personal income tax, the corporate income tax, and the franchise tax that North Carolina households and businesses currently pay and replacing these with

• a higher (8.05 percent) sales tax which would be extended beyond the current tax base to cover groceries, insurance premiums, out of pocket medical expenses, residential leases, lottery ticket sales, and any service that is taxed in at least one other state (the proposal would also eliminate other exemptions and special rates in the current tax code but would exempt business expenditures on capital goods);
• a business license fee; and
• a real estate conveyance fee (a tax on commercial real estate sales)

Civitas claims that the change would be "revenue neutral," meaning that the new and increased taxes would bring in as much money as the taxes they are replacing. The claims of neutrality are suspect because the revenue figures that Civitas uses are $750 million less than what the state actually took in. Let's assume, however, that the final proposal is revenue neutral.

Under a revenue neutral tax reform, some households and businesses will pay less, while others will pay more. The reform shifts the responsibility of paying taxes from one group to another.

For this particular proposal, the responsibility would shift from rich households and prosperous corporations to poor households and smaller businesses. The tax system would lurch from being progressive (meaning that wealthier people pay a higher proportion of their income in taxes than poorer people) to regressive (meaning that poorer people pay a higher proportion of their income in taxes than wealthier people).

Civitas claims that this shift will actually be beneficial because "progressive income taxes (are) more harmful to growth." As evidence in support of this claim, Civitas compares "growth rates" for states with and without corporate income taxes and states with and without personal income taxes. It finds that states without the taxes experienced higher rates of economic growth.

Civitas provides almost no documentation for its figures besides saying that they are based on data from the Bureau of Economic Analysis (BEA). An analysis of the BEA data, however, indicates that the Civitas claims don't hold water.

The "headline" measure of state economic growth that the BEA uses is real (inflation-adjusted) gross domestic product (GDP), an estimate of the value of goods and services produced within the state. For instance, Civitas claims that average annual growth from 2002-2011 was half a percent lower in states with a personal income tax than in states without such a tax (1.7 percent growth vs. 2.2 percent growth). There is some question regarding which states do and don't have personal income taxes. Seven states (Alaska, Florida, Nevada, South Dakota, Texas, and Washington) definitely do not have personal income taxes. Two other states (New Hampshire and Tennessee) only assess personal income taxes on certain types of income, such as dividends or interest. For the present analysis, I computed the annual changes in real GDP for 2002-3, 2003-4, ..., 2010-11, averaged the annual changes for the first seven states, and averaged the annual changes for the remaining 43 states (omitting the District of Columbia). Doing this reproduces Civitas' 2.2 percent average annual growth figure for the no personal tax states but only produces a 1.5 percent growth figure for the other states. These comparisons are more favorable to Civitas' argument than others (such as including DC or treating NH and TN as no-personal-income-tax states), so I'll continue with them.

There are a number of problems with Civitas' analysis. For one thing, Civitas does not adjust its GDP figure for population growth. Redoing the comparisons using real per capita GDP reveals that economic output per person grew slightly more in the personal-income-tax states (0.7 percent per year) than in the no-personal-income-tax states (0.6 percent per year).

Civitas similarly fails to account for the fact that three of the seven no-personal-income-tax states are major oil and gas producers that have benefited from high energy prices over the last decade. Although oil and gas extraction accounted for only one percent of economic output nationally in 2010, it accounted for 16.4 percent of the output in Alaska, 14.2 percent of output in Wyoming, and 6.3 percent of output in Texas. Indeed, Alaska gets so much revenue from its oil and gas fields that it actually pays an annual royalty to its citizens.

Federal government military and civilian activity also accounts for a larger share of economic output in the no-personal-income-tax states than in the others, and federal military and civilian activities grew at a faster rate in the last decade in those economies than in others. For example, although federal civilian and military activities only accounted for 3.7 percent of state economic output nationally in 2010, they accounted for 10 percent of the economic activity in Alaska and 5.1 percent of the activity in Washington. The state and local governments in the seven no-personal-income-tax states also get more intergovernmental revenue from the federal government (e.g., payments from the federal government to help the state and local governments operate schools and build roads) on a per capita basis than other states. Figures from an analysis by The Economist also reveal that the seven no-personal-income-tax states enjoyed a bigger net differential over other states between 1990 and 2009 in the receipt of federal expenditures over the payment of federal taxes. It's much easier to lower your state's tax rates when taxpayers from other states are footing so much of the bill.

Shifting more of the responsibility of paying taxes from those who have benefited from the economy to those who haven't is a cruel prescription, especially given the deprivations that poor families have faced over the last few years. However, it's crueler still to do this with no demonstrable benefit to the economy.

Tempest in a lunch box

Yesterday, the Pope-funded Carolina Journal misreported that

A preschooler at West Hoke Elementary School ate three chicken nuggets for lunch Jan. 30 because a state employee told her the lunch her mother packed was not nutritious.

The girl’s turkey and cheese sandwich, banana, potato chips, and apple juice did not meet U.S. Department of Agriculture guidelines, according to the interpretation of the agent who was inspecting all lunch boxes in her More at Four classroom that day.

Meanwhile the Pope-funded Civitas Institute added, "A state inspector assessing the pre-K program at the school said the girl also needed a vegetable, so the inspector ordered a full school lunch tray for her."

One teensy-weensy problem though--the state employee made no such statement to the girl and ordered no such meal. It's doubtful that the state employee "inspected" the girl's lunch at all.

The Carolina Journal was forced to backtrack on the story, changing the paragraphs from above to

A preschooler at West Hoke Elementary School ate three chicken nuggets for lunch Jan. 30 because the school told her the lunch her mother packed was not nutritious.

Funny, I didn't know that schools could talk.

The girl’s turkey and cheese sandwich, banana, potato chips, and apple juice did not meet U.S. Department of Agriculture guidelines, according to the interpretation of the person who was inspecting all lunch boxes in the More at Four classroom that day.

The Carolina Journal explained that "The first two paragraphs of this story were updated. Neither DHHS nor school officials would identify the person who inspected the homemade lunches and decided they did not meet USDA guidelines." Thus, the CJ's initial statements, which were reported as facts (not "alleged" or according to the child or parent), were never confirmed with the school, DHHS, or the person involved.

Indeed, the CJ actually has the gall to now run a story about not being able to identify the person involved, saying that "the government officials involved have provided sketchy — and sometimes conflicting — details" about the person involved, and then lists contradictions from the Civitas story as part of the evidence.

A spokesperson for the school district later admitted that it was likely the school's mistake.

After investigating, the DHHS determined

...no employee of DHHS, nor the Division of Child Development and Early Education (DCDEE) or its contractors, instructed any child to replace or remove any meal items. Furthermore, it is not DHHS' policy to inspect, go through or question any child about food items brought from home. The facts we have gathered confirm that no DHHS employee or contractor did this.

The CJ has characterized the results of the DHHS investigation as one of the "sketchy" details.

Compounding the error, U.S. Representatives Larry Kissel and Renee Elmers sent a letter to the U.S. Secretary of Labor, complaining that "a school official denied a child the right to eat the lunch provided to her by her mother" and "at no point should a government official be allowed to deny a 4-year-old child access to a parent packed lunch or imply to a child that their lunch is wrong or there is a problem with the food provided to them by their mother or father." This despite the fact that none of the people involved has claimed that the little girl was denied access to her lunch.

However, the CJ is now also reporting on the overblown uproar caused by its own irresponsible and incorrect reporting.

Ultimately, what is the great mistake that was made? People who were concerned that a little girl did not have an adequate lunch appear to have put her in a cafeteria line with the intention of having her get an additional free item to go along with the lunch that her mother packed but mistakenly giving her a full, free school lunch instead.

Which all goes to show that the economists' old adage is true--there is no such thing as a free lunch.

Update and note (6:50 p.m., 2/16): This post summarizes and extends a conversation at Doug Clark's blog.

As part of that conversation, the publisher of the CJ, John Hood, wrote

CJ did not report that the person in question personally intervened to keep the girl from eating her packed lunch. Nor did we report that the packed lunch was confiscated.

...The only reason we changed a couple of words in our initial story is that other news media were misreading them and inventing events that did not happen — and that CJ never reported as happening — such as a government health inspector confiscating the kid's turkey sandwich. We noted that there is no doubt which institution dealt with the kid. It was the school, not the inspector.

That's funny, because besides contradicting the explanation that the CJ actually posted, the statement is belied by CJ's headline on its initial story "Preschooler’s Homemade Lunch Replaced with Cafeteria 'Nuggets:' State agent inspects sack lunches, forces preschoolers to purchase cafeteria food instead."

In addition to the economics free lunch adage, there is an even older adage that says "what a tangled web we weave, when we first practice to deceive."

Update #2 (8:00 p.m. 2/16): Covering its tracks, the CJ has sent the words "forces" and "to" from the article headline down the memory hole. No explanation given by CJ, and frankly, none expected.

People who tell the truth from the start never don't have to change their stories.

North Carolina did not add teachers

The Civitas Institute (and others) are pushing selective numbers to try to show that the draconian K-12 budget cuts by the Republican legislature actually increased the number of teachers being funded by the state in 2011-12.

Civitas is taking its numbers from the North Carolina Department of Public Instruction Statistical Profile and focusing on the 2010-11 and 2011-12 school years. Below I show the figures for teachers from the 2008-09 through 2011-12 school years.

Full-time teachers in public schools
School year	State-funded	Federally-funded	Locally-funded	Total
2008-09	86,447	5,699	6,952	99,098
2009-10	81,746	9,245	4,386	95,377
2010-11	78,963	11,443	4,473	94,879
2011-12	81,020	8,791	4,153	93,964
Data from the NC DPI Statistical Profile.

Civitas is touting the fact that from 2010-11 to 2011-12, the number of teachers that were paid for through state revenues increased by 2,057 from 78,963 to 81,020. The figure that's relevant to children, however, is the total number of full-time teachers in North Carolina's public schools, which decreased by 915 this from 94,879 to 93,964 and which has decreased by more than 4,000 since 2008-9.

The claim that this is anything other than a loss is ridiculous. If I took $3,000 from your savings account and only put $2,000 of it back in your checking account, you wouldn't be thanking me for my "generosity."

Civitas tries to explain this discrepancy away by saying that the losses were really caused by the federal government, which started scaling back its stimulus funding resulting in a loss of 2,652 teaching positions. Decreases in funding by local governments also contributed to the decrease, causing a loss of 320 teaching jobs.

What Civitas overlooks is that the federally-funded teachers were originally state-funded teachers who were put on the put on federal revenues temporarily. In 2009-10 and 2010-11 with the availability of stimulus funding, North Carolina shifted nearly 6,000 teachers from state revenues to federal revenues. In 2010-11, shifts of teachers to federal and local revenues mostly offset shifts out of state revenues. In 2011-12, a third of these "temporarily-shifted" full-time teachers were shifted back to state funds.

Civitas also overlooks decreases in the other funding that the state has sent to local school districts. In 2011-12, these cuts were more than $300 million, on top of the $459 million reduction in other state spending.

When all full-time personnel are included, full-time employment in North Carolina's public schools dropped by 4,840 positions in 2011-12.

Full-time personnel in public schools
School year	State-funded	Federally-funded	Locally-funded	Total
2008-09	144,789	12,573	33,764	191,126
2009-10	128,540	24,715	29,684	182,939
2010-11	125,981	26,070	28,419	180,470
2011-12	130,594	18,650	26,386	175,630
Data from the NC DPI Statistical Profile.

Once again, personnel on state revenues increased but were more than offset by decreases in personnel on local and federal revenues.

Civitas goes on to claim that the 4,840 decrease in employment shows how mild the cuts were. As if.

First of all, the cuts compound cuts of nearly 11,000 full-time people in the preceding two years. Taking a pint of blood on one day leaves you woozy; taking pints on three consecutive days represents a serious health risk.

Second, the figures that Civitas uses (and that are shown above) are limited to full-time personnel and do not include part-time jobs. They also exclude pre-K positions. The schools estimate that when all of these positions are included that the employment loss was 6,400 jobs this year and 17,300 since 2008-9.

Third, the reports do not account for reductions in work days and work hours that occurred in about two-thirds of school districts.

More fundamentally, Civitas overlooks how unnecessary these cuts were. The legislature eliminated a tax surcharge on higher-income households, eliminated a temporary sales tax surcharge, and cut corporate taxes. These cuts led to the losses in positions in pre-K, K-12 and higher education.

Yes, but how about the international ranking of education researchers

Civitas Review touts a recent study that allegedly "exposes the myth of suburban schools." But it seems that the study actually exposes the myth of competent George W. Bush Presidential Center education researchers.

The study in question, the Global Report Card sponsored by the George W. Bush Presidential Center, compares the test score distributions of individual schools and school districts to international distributions. However, because states don't all use the same tests, the study uses a normalizing procedure. The study's web-site describes its procedure

The calculations begin by evaluating the distributions of student achievement at the state, national, and international level. To allow for direct comparisons across state and national borders, and thus testing instruments, we map all testing data to the standard normal curve using the appropriate student level mean and standard deviation. We then calculate at the lowest level of aggregation by estimating average district quality within each state. Each state's average quality is evaluated then using national testing data. And finally, the average national quality is determined using international testing data. Essentially, this re-centers our distribution of district quality based upon the relative performance of the individual state when compared to the nation as a whole as well as the relative performance of the nation when compared to our economic competitors.

For example, the average student in Scarsdale School District in Westchester County, New York scored nearly one standard deviation above the mean for New York on the state's math exam. The average student in New York scored six hundredths of a standard deviation above the national average of the NAEP exam given in the same year, and the average student in the United States scored about as far in the negative direction (-.055) from the international average on PISA. Our final index score for Scarsdale in 2007 is equal to the sum of the district, state, and national estimates (1+.06+ -.055 = 1.055). Since the final index score is expired in standard deviation units, it can easily be converted to a percentile for easy interpretation. In our example, Scarsdale would rank at the seventy seventh percentile internationally in math.

This may be an example of the "new math," but it looks like the index number should be 1.005, not 1.055.

There are other problems with the methodology. A big one is that it normalizes standard deviations in the distribution of test scores across countries and states. Consider a hypothetical state that was successful in improving test scores and in "closing the achievement gap," that is, the state improved test scores among all students but improved them more for students in the bottom of the test score distribution than for students in the top. The standard deviation (measure of dispersion) for its test scores would fall. The Global Report Card, however, uses standard deviations as its unit of measure. The effect would be that school districts within this state would be evaluated on a different standard than school districts in other states.

Another problem is that the methodology does not account for the characteristics of students, such as numbers of students who enter with limited native-language proficiency.

So, beyond the obvious goof on the web-site, there's a lot about this report (and Civitas reporting) that doesn't add up.

Civitas misleads on rail

Surprise, surprise. Brian Balfour at the conservative Civitas Institute has posted a misleading and mistake-filled column, supporting North Carolina House Bill 222, which would potentially turn back the federal rail improvement funds that are coming to the state.

Some of the misleading statements

• The column begins by explaining that the proposed legislation "would prohibit North Carolina’s Department of Transportation from accepting any federal funds earmarked for high-speed rail without first getting the General Assembly’s approval."

  Earmarked? No, the North Carolina rail grant was awarded through a competitive process; no earmarks were involved.

• The column goes on,

  Refusing federal funds for light-rail boondoggle projects would follow in the footsteps of Governors in Wisconsin, Florida and New Jersey who have refused federal funds for high-speed rail.

  Light-rail boondoggle? The grant funds improvements to the primary passenger and freight rail corridor through North Carolina.

• Next,

  North Carolina doesn’t appear to be a very appropriate location for high speed rail lines. According to this analysis, Charlotte is the only NC city among the top 40 in the nation for populations within 10 to 25 miles of downtown – an indication that this area lacks population density in its urban areas sufficient to justify rail projects. The analysis further concludes that passenger rail for intercity travel would only be viable with additional regional investments (more state and local taxpayer dollars).

  Balfour has taken some selective statements and fundamentally misrepresented the actual report, which not only rates the Charlotte-to-Raleigh rail link as one of the more promising in the country but also recommends exactly the types of incremental improvements that are being proposed. The rail links in and around Greensboro actually show up in the report as scoring in the top 10 percent of most of the review criteria for high speed improvements.


• Next,

  But many will still insist that NC would be foolish to pass up 'free' federal dollars to build high-speed rail lines because it would 'create jobs.' I pointed out previously, however, that such federal funds are not 'free,' and in fact hinder a state’s economic growth prospects. A Harvard study examined the impact of federal earmark spending in states and found that federal 'fiscal spending shocks appear to significantly dampen corporate sector investment activity.'

  Again, Balfour compares the North Carolina rail project to earmark spending--it isn't.

• Finally,

  HB 422 is a good idea because accepting these federal funds would put NC taxpayers at risk for paying for the very likely cost overruns and the politically-motivated rail projects will divert scarce resources away from entrepreneurs and make the state’s economy worse off.

  Balfour continues to describe the project in earmark terms (politically-motivated rail projects). He also describes a risk of over-runs but no evidence that these characterize this project.

On the bright side, if there is any leftover funding from the rail project, it might be used to straighten out Civitas' twisted statements.