Taxpayers on the Hook for Unfunded Public Pensions Liabilities

Joshua D. Rauh just announced on his blog about a new study that he just released, with Robert Novy-Marx, that estimates state and local pension contributions need to increase by a factor of 2.5 to reach solvency in 30 years.  That amounts to a tax increase of $1,398 per household, per year!

The study is titled “The Revenue Demands of Public Employee Pension Promises.” (pdf)  Here is the abstract:

We calculate the increases in state and local revenues required to achieve full funding of state and local pension systems in the U.S. over the next 30 years. Without policy changes, contributions to these systems would have to immediately increase by a factor of 2.5, reaching 14.2% of the total own-revenue generated by state and local governments (taxes, fees and charges). This represents a tax increase of $1,398 per U.S. household per year, above and beyond revenue generated by expected economic growth. In thirteen states the necessary increases are more than $1,500 per household per year, and in five states they are more than $2,000 per household per year. Shifting all new employees onto defined contribution plans and Social Security still leaves required increases at an average of $1,223 per household. Even with a hard freeze of all benefits at today’s levels, contributions still have to rise by more than $800 per U.S. household to achieve full funding in 30 years. Accounting for endogenous shifts in the tax base in response to tax increases or spending cuts increases the dispersion in required incremental contributions among states.

The chart below is taken from Table 5 of their study on page 40 which ranks the states (from highest to lowest) in terms of the size of the necessary tax hike, per year, to achieve solvency of the state’s public pension system.  As you can see, New Jersey ranks top in the country at $2,475 while Indiana comes in last at $329.

Estimated Annual Tax Increase Required to Bring State and Local Pensions into Solvency by State_Wealth Alchemy

Taxes Matter X: Vermont Edition

New England 2010 008
Creative Commons License photo credit: mrlaugh

Vermont’s Gov. Peter Shumlin (D) admits to that their tax system in uncompetitive vis-a-vis New Hampshire.

Vermont Gov. Peter Shumlin, a Democrat with a unified legislature, is rejecting calls from within his party to raise taxes. And he has a Sarah Palin joke to explain why.

“My problem is, on the eastern side of me, I’ve got the state of New Hampshire,” he told POLITICO. “Sarah Palin said that she could do foreign policy because she could see Russia from her house. Well, I’m the first governor in 40 years that can see New Hampshire from my house. So I can do tax policy. And I can tell you, we’ve got no more capacity. They’re killing us.”

New Hampshire has no sales tax and no income tax.

Vermont has a 6 percent sales tax and, at the top tier, a 9 percent income tax. The result has been a long period of stagnation for the Green Mountain State.

“We’ve already got a progressive income tax in Vermont, and we can’t get more progressive because we’ll lose the few payers that we have,” Shumlin said in between sessions at the National Governors Association meeting. “We don’t have any more tax capacity.”


You may have read that New Hampshire has become the target state of the Free State Project.  Here is how they describe themselves:

Are you frustrated at the loss of freedom and responsibility in America, while the growth of government and taxes continues unabated? Do you want to live in strong communities where your rights are respected, and people exercise responsibility for themselves and in their dealings with each other?  If you answered “yes” to those questions, then the Free State Project has a solution for you.

What the Free State Project is… The Free State Project is an effort to recruit 20,000 liberty-loving people to move to New Hampshire. We are looking for neighborly, productive, tolerant folks from all walks of life, of all ages, creeds, and colors who agree to the political philosophy expressed in our Statement of Intent, that government exists at most to protect people’s rights, and should neither provide for people nor punish them for activities that interfere with no one else.

When you sign our Statement of Intent, you signal your commitment to move to the chosen free state, New Hampshire, within five years of obtaining 19,999 other people who commit to move. The more signatures we get, the more secure people can be in their decision to move, because they know that many other people will also be moving— enough to make a real difference! You don’t have to wait until we have 20,000 signatures to move, of course, but that option is there to let you be more secure in your decision.

Here is their fascinating list of 101 reasons to move to New Hampshire.

Now, the Free State Project will be coming to a big screen near you as part of a documentary called Libertopia.  Reason TV recently did this interview with the Libertopia’s filmmaker  Christina Heller.

Whatever your views about the Free State Project, it is still a fascinating example of the Tiebout hypothesis in action–the theory that people will vote with their feet to find the optimal mix of government.

Disclosure: I am not a member of the Free State Project.

Is it Really Just the Flat Tax versus the Fair Tax (Sales Tax)?

Dan Mitchell, with the CATO Institute, provides some reasons why he prefers the Flat Tax over the Fair Tax (sales tax) in this video:

Unfortunately, the Fair tax has one glaring weakness in that a broad-based sales tax inevitably leads to tax pyramiding–the taxation of business-to-business transactions.  Pyramiding leads to all kinds of distortions in the marketplace.  Finding solutions to pyramiding either requires shrinking the tax base–and raising the rate–or dramatically increasing tax compliance costs.

While I am a big fan of the flat tax (and have also written papers about it in the distant past), there is a third-way out there which I have discussed previously.  A little known tax in New Hampshire called the Business Enterprise Tax.  It is much like the flat tax, but I would argue it is a little less complicated for businesses.

For businesses the flat tax works on a subtractive principle (start with receipts and subtract expenses) while the BET works on an additive principle (salaries and wages, interest and dividends).  While New Hampshire does not have a personal component like the flat tax, there is no reason why you couldn’t have one to compliment the business-side tax–that is for any other state but New Hampshire. 🙂

Taxes Matter IX: U.S. Effective Corporate Tax Rate on Par with Uzbekistan

Kukeldash Madrassa, Tashkent
Creative Commons License photo credit: upyernoz

A distressing new study by well-respected Canadian tax economist–Duanjie Chen and Jack Mintz–for CATO found that the effective U.S. Corporate Tax was 34.6 percent in 2010 (pdf).  The U.S. corporate rate is the 4th highest among all OECD countries and on par with Uzbekistan (34.9 percent).  That’s what it says . . . Uzbekistan!

Also, I’m glad to see them recognize the destructiveness of state sales taxes:

State governments also play an important role in business tax policy. Unfortunately, the average state corporate tax rate has not been cut in at least three decades, despite major reductions around the world since then. Furthermore, state retail sales taxes impose substantial burdens on capital purchases, which undermines investment and productivity. Thus, sales taxes should be reformed to remove taxation on business inputs.

This may seem to be a minor point, but there is a clear movement among state-based policymakers that it is OK tax reform to raise sales taxes and cut other taxes.  I disagree and did so time and time again in the recent debate over reforming Maine’s tax system which included a cut in the income tax rate in exchange for a broader sales tax base.  I argued that the sales tax is a job-killer. (pdf)

While cutting the federal corporate income tax rate may seem like a distant dream because of high budget deficit, state can get in on the game by reducing their own corporate income tax rate and/or sales tax rate.  The benefits of doing so are very large.

A growing number of policymakers are recognizing that the U.S. corporate tax system is a major barrier to economic growth. The aim of corporate tax reforms should be to create a system that has a competitive rate and is neutral between different business activities. A sharp reduction to the federal corporate rate of 10 percentage points or more combined with tax base reforms would help generate higher growth and ultimately more jobs and income. Such reforms would likely lose the government little, if any, revenue over the long run.