Sequester Update

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Three months into sequestration, effects have started surfacing from the first round of remarkable and random federal cuts to discretionary outlays. According to a poll this week by ABC New/Washington Post, the sequester now directly affects the lives of almost forty percent of Americans to some degree, and half of those affected claim substantial personal injury from this $85 billion slash in spending.  How this expenditure reduction will specifically affect Maryland’s residents remains uncertain, but a report released Wednesday by the Economic Policy Institute (EPI) that analyzes the net change to states’ federal grants sheds some light on possible consequences for the state’s budget.

According to the issue brief, while sequestration reduced total federal grants to states by $5.1 billion overall in 2013, Maryland fared better than average, receiving a $44 million increase in its federal aid (which represents a 0.5 percent increase relative to the 2012 funding level). The report provides state residents some reason for optimism, but this analysis does not suggest that Maryland as a whole has dodged the fiscal bullet. While the net effect on federal aid to the state may show an increase, some support for programs such as housing assistance, Meals on Wheels, and Head Start has waned. The state has also seen a $3.4 million decrease in federal support to administer unemployment insurance, according to a study by Pew. Many nonprofits in the state face grant reductions, with some shedding staff as a result; others yet to be hurt by the sequester see their own cuts looming next year. Additionally, a full seven percent of Maryland’s workforce is employed by the federal government, and many major agencies have issued furlough orders.  The economic effects of these lost wages will inevitably ripple through the economy.

Results for other states were mixed. Virginia likewise saw its grants grow (up $271 million, or 2.7 percent from last year), while others in the region like the District of Columbia, Pennsylvania, and Delaware suffered millions of dollars in federal revenue losses. EPI attributes the difference in states' outcomes to the mechanics of the sequester— it only reduces spending on discretionary programs, so states with increases in beneficiaries under mandatory spending formulas saw grants expand amidst this great spending contraction. Overall, 25 states experienced reductions in federal grant funding that will decrease their ability to provide public goods such as infrastructure, education, and social services for elderly and low-income residents.

Sequestration and its effects are far from over, as Evan Soltas of Bloomberg News points out in his blog post this week, reminding Americans that another $92 billion in cuts await us in 2014, and a portion of the spending reductions from this year have yet to go into effect.  

Week Ahead (Memorial Day Edition)

Last week was slow at MBTPI. Here's a look at the week ahead.

For the week of May 27th to June 2nd:

• On Tuesday, May 27^th, the Alcoholic Beverages Article Review Committee meets at 5pm in the Judicial Training room at 2009F Commerce Park Drive, Annapolis.

• On Wednesday, May 28^th, the Board of Public Works will meet at 10am in the Governor’s Reception Room at the State House, Annapolis.

• Additionally on Wednesday, the Bureau of Labor Statistics (BLS) will release its April report on Metropolitan Area Employment at 10am.

• Later on Wednesday, May 29^th, the Health Care Delivery and Financing Joint Committee will convene to discuss the Medicare Waiver at 1pm in Room 240 of the House Office Building on 6 Bladen Street, Annapolis.

The Week Ahead

Last week MBTPI's analysis was highlighted in a story about gambling's future in Maryland, and Neil Bergsman talked with MarylandReporter.com about the need to pay state employees market-rate salaries. Neil also had an op-ed in the Baltimore Sun, highlighting the reasons why Maryland is a great place to do business.

Neil's op-ed was a summary of his blog post on the same topic. We also blogged about a pilot program to reduce childhood hunger, and the latest state-level employment figures.

For the week of May 20th to May 26th:

• On Monday, May 20th, the General Provisions Article Review Committee will meet to review drafts of Title 5 "Public Ethics" at 3pm in the House Office Building, Annapolis.
• On Wednesday, May 22nd, the Board of Directors of the Maryland Health Insurance Plan meets at 9am in suite 630, 1 Calvert Plaza, 201 E. Baltimore Street, Baltimore.
• Also on Wednesday the Workgroup on Access to Habilitative Services Benefits, from 9:30-11:30am, at the Maryland Insurance Administration, St. Paul Plaza, 200 St. Paul Place, Baltimore. 
• On Thursday, May 23rd, the Maryland Advisory Commission on Manufacturing Competitiveness meets from 10am to noon at Catonsville Community College, Time Center, 800 South Rolling Road, Catonsville.
• Later on Thursday, the Maryland Medicaid Advisory Committee meets from 1-3pm at 201 W. Preston Street, Baltimore.

MD unemployment falls to 6.5 percent

Maryland's unemployment rate fell again, to 6.5 percent in April, according to figures released today by the Bureau of Labor Statistics (BLS). The March unemployment rate had previously been estimated at 6.6 percent. April's figures were better than the national rate of 7.5 percent, but still roughly double Maryland's unemployment rate at the start of the Great Recession.

According to the BLS, Maryland's labor force grew while the ranks of the unemployed shrank. Almost 3,700 more Marylanders were employed in April than in March. Compared to April 2012, more than 31,000 more Marylanders were employed last month.

Interestingly, the data from employers showed an opposite trend. Overall, employers reported 6,200 fewer positions in April. Losses were spread broadly across the private sector--the only industries to show job growth were manufacturing; trade, transportation and utilities; and government. The most likely reason for these conflicting trends is that Maryland workers are either crossing state lines to find work, or they are starting their own businesses and thus do not appear in the second data set.

MD pilots innovative anti-child hunger program

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Last month Maryland was selected by the U.S. Department of Agriculture to pilot the Community Eligibility Option (CEO) in the 2013-2014 school year. CEO provides free meals to all students in schools with high percentages of low-income students. The Maryland Budget and Tax Policy Institute was one of several organizations involved in advocacy efforts to bring this new tool to Maryland, and we are please that Maryland's application was approved.

Three education agencies will take part in the pilot: Baltimore City Public Schools, select schools in Washington County, and the SEED School of Maryland. CEO means that every student in these schools will be provided with free school breakfast and school lunch. By providing for all students, CEO eliminates the negative stigma often associated with eating school meals. Additionally, CEO reduces paperwork for families who no longer have to qualify individually, and administrative costs for the school system related to processing individual applications. CEO is already operating in over 400 local education agencies in 7 states and the District of Columbia with great success.

Implementing CEO in Maryland places us on the leading edge of improving access to – and the quality of – school meals for children. This is an important step forward as the Free State works to achieve the Governor’s goal of ending childhood hunger by 2015.

Maryland’s ranking on business taxes: anywhere from 6 to 41

We are obsessed with where Maryland ranks. It’s human nature. That's why we pay attention to stories about how the Free State ranks in terms of education or business climate. However, most of the published rankings of tax levels or “business climate” don’t tell us what we think they do or what we want to know--they lack any relation to actual economic performance or to Maryland's ability to invest in a high quality of life for ourselves and our children.

Peter Fisher’s new report, “Grading Places: What do Business Climate ranking Really Tell Us?” critically examines six different measures of tax or business policies, and find them to be "deeply flawed and of no value in informing state policy."

Four of the measures are widely reported indexes that are supposed to summarize something about states’ friendliness to businesses. Fisher’s analysis discredits these indexes in three ways:

• First, he finds that many of the indicators used as components of the indexes don’t make sense.
• Second, he finds that the way the final score is computed often gives greater rate to more trivial components, so that the final rankings could be meaningless even if the individual components did have some value.
• Third, and most importantly from a practical viewpoint, Fisher shows that the results of these rankings actually have no statistically significant relationship to growth in Gross State Products, employment, wages, or poverty rates.

The other two measures are “representative firm” models. These studies use the approach of specifying a uniform, hypothetical business, and then estimating the tax bill that firm would have if it were located in any of the 50 states. Fisher finds this approach sounder. However he finds that in these studies the simplifying assumptions used make the results irrelevant for most real businesses.  

Index	Maryland’s Rank	Top State
Business Climate Indexes
US Business Policy Index (Small Business and Entrepreneurship Council)	36th	South Dakota
State Competitiveness Report (Beacon Hill Institute)	23rd	Massachusetts
State Business Tax Climate Index (Tax Foundation)	41st	Wyoming
ALEC-Laffer Economic Competitiveness Index (American Legislative Exchange Council)	32nd	Utah
Representative Firm Models
Competitiveness of State and Local Business Taxes on New Investment (Council on State Taxation/Ernst and Young)	12th (effective tax rate on capital) 25th (ETR on jobs)	Maine
Location Matters (Tax Foundation/KPMG)	46th (new firms) 8th (mature firms)	Nebraska (new firms) Wyoming (mature firms)
Reference for Comparison Purposes
Estimated effective tax rates (Council on State Taxation/Ernst and Young)	6th	Oregon

The chart shows that the ranking for Maryland varies wildly from one report to the next. And that would be true for pretty much any state. The top-ranked states in the different reports are  - literally - all over the map. And, with all due respect to the many wonderful qualities of Nebraska and South Dakota, they may not be the states where you would prefer to live and do business.

Here in Maryland, conservatives and business advocates particularly like to indict our state’s policies using the Tax Foundation’s State Business Tax Climate Index. This index combines 118 different features of state tax policy. They include the top corporate- and individual-income tax rates and also the number of tax brackets. States are rewarded for applying the sales tax to gasoline and groceries, and downgraded for applying it to business purchases. States get points for conforming with federal depreciation schedules, but lose points for having tax credits for research and development or job creation.

The main components of the Tax Foundation index are assigned weights based on the degree of variability in the component scores. This has the effect of maximizing the differences among states’ final scores. However, it also creates a nonsensical result. If the authors of the index had used the percentage of taxes associated with each category as the weight, 31 states would move up or down at least 10 places in the rankings. Maryland would be 34th instead of 41st. That doesn't mean that 34th is Maryland's correct ranking - it shows that the TF's system for calculating the ranks changes markedly when you make small changes in the methodology.

Finally, the mish-mosh of indicators has no relation to what businesses actually pay in taxes. While Maryland ranks 41st in the Tax Foundation index, we rank 6th lowest in business taxes as a share of Gross State Product.

Maryland gets low marks from TF mainly because of our progressive income tax. Maryland businesses benefit from lower-than-average property and sales taxes (much larger slices of a typical business' tax bill), but the TF's methodology gives lower weights to these factors. 

Fisher concludes that the Tax Foundation’s ratings consistently favor regressive tax structures that fall disproportionately on the poor.

About the state ranking studies in general, Fisher writes: “They display no predictive value about economic growth. They come to highly inconsistent findings among themselves…. The result is not a useful summary measure of business climate as claimed. It is at best meaningless, and at worst a state ranking manipulated to make the case for policy positions advocated by the organization sponsoring the index.”

As hard as it is, we in Maryland should ignore these slanted pseudo-scientific pieces of corporate propaganda. To build our economy for the future, we need tax policies that are adequate to fund public investments in education, infrastructure, and a high quality of life; and that are fair to working families and businesses of all sizes.

Week Ahead (Mother's Day Edition)

Yesterday was Mother's Day (hope you didn't need the reminder!), and we're celebrating by highlighting a blog post last week by the Bureau of Labor Statistics about working mothers.

Last week we blogged about U.S. Senate action on the internet sales tax, which has the potential to help Maryland businesses as well as state government. We also blogged about how unpopular Maryland is with CEO Magazine. And, we released our latest animated video, on the need for paid sick leave (watch other videos here).

For the week of May 13th through May 19th:

• On Tuesday, May 14th, the Advisory Council for Alternative Response holds their monthly meeting. From 1pm in room 1044 of the Department of Human Resources, 311 West Saratoga Street, Baltimore.
• The Maryland Commission on Artistic Property also meets on Tuesday, at 1:30pm in room 180 of the House Office Building, Annapolis. The Commission will discuss matters related to the State owned art collection.
• Later on Tuesday, the State Commission on Criminal Sentencing Policy meets at 5:30pm at 2009D Commerce Park Drive, Annapolis. 
• Finally on Tuesday, the Community Services Reimbursement Rate Commission meets from 6-8pm at the Mental Hygiene Administration office at 55 Wade Avenue, Catonsville. 
• On Wednesday, May 15th, the Board of Public Works meets at 10am in the State House, Annapolis.
• On Thursday, May 16th, the Maryland Health Care Commission meets at 1pm in their offices at 4160 Patterson Avenue, Baltimore.
• On Friday, May 17th, the Bureau of Labor Statistics (BLS) releases state-level employment figures for April. The initial BLS estimate for March found that Maryland's unemployment rate held steady at 6.6 percent, though the number of unemployed residents fell. However, the national figures for April included positive revisions to the February and March estimates, which may spill over to Maryland's figures.

CEOs’ favorite states: lower incomes, less education, less health coverage

Big business and anti-tax groups have been making hay out of a story in CEO Magazine in which a survey of CEOs ranked Maryland 41st in business climate. But look closely: a lot of the things that made CEOs downgrade Maryland (and the other states that ranked low in this poll) are actually things you would want for yourself and your family.

The results are based on a survey of over 700 CEO’s on the subjects of “Tax and Regulation,” “Workforce Quality,” and “Living.” So, what have these CEO’s told us about the states they like and don’t like? Here are their top 10 and bottom 10 states:

CEO Magazine Top 10	CEO Magazine Bottom 10
1. Texas	50. California
2. Florida	49. New York
3. North Carolina	48. Illinois
4. Tennessee	47. Massachusetts
5. Indiana	46. New Jersey
6. Arizona	45. Connecticut
7. Virginia	44. Michigan
8. South Carolina	43. Hawaii
9. Nevada	42. Pennsylvania
10.Georgia	41. Maryland

To find out how well the CEOs opinions tracked with the actual economic data, I looked at some indicators related to these twenty states. Median household incomes. Growth in per capita incomes. Poverty rates. Health insurance coverage. Education attainment.

 

Sources: CEO Magazine, US Census, MBTPI calculations

 

In each of these indicators, CEO Magazine’s bottom 10 states outperform their top 10. The blue bars on the graph show the average ranking of CEO Magazine’s top 10 states on these indicators. The green bars show the average ranking of CEO Magazine’s bottom 10 states. For example, the top 10 states, as rated by the CEO’s actually averaged the 28th highest median household income. Household incomes in the states ranked in the bottom ten were much higher – ranking 11th on average. In fact, CEO magazine’s 10 least favorite states included 6 of the 10 states with the highest incomes.

And it goes on like that for category after category. The states ranked lowest by CEOs had faster income growth, lower poverty, more health insurance coverage and more college grads. These are all things we want for ourselves and our families: we want to make a good living, to avoid poverty, for our kids to have a good education, and to have access to health care.

As business managers focused on their bottom lines, some CEO's might like to operate where they can get labor cheaply and without being expected to provide a lot of benefits.

As citizens, though, we want to promote good jobs that can support families, broad access to education, and health services.

This is not just an article in a trade magazine. This divergence between the interests of the short-term profit for investors and managers versus workers and citizens has a real impact on families in the real world. I know, because there was one measure I found where CEO’s top 10 lined up with economic realities: job growth.

CEO Magazine’s top 10 includes 8 of the 10 fastest-growing states in terms of employment over the past decade. The CEO top ten ranked 10th on average in job growth. The bottom 10 ranked 21st on average (Maryland fared better on this measure, ranking 11th).

And this helps to explain why workers are no longer benefiting from increases in productivity and why nearly all of the benefits of economic growth are going to the top 1 percent. These new jobs in the CEO-preferred states are low-quality (for the worker) jobs--lower paid, lacking benefits, and with few prospects for advancement.

CEO Magazine's kind of employment strategy is not what we want in Maryland. We need to continue to focus on maintaining our high standards for education and quality of life, and on attracting and retaining jobs that will help Marylanders thrive.

US Senate allows states to enforce sales tax online

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These days online purchases are commonplace, yet Maryland's budget and tax system are still playing catch-up. The problem is that online retailers who do not have a physical presence in Maryland (such as a store or warehouse) are not required to collect sales tax. This puts the burden of payment on customers (who rarely pay), disadvantages local businesses, and forces Maryland to under-invest in education, healthcare, and public safety.

On Monday, the U.S. Senate took a step forward and passed legislation empowering states-including Maryland-to collect sales taxes from online purchases. This includes books, clothes, recreation equipment, and all the other stuff we pay Maryland sales tax for when we buy it in a physical store. Technically the bill does not create a new tax; rather it allows states to enforce collection of a tax which is now legally due, but rarely collected. 

Maryland and Virginia both counted on this authority in their recent transportation revenue packages. In Maryland’s case, the transportation bill provides that if Congress acts to allow states to collect Internet sales tax, then two things happen:

• 4 percent of all sales tax revenues would be allocated for transportation purposes (currently all sales tax revenues go into the general fund to pay for investments such as education, healthcare and public safety).
• The new sales tax on gasoline (which is in addition to the existing 23-1/2 cent gas tax) will be capped at 3 percent. If Congress fails to act it will rise to 5 percent. This sales tax on gasoline all goes for transportation purposes. Either way, this change would be phased in gradually over four years.

However, the federal legislation now has to pass the more conservative U.S. House of Representatives, which will be a tougher test than the Senate was.  A majority of U.S. representatives would need to vote for something that looks like a tax increase, where they get the blame, but state officials get to take credit for allocating the proceeds. Until now, this measure – meritorious as it is – has not made much progress in Congress.

Yet the ability to tax internet sales is unequivocally the correct economic and financial policy. Internet commerce is no longer a fragile new enterprise. It is a major player in the retail industry. It no longer needs the advantage of a de-facto sales tax exemption to grow and thrive (if it ever did).

And it is not fair to physical retail stores, or to internet sellers with physical locations in Maryland (from Target to your local florist). Under the current arrangement, they have to collect sales tax, but compete with out-of-state internet sellers who don’t.

So, however difficult the politics are, Congress should pass this bill.

Maryland’s allocation of these receipts for transportation, however, might endanger funding for general fund needs in the future. That means local schools, higher education institutions from our county community colleges to the University of Maryland, health programs, and police departments.

When and if Maryland starts collecting tax on all Internet sales,  legislators will need to keep a close eye on the receipts, to make sure that education, healthcare, and other functions funded from general revenues get their fair share.

The Week Ahead

Last week we blogged about national employment in April. On Thursday we also saw Governor O'Malley sign into law bills repealing the death penalty, combating cyberbullying, expanding access to driver’s licenses, extending early voting, reforming campaign-finance, and legalizing medical marijuana.

For the week of May 6th through May 12th:

• On Wednesday, May 8th, the Maryland Council for Educator Effectiveness meets from 9am to noon in the House Office Building, Annapolis.
• Also on Wednesday, the Interagency Committee on School Construction meets at noon to discuss fiscal year 2014 recommendations to the Board of Public Work. The meeting will be held at 200 West Baltimore Street, Baltimore.
• On Thursday, May 9th, the Payer/Provider Stakeholder Group will discuss the Community Integrated Medical Home initiative from 12:30-5pm, at 201 West Preston Street, Baltimore.
• Also on Thursday, the Department of Health and Mental Hygiene will hold a public hearing from 1-3pm on Healthchoice 1115 Waiver Renewal in room 240 of the House Office Building, Annapolis.

Employers Add 165k Jobs in April: Previous Estimates Also Increased

According to today's report from the Bureau of Labor Statistics, employers added 165,000 more jobs last month. Industries that added jobs included professional and business services, food services and drinking places, retail trade, and health care. The unemployment rate fell slightly, to 7.5 percent, a four year low.

Job creation estimates for February and March were increased by a total of 114,000, a reassuring development as job growth had been seen as particularly weak in March.


Some interesting points about today's jobs report from around the web:

• Dean Baker at the Center for Economic and Policy Research: "One issue worth emphasizing from this and past reports is that there is zero evidence that the prolonged period of high unemployment is due to a lack of skills of the workforce."
• Chad Stone at the Center on Budget and Policy Priorities: "The Fed has recognized that unemployment is too high and there is no immediate threat of inflation.  It’s time for lawmakers to recognize that unemployment is too high and there is no looming debt crisis...Despite 38 months of private-sector job growth there were still 2.6 million fewer jobs on nonfarm payrolls and 2.0 million fewer jobs on private payrolls in April than when the recession began in December 2007."
• Michael Greenstone and Adam Looney of The Hamilton Project at the Brookings Institution: "As of April, our nation faces a jobs gap of 10 million jobs." They also have a neat calculator where you can input your own job creation rate and see how long it will take the United States to close the jobs gap at that rate.
• By definition, the official unemployment rate does not count those workers who have given up and stopped looking for work, nor does it take into account those who are underemployed. For those figures, you have to look at the alternative measures of unemployment. By the most inclusive measure, unemployment stands at 13.9 percent (that's still significantly below the 17.1 percent it was in late 2009).
• The big problem is still long-term unemployment, according to the New York Times, among many others.