Alaska voters go to the polls tomorrow to decide Measure 1, which would change taxation of oil production. A yes vote repeals the More Alaska Production Act (MAPA) tax system championed by Gov. Sean Parnell (R) and passed in 2013, instead reinstating the previous Alaska’s Clear and Equitable Share (ACES) tax system pushed through in 2007 by then-Gov. Sarah Palin (R) in 2007. A no vote keeps the MAPA tax system.
Alaska has imposed a severance tax on oil production ever since sizeable extraction began in the late 1970s, which enabled Alaska to be the only state to repeal its state income tax. Over time, Alaska has collected $191 billion in oil production taxes, including tens of billions set aside in the Permanent Fund, with some of that paid to Alaska residents annually as dividends. Historically, the tax was structured as an Economic Limit Factor (ELF), which adjusted tax deductions to result in high taxes on highly productive oil fields and low taxes as a field’s profitability drew down.
Alaska oil production peaked in 1988 at about 2 million barrels a day and has declined since, to about 500,000 barrels a day today. With production declining and oil prices soaring, Alaska in 2006 adopted the Petroleum Profits Tax (PPT), which doubled taxes by consolidating tax calculations for various fields into regions and taxing the value of the oil and gas produced, with a higher tax when profits exceeded $40 per barrel. Continued soaring oil prices led to the enactment of the ACES system in 2007, which doubled taxes again by disallowing a number of production cost deductions, increasing the base tax rate to 25 percent, and taxing profits more heavily when they exceed $30 per barrel. These taxes are in addition to state and federal corporate income taxes.
Production has continued to decline under ACES, while production in Texas, Oklahoma, New Mexico, North Dakota, and Canada have grown sharply. Dividend checks mailed to each Alaskan fell from over $2,000 in 2008 to $900 last year, and the Trans-Alaska Pipeline is running dry. Governor Parnell blames the high taxes and pushed through SB 21 in 2013 to enact the MAPA system, which imposes a higher base tax rate of 35 percent but eliminates progressive add-ons. Parnell said the system is needed to encourage greater production, but opponents say it will sharply reduce oil tax revenue.
Polls show Alaskans almost evenly split on the measure, and signs and ads for both sides are everywhere in the state. It’s an important topic for the state because oil wealth has fueled much of the economic progress and state services for the last several decades. Unemployment in the state has crept above the national average for the first time in a long time, and anxiety is growing as production declines and other states surpass Alaska’s oil production. Both sides emphasize the importance of the oil industry to the state’s economic progress, debating whether taxing it very heavily is the right approach. Each voter may well be thinking the future of the state is in their hands with this vote.
This week’s tax map shows the real value of $100 in each state. Because average prices for similar goods are much higher in California or New York than in Mississippi or South Dakota, the same amount of dollars will buy you comparatively less in the high-price states, or comparatively more in low-price states. Using data from the Bureau of Economic Analysis that we’ve written about previously, we adjust the value of $100 to reflect how prices are different in each state.
For example, Tennessee is a low-price state, where $100 will buy what would cost $110.25 in another state that is closer to the national average. You can think of this as meaning that Tennesseans are about ten percent richer than their nominal incomes suggest.
The states where $100 is worth the least are the District of Columbia ($84.60), Hawaii ($85.32), New York ($86.66), New Jersey ($87.64), and California ($88.57). That same money goes the furthest in Mississippi ($115.74), Arkansas ($114.16), Missouri ($113.51), Alabama (113.51), and South Dakota ($113.38).
Regional price differences are strikingly large, and have serious policy implications. The same amount of dollars are worth almost 40 percent more in Mississippi than in DC, and the differences become even larger if metro area prices are considered instead of statewide averages. A person who makes $40,000 a year after tax in Kentucky would need to have after-tax earnings of $53,000 in Washington, DC just in order to have an equal standard of living, let alone feel richer.
As it happens, states with high incomes tend to have high price levels. This is hardly surprising, as both high incomes and high prices can correlate with high levels of economic activity. However, this relationship isn’t strictly linear: for example, some states, like North Dakota, have high incomes without high prices. Adjusting for prices can substantially change our perceptions of which states are truly poor or rich.
As we showed in an example in our recent paper on income data, adjusting for prices reveals average real incomes in Kansas to be higher than in New York, despite New York having much higher incomes as measured in dollars.
The tax policy consequences of this data are significant. For example, because taxes must be calculated based on nominal income, the average New York resident pays significantly more in taxes than the average Kansas resident. But the Kansas resident actually has higher purchasing power, meaning that they get to pay lower taxes despite getting to have a richer amount of consumption.
Furthermore, this affects means-tested federal welfare programs. A poor person in a high cost area – like Brooklyn or Queens - may be artificially boosted out of the range of income where they are eligible for welfare programs, despite still being very poor. At the same time, many people in low-price states may be eligible for welfare programs despite actually being much richer than they appear. If the same dollar value program is offered in New York City and rural South Dakota, it may be too small to help anyone in New York City, and yet so big it discourages work in South Dakota.
We’ve explained elsewhere how taxes have a role to play in urban gentrification, which in turn increases the cost of living and the local price level. As we also pointed out when the BEA data was first released, adjusting state incomes for price levels helps solve several statistical problems related to taxes and migration as well.
College is generally a good investment. On average, people who earn a four year degree go on to make almost twice as much as those with only a high school diploma. But while those future high earners are in college, they tend to be relatively poor (speaking from experience here).
The relative poverty of college students has some big implications for how we look at inequality. We recently released a new report that takes a new look at the use of household income data and it’s implications for inequality.
Incomes are Low in College Towns
College towns are often home to the lowest-income places in the United States (table below).The Fifteen Lowest-Income Places in the United States
Number of Households
Median Household Income (2012 Dollars)
Mean Household Income (2012 Dollars)
Boone, North Carolina
Appalachian State University
Southern Illinois University
East St. Louis, Illinois
Georgia Southern University
East Cleveland, Ohio
University CDP (Hillsborough County), Florida
University of South Florida
Central Georgia Technical College, Georgia College, Georgia Military College
State College, Pennsylvania
Pennsylvania State University
Washington State University
Source: U.S. Census Bureau, American Community Survey (Selected Economic Characteristics, 5-year Estimates).
Note: minimum 5,000 households.
According to U.S. Census Bureau data, Hillsborough County, Florida (the home of the University of South Florida) has a median income of just over $20,000 a year. It would be very easy for the common observer to assume that the residents of Hillsborough County have a relatively low quality of life, when in fact they have a bright future.
One example: If you observed the tax data for surgeons, you would find very high degrees of inequality. Through their twenties, surgeons are in medical school and earning very little. Whereas, in their prime, with a proven track record and solid experience, they can earn $400,000 or more.
Economists and social scientists often consider low incomes as a sign of a lack of opportunity. Although that is sometimes very true, the opportunity costs of the situation must also be taken into account. Economist Alan Cole writes:
“A reasonable person would not say a construction worker is clearly better off than a business school student. And yet, it is the latter who benefits from progressive income taxes and refundable tax credits at the expense of the former. Use data unreasonably and you will get unreasonable results.”
The Growth in College Enrollment
Not only do post-secondary students predictably skew overall income data, they do it at an accelerating rate. Over 20 million students are currently enrolled in post-secondary education.
Since the late 1970s, we have seen post-secondary enrollment nearly double, from just over 10 million students to over 20 million students today.
This growth in post-secondary enrollment must certainly be considered in any discussion of changes in inequality.
To read the full report: click here
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An interesting new interactive tool produced by the New York Times’ Upshot blog presents data showing state populations back to 1900, and what share of them were born in-state, abroad, or in other states. It’s a fascinating graphic to look at, but can be hard to interpret. What does it mean that North Carolina’s born-in-state share has fallen dramatically over the last few decades? How should we interpret New York’s remarkably small amount of domestic in-migrants? What conclusions can we draw from California’s declining number of interstate migrants?
The Upshot offers some commentary, suggesting that the rising share of domestic migrants in the south may help boost Democrats’ political fortunes in those states. Looking at New York specifically, they chart how large amounts of the population have gone to Florida. Hopefully, they’ll keep offering more data and commentary along these lines, helping translate a rich dataset for public use.
One point that is hard to ignore when scrolling through the 50 charts is just how big interstate migration really is. As the Upshot makes clear, interstate migration is a major force in America today. While the annual population of migrants may just be between 1 and 3 percent of the population, these annual flows, when repeated year after year, result in huge demographic consequences for states.
Furthermore, this new data can tell a striking story for readers who know the historical tax policies of the various states. Just to focus on one example, California saw rising migration from other states from 1910 to 1960. Then from 1970 to the present day, it has experienced persistent out-migration. No doubt many factors, including the interstate highway system, the Great Depression, agricultural modernization, the invention of air conditioning, an aging population, and others impact these changes.
But it’s also true that California’s Governor Earl Warren cut top income tax rates from 15 to 6 percent in 1943. Income tax rates did not rise above 7 percent until 1967, meaning that California did not have a very high income tax compared to other states at the time. Since the tax hikes in 1967, California income taxes have remained higher than the national average. The 1960s also saw California’s sales tax rates rise well above those of other states, when they had previously been closer to the national average. Eventually, as property taxes also rose rapidly, California citizens became deeply disgruntled with the state’s tax policies. This led to the 1978 “tax revolt” and Proposition 13, which capped and cut property taxes. It is no great surprise that the same rising tax burdens that led to a massive political upheaval were also associated with a reversal in migration patterns.
Taxes cannot be wholly blamed for the ongoing exodus of California residents, but they can play a part (certainly other commonly-cited reasons like job opportunities or weather can’t be blamed). Furthermore (and contrary to some of the Upshot’s commentary), migration of disgruntled Californians (or New Englanders) to southern states may not be good news for southern Democrats. If migrants are leaving behind frustration about taxes, restrictive zoning regulations, or lack of job opportunities, they may not be very likely Democratic voters. Migrants may not be representative of normal Californians or New Yorkers: they may be disproportionately likely to want something else. Exactly how great a role interstate migrants play in shifting partisan voting patterns is not immediately obvious.
But the new tools and commentary from the Upshot clearly show that migration is a major demographic force, and thus economically significant enough to merit attention from policymakers. Prominent changes in the data suggest that taxes may have a role in affecting migration, though certainly taxes are just one of many important variables, and probably not even the biggest factor. As always, talking about migration isn’t simple: migration data is challenging to measure and represent, and even more difficult to interpret.
Read more about migration here.
Check out our interactive migration data here.
Read more on California here.
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In the current hysteria over corporate inversions, many point to their cost to the U.S. Treasury. In a Washington Post article, BusinessWeek’s Allan Sloan writes about corporate inversions saying: “All of this threatens to undermine our tax base, with projected losses in the billions.”
While corporate inversions point to fundamental problems with our corporate tax system, corporate inversions are not a significant threat to the corporate tax base.
The Joint Committee on Taxation in May released their estimate of the revenue gained from passing the “Stop Corporate Inversions Act of 2014.” This law alters rules and makes it harder for corporations to invert and move overseas. The JCT estimates that this will raise approximately $19.5 billion over fiscal years 2015 and 2024.
Compare this to the Congressional Budget Office’s fiscal outlook that estimates that the corporate income tax is estimated to raise approximately $4.5 trillion over the same period.
That is a 0.4 percent loss to our corporate tax base due to corporate inversions. Hardly the doom and gloom many in the press and Congress make it out to be.
Why does there seems to be a great deal of hysteria over inversions when it costs so little? It is likely a misunderstanding of how the corporate tax system works. Many news reports mischaracterize an inversion as a way a corporation can escape all federal corporate income taxes. In fact, corporate inversions only work to change the taxes on the income a U.S. corporation earns overseas.
The United States has what is called a worldwide tax system. This tax system taxes the income earned of corporations both here and abroad at the 35 percent corporate tax rate.
First, companies operating in foreign countries pay income taxes to the country in which those profits were earned. For example, if a subsidiary of a U.S. firm earns $100 in profits in England, it pays the United Kingdom corporate income tax rate of 21 percent (or $21) on those profits. When those profits are brought back to the United States, an additional tax equal to the difference between the U.S. tax rate of 35 percent and the UK corporate rate of 21 percent ($14 in this case) is collected by the IRS. Between the two nations, the U.S. firm will have paid a total of $35, or 35 percent, in taxes on its foreign profits.
An inversion only allows them to escape the additional domestic tax on their foreign earnings (the $14 in the above case). U.S. corporations will still be liable for tax on every single penny it earns in the United States.
By no means are corporate inversions not a problem. Inversions point to fundamental problems with our tax code: at 39.1 percent, the United States has the highest corporate income tax rate in the developed world. Additionally, we are one of few countries that continue the practice of taxing our corporations on a worldwide basis. Inversions are a response to this reality.
One thing is sure: if we do not fix our uncompetitive corporate tax system, we will continue to lose out on corporate investment.
State Tax Notes today reports that the California Senate just approved a bill that would prohibit sports team owners from deducting professional fines as business expenses. The bill, which was approved 27 to 9, is aimed at Donald Sterling, owner of the Los Angeles Clippers, who made racially offensive comments this year resulting in a $2.5 million fine from the NBA. The bill would only affect team owners, not players.
I argued in June when the bill was introduced:
Sterling is awful, and I’d love to stick it to him, but it’s a little bit weird to bring the tax code into play here. Fines imposed on franchise owners have been a mixed bag: check out this list at ESPN. Sometimes they are for totally reprehensible behavior, like when Cincinnati Red’s owner Marge Schott said nice things about Hitler, but other times they are for things that concern the league and its politics, like when Michael Jordan and Micky Arison were fined for just talking about the NBA lockout.
I suppose I’m a purist; let’s leave the league governance to the leagues, and the tax code to the legislature. Put another way, I believe in the separation of sports and state.
The bill now goes to the Assembly.
Follow Scott on Twitter.
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