UWT economist wants Legislature to take tax policy inspiration from New Jersey; she should have chosen a different model.

In a Puget Sound Business Journal op-ed, Katie Baird, a University of Washington Tacoma economist, urges state lawmakers to adopt progressive tax reform. She turns to the East Coast for a policy role model.

So let’s take inspiration from New Jersey. Officials there recently announced a plan to increase state income taxes on those making over $1 million. While Washington lacks an income tax, other options are available to us. The governor’s office has crafted a 9% capital gains tax. Not long ago a group of state senators proposed a new law taxing compensation above $1 million.

There’s surely a lot to like about New Jersey. But tax policy wouldn’t be our first pick. The Tax Foundation ranks New Jersey dead last in the 2020 State Tax Business Climate Index. (That’s No. 50 over there next to New York.)

The Tax Foundation writes,

The states in the bottom 10 tend to have a number of afflictions in common: complex, nonneutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, has the second highest-rate corporate and individual income taxes in the country and a particularly aggressive treatment of international income, levies an inheritance tax, and maintains some of the nation’s worst-structured individual income taxes.

Add that new tax to the “nation’s worst-structured individual income tax” regime and it doesn’t get better.

A lot of people are noticing. And leaving the Garden State. The libertarian Cato Institute – we know, not everyone will love the source – writes,

New Jersey’s richest person, David Tepper, moved with his hedge fund business to Florida in 2016. That single move cost the state of New Jersey up to $100 million a year in lost income taxes. Yet, this year, New Jersey’s Democratic governor Phil Murphy hiked the top income tax rate from 8.97 to 10.75 percent. Murphy wanted to raise revenue, but the hike won’t do that if it prompts more of the rich to leave. The top 1 percent in New Jersey pay 37 percent of the state’s income taxes.

The data show New Jersey has been seen significant population losses. New Geography reports,

New Jersey, which is largely split between the New York and Philadelphia metropolitan areas, suffered the fourth net domestic migration loss, at nearly one million. New Jersey placed third in proportional decline, at 11.3%.

The New Geography post includes the following charts. 

We agree. There are lessons to be learned from the way New Jersey policymakers have handled things. The main lesson being: Don’t do what they have done.

A look at “austerity budgeting” during downturns. Washington has enjoyed strong growth since Great Recession

Balancing government’s books during recessions is a challenge. As we’ve seen with trillion-dollar federal pandemic relief packages, Congress doesn’t worry about that too much. But state and local governments, lacking the authority to deficit spend, must take a more disciplined approach.

The Washington Research Council has examined how states performed during and following the last recession. Their analysis provides useful perspective on the effects of what some have called austerity budgeting. Here’s the set-up.

Speaker [Laurie] Jinkins [said] that her first year in the Legislature was 2011, when budgets were still being cut in response to the Great Recession: “I experienced austerity budgets. And actually Republicans may say what they say but the actual research says that using an all cuts budget for the Great Recession actually hurt Washington’s recovery.”

Austerity budgets are those that reduce government deficits using spending cuts, tax increases, or both. Washington’s Great Recession response was not all cuts—it also included tax increases, fund transfers, reserves, and federal funds.

WRC senior analyst Emily Makings examined the assertion. She reviews some research at the national level–we recommend reading the post–and then writes,

The closest thing to an economic study that I’ve found on the question of how Washington’s budget cuts affected the state economy is this piecefrom the Center for American Progress in 2012. It simply split the states into two groups: states that cut public spending (including Washington) and states that expanded public spending since the start of the Great Recession. Then it looked at median unemployment rates, private sector job growth, and real GDP growth for each group. It found that the median spending cut state had a higher unemployment rate, fewer private sector jobs, and slower economic growth than the median spending expansion state. From this, it concluded that states “that cut spending have fared worse economically than those that expanded spending.”

Makings notes that the exercise says nothing about Washington’s performance, nor does it examine other factors that might have influenced states’ recoveries. (We’d also add that the Center for American Progress promotes an aggressive and  progressive policy agenda. Austerity is not part of their program.

We develop new policy ideas, challenge the media to cover the issues that truly matter, and shape the national debate. With policy teams in major issue areas, CAP can think creatively at the cross-section of traditional boundaries to develop ideas for policymakers that lead to real change. By employing an extensive communications and outreach effort that we adapt to a rapidly changing media landscape, we move our ideas aggressively in the national policy debate.

What’s particularly helpful in understanding Washington’s recovery is the use Makings makes of the CAP analysis. We quote extensively.

The charts below show changes in real GDP, private sector employment, and unemployment rates (like similar charts in the Center for American Progress analysis). I’ve used the same state groupings as the Center for American Progress, but I’ve also shown Washington separately and added data through 2019. As you can see, Washington’s real GDP has grown more since 2007 than either group of states (both through 2011 and through 2019). Washington’s private sector employment didn’t perform as well as the spending expansion states through 2012, but since then it has outperformed either group. Washington’s unemployment rate did increase by more than the median state in the spending expansion group.

The crux:

Altogether, these data points do not show that Washington’s budgetary response to the Great Recession hurt Washington’s recovery, nor do they show that all-cuts responses in general hurt recoveries. Perhaps Washington’s growth would have been even stronger if a different approach had been taken, but the fact is that we have seen significant growth in GDP and private sector employment. From 2007 to 2019, Washington’s real GDP grew 45.0 percent—the second highest growth in the country. Washington’s growth in private sector employment over the same period grew by 18.4 percent—the sixth highest. Further, this growth yielded extraordinary revenue growth for the state in 2013–15, 2015–17, and 2017–19.

In sum, Washington’s measured approach to budgeting during the Great Recession had no demonstrable negative effects on the recovery and may have helped nurture the state’s extraordinary post-recession economic vitality.

Makings concludes,

With the September revenue forecast and the October collections report, the state’s budget shortfall is narrowing. If this trend continues, the question of whether to increase taxes or substantially cut spending may be moot.

Let it be so.

State Employment Security Department reports 24% drop in regular initial unemployment claims last week.

The state Employment Security Department reports just under 17,000 regular initial unemployment claims were filed last week.

During the week of October 11 – 17, there were 16,890 initial regular unemployment claims (down 24.3 percent from the prior week) and 491,241 total claims for all unemployment benefit categories (up 3.0 percent from the prior week) filed by Washingtonians, according to the Employment Security Department (ESD).  

  • Initial regular claims applications remain at elevated levels and are at 172 percent above last year’s weekly new claims applications.
  • Initial regular initial claims, Pandemic Unemployment Assistance (PUA) initial claims and Pandemic Emergency Unemployment Compensation (PEUC) initial claims all decreased while continued claims increased over the week.

Here’s the three week report:

The payout over the crisis to date:

Since the crisis began in March, ESD has paid more than $11.8 billion in benefits to over a million Washingtonians.

As they say, unprecedented.

787,000 unemployment claims filed nationally last week, unemployment rate drops to 5.7%

The U.S. Department of Labor reports 787,000 unemployments were filed last week.

In the week ending October 17, the advance figure for seasonally adjusted initial claims was 787,000, a decrease of 55,000 from the previous week’s revised level. The previous week’s level was revised down by 56,000 from 898,000 to 842,000. The 4-week moving average was 811,250, a decrease of 21,500 from the previous week’s revised average. The previous week’s average was revised down by 33,500 from 866,250 to 832,750.

The advance seasonally adjusted insured unemployment rate was 5.7 percent for the week ending October 10, a decrease of 0.7 percentage point from the previous week’s revised rate. The previous week’s rate was revised down by 0.4 from 6.8 to 6.4 percent.

Here’s the trend. Still a very high plateau.

This week’s report comes without the California asterisk:

California has completed its pause in processing of initial claims and has resumed reporting actual unemployment insurance claims data based on their weekly claims activity. This News Release reflects actual counts for California for the current week and revisions to the two prior weeks. 

Calculated Risk writes,

 This does not include the 345,440 initial claims for Pandemic Unemployment Assistance (PUA) that was up from 337,228 the previous week. (There are some questions on PUA numbers).

From the Associated Press report,

The number of laid-off Americans seeking unemployment benefits fell last week to 787,000, a sign that job losses may have eased slightly but are still running at historically high levels.

Last’s week’s figure was down from 842,000 the previous week, the Labor Department said Thursday. The government also revised down the number of people who sought aid in the two weeks before that. The total for the week that ended Oct. 3 was 767,000, the fewest since the viral pandemic erupted in March, though still more than three times the levels that preceded the pandemic.

Economists welcomed the declines as evidence that the job market is still recovering from the pandemic recession. But many cautioned that the improvement could prove short-lived. With confirmed infections having neared 60,000 in the past week, the most since July, many consumers have been unable or reluctant to shop, travel, dine out or congregate in crowds — a trend that has led some employers to keep cutting jobs. Several states are reporting a record number of hospitalizations from the virus.

So, persistent high unemployment and elevated uncertainty. Again.

Research Council finds WA tax structure performed well during pandemic; Tax Foundation ranks WA #16 in business tax climate.

There’s never a shortage of critics of Washington’s tax structure. Again this year, the Legislature continues the work of the Tax Structure Work Group.  Last week, three former governors agreed that system requires reform. And yet, after decades of criticism, ballot initiativesblue-ribbon commissions, the system has been retained. 

Perhaps that’s because it generally works pretty well. 

The Washington Research Council has a good blog post reviewing some of the criticism and setting the record straight. The WRC leads with the criticism levied last week by the former governors.

The Puget Sound Business Journal (PSBJ) reported last week on an event with former Washington governors Gregoire, Locke, and Evans. According to the PSBJ,  

All three governors said the state should create a more fair, progressive tax system that provides stability in recessions. Washington’s current tax system, relying heavily on sales taxes, has proven to be volatile during the pandemic and other economic slowdowns. Locke said a state income tax could be a better solution.

On the contrary, Washington’s tax system is less volatile than most other states. Pew reported last week that for the fiscal years 2000–2019, Washington’s tax revenue ranked the 16th least volatile in the country.

This revenue stability is a favorable point in Washington’s credit rating. In an Oct. 7, 2020 credit rating report, S&P noted that Washington’s high rating in part reflected its “Sales tax-based revenue structure that has demonstrated less sensitivity to economic cycles compared with income tax-reliant states.”

There’s much more at the blog post, which we commend to you. We will quote one other section.

Similarly, Lucy Dadayan of the Urban Institute reported last week that preliminary data on state tax collections through August indicate that total state tax collections for the period of March–August 2020 are down 6.4 percent compared to the same period last year. Washington is one of just eight states that reported that tax collections actually increased for this period from 2019 to 2020.

The Tax Foundation also gives the state relatively good marks on business tax policy, ranking Washington 16th in the 2021 State Business Tax Climate Index, released today (first is best).

Here’s the Washington page. As the TF snapshot below shows, Washington is one notch below Oregon and four ahead of Idaho. The state’s best ranking, No. 6, is on individual taxes, a nod to the lack of a personal income tax.

The TF index, while not definitive, does point to some relative strengths and weakness in the tax structure. The authors write

The Tax Foundation’s State Business Tax Climate Index enables business leaders, government policymakers, and taxpayers to gauge how their states’ tax systems compare. While there are many ways to show how much is collected in taxes by state governments, the Index is designed to show how well states structure their tax systems and provides a road map for improvement.

The absence of a major tax is a common factor among many of the top 10 states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. Nevada, South Dakota, and Wyoming have no corporate or individual income tax (though Nevada imposes gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire and Montana have no sales tax.

This does not mean, however, that a state cannot rank in the top 10 while still levying all the major taxes. Indiana, North Carolina, and Utah, for example, levy all of the major tax types, but do so with low rates on broad bases.

Again, much more in the study. We expect the tax reform discussions to continue. The challenge for the reformers is to demonstrate how their proposed changes will improve upon on performance of the current structure.

Who’s feeling optimistic? Homebuilders!

Homebuilder confidence has reached new highs, according to a new survey. 

In a further show of strength for the housing sector, builder confidence in the market for newly-built single-family homes increased two points to 85 in October, further surpassing the previous all-time high of 83 recorded in September, according to the latest NAHB/Wells Fargo Housing Market Index (HMI) released today. These are the first two months the index has ever been above 80…

“The housing market continues to be a bright spot for the economy, supported by increased buyer interest in the suburbs, exurbs and small towns,” said NAHB Chief Economist Robert Dietz. “NAHB analysis published last week showed that new single-family home sales are outpacing starts by a historic margin. Bridging this gap will require either a gain in construction volume or reductions in available inventory, which is already at a historic low in terms of months’ supply.”

Bloomberg reports on the survey,

U.S. homebuilder confidence advanced in October to a fresh all-time high as record-low interest rates continued to fuel sales and the demand outlook.

A gauge of builder sentiment climbed to 85, the highest in records back to 1985, from 83 a month earlier, according to the National Association of Home Builders/Wells Fargo Market Index released Monday. The October reading was stronger than the median forecast of 83 in a Bloomberg survey of economists, and marked the sixth straight month builder sentiment has exceeded the consensus estimate.

The booming housing market has been a bright spot for the economy since the coronavirus lockdowns eased. Declining mortgage rates are making it easier for buyers interested in purchasing larger homes or relocating to suburbs as houses are increasingly viewed as remote workplaces in light of the pandemic.

Housing has also shown resilience in our state, as pointed out in the September revenue forecast.

  • Washington housing construction declined in the second quarter but exceeded the June forecast. Washington housing units authorized by building permits averaged 40,300 (SAAR) in the second quarter of 2020, down from 49,800 in the first quarter. Second quarter permits consisted of 17,800 single-family units and 22,600 multi-family units. The June forecast predicted 12,300 single-family units and 16,700 multi-family units for a total of 28,900 units in the second quarter. Housing construction remained moderate at the beginning of the third quarter. In July, single-family permits improved to 23,600 units (SAAR) and multi-family units slowed to 17,400 for a total of 41,000 units.

  • Seattle-area home prices declined for a third consecutive month in June following eleven consecutive increases. According to the S&P/Case-Shiller Home Price Indices, seasonally adjusted Seattle home prices decreased 0.2% in June following declines of 0.2% and 0.3% in April and May. The composite-20 index was unchanged in June. Seattle home prices were still up 6.5% over the year. In comparison, the composite-20 index was up 3.5% over the year. In June, Seattle home prices were up 100% since the December 2011 trough and exceeded the May 2007 peak by 39%. The reported June figure is for the three months ending in June.

And real estate activity contributes to the strengthened revenue outlook.

  •  The real estate market has been much stronger than expected. While taxable activity was depressed from April through July, by August activity was above its year-ago level. Because of this, real estate excise tax (REET) collections since June came in $103 million higher than expected. REET collections for the current biennium are now forecasted to be $281 million higher than forecasted in June.

A little good news and optimism is always welcome.

 

September unemployment rates decline in 30 states, including Washington. A slow labor market recovery anticipated.

The U.S. Bureau of Labor Statistics reports today that unemployment rates continue to decline in most states, but everywhere remain much higher than the pre-pandemic rates a year ago.

Unemployment rates were lower in September in 30 states, higher in 8 states, and stable in 12 states and the District of Columbia, the U.S. Bureau of Labor Statistics reported today. All 50 states and the District had jobless rate increases from a year earlier. The national unemployment rate declined by 0.5 percentage point over the month to 7.9 percent but was 4.4 points higher than in September 2019.

Nonfarm payroll employment increased in 30 states, decreased in 3 states, and was essentially unchanged in 17 states and the District of Columbia in September 2020. Over the year, nonfarm payroll employment decreased in 48 states and the District and was essentially unchanged in 2 states.

The BLS reports Washington’s unemployment rate in September was 7.8%, down from 8.4% in August and just slightly below the U.S. rate of 7.9%. A year ago, Washington’s unemployment rate was 4.1%., while the U.S. rate was 3.5%.

Tourism dependent states continued to suffer.

Hawaii had the highest unemployment rate in September, 15.1 percent, followed by Nevada, 12.6 percent…

The largest unemployment rate increases from September 2019 occurred in Hawaii (+12.4 percentage points) and Nevada (+8.9 points). 

The vice-chair of the Federal Reserve expects unemployment to remain elevated for some time.

The U.S. economy is rebounding strongly after taking a big hit because of the coronavirus pandemic, but it may be another year before the economy returns to pre-crisis levels and take even longer for the labor market to recoup lost ground, Federal Reserve Vice Chair Richard Clarida said on Monday.

“While recovery since the spring collapse in economic activity has been robust, let us not forget that the full economic recovery from the COVID-19 recession has a long way to go,” Clarida said during a virtual discussion organized for the American Bankers Association Convention.

The pandemic threw the U.S. economy into a “very deep hole” and despite recent improvements, the outlook is “unusually uncertain,” Clarida said.

The U.S. unemployment rate has dropped significantly to 7.9% from a high of 14.7% seen earlier this spring, but it may not drop below 4% again until the end of 2023 according to Fed projections.

A rough prognosis.

Top aerospace analyst says Washington should focus on winning Next Boeing Airplanes.

After Boeing announced its decision to consolidate 787 production in Charleston, South Carolina, public officials here expressed a variety of views. Notably, Gov. Inslee s called for a “hard look” at the company’s tax treatment. We agreed with others that raising taxes on the industry would be counterproductive.

But there’s more to the story. A sharp analysis by Scott Hamilton, one of the nation’s leading aerospace analysts, takes a look at how state leaders have responded, traces some of the company’s recent history with state leaders, and … most important … looks ahead to the company’s future in the state. It’s a pointed, insightful, and must-read critique. (Credit to the Washington Research Council for first posting on the piece.)

Hamilton writes,

With the announcement last Thursday by Boeing it will consolidate 787 production from Everett into Charleston, local political leaders were disappointed but understanding and even sympathetic.

Snohomish County Executive Dave Somers and Everett Mayor Cassie Franklin likened Boeing to a family member who was in crisis. Hard decisions by Boeing were made, but in a crisis, you must. Support your family. Understand the situation. Figure out how to make the best of it to move forward.

On the other hand, Gov. Jay Inslee vowed to review the state’s relationship with Boeing and tax breaks granted to the company. Inslee claimed understanding but his tone was hostile, defiant and angry.

Getting to the essential point, Hamilton reviews the company’s options. We encourage you to review the analysis for yourself. Here’s the crux: Boeing has choices.

LNA analyzed the pros and cons of moving some or all the three lines from Renton to Everett to fill the vacuous space that will be left when the 787 and 747-8 FALs disappear. We agree that moving the lines out of state isn’t worth the trouble and cost, however. But that’s not to say it couldn’t be done.

There are lots of obstacles, challenges and considerations to moving 737 or 777 production. But myopically, Inslee overlooked several other possibilities Boeing has.

There is nothing stopping Boeing from moving engineering jobs out of state. It’s been doing that. It can continue to do so.

Boeing could relocate its facilities at Moses Lake out of state.

What’s to say Boeing doesn’t relocate Insitsu, its UAV company in Bingen (WA), across the Columbia River to Oregon or elsewhere?

Given recent news, this sound prescient.

More to the point, who says the headquarters for Boeing Commercial Airplanes must remain in Renton at its huge Longacres campus? Administration and sales don’t have to be in Puget Sound.

The more important point for state leaders, however, is that there are also significant opportunities for expansion in the Puget Sound region.

Mayor Franklin and Executive Somers got it right. The real point is preparing for the future, not whining about the past. Inslee needs to focus on how Washington State can win the Next Boeing Airplanes.

Boeing needs two new airplanes for the 2030 decade. The pressing need is a replacement for the 737-9 and 737-10. These two airplanes do what they do very well, but there are inferior to the A321neo family. The strength of the A321neo drives Airbus’ successful market share in the single-aisle sector to capture 55% or more.

Boeing needs a new airplane in the 190-250 seat sector, and it needs it badly.

The company also needs a new airplane in the 125-189 seat sector to replace the highly niche 737-7 and the anchor 737-8 MAX. Embraer was going to be charged with this responsibility (in the 100-160 seat sector). This joint venture is off, however. So, it falls to Boeing to design this airplane, too.

Governor, this is your mission, should you be reelected. You need to be thinking how to win this business for Washington.

Right. Again, the whole piece is well worth your time.