Caution: These Links Will Ruin Your Sleep

A campaign pitch for an incumbent member of Congress you will not hear:  You are getting $4 worth of government for every $3 you pay in taxes and fees, and the other buck is piled on as debt for your kids and grand kids to pay! You should vote me back in!

The Treasury Department’s own news release Monday, flagged by The Republican Standard,  attempted the spin that this is not the fault of President Donald Trump and the halcyon days coming thanks to his wise policies will soon begin to reverse this.  Hang with us!  Reading through the actual reports on income and spending, however, it is impossible to build up any hope.

This is another one of those cases where I indulged my own morbid curiosity and am now sharing the results.  I do not spend much time with the federal reports, compared to the state spreadsheets, but from time to time everybody should dig into the depressing details.  Stop reading my observations and dive into the actual reports – I won’t be offended.

The federal budget is broken into two big categories:  on budget and off budget.  This in no way correlates to the state’s system of splitting things into general fund and non-general fund.  The federal off-budget component is mainly Social Security pension and disability payments.   Other situations where specific taxes or fees pay for specific programs, including Medicare and the Post Office, are lumped into the on-budget categories.

When Social Security was collecting healthy receipts exceeding its annual outlays, it was producing surpluses.  These off-budget surpluses provided a nice way to hide the true size of the deficit in the on-budget category.  Well, for federal fiscal year 2018 (which ended September 30) that was a very small fig leaf indeed – about $6 billion, compared to $49 billion the year before.  Will the current fiscal year 2019 produce the first cash flow deficit for Social Security?  Will that wake up anybody?

When you back out that small off-budget surplus, the on-budget deficit was $785 billion, just under 25 percent of the $3.26 trillion in on-budget spending.  That on-budget deficit grew $70 billion, almost ten percent in a single year.  You can choose whether to blame higher spending or tax cuts.  Machts nichts.

The big federal tax cut went into effect three months into this past fiscal year and was in play for nine months, but individual income tax receipts grew 6 percent for that year.  Perhaps it’s too soon to judge the impact until people file next year.  But the impact of the corporate income tax changes did show up last year, with a $92 billion (31 percent) drop in CIT revenue.  There was a healthy boost in customs duties and that will really take off for 2019. (Is that the plan? Make tariffs the main source of federal income for the first time since President Polk?)

The federal officials quoted in the official release make much of slight decreases in a couple of social benefit programs, such as SNAP (a.k.a. food stamps), but reviewing the spending sheets really reveals the depth and breadth of income-based transfer programs, plus the political genius of sprinkling them through so many difference parts of the budget.

SNAP and other food programs are in the Agriculture Department ($91 billion).  Federal student aid ($46 billion) is in Education.  Medicaid ($389 billion), Temporary Assistance for Needy Families ($21 billion) and Children’s Health Insurance Program ($17 billion) are in Health and Human Services.

Housing gets its own programs for the economically challenged ($48 billion).  The Earned Income Tax Credit ($59 billion) is buried under the Treasury Department and the Social Security Administration handles the Supplemental Security Income payments of cash ($55 billion) that are not part of the regular disability coverage, which is (of course) off budget.  I’m sure I missed some.  I think the Veteran’s Administration still makes some pension payments based on poverty (maybe not.)

A single Department of Federal Need-Based Assistance which puts all those programs in one basket would approach $800 billion and would be larger than defense spending or the payments on the debt ($521 billion).   Which of course is why no politician of either party will ever, ever do that and make things that clear.

What is the choice on November 6?  There really is no reason to differentiate the parties on this issue any more, or to believe any candidate promising something else.  A bipartisan deal on Fiscal Year 2019 explodes spending and the projected deficit this year approaches $1 trillion. We are in this condition in a strong economy and looking at the deficits run coming out of the last recession indicates the deficits in the next one (inevitable) will approach $2 trillion.

 

 

Good News Story: Richmond’s Murder Arrest Rate

Richmond Police Chief Alfred Durham — winning everybody’s confidence.

The City of Richmond’s school system leaves a lot to be desired, a fact I have belabored on this blog, but the city’s Police Department is doing a great job of fighting crime — so good that the Washington Post profiled the Richmond P.D. as an exemplar in closing murder cases.

Nationally, there have been 50,000 homicides in major American cities since 2007. Of those, 26,000 have not resulted in an arrest. But of the 50 cities studied, Richmond has the highest homicide arrest rate. The police have closed 70% of all murder cases. Writes the Post:

That outcome, police officials said, is the result of persistent community outreach that has helped encourage witnesses to cooperate.

“If I’m in the city, I’m at every scene,” said Chief Alfred Durham, a former D.C. police officer who has led Richmond’s department since early 2015. “People in the community need to see members of our command staff engaging and doing everything possible to close each case. . . . We’re out there building relationships.”

Detectives said they have worked hard to gain the confidence of potential witnesses by assuring that police will do all they can to protect them if they come forward.

The high arrest rate represents a significant turn-around from 12 years ago when Richmond had won the reputation as a mini-murder capital. After an overhaul of the department, murder rates have declined and arrest rates have soared.

While Richmond is among the smallest of the 50 cities studied, it has tremendous concentrations of poverty — with all the social pathologies that concentrated poverty creates. Little has changed economically or demographically that might explain the exceptional murder clearance rate. The improvement results from good community policing.

The building of trust between police and communities also is reflected in the different tenor of politics in the city. Not to say that there isn’t a racial divide over issues like Civil War statues, but Richmond doesn’t have the same kind of hyper-polarized racial animus seen in places like Baltimore and Chicago. That makes it a lot easier for someone like African-American Mayor Levar Stoney to govern as a moderate liberal — with an emphasis on the moderate. Now… if only some of that positive mojo can rub off on the city schools.

(Hat tip: Steve Nash)

More Test Score Sleight-of-Hand

As expected, the Virginia Department of Education (VDOE) has responded to the latest ACT college-entrance exam results with glowing comparisons between Virginia high school test takers and their peers in other states.

“The percentage of 2018 graduating seniors in Virginia public high schools who met the ACT’s college-readiness benchmark in each content area was 22 or more points higher than the percentages for public graduates nationwide,” stated the VDOE press release.

“The commonwealth’s public school students achieved an average composite score of 23.8 on the ACT, compared with 20.4 for public graduates nationwide,” the press release added. “Public school students accounted for 83 of the 95 Virginia students who achieved perfect scores on the test.”

Wow! If Virginia students are that much smarter than everyone else, that must mean Virginia schools are doing a fantastic job! … Right?

There is less to these comparisons than meets the eye. Click here to view average ACT scores by state graduating class in 2018. As ACT warns at the top of the table: “The best practice is to compare states where the same or similar percentages of graduates were tested (e.g, Alabama 100% and South Carolina 100%; or Kansas 71% and Arizona 66%).”

In 17 states 100% of high school graduates took the tests. Fifty-five percent took the exams nationally. And Virginia? Well, in Virginia only 24% partook. So, while it may be true that nearly twice as many Virginia grads are taking the exams as ten years ago, as Staples said, the percentage in the Old Dominion is less than half the 55% national average. Only in seven states does a smaller percentage participate.

Thus, while the composite score of 23.9 for Virginia students may look good in comparison to (to pick a state) 20.2 for Kentucky, bear in mind that every Kentucky student took the exams while only one in four Virginia students did. When participation is so discretionary, it is safe to assume that the Virginia test-takers are a highly self-selected group —  more serious about going to college, better prepared academically, and more likely to earn high ACT scores.

For a meaningful comparison, let’s see how Virginia stacks up against other states where roughly the same percentage of high school grads took the ACT exams.

Er… Not so great. New York, Connecticut, Massachusetts, Vermont, and Michigan all outperformed Virginia. In each of those states, students are somewhat better prepared for college than Virginia students.

Surely, VDOE knows this. But the Department chose not to provide this context in its press release. Instead, Virginians are fed happy talk about what a great job their schools are doing.

Bacon’s law of public policy: You cannot make things better if you are disconnected from reality.

Bacon’s bottom line: VDOE’s press release strongly suggests that the VDOE’s top brass is disconnected from reality. Alternatively, if VDOE isn’t disconnected from reality, it is peddling happy talk that keeps Virginia lawmakers and the public disconnected from reality. This is no way to achieve the goal of making Virginia the best educated state in the country.

Update: A previous version of this post mistakenly included quotes and graphs from last year’s VDOE press release. I have deleted them and replaced them with quotes and charts from this year’s release.

Virginia Gothic

by Bill Tracy

Following up on Steve Haner’s discussion of Virginia’s handling of the new federal tax laws, I decided to do a “hypothetical” sample calculation.  “Hypothetical” is in quotes, because this example is somewhat similar to my own household, where we are grandparents in retirement.

In this simplified example, the annual income is assumed to be $150,000 withdrawn from retirement savings. Itemized deductions total $28,500 including $7500 state income tax, $7500 property tax, and $13,500 mortgage interest and charitable donations.  Thus the SALT (state and local taxes) exceed the new $10,000 federal limit.

Our hypothetical taxpayers are filing a Married-Joint tax return, and they are Age 65 or older.  Due to being over Age 65, this couple benefits from a larger 2018 Federal Standard Deduction of $26,600 vs. the normal deduction of $24,000 for younger couples.   In our example, the couple’s itemized deductions total $28,500 in 2017, but which is reduced to $23,500 in 2018 with the new SALT deduction limits.  Thus the $26,600 Standard Deduction looks better, but only on the surface.  As you will see below, the plot thickens in 2018 for many Virginians.

Using 2017 as a Base Case, let’s look at the tax payment options available to the couple in 2018:

Option-1 above is currently the best for our couple in 2018, but they are not very happy. Upon completion of their Federal FORM 1040 they are temporarily pleased see $801 tax savings, courtesy President Trump. However, upon filing their Virginia FORM 760, the couple owes Virginia an extra $863, courtesy whomever wants to take the credit for that. So the overall loss is $62 versus the 2017 Base Case.

Option-2 uses itemized deductions, and presents our retired couple with an interesting and rebellious alternative. If they are mad at Virginia, they could elect to itemize deductions, and pay more tax to the Feds, and less to the state. In my actual personal tax projection, right now I think Option-2 probably saves me a few bucks.

Option-3 is the most preferable option for our retired couple, but it requires the General Assembly to change the Virginia tax laws. Virginia tax law currently stipulates that a taxpayer who takes the Federal Standard deduction, cannot itemize taxes for Virginia purposes. It is this Virginia law that prevents our retired couple from taking the modest tax reduction that the new Federal tax law tries to achieve.

(Calculations based on a shareware 2018 Federal Tax estimator, and using 2017 Virginia tax calculator with adjustments for itemized/standard deductions.)

Bill Tracy, a retired engineer, lives in Northern Virginia.

Chesterfield’s $50 Million Fiscal Landmine

Virginia and its local governments are constitutionally obligated to balance their budgets ever year. But as I have repeatedly pointed out, there are many ways to duck that obligation. One is to rack up unfunded pension liabilities. Another is to under-fund maintenance.

Today we discover that even a highly reputed county with a AAA bond rating can engage in fiscal sleight-of-hand. From today’s Richmond Times-Dispatch: “Chesterfield County needs $50 million for school maintenance problems that could keep kids out of schools if they are not addressed soon.”

The county issued $300 million in bonds after a voter-approved referendum in 2013 to replace and renovate county schools. Apparently, there’s only $13 million left for fixing facilities — far short of what’s needed.

Dan Champion, a program manager for the firm EMG, said there are schools across the county with serious electrical, air conditioning and roofing problems. If not adequately addressed over the next two decades, the cost of the repairs could rise to nearly $1 billion, he said.

The Times-Dispatch article delves into the riff between the county administration and the school system. There’s a lot of finger-pointing going on. Regardless of who is to blame, it is clear that Chesterfield schools have run $50 million in maintenance deficits over the years. And now the county is on notice that, absent corrective action, the maintenance deficit could reach $1 billion over 20 years.

How many other Virginia school districts have engaged in deficit maintenance spending? How many other agencies and localities have piled up unfunded liabilities for deteriorating roads, highways, bridges, mass transit systems, water and sewer plants and pipelines, libraries, administration buildings, courthouses, jails, prisons, municipal gas systems, IT systems, automotive fleets, and the rest of the state’s vast infrastructure?

Administrators and elected officials have no interest in knowing the truth that might make them look bad. So, nobody tracks this information until it becomes an explosive issue. What’s that noise we hear in Chesterfield? Kaboom!

Global Climate Catastrophe (in 1501?)

Low water creates islands in the Danube at Budapest last week. The normal waterline is visible on the bridge above their heads and the gap equals the draft of Viking’s boats.

Once the Viking Cruise people have your mailing and email address the marketing is relentless, and the fog from 11 hours on two legs of Lufthansa had barely lifted before the email arrived with a fabulously attractive deal on a Rhine cruise in early 2019.

Ah, but I know now why the price is so low.  Drought and low water in central Europe have disrupted cruising all summer and fall.  That iconic sail past the Hungarian Parliament in Budapest so prominent in Viking ads turned into a slow roll on a motor coach.  The one Viking boat docked in Budapest hadn’t moved in weeks and was described as a ghost ship.  We stayed in a below-standard Budapest hotel far from the stunning night views (wash cloths?  Why would you want them?)

The low water on the Danube, Rhine and others is hardly Viking’s fault and they did their best.  One of the captains (we had to switch boats before reaching Vienna, where we left the second boat behind) said it was the worst sustained low water since 1947, and I heard others call it a 200-year drought.  Drought of course might not be the only problem as with low rainfall water draws for farm or human consumption also increase and have greater impact.

Meanwhile, back in the states, Evil-Human-Caused Climate Change created the opposite situation, with a nasty hurricane slamming the Florida Panhandle and matching Florence with its impact on Richmond.  Drought, storms – anything and everything can be blamed on warming temps (convenient), and the alarmists were out with another report that the end is nigh.

Flood levels recorded on Passau Rathaus (City Hall)

Then again, perhaps its all just normal variations.  Neither droughts or hurricanes are new and with a scale that goes up to five we’ve yet to see a hurricane that hits Spinal Tap’s eleven.  While the Dunube is low now, at Passau we were shown dramatic evidence of past floods, the most recent and second highest in 2013.

The fault of industrialization and fossil fuels?  Check out the year for the highest recorded, 1501, and the many others of similar impact during pre- or early-industrial times.  For North America, of course, there are at best only 200 years of records and perhaps 100 years of good ones.  Thomas Jefferson’s personal records pick up the ending of the so-called Little Ice Age.  Nasty hurricanes plagued the Jamestown settlement.

Getting off the river to drive for hours on the autobahns gave me a chance to see the extensive solar panels in Germany and the massive wind turbine installations in Hungary, visible again from the air during our departure.  Their addition to the landscape did not reduce the beauty of the scenery.

Turbines visible from a rest stop along the highway inside Hungary.

There is no question we need to move quickly away from burning filthy coal and increase the percentage of energy generated from sun and wind.  I still consider natural gas a good substitute for coal and a necessary part of the mix.   But do everything the environmentalists want and the hurricanes will continue, the floods and droughts will continue, and You Know Who provided excellent advice 2,100 years ago about building on rock, not sand, as recorded by Saint Matthew.

Viking is moving more emphasis onto its ocean cruise business, perhaps as a hedge against continued challenges on the rivers.  Odds are the rivers will be back up in a year or so and the concern will shift back to floods.  If indeed the climate is changing, and it seems to be, I just don’t buy that human activity is the single or dominant cause, or that adjustments now will make much difference down the road.

Uh, Oh, ACT Exam Numbers Don’t Look Good


The college readiness of 2018 high school graduates taking the ACT college-entrance exam slipped this year in all subjects tested — English, math, reading, and science, with math readiness hitting a 14-year low.

“The negative trend in math readiness is a red flag for our country, given the growing importance of math and science skills in the increasingly tech-driven U.S. and global job market,” said ACT CEO Marten Roorda in a press release. “It is vital that we turn this trend around for the next generation and make sure students are learning the math skills they need for success in college and career.”

In contrast to the weak scores, student aspirations are high, states the ACT press release. Around three-fourths (76%) of 2018 ACT-tested graduates said they aspire to postsecondary education. Most said they aspire to a four-year degree or higher.

The average composite score for Virginia high school grads was 23.9 (on a 1-to-36 scale). That represents an incremental improvement from 2017, when the composite score was 23.8, which in turn was up from 23.3 the year before that. However, the percentage of students taking the exams was only 24%, down markedly from 29% in 2017 and 31% in 2016. It is likely that those who take the ACT exams have the strongest intention of going to college and, thus, tend to be the most academically qualified. A decline in the participation rate likely means that weaker, lower-scoring students are dropping out. With such a large drop, comparing year-to-year results is a meaningless exercize.

(Likewise, given the enormous variability in test-taking rates — ranging from 7% in Maine to 100% in Alabama — it is dangerous to compare performance between states. Nationally, 55% of college graduates took the ACT exams, almost twice the percentage of Virginia.)

The Virginia Department of Education (VDOE) hasn’t released its analysis of the test scores yet, but in previous years, press releases emphasized how much higher Virginia’s test scores were than the national averages.

More Virginia students take the College Board SATs than the ACT exams, so ACT may not represent the full universe of Virginia students qualified to attend college. With that important caveat, let’s examine the ACT numbers. According to ACT, the percentage of Virginia test takers meeting college-level benchmarks were:

English — 80%
Reading — 66%
Math — 60%
Science — 55%

If we assume that the 76% of high school grads who didn’t take the ACT exams are not ready for college-level work in these subjects, what percentage of the 24% of Virginia grads who did take the exams are prepared for college-level work? Extrapolating from the ACT scores:

English — 19.2% are college-ready
Reading — 15.9% are college-ready
Math — 14.4% are college-ready
Science — 13.2% are college-ready

Undoubtedly, there are college-bound high school grads who took the SAT exams but did not take the ACT exams. It would be interesting to conduct a similar analysis of the SAT results to see how they compare. But even if those percentages represent a lowest possible bound, they are scary. Remember, 76% of ACT test takers nationally said they would like to attend college. If that percentage applies to Virginia as well, a large percentage of would-be college students is not qualified.

A number of questions arise:

  • What kind of academic preparation are Virginia’s kids getting in high school if so few are academically prepared to do college-level work?
  • How many academically ill-prepared students are attending college anyway?
  • What benefit are academically ill-prepared students actually getting out of college?
  • Are we encouraging ill-prepared students to attend college where they accumulate massive student debt but learn little?

I fully acknowledge that the numbers I highlight above represent are a worst-possible-case analysis. But they raise serious questions about the massive misallocation of human and financial resources resulting from our cultural fixation on sending everyone to college. You can be assured that the Virginia Department of Education, putting the best-possible spin on the ACT numbers, will tell a different story. I will report back when VDOE publishes them. 

On College Affordability, History Need Not Repeat

by James Toscano

In his October 14 opinion column in The Virginian-Pilot, Gordon Morse decried a speech by Virginia Speaker of the House Kirk Cox that underscores the obvious connection between Virginia’s economic vitality and the roles our public colleges and universities should be playing.

But rather than focus on the future, Morse decided we needed a history lesson, replete with programmatic litanies of “who did what to whom” and “we got here because of political choices” made almost 30 years ago.

Naturally, the irony is inescapable: then, Morse was a speechwriter for one of Virginia’s governors and undoubtedly had every opportunity to weigh in on “political choices” that, today, he characterizes as wrongheaded.

What makes even less sense are criticisms leveled at the Speaker for suggesting that it’s time to consider new ways of writing academic success stories focused on affordability, and rewarding Virginia’s schools who lead the way in public and measurable terms.

To some, it may seem heretical to suggest change. . . to challenge old ways of thinking and doing.  But we’re not going to get out of this higher education mess without change, and the Speaker and others from both sides of the political aisle deserve credit for leading the way.

On the other hand, there will always be those who would rather dwell in the past and use history as a shield against change.  As Morse put it, “If only we could just get straight on the history — yes, it matters – of how we got to this point.”

Well, sure it does.  But only to a point.

Instead, what matters more is how our public colleges and universities will respond to these historic realities:

  1. Too many students are going into debt to get a college degree, and it’s not because they’re drinking too many lattes.
  2. College debt has become the albatross that’s dragging down our economy and draining Virginia’s talent pool.
  3. More and more, a tidal wave of mounting student debt is pushing graduates, parents and grandparents under water, and into bankruptcy.
  4. Left with no affordable – much less realistic – option, Virginia’s next generation of college graduates won’t be.  And then what?

Say what anyone might, but those leading our public colleges and universities – not to mention those governing them – have a primary obligation to educate Virginians first.

It’s what Thomas Jefferson – who wanted to be remembered as the founder of the University of Virginia instead of our third president – always wanted, but what far too many seem to have forgotten.

So if it means meeting a first principles obligation to follow the truth even if it means change, then so be it.

If it means one size will never fit all, and that it will take flexibility and new ways of thinking that don’t quite conform to the past, then so be it.

And if it means accepting that history isn’t a straight line, but something that can actually bend to meet today’s needs, then so be it.

Speaker Cox is a retired high school government teacher who knows these things.

The pity is that others seem to have forgotten them.

James Toscano is president of the Partners for College Affordability and Public Trust.

Dominion Files to Extend Surry Nukes

Surry Nuclear Power Station

Dominion Energy has filed an application with the Nuclear Regulatory Commission to renew operating licenses for its Surry Power Station for an additional 20 years, the company announced today.

Like all nuclear units, the three-loop Westinghouse pressurized water reactors, capable of generating 1,676 megawatts each, were originally licensed to operate 40 years. Under its current licenses, the two nuclear units are allowed to generate electricity through 2032 and 2033. A second re-licensing would extend their lives through 2052 and 2053. The units account for about 15% of the electricity consumed by Dominion customers.

Dominion also has applied to re-license its two units at the South Anna power station. Between the four units, the utility estimates that it could spend as much as $4 billion on the re-licensing program.

Critics are certain to attack the proposal on the grounds that the power company should not make a long-term commitment to an expensive electric generating source even as the cost of solar power, wind power, and battery-powered backup continue to decline. Dominion argues that the nuclear units will provide a reliable, CO2-free source of base-load electric power. In essence, the critics are advocating a zero-nuclear, renewables-intensive energy policy similar to Germany’s energiewende, which has resulted in high electricity rates and burns CO2-intensive coal to replace the lost nuclear power.

It will make a fascinating debate.

Taxes, Innovation and Virginia’s Lost Mojo

In 1940

In 1940, technological innovation in the United States was concentrated overwhelmingly in the Great Lakes states, the Northeast, and California. The powerful economic force known as agglomeration — in which geographic proximity boosts the productivity of inventors and researchers — acted to perpetuate those states’ lead. Yet over the following six decades, the propensity for innovation, as measured by patents per 10,000 state residents, diffused to Texas, the South Atlantic states (including Virginia), and the Rocky Mountain states. What drove that change?

One likely factor was tax rates — primarily for corporate income taxes, but for personal income taxes as well. And that should be a wake-up call to Virginia. The Old Dominion’s 6% top marginal tax rate for corporations gives the state a crummy 31st rank in the Tax Foundation’s business tax climate index, and its 5.75% top tax bracket contributes to the state’s 9th highest rank for state-and-local income taxes paid per year.

A new study by Ufuk Akcigit, a University of Chicago economics professor, and three colleagues has found that corporate and personal income tax rates have a profound effect over long periods of time on technological innovation. States their paper, “Taxation and Innovation in the 20th Century“:

Taxes affect the amount of innovation, the quality of innovation, and the location of inventive activity.

The effect of taxes on innovation is a consuming question in modern-day economics. Heavily dependent upon anecdotal evidence and incomplete data, the debate has been impossible to resolve decisively. However, Akcigit and his co-authors have set a new evidentiary standard by compiling three new datasets. First they constructed a database of inventors based on historical patent data since 1920, which allows them to track innovations over time, industry, and location. Secondly, they built a database of corporations’ R&D labs and research employment. Thirdly, they created a dataset of state-level corporate and personal income tax rates.

The authors find that personal and corporate income tax rates have “significant effects” at the state level on patents, citations (a measure of the significance of a given patent), the prevalence of inventors in a state, and the share of patents produced by firms compared to those produced by lone inventors.

Corporate inventors are the most “elastic” — economics speak for “sensitive” — to tax rates. Corporations tend to be unsentimental about where they invest. They have less loyalty to a given geographic area. They look to maximize their return on investment wherever they can find it. By contrast, individuals may have strong personal and sentimental attachments to a location. However, when inventors do choose to move, Akcigit has found, they are “significantly less likely” to move to states with higher taxes.

Though a significant factor in shaping the geographic distribution of innovation, taxes are not all-powerful. The authors readily acknowledge the influence of agglomeration effects. Within a given scientific or technological field, inventors like to stay close to the action — in other words, to locate near others in the same field. Often, agglomeration effects are stronger than tax rates.

Bacon’s bottom line: Let me offer a couple of refinements, and then a warning to Virginia.

The authors examine published corporate income tax rates. They do not take into account the impact of corporate tax giveaways — an essential strategy for some states (such as New York) to retain corporate activity and for other states (such as anyone trying to attract Amazon’s HQ2) to bribe corporate investors. Also, they don’t examine how the tax money is spent. In theory, highly skilled and educated inventors prefer to live and work in locations with superior amenities made possible with higher taxes. Finally, they neglect to examine university-generated R&D. It goes without saying that university R&D is tied to the geographic location of the institution (although research teams can be induced to move).

I would argue that powerful forces work to perpetuate the geographic status quo:

  • Agglomeration effects, in which inventors in industry clusters feed off one another. Silicon Valley is a classic example of how agglomeration effects outweigh the negative impact of high taxes and even higher real estate prices.
  • Government and cultural amenities, in which wealthy regions of the country spend more money on schools, higher-ed, and other amenities valued by the educated class, and where philanthropists have endowed local universities, medical centers, and arts & cultural institutions over the ages.
  • Tax-favored institutions, in which leading universities, disproportionately located in the Northeast, the Midwest and California, have accumulated massive tax-exempt endowments that allow them to underwrite the recruitment of world-class research faculty. Insofar as universities serve as anchors for innovation ecosystems, this tax advantage is crucial.

It is remarkable, given the extraordinary advantages of the incumbent innovation leaders, that research and innovation has migrated to other states at all. What allows these other states to compete? Lower corporate and individual taxes is one of the few public policy tools a poorer state can muster.

Once upon a time, Virginia was known as a low-tax, fast-growth state. That is no longer true. At best, we can claim to be a moderate-tax, moderate-growth state. We have neither the advantage of accumulated wealth in the form of world-class research universities, medical centers, foundations, museums, and cultural institutions nor the advantage of lower taxes that attract corporate investment. (Yeah, yeah, the University of Virginia is great, and so is the Virginia Museum, but overall Virginia is strictly second-tier.) Measured by economic performance, Virginia is in the muddled middle. Economic growth is plodding. For the first time in decades, more native-born Americans have been leaving the state than entering it. 

Is our tax policy to blame? Do our tax structures and budgetary priorities increasingly resemble those of the Midwestern and Northeastern states — without the inheritance of vast industrial-era wealth and philanthropy to underpin our economy? I suspect strongly that that’s the case.

To answer the question, it would help to have innovation data more recent than 2000. Economically speaking, Virginia was on a roll then. Today, the state is suffering economic malaise. I would not be surprised to find that our relative innovation standing has declined. Our governor and legislature propose lots of small-small remedies to jump-start the economy, but it’s hard to see how they will amount to much. Virginia’s relative decline warrants far more serious thought than it has received so far.