Thursday, May 15, 2008

Butt out! Tobacco taxes are costly!

The Associated Press reported yesterday that New Hampshire lawmakers are set to capitalize on the Massachusetts legislature's newly-minted higher cigarette tax. The New Hampshire legislature voted to approve a measure that would delay its own $.25 increase if the Granite State doesn't get $50 million from cigarette sales between July 1 and Oct. 1.

With Massachusetts considering adding $1 to its current $1.51 per pack tax the short drive to the NH border is looking more appealing. By leaving its taxes constant -- at least for the time being, the per pack price in NH will remain lower and rise only to $1.33 per pack while Massachusetts will become one of the highest in the nation. As local NH retailers know very well, the delay mostly likely will draw more sales into NH and thus increase tax revenue. This doesn't even account for other spending that might take place in sales-tax free, “Live Free or Die State.”

As we noted recently, increases in cigarette taxes are also steeply regressive -- placing almost nine times the burden on households making less than $20,000 than the burden placed on those households making $50,000. That might turn out to be an incentive for low-income smokers to drive north. Expect the state lottery to take a hit too. Low-income smokers tend to gamble more and they like the opportunity to buy Powerball tickets. The higher gas prices to fill the tank for the trip to NH also provide another perverse incentive for Massachusetts shoppers to stock up on items they might have purchased at home.

Like individuals, states respond to incentives. By delaying a modest increase in its own taxes, New Hampshire is once again beating the Bay State on the field of tax competition. Herein is the lesson: Since by nature they are distortionary, taxes do matter.

Monday, March 31, 2008

BHI testifies on Cape Wind proposal

On March 13, 2008, BHI researcher Michael Head testified before the Mineral Management Services hearing at the University of Massachusetts, Boston. His testimony follows:
I am Michael Head from the Beacon Hill Institute, the research arm of the Economics Department at Suffolk University. My testimony will focus on those sections of the DEIS that deal with economics.

Still no Cost-Benefit Analysis
The DEIS does not include a social cost-benefit analysis that would systematically weigh the social costs against the social benefits of the project, a serious omission. Presidential Executive Order 12866 states that “each agency shall … propose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs.” The Cape Wind proposal should not be exempt from this test.

Our updated research shows that the Cape Wind project is not economically viable, showing that the economic costs would exceed the economic benefits by $700 million in 2008 dollars.

Tourism could well be hurt
The DEIS asserts that “the proposed action is located far offshore and is not expected to affect tourism.” This conclusion is too optimistic and in the context of Cape Cod, which is heavily dependent on tourism would, on balance, be hurt by the Cape Wind project. In our 2003 study 62% of a sample of tourists surveyed believed that the turbines lessened the area’s appeal as a vacation destination.

Property Values May Decrease
The DEIS states that “currently available information does not support any firm conclusion with respect to the wind facility’s effect on property values.”

However, based on surveys undertaken by the Beacon Hill Institute in 2003:
• Home owners believe that the windmill project will reduce property values by 4.0%, and waterfront property by 10.9%
• Forty-nine percent of area realtors also expected property values to fall.

This translates into between a $1.76 and $2.54 billion loss in property values.

Employment Effects
DEIS also predicts secondary induced employment benefits resulting in an additional 206 to 622 jobs in Massachusetts. These effects are overstated.

In fact, the reduction in tourism brought about by the Cape Wind project would lead to a reduction in employment of about 700 jobs.

Friday, March 28, 2008

On details, BHI leads the way

Seeking to address a nearly $20 billion infrastructure shortfall, Governor Deval Patrick, Senate President Therese Murray and House Speaker Salvatore DiMasi expressed an interest in reforming the state's costly police detail system at a press conference yesterday. Excessive police detail costs have been identified in the past by a 2004 Beacon Hill Institute study, Police Details: Protection or Perks?

Here's a November 2007 Globe op-ed by David Tuerck on police details

Tuesday, March 04, 2008

BHI's contribution to the Center for the American Experiment's Symposium: What does it mean to be an urban conservative?

Location, Location, Location
David G. Tuerck

To consider what it means to be an “urban” conservative, it’s necessary to ask what distinguishes a conservative of this variety from any other. There are already plenty of varieties to consider -- social conservatives, neoconservatives, libertarians, and so on. How, we may ask, does it benefit the lexicon to add this new one?

We can attempt an answer by recognizing that location choices are similar in important respects to choices we make in the marketplace for ordinary products. Urbanites differ from other Americans insofar as they are willing to pay for amenities that only cities can offer. New York City, that most urban of all locations, offers an endless list of amenities: symphony, opera, museums, Broadway shows, jazz clubs, churches, sporting events, lectures —- you name it. People who live or work in New York City pay for these amenities by putting up with the congestion, taxes and general mayhem that go with living or working there.

To be sure, people don’t live or work in cities merely because of the amenities they provide. Some people, who would prefer the suburbs or the country, simply have no choice. Yet as we transition to a service economy and as electronic communication makes location less and less important a consideration for running a business, it’s the amenities that cities provide that will increasingly explain the attraction they hold for people.

So what is an urban conservative? Quite simply, it’s someone who is willing to pay for the amenities offered by a city and who happens also to be conservative. The mere fact that one enjoys world class opera or sports does not bear at all on one’s ideological orientation. It bears merely on the sacrifices, in the form of suburban or rural comforts, that one is willing to make in order to enjoy these amenities.

Yet there are aspects of the urban culture that can prove challenging and troubling to a conservative.

Consider what it means to be an urban social conservative. Probably, as some argue, there is a greater concentration of gays in the “creative class” that makes up the art scene in a big city. The prominence of the gay lifestyle in cities like San Francisco is troubling to social conservatives. Social conservatives are appalled that Massachusetts now permits same-sex marriages.

Neoconservatives likewise feel uncomfortable with the anti-war sentiment that is dominant in cities like Boston, New York, and San Francisco.

Libertarians oppose the government subsidies that go to support the arts, sports stadiums, and rapid transit in the cities.

Is it philosophically possible, then, for an individual to be both conservative and happily ensconced in the city? The answer is yes, provided that he understands and acts upon a theorem handed down many years ago by economist Charles Tiebout. According to the Tiebout theorem, the ability to "vote with one’s feet" is the key to unraveling the otherwise knotty problem of providing "public goods" (including concert halls and sports stadiums) without coercing the support of people who don’t necessarily benefit from their provision.

If government subsidies are necessary in order to make the amenities offered by a locality economically viable, then the simple answer is for the locality to finance the subsidies out of local taxes. As long as the cost of subsidizing some amenity is borne by local taxpayers, even the most hardcore libertarian could feel comfortable supporting the taxes and enjoying the amenity. If not, he could vote with his feet and move to a different locality that neither imposes the taxes nor provides the amenity.

If the urban conservative doesn’t want the Metropolitan Opera badly enough to pay New York City taxes, he can move to Nashville, where the Grand Ole Opry gets along fine without government subsidies. It’s necessary only that New Yorkers pay for the Met and that Tennesseans do not. Similarly, social conservatives or neoconservatives can readily move from Boston to, say, Houston, where the ideological climate is more to their liking, provided only that Houston isn’t compelled to become like Boston in terms of its social and ideological mores.

David G. Tuerck is executive director of the Beacon Hill Institute ( and chairman and professor of economics at Suffolk University ( in Boston.
Reprinted from What does it mean to be an urban conservative? by the Center for the American Experiment

Friday, February 15, 2008

David G. Tuerck response to critics of BHI prevailing wage study

Some union leaders have responded to our prevailing wage study with the argument that the Davis-Bacon Act doesn’t raise costs, since the increase in wage rates that it brings about is offset by productivity gains.

This is pure hogwash.

First, Davis-Bacon does not attempt to fix wages according productivity differences. Rather it attempts to fix them according to some average “prevailing” wage. If some workers command higher wages because they are more productive, then that difference will disappear once the average, prevailing wage is calculated. Second, our study does not dispute the requirement that employers must pay the prevailing wage on federally-funded construction projects; rather it argues that the wage that employers are required to pay isn’t the prevailing wage at all, but some artificially constructed wage arrived at by federal bureaucrats who employ biased and therefore unreliable estimation methods. Finally, if in fact, union labor is more productive than nonunion labor, then the unions should not advocate a law that fixes the wage equal to some average, which would necessarily be weighed down by the less productive nonunion labor. Rather, the unions should want the wage to be determined by market considerations, which would then reflect the more productive union labor in the higher wages offered by employers.

In fact, as everyone knows, the reason that the unions are so strongly wedded to Davis-Bacon is that they fear, probably correctly, that union labor is no more productive than nonunion labor. They understand that the only way for them to compete with nonunion labor is to get the federal government to fix the wage at some level that makes nonunion labor uncompetitive. And that is why the federal agency charged with computing the prevailing wage comes up with estimates that are artificially high. In order to produce a calculation that biases the playing field against nonunion workers, the unions have to get the feds to use methods that bias the wage upward.

Another union argument is that, by estimating the fraction of construction costs accounted for by labor to be 50%, our study overestimates the effect of the wage bias on construction costs. We stand by our estimate, for which we provide what we consider to be adequate documentation. But even if labor costs are only half what we estimate, the burden on taxpayers still runs in the billions.

Finally, there is no doubt about the racist motives behind Davis-Bacon, as originally conceived. Its purpose was to deny employment opportunities to poor Southern blacks. The fact that Davis-Bacon is no longer applied overtly to this end doesn’t mean that it doesn’t hurt minorities. In fact, it is arguable that minorities continue to suffer since they would be mostly likely to benefit from the employment opportunities that repeal of Davis-Bacon would make possible as it opened the market for construction labor to competition.

Congressman cites BHI Prevailing Wage Study

Statement of Steve King Representative United States
Committee on House Education and Labor
February 13, 2008

Mr Chairman, I come today to discuss the ramifications of being forced to pay Davis-Bacon mandated wages for construction or remodeling of publicly funded schools. Davis-Bacon is the last Jim Crow law. It was enacted in 1931 to protect the white northern workers from the lower paid carpet-bagger workers that had come up from the Southern states to look for work. Union workers were threatened by the sudden influx of cheap labor. The Davis-Bacon Act of 1931 was passed to prevent them from working.

This Act has a checkered past. Davis-Bacon was a Depression-era wage subsidy law, requiring that each public works contract over $2,000 contain a clause that established certain wages to be paid.

This limit has never been adjusted, not even for inflation.

Contractors and subcontractors must pay workers a wage based on the so-called "prevailing wage." But that wage is not the market wage and it artificially inflates wages and raises the cost of public construction projects for taxpayers. Davis Bacon also takes work away from competitive workers. And, having owned and operated a small construction company for over 20 years, I have personal experience being slighted in such a way.

A study was recently done by the Beacon Hill Institute on the effects of paying Davis-Bacon inflated wages in public construction projects. It found that when the Davis-Bacon mandated wages were followed, labor costs rose by 22% above the reported median wage. I would like to enter a copy of this fantastic study into the record.

In total, this study reports that Davis-Bacon costs taxpayers over $8.6 billion annually. That is enough money to hire over 18,000 teachers.

I've used this education related example to illustrate the cost of complying with Davis-Bacon because its mandated wages would apply to some of the bills pending before this committee, namely those that deal with school renovation and new construction. In the General Education Provision Act, [20 USC 1232b] the law specifically states:

"All laborers and mechanics employed by contractors or subcontractors on all construction and minor remodeling projects assisted under any applicable program shall be paid wages at rates not less than those prevailing on similar construction and minor remodeling in the locality as determined by the Secretary of Labor."

Thus the Davis-Bacon mandate would apply to any bill that receives federal dollars for construction or renovation--even state projects only partially funded by federal dollars. Therefore Davis- Bacon is the federal government intruding in the affairs of the States as well.

Davis-Bacon provisions artificially inflate construction labor costs.

The Beacon-Hill study proves that. It states that by paying Davis- Bacon artificially high wages labor costs go up 22% and overall construction costs go up 9.91%. That is why I am here today, to urge this committee to reject legislation that would force the Davis-Bacon mandate on school construction and re-modeling.

The GAO is also on record stating that economic conditions and labor provisions have changed significantly since the 1930's. It reported that the Davis-Bacon Act is, "not susceptible to practical and effective administration" by the Department of Labor. It further stated that Davis-Bacon has resulted in unnecessary construction and administration costs, inflated prices, and inaccurate wages.

Construction costs are rising, according to a recent study by Reed Business information in October 2007. The 30-city construction cost index showed roofing and siding costs are up 20.5%; pre-cast concrete costs are up 14.4%; and structural and metal framing costs are up 10.5%. Take into account price increases for energy and you can see why now we need to be smarter with our money.

Davis-Bacon is anti-competitive. Non-union construction companies, like the one I started, are seriously hurt by Davis- Bacon provisions. Small businesses simply can't compete because it is TOO INEXPENSIVE to get a government contract. We cannot afford to use 70 year old methodology anymore.

The remedy is simple: take out the provision of these bills that artificially inflates or skews construction labor costs. The money saved on labor can be used to build and remodel more and better schools.

I ask you to reflect upon what this extra funding not spent on Davis Bacon would mean to these kids, small business owners, or to the taxpayers? We should spend money so much more wisely.

The Beacon-Hill Institute study points out that the costs of the unfair Davis-Bacon mandate is almost 10% of the total construction cost of a new school. In other words, we could save a million dollars off the cost of a new ten million dollar school.

With that savings we could employ over 20 new teachers to the new school. We need to get our priorities straight. The Beacon- Hill Institute study is a wake-up call for this committee and this Congress. Congress should be working to build as much square footage of good schools.

Copyright 2008 Congressional Quarterly, Inc. All Rights Reserved.
CQ Congressional Testimony
February 13, 2008 Wednesday
LENGTH: 857 words

NOTE: In accordance with Title 17 U.S.C. section 107, this material is distributed without profit or payment to those who have expressed a prior interest in receiving this information for non-profit research and educational purposes only. For more information go to:

Friday, January 18, 2008

Should we compensate bullies?

The world owes you little if anything, if your job is outsourced, says Steven Landsburg.
I doubt there’s a human being on earth who hasn’t benefited from the opportunity to trade freely with his neighbors. Imagine what your life would be like if you had to grow your own food, make your own clothes and rely on your grandmother’s home remedies for health care. Access to a trained physician might reduce the demand for grandma’s home remedies, but — especially at her age — she’s still got plenty of reason to be thankful for having a doctor.

Some people suggest, however, that it makes sense to isolate the moral effects of a single new trading opportunity or free trade agreement. Surely we have fellow citizens who are hurt by those agreements, at least in the limited sense that they’d be better off in a world where trade flourishes, except in this one instance. What do we owe those fellow citizens?

One way to think about that is to ask what your moral instincts tell you in analogous situations. Suppose, after years of buying shampoo at your local pharmacy, you discover you can order the same shampoo for less money on the Web. Do you have an obligation to compensate your pharmacist? If you move to a cheaper apartment, should you compensate your landlord? When you eat at McDonald’s, should you compensate the owners of the diner next door? Public policy should not be designed to advance moral instincts that we all reject every day of our lives.

In what morally relevant way, then, might displaced workers differ from displaced pharmacists or displaced landlords? You might argue that pharmacists and landlords have always faced cutthroat competition and therefore knew what they were getting into, while decades of tariffs and quotas have led manufacturing workers to expect a modicum of protection. That expectation led them to develop certain skills, and now it’s unfair to pull the rug out from under them.

Once again, that argument does not mesh with our everyday instincts. For many decades, schoolyard bullying has been a profitable occupation. All across America, bullies have built up skills so they can take advantage of that opportunity. If we toughen the rules to make bullying unprofitable, must we compensate the bullies?
Tough stuff worth learning. For a different view see this post.

Thursday, January 17, 2008

A strange map indeed

California should be a member of the G-8!

Lower taxes, get more entprenuers

Ireland is on the move thanks to tax cuts.
Government help for Irish entrepreneurs grew out of an overall economic policy devised in 1987 that reduced personal taxes, said Kevin Sherry, a director of Enterprise Ireland who specializes in start-up companies.

Income tax rates in Ireland today are 20 percent on the first $50,000 of income and 41 percent on income above that. But there are value-added taxes of 21 percent levied on all goods and transactions, with the exception of health and medical services, children’s clothing and food.

The tax on corporate profits, though, is 12.5 percent, which is an incentive to own a business. And government helps out. “We have helped over 300 people or groups in the last dozen years or so,” Mr. Sherry said.
For more on the "Celtic Tiger," read BHI senior economist Ben Powell's paper on Ireland prepared for the Goldwater Institute last year.

BHI on biotech bond bill H4234

BHI: Biotech bill is not sound investment

(BOSTON ) – A proposal to establish a Massachusetts Life Science Center would do little to improve the state’s economic competitiveness according to testimony offered by the Beacon Hill Institute at Suffolk University today before the Joint Committee on Bonding, Capital Expenditures and State Assets.

House No. 4234, a bill to encourage investment and expand the state’s life sciences industry, would provide $500 million in bond funding for specific capital projects. It would also establish an “investment fund” for fellowships, research grants, loans and workforce training. The bill also calls for an incentive program that grants tax breaks to biotech firms that locate in Massachusetts.

“What Massachusetts has never needed and doesn’t need now is a policy of throwing state money at sectors deemed to be ‘winners,’ to the inevitable disadvantage of those implicitly ruled out as ‘losers,’” BHI Executive Director David Tuerck told the panel. “Just because other states want to glamorize biotech with ill-considered public subsidies doesn’t mean that Massachusetts has to go along.”

According to several studies published by the institute since 2001, Massachusetts is a highly competitive state with an economy that enables both growth and high wages. Massachusetts ranks second in the most recent index complied by the institute. At the same time, the state faces huge infrastructure, housing and energy challenges. Throwing money at high tech, rather than attending to these challenges is bad policy.

“Maintaining a high level of competitiveness is like riding a bicycle: You have to go forward to stay up. We need to repair our roads, bridges and tunnels. We should find ways to reduce energy costs and reduce – not increase – corporate taxes. But it is these matters that should get our attention, not the professed needs of one sector that seems now to represent the next wave of innovation,” said Tuerck.
Both the administration and the legislature should focus on policies that address all of the state’s economic sectors. “We should not get back into the business of targeting corporate tax cuts to special pleaders as we did back in the 90s.

“Instead, what’s needed is comprehensive corporate tax reform that will broaden the base and lower the rate; a sensible transportation policy; and, an education system that trains the workforce of tomorrow whether in biotechnology or other areas in which the Bay State excels.”

Press release in PDF

Full Testimony in PDF

Thursday, October 18, 2007

Are we in a recession?

The data says the economy's doing OK, not great but acceptable. The American public thinks otherwise.
WASHINGTON (CNN) — Nearly half of Americans think the U.S. economy is in a recession — close to 46 percent of those surveyed in a new CNN-Opinion Research Corporation Poll out Thursday morning say the country’s economy is in a recession while 51 percent of those questioned say no.

The poll finds a major difference of opinion between black and white Americans — 69 percent of black Americans questioned in the survey say the country’s in a recession while only 42 percent of white Americans feel the same way.

According to CNN’s Ali Velshi, the National Bureau of Economic Research defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.”

The recession numbers may be having an impact on President Bush’s approval rating.

The new poll finds Mr. Bush’s approval rating remains steady at 36 percent, but his approval rating among black Americans is just 15 percent.

CNN Polling Director Keating Holland says “a majority of whites also disapprove of Bush, although four in ten have a favorable view of his administration. The president’s approval rating has been stuck at 36 percent since late summer.”

The poll surveyed 1,212 adult Americans, including 762 white Americans and 307 black Americans. It was conducted by telephone from October 12 to 14. The sampling error is plus or minus three percentage points for the overall number and five and a half percentage points for the black and white breakdowns.

Wednesday, October 17, 2007

First Baby Boomer files for Social Security

Should we be worried about this?
WASHINGTON — Kathleen Casey-Kirschling filed for early retirement Monday, becoming the first baby boomer to start collecting Social Security.

Born one second after midnight in January 1946, the retired teacher leads the way for as many as 80 million individuals who will qualify for the retirement payout.

"I think I'm just lucky to be at the top of the boom. I'm just one of many many millions and am blessed to have been in this generation and really blessed and to take my Social Security now," Casey-Kirschling said during a ceremony held at the National Press Club featuring Social Security Commissioner Michael J. Astrue.

Casey-Kirschling said she supports anyone who wants to collect retirement benefits whenever he or she is eligible to take them. But many Washington officials and American workers are wondering if Social Security will be able to support them.

David Walker, the comptroller general of the Government Accountability Office, Congress' legislative arm, warned the Social Security system will soon have more recipients coming than it can afford to pay out.

"We face a tsunami of spending due primarily to the retirement of the baby boom generation and rising health care costs," Walker said. "So what's happened is we've gone from 16 workers paying into Social Security for every person drawing benefits in 1950 to 3.3 to one today, and we're going down to two to one by the time the boomers retire in big numbers and that's about where it will stay over the long run."

Tuesday, October 16, 2007

Should the Internet be taxed?

The perennial argument: Should Congress extend the Internet Tax Moratorium Act, making the net tax free permanently? Ron Preston, editor of InformationWeek argues in the affirmative.

Monday, October 15, 2007

Out of sight out of mind: The good news ignored

Given the state of economic journalism and the antimarket bias of voters, Bizzy Blog asks: "Does anyone seriously believe that the news would have been almost completely ignored if the deficit had instead gone up?"

Check out these charts.

Monday, August 13, 2007

News: BHI: Sales tax holiday provides a boost to Bay State economy of up to $106m

BOSTON - An economic analysis by the Beacon Hill Institute at SuffolkUniversity finds that the sales-tax holiday just ended added more than $100 million to the state economy and created hundreds of full-time equivalent jobs.

The tax holiday, which ran over the past weekend, suspended the Commonwealth's 5% sales tax on selected non-business purchases up to $2,500. Officials estimated that the tax holiday cost the state $30 to $50 million in sales tax revenue.

BHI finds that the cost in lost revenue was far less and that the holiday provided a boost to the economy.

The institute bases its findings on its Massachusetts State Tax Analysis Modeling Program (MA-STAMP). The model incorporates a widely used methodology for simulating tax-policy changes. BHI performed its estimates after adjusting for purchases that would have been without the tax holiday.

Results from the model estimate that the sales-tax holiday produced the equivalent of between 163 and 275 full-time equivalent jobs (resulting temporary additions to staff over the weekend) and boosted production by between $63 and $106 million dollars. State disposable income was boosted by between $5 and $9 million. Because of these "dynamic" effects, the loss of combined state and local tax revenue was only $16 - $27 million.
Table 1: Summary Results: MA-STAMP - Tax Holiday
New Full-Time Equivalent: Jobs: 163-275 jobs
Additional Disposable Income: $5 - $9 million
Additional Production: $63 - $106 million
Lost State and Local Revenue: $16 - $27 million

The boost stems from additional purchases by Massachusetts consumers, by tourists and by residents from bordering states. David G. Tuerck, BHI Executive Director, said that "the sales-tax holiday provides a simple lesson in economics: Consumers respond to incentives." He added, "Considering how little the holiday costs state and local treasuries and how much it adds to the economy, it is a custom worth preserving."

Tuesday, April 03, 2007


BHI Executive Director David G. Tuerck discusses former Governor Mitt Romney's economic record in Massachusetts with the Wall Street Journal's Paul Gigot on the March 31 edition of Journal Editorial Report.

Video from FoxNews


Comments welcome.