The Wire

  • New tunnel, premium RV section at Talladega Superspeedway on schedule despite weather


    Construction of a new oversized vehicle tunnel and premium RV infield parking section at Talladega Superspeedway is still on schedule to be completed in time for the April NASCAR race, despite large amounts of rainfall and unusual groundwater conditions underneath the track.

    Track Chairman Grant Lynch, during a news conference Wednesday at the track, said he’s amazed the general contractor, Taylor Corporation of Oxford, has been able to keep the project on schedule.

    “The amount of water they have pumped out of that and the extra engineering they did from the original design, basically to keep that tunnel from floating up out of the earth, was remarkable,” Lynch said.

  • Alabama workers built 1.6M engines in 2018 to add auto horsepower


    Alabama’s auto workers built nearly 1.6 million engines last year, as the state industry continues to carve out a place in global markets with innovative, high-performance parts, systems and finished vehicles.

    Last year also saw major new developments in engine manufacturing among the state’s key players, and more advanced infrastructure is on the way in the coming year.

    Hyundai expects to complete a key addition to its engine operations in Montgomery during the first half of 2019, while Honda continues to reap the benefits of a cutting-edge Alabama engine line installed several years ago.

  • Groundbreaking on Alabama’s newest aerospace plant made possible through key partnerships


    Political and business leaders gathered for a groundbreaking at Alabama’s newest aerospace plant gave credit to the formation of the many key partnerships that made it possible.

    Governor Kay Ivey and several other federal, state and local officials attended the event which celebrated the construction of rocket engine builder Blue Origin’s facility in Huntsville.

5 years ago

Here’s why politicians trying to kill Alabama’s payday loan industry are misguided (opinion)

Payday loan sign (Photo: Flickr)
Payday loan sign (Photo: Flickr)
Payday loan sign (Photo: Flickr)

Payday lending is often portrayed as a manipulative industry only concerned with preying on naïve consumers. Thus, it is no surprise that Alabama policymakers are calling for restrictions against the industry.

Without an understanding of economics and finance, however, well-intended regulators could harm the very payday loan customers they are hoping to help.

It is important to recognize that payday lending meets an important need in the community. According to a survey by Federal Reserve economist Gregory Elliehausen, over 85 percent of payday lending customers reported that they took out a payday loan in order to meet an unexpected expense. While we all face unexpected expenses, the typical payday lending customer finds these circumstances especially difficult since traditional lenders and even close friends and family are often reluctant–or unable–to make unsecured loans to them given their poor credit histories.

While the need for short-term lending often isn’t disputed, reports of Annual Percentage Rates (APR) of several hundred percent often invoke anger and hostility, and provide the impetus for calls to restrict this rate to under 40 percent. But this is an inappropriate portrayal. The typical payday lending loan is under $400, lasts under four weeks (even including consecutive new loans and renewals), with an interest charge under $19 per $100.

Where does the high APR come from, then? For example, let’s assume you take out a $400 loan for two weeks with a total finance charge of $76. That amounts to a nearly 495 percent APR using a common calculation. Basically, the APR is calculated by projecting the interest rate for an entire year! Looking at the APR, however, is extremely misleading because the vast majority of these loans last only two to four weeks. Limiting the APR to 40 percent would mean that a payday lender could only charge $6.14 for a two-week loan of $400.

Would you be willing to lend an unsecured $400 out of your own pocket to a financially risky person for two weeks for only $6? Certainly not! Especially if you consider that, as a payday lender, you would have to pay rent on a building, pay your electricity bill, make payroll, and incur expected losses on unpaid loans.

Even without interest rate restrictions, payday lending isn’t a very lucrative business; a Fordham Journal of Corporate & Finance Law study finds that the typical payday lender makes only a 3.57 percent profit margin. That is fairly low when you consider that the average Starbucks makes a 9 percent profit margin and the average commercial lender makes a 13 percent profit. Interestingly enough, the average bank overdraft charge of $36–an alternative option for payday lending customers–could easily result in an APR of several thousand percent.

In a review of the research on payday lending in the Journal of Economic Perspectives, economist Michael Stegman recommends that policymakers resist implementing legislation restricting the interest rate charged by payday lenders and instead examine ways to help prevent the small number of customers who are caught in a cycle of payday lending debt. This is because the vast majority of payday lending customers pay off their debts and voluntarily agree to the interest rates charged. In fact, Gregory Elliehausen finds that over 88% of payday lending customers were satisfied with their most recent loan from a payday lender. Almost no payday loan customers reported that they felt they had insufficient or unclear information when taking out their loan.

Christy Bronson, a senior economics student at Troy University, conducted a survey to see if these national results held true here in Alabama. The results from her study on payday lending customers in the Wiregrass area corroborated these national results. A full 100 percent of respondents reported being satisfied with their most recent payday loan experience and 78 percent reported being satisfied with their payday loan experiences overall. If most payday lending customers were caught in a vicious debt cycle, you would expect customer satisfaction to be much lower. Survey participants in the Wiregrass area also overwhelmingly indicated that they were satisfied with their knowledge and understanding of the terms and conditions of payday lending. The survey also found that payday lending customers in the Wiregrass area used payday loans moderately and found that the overwhelming majority of payday lending customers do not consider themselves to be in financial difficulty as a result of using payday loans.

There is a logical explanation for these findings. Payday lenders don’t profit from customers who can’t repay their loans. Cycling debt only increases the risk that the payday lender will not get their interest or principal back and will lose out to secured creditors in a bankruptcy. This is why many payday lenders in Alabama came together to form Borrow Smart Alabama, an organization designed to better inform payday lenders and to set a code of ethics and accountability for payday lenders in Alabama.

Running payday lenders out of business with severe interest rate restrictions or costly regulation won’t keep customers in urgent need of cash from borrowing money. We know from experience that banning goods or services that people want doesn’t prevent a black market from emerging. Just look at examples of alcohol, drug, and gun prohibition. Payday lending customers, lacking the credit worthiness required for traditional lines of credit, will only be forced to use less desirable–and more expensive–credit options such as loan sharks, online lending, or overdrawing their bank account or credit card.

Daniel J. Smith is the associate director of the Johnson Center at Troy University. Follow him on Twitter: @smithdanj1. Christy Bronson is a senior economics major at Troy University.

5 years ago

Here’s how much money Alabama’s corruption epidemic took out of your pocket this year

YH Alabama corruption

Corruption at the highest level of all three branches of Alabama’s government is not just making national news, it’s making international news. Unfortunately, the latest episodes of corruption are just additional examples of the deep-seated problem of corruption in Alabama. One can only imagine what this corruption is costing the state in terms of economic growth and development. Expanding and maintaining public accountability and transparency is necessary to curb Alabama’s culture of corruption and to help promote economic prosperity in Alabama.

Corruption in Alabama politics not only makes Alabama less attractive for business investment—meaning, less job growth and opportunity—actual corruption costs each resident in nine of the ten most corrupt states, including Alabama, an estimated average of $1,308 per year. Even just the perception of corruption causes real damage to the business environment in Alabama by discouraging investment. That is a problem worth solving.

Alabama is frequently listed as one of the most corrupt states in the country by the Harvard University Center for Ethics. A separate state-level corruption study recently published in Public Administration Review also listed Alabama as one of the most corrupt states in the nation. In our recently released study, Alabama at the Crossroads: An Economic Guide to a Fiscally Sustainable Future, my colleague John Dove and I find that tackling corruption in Alabama is necessary to put Alabama on the path to a fiscally sustainable future.

Ensuring Alabamians–and future Alabamians–that they can hold public officials accountable is one way to reduce both real and perceived corruption. That means public accountability across the board, including for our state pension system that is facing an $80 billion funding gap due to flawed accounting practices which substantially understate pension liabilities, putting our fiscal future in jeopardy.

The lack of transparency contributes to the state’s corruption problems especially when it comes to public access to information, political financing, and redistricting. Reducing political corruption in Alabama, both real and perceived, will require expanding and maintaining accountability and transparency in all areas of state regulation, spending, and employment. It also means fostering a principled political culture that rejects corruption, with informed voters holding policymakers accountable.

Perhaps even more troubling than the cost of corruption in Alabama, is the impact of corruption on business and job growth. A World Bank study found that corruption has a more harmful effect on business growth than even taxation. When corrupt public officials direct tax money toward sectors conducive to bribery, such as highways and construction, or for other self–serving functions like wage and salary increases, they create an unfair political and economic environment on the backs of taxpayers. In another study looking at corruption in just the U.S., the economists David Mitchell and Noel Campbell found that concentrating resources on reducing corruption at the state level is more effective in producing business growth than economic incentives programs.

The State Integrity Investigation Report Card finds that Alabama is particularly vulnerable to corruption when it comes to public access to information, legislative accountability, state pension fund management, political financing, and redistricting.

State leaders serious about weeding corruption out of Alabama politics—and saving taxpayers more of their hard-earned money—should take these reports seriously and implement basic procedures to add more accountability and transparency to our political system. Accountability and transparency will reduce both real and perceived corruption.

Taking steps to tackle political corruption in Alabama, by expanding public accountability and transparency, will improve investment and job growth and help cut wasteful expenditures. We can do this by strengthening our information access laws and procedures, being more transparent and open about redistricting, and making and enforcing stricter conflict of interest laws for public officials.

Daniel J. Smith is the associate director of the Johnson Center at Troy University. Follow him on Twitter: @smithdanj1

5 years ago

Unfunded liabilities in Alabama’s pension system have increased 500% since 2003. It’s time for reform.

An RSA tower in Mobile at night (Flickr user Steve Driskell)
An RSA tower in Mobile at night (Flickr user Steve Driskell)
An RSA tower in Mobile at night (Flickr user Steve Driskell)

An overwhelming majority of economists believe that, without pension reform, states will be forced to resort to austerity budgets, federal bailouts, and/or default.

This is especially a concern for Alabama, given that we are already finding it difficult to balance our budget. Many states, including Alabama, have established committees to analyze the health of their state pension system and to explore potential reforms. Half-measures and partial reforms within the same structure, however, will only temporarily patch over the problem. Only structural reform could ensure public employees, teachers, and judges their hard-earned retirements and minimize the strain of underfunded retirement systems on current and future taxpayers.

As a major policy issue facing Alabama, in forthcoming research with my Johnson Center colleague, John Dove, we will provide an in-depth analysis of the health of the Retirement Systems of Alabama (RSA) and offer avenues for structural reform.

RELATED: How an Alabama state employee built a billionaire’s lifestyle in a taxpayer-funded job (opinion)

First, we have to accurately assess the funding health of the RSA as it stands today. One method that has been frequently used to examine the financial position of the RSA is the growth in Total Assets Under Management (TAUM). The RSA’s TAUMs have increased an impressive 43.15% since 2000. But, adjusting this data for inflation drops the increase down to 9.44%. Even this growth rate reflects, primarily, increased state and member contributions to the RSA. If we hold state and employee contributions per member constant at the level they were in 2001, TAUM growth drops to a negative 2.51%. And that is despite the fact that state contributions from nearly 160,000 withdrawn members over this period are still included in this total. This is because contributions made by the state on the behalf of members who withdraw from the system are not given to these employees or even returned to the state; they remain in the RSA.

Another telling, and more appropriate, way to analyze the health of the RSA system is by projecting and comparing actuarial assets and actuarial liabilities to get the funded ratio. The funded ratio tells us the percentage of actuarial liabilities that are covered by actuarial assets. A 100% funded ratio indicates that all liabilities are covered by assets, a 0% funded ratio indicates that no liabilities are covered by assets.

In every annual edition between 2000 and 2005 of the RSA’s Pension Trust Fund section of the State of Alabama Comprehensive Annual Financial Report accurately states that, “Analysis of this percentage [the funded ratio] over time indicates whether the respective system is becoming financially stronger or weaker. Generally, the greater this percentage [funded ratio], the stronger the retirement system.” According to the RSA’s own projections, the funded ratios of the Teacher’s Retirement System (TRS), Employee’s Retirement System (ERS), and Judicial Retirement Fund (JRF) have drastically declined. In fact, the RSA reported that the TRS and ERS were fully funded in 1999. Since then, their funded ratios have fallen to 66.2% and 65.7% respectively (the JRF went from 84.2% in 1999 to 58.7% in 2013).


For 2013, the RSA reported a total of $15.4 billion in unfunded liabilities in the TRS, ERS, and JRF (in 2014 dollars). That is nearly 1.7 time more than total state tax revenue in 2014! That represents an increase in unfunded liabilities of nearly 500% since 2003. In addition to underfunded pension liabilities, Alabama’s retiree health care systems for public employees adds another $11 billion in unfunded liabilities.

It is clear that partial pension reform will not be sufficient to meet these liabilities. Our study points to several avenues for structurally reforming the RSA, including successful reforms implemented in Utah and Michigan. While legislators cannot – and should not – change obligations already incurred, they can reform the pension system for future employees and offer current employees the voluntary option to transition to a new system.

More importantly, portable and customizable retirement options will benefit – and help recruit – future state workers. The Bureau of Labor Statistics reports that the median state and local employee will stay at their current job only 7.4 and 7.9 years, respectively. The RSA’s 10 year vesting period does not provide an attractive or fair retirement plan for workers in today’s economy when compared to the private sector. For instance, Vanguard reports that 47% of participants in their employer plans offer immediate vesting of employer contributions. An additional 26% of participants are fully vested within three years. Withdrawn RSA members, including some of the spouses of our military service members, even receive a raw deal on their own contributions; while the RSA assumes an 8% rate of return, withdrawn employees receive only 2% interest on their own contributions if they leave between 3 and 16 years (they receive 0% interest if they leave in under three years).

One objection to reform is that while it will save taxpayers money in the long-term, costs will increase in the short-term. This would certainly be a dilemma for a state like Alabama facing difficult budgetary times. This objection is based on a misunderstanding of the accounting rules for public pensions. While our suggested reforms do require a change in the accounting methods used in the RSA’s reporting, legislators are not required to change how they have been funding the system based upon the new accounting standards. Thankfully, the RSA’s actuary, Cavanaugh MacDonald, cleared this up in their capacity as the consulting actuary for the Kansas Public Employees Retirement System, stating that the accounting rules were “strictly related to accounting for pension benefits, and does not represent a requirement to fund the plan under the standard.”

Undertaking structural reforms in our public pension system is the only way to avoid substantial budgetary problems down the road. The good news is that structural reform of our public pension system will make Alabama more attractive for public employees and, especially, future taxpayers.

Daniel J. Smith is the associate director at the Johnson Center for Political Economy and an associate professor of economics at Troy University. Follow him on Twitter: @smithdanj1

5 years ago

Economists: Alabama’s income tax is inhibiting economic growth, should be eliminated


YH Taxes

By Dr. Daniel J. Smith and Dr. Stephen C. Miller

According to the Public Affairs Research Council of Alabama (PARCA), Alabama has the lowest taxes per capita in the nation. However, this doesn’t justify tax hikes as many people believe. In fact, it actually highlights the pressing need for tax cuts to make Alabama more competitive.

Let us explain.

What PARCA finds, using Census data, is that Alabama has low tax revenues per person. Many factors can influence this including state GDP, demographics, population trends, and, especially, tax rates. States that adopt competitive tax structures – tax structures that are straight forward, fair, and reasonably low – often foster a flourishing economy that brings in additional tax revenue through population and business growth.

Rather than suggesting that tax rates are too low, our low per person tax revenues actually suggests that Alabama’s tax rates are too high!

Alabama’s per person tax revenues may be the lowest in the nation, but Alabama’s tax rates are certainly not the lowest in the nation. Alabama’s 5% tax rate makes it the 31st highest in the nation (tied with Mississippi, New Hampshire, and Utah). That is higher than Florida, Tennessee, and Texas which all have zero income taxes (though Tennessee does have a 6% tax on interest and dividend income).

When it comes to corporate taxes, Alabama’s 6.5% corporate tax rate makes it the 26th highest in the nation (tied with Arkansas, Tennessee, and West Virginia). Importantly, nearby states such as Florida, Georgia, Mississippi, South Carolina, and Texas all have more competitive corporate tax rates.

Looking at sales taxes, Alabama’s state and local sale taxes make it the 4th highest in the nation. You see a similar story with liquor (Alabama is the 4th highest), wine (Alabama is the 5th highest, tied with New Mexico), and beer taxes (Alabama is the third highest). In fact, there are only a few things taxed in Alabama that have what can be considered, comparatively, a low tax rate, such as property, gasoline, and cigarettes.

What does this mean? It means that Alabama can’t tax its way to prosperity. This approach has clearly failed in Alabama. It also, as the PARCA report shows, hasn’t brought in the revenue state leaders hoped for. That is because other states, including many nearby states, are better situated to draw in state revenue because they are attracting residents and businesses to their states with their more competitive tax structures.

Overall Alabama doesn’t have a revenue problem, it has a competitiveness problem. We can build the best golf courses in the world, but even hard-core golfers will still choose to live in Florida. Because of that, Florida doesn’t just have lower taxes and more revenue per capita than Alabama, Florida has more capita! And, it is people that are the ultimate source of economic growth and development.

Researchers from Florida State University and Ohio University have shown that states with higher taxes than their neighbors have slower income growth. The long-run implication of this research is that lower tax rates can actually lead to higher revenues as incomes rise. Additionally, taxes can be cut without reducing revenue by broadening the tax base at the same time. In other words, tax privileges and exemptions should be reduced or eliminated in combination with tax cuts.

Eliminating the income tax would be ideal, to be competitive with Florida and Tennessee. Failing that, Alabama’s income tax should be reduced and flattened, with only one tax bracket to ensure that everyone pays their fair share. People who earn more pay more under a flat tax. That is because four percent of a million dollar income will always be much more than four percent of 50 thousand dollars.

Alabama needs tax reform. The current tax regime is both unfair and inefficient. More importantly, it’s not competitive with our neighbors and inhibits economic growth. While more prosperity will bring higher tax revenues, tax revenue is not itself the answer to Alabama’s sluggish growth. Alabama has chronic budgeting and spending problems. But the solution isn’t higher taxes. Economic growth doesn’t come from higher taxes.

Stephen C. Miller is the Executive Director of the Johnson Center for Political Economy and the Adams-Bibby Chair of Free Enterprise at Troy University. Follow him on Twitter @stevemillerecon. Daniel J. Smith is the Associate Director of the Johnson Center for Political Economy at Troy University. Follow him on Twitter @smithdanj1

5 years ago

Troy prof: Liberal faculties nationwide are blocking students from well-rounded education


Watching state and national politics, I often wonder how a country founded on the principles of limited government, individual responsibility, and a healthy dose of skepticism – and fear – of the tendencies of government to grow in power and influence, accumulated a national debt of $210 trillion, a Code of Federal Regulations that now exceeds 175,000 pages, and a Federal tax code over 10 million words long. Even “fiscally conservative” state and local governments, including Alabama, seemingly face little citizen resistance to the exponential growth of government.

After our nation’s founding, Thomas Jefferson stressed the need for an educated citizenry to preserve our newly won liberty, writing that “If a nation expects to be ignorant and free…it expects what never was & never will be.” Thus, the massive growth in the size and scope of government at all levels in the U.S. is perplexing, given the substantial increase in access to higher education. With more Americans with college degrees than ever before in our nation’s history, why is liberty eroding in our economic and personal lives?

Certainly, one would hope that our college students are, at the least, being exposed to sound economics, the principles of limited government that our nation was founded on, the importance of constitutional checks on power, and the track record – both ancient and modern – of oversized government. Yet, the trajectory of our nation suggests they aren’t.

A new report may explain why. According to data from the Higher Education Research Institute, only 12% of college faculty identify as being “Far Right / Conservative,” while around 60% of college faculty self-identify as being politically “Far Left / Liberal.” With faculty so overwhelmingly one-sided, is it any wonder that our relatively young nation has strayed so far from its founding principles? Maybe that is one reason the U.S. has experienced a concerning 15-year fall in economic freedom with no indication of letting up.

It is difficult to see how college students could receive a well-rounded education if they are so infrequently exposed to alternative viewpoints. While this is certainly a concern for those of a free market perspective, such as myself, I think it should also be a concern for those of a liberal persuasion as well. As John Stuart Mill observed, “He who knows only his own side of the case knows little of that. His reasons may be good, and no one may have been able to refute them. But if he is equally unable to refute the reasons on the opposite side, if he does not so much as know what they are, he has no ground for preferring either opinion.”

Wrestling with competing viewpoints is a necessary component of the educational process and is the only way for students to learn to formulate independent, informed views, to constantly challenge their own views, and to learn to humbly change their own views when warranted. Unfortunately, most students today are earning college degrees without having been challenged to find deeper theoretical, empirical, and philosophical justifications for their worldviews. Just as troubling, the freedom of expression for faculty and students on college campuses across the nation is in serious jeopardy. Even here in Alabama, not a single university has a speech code that adequately protects the freedom of expression on campus.

In the Johnson Center we work hard to foster the free exchange of ideas in order to provide rigorous educational opportunities for our students. Rather than attempt to suppress or alienate opposing viewpoints, we actively encourage students to explore alternative methodologies and viewpoints across the curriculum. We’ve hosted reading groups where students have read the works of Adam Smith, Milton Friedman, and F. A. Hayek alongside Karl Marx, Thomas Hobbes, and Jean-Jacques Rousseau. One of my courses this semester, The Economic and Moral Foundations of Capitalism, will expose students to modern critiques of capitalism, such as inequality, egalitarianism, and exploitation. It will also expose them to important responses to these critiques; ideas that are underrepresented on most campuses across the nation.

Unfortunately, the Johnson Center for Political Economy is one of the few exceptions that proves the rule; the overwhelming lack of intellectual diversity in U.S. higher education. Too often students aren’t being exposed to alternative viewpoints at their universities. It is particularly disturbing when the “alternative viewpoints” they aren’t being exposed to include the very ideas our nation was founded upon; ideas that have brought unprecedented wealth and prosperity around the globe.

Daniel J. Smith is the associate director at the Johnson Center for Political Economy and an associate professor of economics at Troy University. Follow him on Twitter: @smithdanj1

5 years ago

Troy professor: The government isn’t Santa Claus

The Grinch
The Grinch
The Grinch

If you have been through the frustration of untangling cords, replacing bulbs, and teetering on a ladder – maybe the eggnog ought to wait until after the job is done next time! – to put up exterior Christmas lights, new laser light products that obviate the need for putting up traditional Christmas lights probably fill you with holiday joy. 

It is useful to reflect on why laser light products have you humming “Joy to the World.” That is, in addition to that aforementioned eggnog. It is because laser lights free up labor. Labor is a cost to obtain the ends – goods and services – that we desire. By freeing up the time you would have spent putting up Christmas lights this year, you will be able to do attend to other tasks or spend more precious time with your family and friends. 

I’ll bet this seems obvious. It is. Whenever it comes to government, however, we often forget this obvious fact. The defenders of various government programs and subsidies often tout job creation as a benefit. But, it is actually a cost because government is pulling labor away from producing the goods and services consumers value enough to actually pay for!

Now, labor is a necessary cost of producing goods and services. Yet the cost of nearly every government program inevitably spirals out-of-control, oftentimes creating unnecessary and overpaid jobs. These jobs often involve producing goods or services that don’t actually benefit consumers. Or, they create jobs that could readily be provided by the private sector at a more reasonable cost, such as ABC liquor stores or golf courses.

In the market, however, businesses compete against each other by finding ways to lower costs. That includes reducing or even eliminating labor costs. Now, that may sound like something Scrooge would say, but let me explain why that is a good thing.

Economies flourish not by creating more jobs to create the same goods and services, but by finding ways to free up labor to produce new goods and services. For instance, it wasn’t that long ago that nearly every American was a farmer. In fact, agriculture took up 97% of the workforce. New labor-saving innovations, such as mechanized farming equipment (thank you, John Deere) and more intensive fertilization techniques, freed up labor to produce other goods and services that enrich our lives such as F150s, gun safes, and pump action shotguns (Hint, hint: this is my, admittedly unrealistic, Christmas wish list in case my wife is reading this). More importantly, it created something never fully achieved in human history, occupational choice; it enabled Americans to choose careers beyond farming that suited their unique talents and passions.

Imagine how impoverished and unfilled our lives would be if government took action to protect agricultural jobs to ensure that 97% of us still were farmers. Or, if government subsidized the horse and carriage industry to save jobs when the automobile was invented. Or, if the government created programs to protect jobs in the ice industry when the refrigerator came along.

Thankfully, labor-saving technologies have even made writing columns like this one easier. I’m able to dedicate the time I save using a computer to write this column, rather than quill and ink, to do academic research, policy work, and prepare lectures. Not to mention, Yellowhammer News probably also appreciates receiving the article electronically in Word rather than on parchment because it frees up their labor costs to devote to continuing to produce quality news and radio content. While there are probably some bureaucrats, politicians, and readers who don’t appreciate me being more productive in this regard, the market incentive to reduce labor cost is an important factor driving economic growth and prosperity, and yes, employment opportunities. 

All-too-often, politicians impose needless costs on the economy building bridges to nowhere and undertaking stimulus projects (which, ironically – but not unexpectedly – failed to create the promised jobs). If politicians want to foster job opportunities that encourage economic growth they should allow the free market to unleash entrepreneurship and innovation by reducing government spending and regulation.

Just remember that labor is a cost whenever you hear politicians trying to sell you their next round of subsidies, their newest government handout program, or the inevitable tax increases necessary to pay for it all. Government only creates jobs by pulling labor away from producing what consumers actually want, ultimately reducing economic growth and prosperity. In other words, as my former professor Walter Williams puts it, government isn’t Santa Claus.

Daniel J. Smith is the associate director at the Johnson Center for Political Economy and an associate professor of economics at Troy University. Follow him on Twitter: @smithdanj1

6 years ago

Democratic candidates’ ‘free college’ plans will leave both students and taxpayers worse off

(COD Newsroom/Flickr)
Flickr user COD Newsroom
Flickr user COD Newsroom

By Dr. Daniel J. Smith and Sean P. Alvarez

Vying for the democratic nomination for the Whitehouse, both Bernie Sanders and Hillary Clinton have proposed higher education reforms to decrease or even eliminate tuition for college students.

While academics (and aspiring academics) like ourselves can reasonably expect to benefit from reforms to boost college enrollment, these gains would be outweighed by the costs imposed on taxpayers and students themselves. Let us explain.

One has to constantly remind politicians – especially those up for election – and voters alike that government programs must be funded. The costs of Mr. Sanders and Mrs. Clinton’s higher education reforms must ultimately fall to taxpayers. Their proposed reforms certainly aren’t cheap, especially given the rising costs of other federal programs such as social security and the affordable care act. Bernie Sanders plan for tuition-free college would cost an estimated $750 billion over the next ten years. That amounts to over $4,700 for every current member of the U.S. labor force. Even Hillary Clinton’s more modest affordability plan would still stick taxpayers with a bill of $350 billion.

Most likely, these costs are understated. Students paying reduced tuition – or even no tuition under Mr. Sanders’ plan – would have little incentive to bargain shop and compare the costs of tuition at different universities. If you think higher education costs are already spiraling out-of-control, wait until colleges have even less incentive to contain costs. And taxpayers will be on the hook for it.

The damage won’t be confined to taxpayers’ hard-earned dollars. The students themselves will be worse for wear. Students with subsidized student loans are already disproportionately choosing to major in less rigorous fields with lower pay. More often than not, these students end up in low-skilled jobs that traditionally haven’t required a college degree. If educational reforms reduced the cost of tuition or eliminated it completely, you could only imagine that students would have even less incentive to judiciously select their college major. The likely result would be shortages of college graduates in fields such as engineering and science and an overabundance of majors in fields with lower demand.  

Furthermore, the less students pay for their college education, the less skin in the game they have when it comes to succeeding in the classroom. Even under our current system of subsidized higher education loans, undergraduates already exhibit less academic ambition. In fact, college students today spend three times more hours socializing than studying. Colleges, realizing that students are placing more value on the social experience of college than on actually educational pursuits, have resorted to luxury dorms and amenities to attract students. One can only imagine how much more emphasis students will place on championship football teams and resort-style living if students aren’t paying for it.

Denmark, held up by both Mrs. Clinton and Mr. Sanders as a model system when it comes to higher education, shows us precisely how free-tuition hurts both taxpayers and students. Since Danish students aren’t paying tuition, they have increasingly taken longer and longer to finish their degrees, heaping more burdens on taxpayers already facing a 56% top tax rate.

While we certainly stand to personally benefit from Mr. Sanders or Mrs. Clinton’s proposed educational reforms, they would ultimately straddle already overburdened taxpayers with new taxes, drive up the costs of higher education, and ultimately reduce academic ambition.

Sean P. Alvarez is an economics major at Troy University. Daniel J. Smith is the associate director of the Johnson Center at Troy University. Follow him on Twitter: @smithdanj1

6 years ago

Troy economist: Alabama chose liquor stores over Driver’s License offices (Opinion)


In the face of ongoing budget concerns, the state of Alabama released a list of 31 driver’s license offices it plans to close in an effort to cut government spending. Of those 31 cities losing a driver’s license office, 21 of them — 68% — currently have an ABC liquor store, operated by the state. How is it that our elected officials decided that their role in selling liquor is more important than making sure people have access to a driver’s license?

The answer is that this is just another example of politicians playing political games when they run out of taxpayer money to spend. The fact is, our elected officials are punishing those that elected them —unnecessarily inconveniencing families and hard-working people of this state in an effort to fabricate a dire situation to justify squeezing them for more tax money.

While I enjoy my scotch (Laphroaig) as much as the next guy, selling liquor is not a necessary function of government. Liquor can, and is, provided effectively by the private sector. In fact, in terms of price, quality, and selection, private companies have a far better track record of providing products and services.

Here in Alabama, there are already 550 privately operated liquor stores, and only 17 other states are still in the liquor business, showing that private stores can effectively and safely serve customers.

If Alabama’s government is genuine about cutting operating costs, leaving liquor sales to the private sector — often, small, locally owned shops — is a great place to start. Not only would this move get government out of the business of hawking liquor in low-income areas — a business it shouldn’t be doing in the first place — it would save the state millions in operating costs including rents, wages, and pension contributions.

Not only would shedding rental costs for more than 170 ABC stores and personnel costs for more than 600 state employees save the state money, the revenue generated by liquor stores could readily be generated from taxes collected by private liquor stores.

The Alabama ABC Board has taken a first, small step in this direction by announcing the closure of 15 ABC liquor stores, but only four of those stores are in cities where a driver’s license office is being closed. That means that even after these 15 ABC liquor stores are closed, 55% of the cities losing a driver’s license office will still have state-operated ABC liquor stores.

While some of these driver’s license offices are not a justified state expenditure since they serve so few residents, you would think state leaders would first shut down state-run liquor stores in those cities. Instead, it appears that shutting down these driver’s license offices is just another ploy to bolster support for future tax increases.

If elected officials are sincere about cutting spending, after privatizing liquor stores, they could also look to privatizing driver’s license offices. States across the nation, including ArizonaLouisiana, and Ohio, have successfully privatized driver testing, licensing, and title services, helping to expand the availability of these important services to residents while cutting costs for taxpayers.

If the state can’t justify funding a driver’s license office in a city, it probably can’t justify operating a state-run liquor store in that same city. In other words, we might have mixed priorities if we pay state employees to sell booze — and even provide mixed drink recipes — over driver’s licenses.


Daniel J. Smith is an associate professor of economics at the Johnson Center at Troy University. Follow him on Twitter: @smithdanj1

6 years ago

Birmingham’s minimum wage hike is off-target and will harm those it seeks to help (Opinion)

Fast food workers protest McDonald's, push for higher minimum wage. (Flickr user Light Brigading)
Fast food workers protest McDonald's, push for higher minimum wage. (Flickr user Light Brigading)
Fast food workers protest McDonald’s, push for higher minimum wage. (Flickr user Light Brigading)

Say I approach the administrators at Troy University and tell them that I strongly believe my expertise in economics is worth far more to the university than it pays me, and threaten to leave unless my salary is increased by $1 million per year — a bargain in my mind. Even if you’re a fan of my columns, you probably would expect Troy to send me packing. And they would be right to do so.

Understanding that basic intuition — that an employer cannot pay a worker more than he is worth in terms of productivity — demonstrates an understanding of the economic harm that hikes in the minimum wage pose to low-skilled workers.

The fact is, the vast majority of minimum wage workers are low skilled and these types of jobs are an important opportunity for them to gain the skills necessary to move up and demand higher wages. In other words, minimum wage jobs are an opportunity for individuals to increase their own value to employers.

Unfortunately, cities across the U.S. have been raising their minimum wages in an effort to help lower income groups and Birmingham is the latest city to do so. When it comes to economic issues such as the minimum wage, it is important to draw a distinction between the intentions of a policy proposal and its actual outcomes. While supporters of the minimum wage often have noble intentions, the minimum wage tends to reduce employment opportunities for many of the low-skilled people they intend to help.

For instance, a National Bureau of Economic Research review of studies on the minimum wage by David Neumark and William Wascher finds that a significant number of studies show that raising the minimum wage reduces the number of jobs available for low-skilled workers.

The reality is, the least-skilled Alabamians — primarily young, part-time workers — will face unemployment as mandated wage rates exceed their skill and experience levels. Sadly, their best option for gaining the skill and experience necessary to earn a higher wage through on-the-job experience is taken away. To truly help these workers, policy makers should focus on helping this group boost their skills through educational reform and by expanding economic opportunity, not by increasing the costs of employing them.

While Alabama has recently taken a small, but important, step in reforming its educational system by becoming the forty-third state to legalize charter schools, many states are successfully implementing more systematic and radical reforms, including wider access to charter schools, and by making private educational options available through tax credits or vouchers. These changes are necessary to revolutionize our failing, one-size-fits-all educational system in Alabama.

To expand economic opportunity, Alabama leaders need to expand the economic freedom necessary to promote business growth and development. That means limited government, low taxes, and low regulatory barriers. For instance, both a White Housereport and a Johnson Center study recommend reforming occupational licensing laws as a way to expand job opportunities for the poor. Removing burdensome regulatory barriers for businesses, such as those faced by Uber — ironically banned in Birmingham — or the craft brewing industry, would also expand economic opportunities for low-skilled workers.

State leaders and city councilmembers interested in raising the wages of low-skilled workers should address the underlying problem. That means finding ways to help workers boost their skills through educational reform and by expanding economic opportunities. Attempts to legislate higher wages will only result in the loss of employment opportunities, and thus the chances for these workers to gain the necessary skills and experience to eventually earn higher wages.


Daniel J. Smith is an associate professor of economics at the Johnson Center at Troy University. Follow him on Twitter: @smithdanj1

6 years ago

Alabamians shouldn’t be duped by the narrative that there’s nothing left in government to cut (Opinion)

cut government spending

The special session called by Governor Bentley to address the short-term budget gap looks like it will end in a deadlock, ensuring another special legislative session.

While many state leaders insist that there is nothing left to cut in the Alabama budget, the growth in the size of state government—especially in areas that do not follow principles of limited government—reflects a spending problem, not a revenue problem. To address the budget shortfall, state leaders should turn over to private businesses those services that can successfully be provided by the private sector.

There is a lot more at stake in the recent budget debates than most Alabamians realize. Ultimately, they reflect what Thomas Sowell refers to as “a conflict of visions” regarding fundamental principles. In Alabama and across the nation, we generally see two competing visions with drastically different effects on our economic future. One vision, the path of big government, often leads to economic stagnation. The other vision, embracing limited government, fosters economic growth and prosperity.

People holding the big-government vision, despite federal, state, and local spending already approaching 1/3 of GDP, say that even more government spending—and the taxation necessary to support it—is both desirable and necessary. In this vision, there is simply no government spending to cut.

In contrast, people with a limited-government vision understand that citizens create more value for one another when they make their own decisions with their money. They say that bloated government spending is precisely what is stifling economic growth. They see that private-sector workers ultimately pay for the public sector. The private economy is stifled as the public sector grows. And taxes actually tend to reduce government revenue in the long-term by discouraging economic activity and slowing down economic growth.

In this second vision, reining in the government’s out-of-control spending through reforms and privatization is considered necessary to avoid raising taxes and to unleash the private sector.

Is there hope for the pro-growth, limited-government vision in Alabama? Let’s examine the evidence.

There is good evidence that the big-government vision expresses reality in Alabama today. Americans for Tax Reform recently released a study finding that Alabama, even after adjusting for inflation and population, has overspent by 21% since 1999. This isn’t surprising; Alabama’s economy, compared to the rest of the nation, is straining under the costs of both high public employment and high public-employee compensation.

One of the reasons Alabama is one of only two states with both high public employment and high public sector compensation is that its state and local governments provide services that can, and should, be provided by the private sector.

This reality is what offers hope for the pro-growth vision. Turning over these services to the private sector, known as privatization, could solve the budget gap while increasing the quality of service for Alabamians.

Privatization can occur through either outright sale or competitive contract. Private companies, competing in the free market, have far more incentives to reduce costs, innovate, and improve the quality of services than government agencies have. In an academic review of the evidence on privatization, Harvard economist Andrei Shleifer concludes that we rarely find out that government provision was more efficient than the privatized service.

There are plenty of services currently being provided by state and local governments in Alabama that easily could be privatized, leading to both savings and better quality. Areas ripe for privatization in Alabama include golf courses, parks, state employee pensions, ABC liquor stores, accounting and auditing services, rest stops and visitor centers, convention center management, and auxiliary (non-educational) school services.

Many of these services are provided effectively by the private sector in states across the nation. These states have already privatized such services in order to reduce the size and cost of their state governments. For instance, Georgia contracted out the management of five state parks with luxury lodges and golf courses in 2013. This strategy that has been successful in several other states as well, including Arizona and New Mexico.

In some cases, such as liquor stores, accounting services, and golf courses, the private sector in Alabama has already proven that it can provide these services effectively without burdening taxpayers.  

The privatization option shows that Alabamians shouldn’t be duped by the demonstrably false narrative that there is nothing left to cut from the budget. Alabama has a spending problem, not a revenue problem. Rather than compromising our economic future by embracing the vision of big government, state leaders should take a serious look at the benefits of unleashing private businesses.  


Daniel J. Smith is an associate professor of economics at the Johnson Center at Troy University. Follow him on Twitter: @smithdanj1

6 years ago

Let’s bust the myth that raising taxes will stimulate Alabama’s economy (Opinion)


YH Taxes
I’ve been reluctant to do this but I’m going to call for an increase in state taxes to boost economic activity.

Let’s call it the Daniel Smith Benefit Tax. My proposal is for a one-time, low, $1 tax on every Alabamian with the $4.849 million in proceeds going to me so I can properly inject it into the economy where it will then spark the growth we’ve all been patiently waiting for.

This tax will surely benefit the public since I plan on spending the money prudently to upgrade to a bigger home, to finally buy that truck my wife hasn’t been letting me purchase, and to fund a couple graduate assistants to help me with my research.

All of these purchases will boost the economy and create jobs here in Alabama — movers, more furniture for my bigger house, I’ll probably want to have it painted too. Oh, and I’ll need to take my new truck to the car wash and for oil changes … and on and on.

As the economist John M. Keynes famously argued, each dollar I spend from the tax proceeds will have a multiplier effect as it makes its way through the economy. The dealer I buy my truck from might put down a payment on a new pool. The owner of the pool company might use the extra income to hire an additional employee. That employee will spend his paycheck at the local grocery store. And so on.

Who could oppose such a promising idea?

You say, “Hold on, Professor Smith, you’re only looking at half the picture. What about the decline in economic activity that occurs from taking $4.489 million out of the private sector economy?” I would say, “You’re absolutely correct, that does poke a hole through my otherwise flawless proposal.” And, I’d probably thank you bringing me back to reality.

Amazingly, the government frequently uses this false Keynesian assumption to justify its excessive spending by quipping that one dollar of government spending creates several dollars of economic wealth as it moves through the economy.

They conveniently ignore the wealth that is destroyed when politicians harness taxpayers to pay for their often ill-fated pet projects. Politicians, operating in a political environment filled with special interest groups, are very unlikely to spend and invest money more productively than private citizens and investors spending their own hard-earned money. In fact, we’ve seen these project come up short over and over again.

For example, my colleague Daniel Sutter reports that more than 20 years of research on subsidies to sports teams and stadiums fails to find evidence that they contribute to economic growth, employment, or taxes, despite the fact that they were all approved on the premise that they would.

And, in his recent book, Megaprojects and Risk, Bent Flyvbjerg’s finds that government officials that promote major land-use development projects, more often than not, tout inflated economic benefits and substantially understate costs to get public approval for their pet projects. It doesn’t help that most of these economic impact studies are commissioned by the very group looking to justify the expenditure and thus often include additional biased assumptions within the already dubious Keynesian framework.

But the real tragedy is that each dollar taken out of taxpayers’ pockets and used by government on golf courses, luxury hotels and other great photo opportunities is a dollar taken away from the productivity of the private sector. Given the track record of failure among these government-run projects when compared with the energy and drive entrepreneurs have injected into our communities, it makes a lot more sense to let individuals push our economy forward. In other words, the money in the hands of the people who earn it is far more likely to create employment and economic growth.

While I‘m joking about my Daniel Smith Benefit Tax, the proposal clearly shows the fallacy in assuming that government spending will provide the necessary antidote to get the economy going. Since most government projects are carefully packaged behind noble intentions and impressive technical economic impact studies, these bad ideas are difficult for taxpayers to catch or evaluate. Just keep my tax proposal in mind every time a politician asks to spend your money.

Daniel J. Smith is an associate professor of economics at the Johnson Center at Troy University. Follow him on Twitter: @smithdanj1

6 years ago

Are Washington’s big government habits rubbing off on Alabama? (Opinion)


In what has become a Groundhog Day scenario, federal legislators will likely grant approval to raise the federal debt limit — again. This will be the 79th time that Congress will raise the debt limit. With an $18.2 trillion national debt, amounting to nearly $57,000 per citizen, every American should find this fiscal irresponsibility disconcerting.

Our substantial national debt as well as our government officials’ continued predisposition towards unfettered spending at the federal, state, and local levels drags down our economy, reduces our economic freedom, and makes us vulnerable when it comes to national defense.

Our nation’s fiscal profligacy is even worse than our elected officials care to admit. In testimony before the Senate Budget Committee, Boston University economist Laurence Kotlikoff declared our country broke. The aforementioned $18.2 trillion official national debt is, in fact, substantially misleading. A proper accounting of all of our country’s debt service, transfer payments, and spending puts our fiscal gap at a staggering $210 trillion — if we stacked this up in $1 bills, it would wrap around the earth over 570 times!

To put this in a different — and perhaps even more troubling — perspective, John D. Rockefeller, the world’s first billionaire, could have easily paid off the national debt in 1916 with his own personal fortune. Today, however, Rockefeller would only be able to pay the interest on our national debt for a little over a year. The $80 billion fortune of Bill Gates, the richest person in the world today, won’t even cover the interest on our national debt for a half year! Even adding up the entire $2.29 trillion net worth of the 2014 Forbes 400 list amounts to only a fraction of our debt. And that doesn’t include additional trillions of dollars of debt racked up by state and local governments.

While Americans have more or less come to accept unrestrained spending at the federal level, it is concerning that those bad behaviors are being picked up by state and local government officials. Even our state and local politicians can’t curb their spending appetites, with 22 states – Alabama included – facing fiscal gaps this year. If we can’t reign in spending in our own backyard, how can we expect to hold our federal officials accountable?

For instance, here in Alabama we face a budget gap of $290 million. Despite being one of only two states in the nation with both out-of-control, public sector compensation and oversized public employment, our state officials are struggling to find ways to fill the gap without resorting to economically harmful taxes (if they are trying at all).

These trends are clearly unsustainable. Yet these bad habits are hard for politicians to break without the political support of the people. My former professor, economist Walter Williams, stresses that renewed respect and appreciation for the Constitution is required to reverse these troubling trends.

As we approach Independence Day, perhaps it is time to dust off our founding documents and show a concerted effort to appreciate and enforce the limitations they put on government. Their project served us well, resulting in unprecedented economic growth and prosperity. However, in the spirit of Benjamin Franklin’s famous warning he issued upon emerging from the Constitutional Convention, it is up to us to keep it. Each day, on our watch, our federal fiscal gap grows larger, compromising our American legacy of freedom. Instead of life, liberty, and the pursuit of happiness, will we be passing on life, deficits, and debt to future generations?

Daniel J. Smith is an assistant professor of economics at the Johnson Center at Troy University. Follow him on Twitter: @smithdanj1

6 years ago

Alabama taxpayers should not be duped by modern ‘Bootleggers & Baptists’ (opinion)


YH Alabama liquor ABC

“Bootleggers and Baptists.”

It’s a catch phrase from a bygone era reminding us that government regulations on the economy make strange bedfellows. It originated with an economist who noted that both Baptists and bootleggers supported restricting the sale of alcohol — the former on moral grounds, the latter because their business benefited from the shuttering of legal retail stores.

The old fashioned term is all but forgotten, replaced by the modern term “special interests,” but the charade it describes is alive and well in Alabama politics.

Modern bootleggers and Baptists can be found in nearly all corners of our economy, including restricting alcohol sales. From Sunday closing laws to outright bans, special interests have something to gain by controlling alcohol sales, and consumers suffer the consequences.

Let’s take a look at beer, specifically. The “Baptists” look the same — individuals who oppose drinking on moral and religious grounds and try to restrict consumption through government force. Surprising as it may seem, the “bootleggers” in this scenario are large breweries like Anheuser-Busch and SABMiller.

Large brewers have an interest in pushing regulations because they make it harder for smaller brewers to enter the market and grow. More competition can eat into the sales of big brewers, but also means more choices and lower prices for consumers.

So, a bit of digging reveals that bootleggers are discreetly advancing their agenda behind the moral convictions of the Baptists.

This motive is more than theory, there is research to back it up. Steve Gohmann, a professor of economics at the University of Louisville, found that large breweries and actual Southern Baptists have successfully held back the growth of craft breweries in the South. Large breweries are more than happy to make campaign contributions to politicians willing to use the moral high ground to restrict competition from new breweries.

Alabamians should be on watch for laws or government programs wrapped in the best of moral intentions that actually just advance the agenda of special interest groups at the expense of hardworking taxpayers.

For example, the proposed e-cigarette tax in Alabama (and across the nation), fits the “bootleggers and Baptists” model. Big tobacco companies (bootleggers) stand to profit handsomely if they can keep customers smoking traditional cigarettes rather than e-cigarettes, a healthier alternative that also helps smokers quit. One way to do this is by raising the price of e-cigarettes with taxes on nicotine liquid. Thus, it is no surprise that big tobacco companies support taxing vapor sales. Yet, ironically, lawmakers advancing the agenda of big tobacco often do so under the guise of health concerns.

Another example is Alabama’s state-run ABC liquor stores. Couched in the noble language of reducing bad social outcomes, the real reason behind maintaining state control — and their drag on taxpayers and consumers — is the special interest groups that benefit, including those who own and lease the property for the 176 ABC stores and the 600 government employees who operate them.

Proponents of the ABC stores claim state ownership protects Alabamians from bad social outcomes. However, the systematicevidence shows no relationship between state alcohol control and a wide range of social outcomes.

To be successful, special interest groups need to advance their political agenda behind noble intentions. Taxpayers and consumers shouldn’t be duped by these charades that come at the expense of their pocketbook.

Daniel J. Smith is an assistant professor of economics at the Johnson Center at Troy University. Follow him on Twitter: @smithdanj1

6 years ago

Troy Univ. Economist: Cut corporate welfare, lower taxes for all businesses (opinion)


YH Alabama Tax
Alabama’s economic incentive programs are slated for reform this legislative session. Such programs cost Alabama taxpayers millions each year so it is certainly important to evaluate whether this money is well spent. That’s the easy part. The hard part is facing reality and taking the uncomfortable steps toward real reform.

To realize change, state policy makers must replace targeted economic incentive programs with simple, low taxes for all businesses. That would encourage businesses of all sizes and ages to grow and expand in Alabama. Unfortunately, the reforms currently on the table fall short.

Economic incentive programs are tax breaks, subsidies, or other economic privileges granted by governments to a few, select businesses. Paid for by taxpayers, this system puts politicians in charge of doling out hard-earned money to politically connected friends. Not only is government allowed to play venture capitalist with very little accountability — a role in which it has a long track record of failure — it places businesses that are not lucky enough to have friends in high places at a disadvantage.

The high taxes required to support incentive programs ultimately drag down economic growth and job creation, especially among small, young businesses. Ironically, most job creation actually comes from these small, young companies.

Furthermore, economic incentive programs reduce the motivation of both privileged and non-privileged businesses to compete and innovate. Imagine if universities were to predetermine the GPA’s of students, selecting those to be at the top of the class and those at the bottom regardless of how hard each student works. The result is predictable and understandable: students would lose their motivation to study.

The same happens with businesses. Why compete to offer better products and services when politicians ultimately determine the winners and losers in the marketplace? The result is stagnancy and poorer quality products and services.

And, evidence shows that government often chooses incorrectly, resulting in the enormous waste of taxpayer dollars. For instance, in Alabama, both National Alabama Corporation and ThyssenKrupp failed to live up to expectations. A recent Johnson Center study found that each direct job at ThyssenKrupp cost the state more than $555,000 in economic incentives. Even more troubling, the American Legislative Exchange Council (ALEC) listed Alabama as one of the worst states for measuring and evaluating economic incentive programs.

This waste of taxpayer dollars is even more frustrating when evidence shows that economic incentives programs destroy jobs by taking money out of the private sector. According to a report by the Mackinac Center, 95 jobs were destroyed in Michigan for every $1 million in economic incentives granted by the state over a six-year period.

Policymakers interested in creating jobs need look no further than lowering taxes and regulation. Economically freer states, with smaller governments and tax burdens, consistently have higher employment growth. A one-unit increase in Alabama’s economic freedom ranking in the Economic Freedom of North America ranking could create as many as 80,000 new jobs per year!

Unfortunately, the reforms currently under consideration would keep and even expand the same bad structure. While the proposals do include measures that would provide more accountability, such as only paying out economic incentives as jobs are created and capping the overall amount of incentives, they ultimately leave the same bad system in place. Rather than remove unfair privileges and lower taxes for all businesses, the proposed reforms would expand these privileges to select businesses in rural areas or for business with job training needs.

It is good to see economic incentive programs on the agenda for reform. Unfortunately, the real reform required to reduce the burden of these programs on Alabama taxpayers isn’t on the agenda. To put Alabama on a trajectory of growth, policy makers should cut the corporate welfare doles and lower taxes for all businesses. We shouldn’t compete against other states for businesses with corporate welfare; we should compete with economic freedom.

Daniel J. Smith is an assistant professor of economics at the Johnson Center at Troy University. Follow him on Twitter: @smithdanj1

6 years ago

If Alabama leaders want to raise revenue, they should cut taxes (opinion)

YH Bentley Bill

State leaders believe plugging a long-term budget gap of $700 million can be as easy as hiking tax rates. Even halfway through the semester, my principles of microeconomics students can spot the error in this short-term thinking.

While raising tax rates may pull-in more revenue for the government in the short-term, a large body of evidence suggests that high tax rates often reduce government revenue in the long-term by dampening business activity and population growth. Agreement on the harmful effects of taxes is broad-based and crosses party lines. For example, Christina Romer (President Obama’s former Chair of the Council of Economic Advisers) and David Romer found that a tax increase in the U.S. of 1% of GDP can result in nearly a 3% decline in economic activity.

Higher taxes discourage economic activity and often reduce tax revenues largely because of their impact on job creators. The added burden discourages entrepreneurship as well as business investment and expansion — all of which are critical to maintaining a consistent flow of tax revenue. When businesses aren’t around, or profitable enough to pay high tax bills, revenue stops. In other words, high taxes cause the well to dry up.

It is important to keep in mind that we’re not just talking about business taxes here; raising individual income taxes discourages business activity as well. Non-corporate businesses earning income that is taxed as individual income, generates over 60% of all U.S. business income. The economists Randall Holcombe and Donald Lacombe looked at 30 years of evidence and found that states that raised their income tax rates experienced slower individual income growth. Ultimately, lower income growth in the short-term means less revenue in the long-term.

Countless examples of businesses halting expansion or moving to states with tax rates more conducive to business growth should be enough to convince any lawmaker that raising taxes in Alabama will have a damaging impact on our state. In their study examining the effect of state taxes on income growth from 2001-2010, Arthur Laffer and Stephen Moore find that the nine states with no income tax, including Florida and Texas, had population growth two and one half times higher than the states with the highest taxes. These nine no-income tax states also had higher tax revenue growth than the states with the highest income taxes.

Because Alabama is in competition with nearby states — especially ones that have more economic freedom and thus friendlier business climates — hiking taxes will definitely stifle economic growth in Alabama. Neighbors such as Tennessee, Mississippi, Louisiana, Texas and Florida, all have substantially lower state and local individual income taxes per person. In fact, Mississippi just overwhelmingly voted to phase out its income tax. Where do you think investors and businesses are going to go if we raise taxes in Alabama?

The evidence is right in front of us: low tax rates are consistently associated with higher employment, higher incomes, and inbound migration. For Alabama to swim against the tide of states like Texas, North Carolina, and Arizona — where taxes and business environments are flatter and friendlier — sends an awful signal to businesses thinking about relocating (let alone staying put in Alabama!).

State leaders should do an about-face and lower tax rates if they want to increase long-term tax revenues. This would encourage investment and business expansion, attract residents, and ultimately raise long-term tax revenues.

Daniel J. Smith is an assistant professor of economics at the Johnson Center at Troy University. Follow him on Twitter: @smithdanj1