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    Thursday
    Jun162016

    Liz Profiled in State Tax Notes Magazine

    Covering the State Finance Beat
    by Billy Hamilton

    Billy Hamilton is the executive vice chancellor and CFO of the Texas A&M University System. In 2015 Hamilton led Texas Republican Gov. Greg Abbott’s Strike Force on the Health and Human Services Commission to complete a management analysis of the agency. Before that, Hamilton was the deputy comptroller for the Texas Office of the Comptroller of Public Accounts from 1990 until he retired in 2006. He is also a private consultant, advising on numerous state tax matters. In this edition of State Tax Merry-Go-Round, Hamilton interviews Governing magazine public finance reporter Liz Farmer to get her thoughts on state and local tax policymaking from her perspective on the periphery, as well as her insight on the big public finance issues elected officials across the country are facing.

    If you search ‘‘interviewing a reporter’’ or ‘‘interviewing a reporter about their job’’ as I did, you’ll come up with two different lists of articles — either how to handle an interview with a reporter (like handling a live rattlesnake seems to be the consensus) or how to prepare for a job interview to become a reporter (like auditioning for the role of rattlesnake, I presume). I learned this when I did research on the subject before I talked to Liz Farmer, who writes about taxes and other state and local finance topics for Governing magazine. Governing’s readers are the denizens of state and local government.

    ‘‘A lot of the readership is at the state and local level, both elected officials and workers,’’ Farmer said. Most aren’t tax experts, or pension experts, or landfill experts. They are the (hopefully) skilled generalists who make the policies that become laws, wind up as campaign issues, and become topics in State Tax Notes and other specialty publications (World Water: Stormwater Management magazine, anyone?).

    Farmer said the typical media coverage of government focuses on what goes wrong because that’s a better story. ‘‘We cater to informed readers about ways to do the things they do better and how to avoid mistakes,’’ she said.

    Governing has been published out of Washington, D.C., since 1987 and covers policy, politics, and government management. The stories in an average issue delve into topics like government finance, land use, economic development, electoral politics, technology, and transportation. Governing’s daily stories and analyses published online are widely read by elected officials, but my guess is that many of its readers are state and local staff members trying to find better ways to develop successful bike-sharing programs or to learn what other states are doing on issues like equal pay or taxing internet sales. A common question from the boss in any state job is: What are the other states — or the other cities our size — doing? Governing is a good place to look for answers.

    Farmer covers the public finance beat, and she does a very good job with a subject that might be viewed by some misguided souls as dull as dishwater. Her stories focus on current events and often include a healthy dose of tax policy issues. I often find interesting quotes from experts and public officials scattered throughout her articles, and her pieces also contain shrewd observations about what state and local governments are doing right and wrong when it comes to financial issues from a government management perspective.

    After a career in public finance, I have a pretty good idea of how people stumble into careers in tax administration or SALT practice, but I have never seen an article about the people who watch and write about state and local policymaking from the edges of the story. I thought maybe the time was ripe, and Farmer was a natural choice because I admire her work and often agree with what she writes.

    Farmer didn’t grow up pouring over city budgets. When I asked how she fell into her job, I learned it came about the same way I fell into tax administration — by accident of circumstance. She grew up in Northern California, moved to the D.C. area for college, where she studied radio, television, and film. She later got a master’s degree in journalism at the University of Maryland. She came to Governing in 2012 after stints covering business news in Baltimore and the D.C. city government for the Washington Examiner. They provided an education in the realities of government and business and their interaction.

    ‘‘I covered the sports business in Baltimore when the racetracks were going broke,’’ Farmer said. ‘‘It was an interesting subject but very narrow.’’ In Washington, she covered the region’s recovery from the recession but also got a ringside seat to the city’s sometimes baroque politics. ‘‘D.C. always has a lot on intrigue,’’ she said. ‘‘Being in the local press corps is like that, squared.’’

    But D.C. politics had its limitations. ‘‘Everything seemed like a big deal — high drama — but when you got outside the District, no one cared,’’ Farmer said. Another limitation of the job was time. ‘‘I wanted to do something in-depth,’’ she said. ‘‘The Examiner was very fast-paced — it was a daily newspaper after all — and you couldn’t look in any depth into the stories you covered.’’ She eventually found Governing, which was looking for someone to cover the public finance beat.

    I asked her what she found most surprising about her job. ‘‘I was surprised at how little most decision-makers know about public finance and especially taxes,’’ Farmer said. ‘‘I recently heard a policy analyst say that if a pension fund saved money on fees, it could be used for education. Well, no, it can’t. It’s an entirely different thing. It shows me how important it is for the media to get the story right.’’

    She’s right about that. Public officials often lack the background to tackle at least some of the issues they face in office. Like Farmer (and me), they learn on the job, and many — maybe most — concentrate on issues of less mind-numbing complexity and political volatility than taxes. The problem is compounded in some states by term limits, which have many supporters, but which also mean that no one in state houses can pause long enough while climbing up the political career ladder to become an expert in complex subjects like pensions or income taxation.

    Given the scope of the issues lawmakers must deal with in a legislative session or year on the city council, it’s easy to see why external groups often exert such surprising influence even today when we live in a world saturated in data masquerading as information. To help lawmakers, Governing offers a series called Finance 101 ‘‘to help public officials navigate the sometimes confusing world of GASB, OPEB, DBs and P3s,’’ as its advertising promises. Even I am not sure what a DB is. Farmer said the stories for that series, many of which she has written, help public officials know what questions to ask. The topics are wide ranging. In the last couple of years, she has written about how Chicago is ‘‘haunted’’ by interest rate swap agreements made before the recession, how states can build up their rainy day funds, and ‘‘the 7 deadly sins’’ of public finance, which include not paying attention to the long-term consequences and ignoring financial checks and balances.

    Her articles are peppered with examples of what state and local governments are doing in these areas and others, and they often provide clues to emerging issues. For example, in an August 2014 article on how states can cope with the economy’s ‘‘wild ride,’’ Farmer offered this example: Pennsylvania’s revenue estimates missed the mark badly in 2014 as corporate income tax revenue fell short by more than $300 million. Combined with other revenue estimate misses, the result was a $1 billion shortfall in the proposed 2015 budget, with just weeks to find a solution. Pennsylvania lawmakers finally passed a bill at the 11th hour that included a tax on natural gas drilling to help cover the fiscal hole.1 That article showed a state that isn’t sure how its revenue system is behaving relative to the economy and has scant idea about what to do about it.

    Those problems worsened in 2015 because of the state’s increasingly acrimonious political battle between Democratic Gov. Tom Wolf and the Republican-dominated legislature. That battle blossomed during last year’s legislative session. By June 2015 Farmer was writing that a total of 14 states, including Pennsylvania, still hadn’t enacted or even agreed on a 2016 budget.2 She identified three underlying problems. ‘‘The first involves simple disagreements about policy, in particular cutting taxes and/or restoring services,’’ she wrote. The other two areas of contention were more recent developments: ‘‘Some states are struggling under the weight of a systemic financial imbalance that prior budgets have papered over with one-time fixes. And other states are simply confronting unforeseen budget deficits.’’

    Pennsylvania’s epic budget failure contained elements of all three categories plus the distraction of a series of messy scandals within the government that had nothing to do with public finance. Whatever the underlying causes, though, the 2016 budget fight, which built on the 2015 struggle, dragged on and produced one of the longest budget stalemates in state government history. It ended in March when Wolf signed a 2016 budget with 100 days left in the fiscal year. Farmer covered that sour, anticlimactic ending as well: ‘‘Although most states are legally required to pass a balanced budget, Wolf argues this one isn’t truly balanced because it doesn’t fix Pennsylvania’s long-standing structural problems. For example, it includes a 3 percent increase in total spending but uses one-time fixes to pay for that.’’3

    That means ‘‘Pennsylvania is no better off than it was a year ago when credit agencies warned lawmakers they needed to fix the state’s structural deficit,’’ she wrote. ‘‘Now they have the budget for the 2017 fiscal year before them, which starts July 1, and will be debating the same issues they failed to agree upon for the last budget.’’

    Pennsylvania’s fiscal problems are an example of one other point Farmer said she has learned about public finance — it’s not just about math and economics. ‘‘No one knows everything about taxes and public spending, but I’m still surprised when policymakers make revenue decisions that clearly don’t add up,’’ she said. ‘‘Surprised,’’ she said, because she has also noticed a larger truth at work. ‘‘Public finance is a math issue, certainly, and an accounting issue, but it’s mostly a political issue. Ultimately, you can’t separate it from politics.’’

    Farmer said that one area where economics, politics, and math collide most clearly is economic development. ‘‘Every politician I’ve run across wants to say they brought jobs to their state or their city,’’ she said. ‘‘Tax credits are a huge part of that effort.’’ She said she realizes that many states and local governments hand out tax breaks like keys to the city. In that regard, she hopes Governmental Accounting Standards Board Statement No. 77, ‘‘Tax Abatement Disclosures,’’ will bring more rationality to this otherwise murky area of state budgets. GASB is an obscure group that sets governmental accounting rules. No one outside government accounting offices pays it much attention until it starts upending state financial practices. That could happen with GASB 77. Adopted August 14, 2015, the statement covers all state and local budgets starting after December 15, 2015, assuming they conform to generally accepted accounting principles. It requires public budgets to report how much revenue the government body has given up in corporate tax breaks granted in the name of economic development — what GASB calls tax abatements. In other words, GASB is mandating that at least a portion of state and local tax breaks be put on the books for everyone to see.

    Ultimately, you can’t separate public finance from politics, Farmer said. Farmer first wrote about GASB 77 when the board issued a draft statement for public comment. She pointed out, correctly, that it could make handing out business tax incentives more difficult for state and local governments. She also touched on an issue that has become a familiar criticism of tax policies aimed at economic development: the lack of transparency under current practices. ‘‘Many state and local governments currently have tax abatement programs in place, and the impact of those abatements can be substantial,’’ she wrote. ‘‘But there’s no way to know the magnitude or the nature of those programs just by looking at government financial statements. Efforts to track such data in the past have been initiated by third-party organizations like Good Jobs First or by media outlets. In 2012 The New York Times reported that state, county and city incentives total some $80.4 billion every year.’’4

    Farmer said she doesn’t believe the final statement went far enough but said she thinks it will encourage the public to demand more disclosure in the future. ‘‘GASB 77 isn’t just a single-year report,’’ she told me. ‘‘It will show how much tax expenditures are costing state and local governments, and that’s going to open some eyes.’’ She said she also thinks, realistically, that producing the report is going to require a lot of work by state and local finance staffs that will have to compile mountains of data on programs that have often been poorly documented and tracked in the past. ‘‘I don’t envy the people that have to pull together the data,’’ she said.

    Hoping to crack the code on some emerging topic I hadn’t yet noticed to use in a future column, I asked Farmer what she saw as the top tax issues likely to be in the news in coming months. She offered four topics to look forward to, although most have been in the news lately. ‘‘I think first, obviously, we’re going to hear a lot more about tax expenditures and tax credits,’’ she said. ‘‘GASB 77 pretty much ensures that that issue is going to be on people’s minds.’’ Despite the greater scrutiny, Farmer said she doesn’t see the interstate fight for jobs abating anytime soon — the political pressure to produce jobs is just too great, making even a modest compromise difficult for politicians.

    For example, one of her recent articles focused on the fight between Kansas and Missouri over jobs in Kansas City, which straddles the border between the states.5 As one writer put it, it’s a city where ‘‘creating jobs’’ sometimes amounts to moving an office across the street. In her article, Farmer mentioned the Missouri legislature’s efforts, beginning in 2014, to enact legislation that would effectively end the state’s tax incentive program in Kansas City — but only if Kansas goes along. Preoccupied with a major tax and budget mess, Kansas dawdled on the issue for most of two years before mid-April, when Gov. Sam Brownback (R) said his state should get behind the agreement with its neighboring state. ‘‘It’s late, but this is a major issue, and it would be a good step forward,’’ Brownback said, adding, ‘‘I’m hopeful it can get done.’’ Farmer wrote in April that Kansas had come up with a ‘‘compromise’’ that offered to withhold incentives in cases when jobs were simply being transferred across the state border and promised not to offer incentives for business moves that amounted to less than $10 million in new construction and moving costs. It was much less than Missouri wanted and was ‘‘openly rebuffed’’ by Missouri legislators and Missouri business leaders. At this point, nothing more is being done, and the time limit on Missouri’s offer is running out. Farmer reported on the fears in the local community that Missouri might not just get mad but get even by doubling down on incentives and not ending the border battle but intensifying it.

    Of course, true to Governing’s mission to present the good with the bad, Farmer’s article also discussed apparently successful programs in Dayton, Ohio, and Denver that mandated transparency and cooperation between neighboring counties when it came to incentives. She said the two cities also ‘‘called for their state economic development programs to ban offering state incentives in situations where a company relocates within the metro area at the protest of the home community.’’

    Second on Farmer’s list is the online sales tax issue. She noted South Dakota’s recent efforts to push a new challenge to the 1992 Supreme Court decision in Quill v. North Dakota6 back to the Court, possibly by late 2017, and to the long-discussed possibility that Congress will pass legislation to address the problem. She sounded more optimistic than I am about the issue. ‘‘Whether it’s the courts or Congress, I think it will be addressed before long,’’ she said. As evidence for her optimism, she points out that House Speaker Paul D. Ryan, R-Wis., has agreed that something should be done about the sales tax base to keep states from having to raise other taxes, and possibly even to allow other taxes to be cut. In a May 20 story, she reported that Ryan had recently told attendees at a National League of Cities meeting that the House will take up tax reform next year, possibly including the remote sales issue. ‘‘Ryan said he’s asked the chairman of the House Judiciary Committee — where a Senate-approved bill allowing states to levy online sales taxes has languished — to get the House’s version of that bill to the floor,’’ she wrote. ‘‘If that’s accomplished, the two bills would have to be reconciled because they differ on whether a sales tax would be applied in the state of the buyer or seller.’’

    She said that the takeaway of this and other issues on Ryan’s list, like the deductibility of state and local taxes, ‘‘could mean more battles for state and local governments on Capitol Hill.’’ She said this could be a ‘‘huge deal’’ for the states if they get what they want. But she admitted that they might not, given the political clout of the groups that don’t want Internet sales taxed.

    Third on Farmer’s list is the push to replace income taxes with sales taxes in some states. She said she expects the push to continue but that the decisions states make in the current period of growth could have longer-term consequences. ‘‘Recessions are scary for governments. But what can be scarier, as far as some fiscal policy analysts are concerned, is what governments do when the revenues start coming back,’’ she wrote in September 2015. She quoted Kim S. Rueben of the Urban Institute, who said recently that simplifying state tax codes is a good idea but that too often tax reform is used as a synonym for tax cuts. ‘‘And that’s a problem,’’ Rueben said.7

    ‘‘Most of the states that want to reduce their income taxes need to offset the revenue, so the idea is always to expand the sales tax base to new goods and services to make the tax reductions work,’’ Farmer said of the strategy that has been proposed in several states, including Kansas and Louisiana. ‘‘But the problem is that the proposed expansion gets chipped away in the legislature, and the states fall back on higher tax rates. That means that lower- income people pick up the bill for tax cuts that disproportionately benefit better off taxpayers.’’ Couple that with the economy’s shift from goods to services and the political difficulty of expending the tax base to services, and what you wind up with is more and more of the state budget relying on a tax that is ‘‘capturing an increasingly smaller piece of what consumers are actually spending.’’

    Ignoring the long-term consequences of this strategy is a good example of one of Farmer’s deadly sins of public finance. Finally, she mentioned the problem of sluggish state revenue growth plaguing several states even as the economy recovery continues nationally. ‘‘Slow growth in the revenue system is tough to balance with the political goal of cutting taxes,’’ Farmer said. ‘‘It also raises the question whether states are ready for another economic downturn.’’ One way to be prepared for the next recession is to have a healthy rainy day fund. Farmer has revisited this subject several times in the last two years, and another issue she has returned to again and again is the lack of clear rules on how and when to use the funds. ‘‘Some states count on their rainy day savings during recessions to limit budget cuts, while others strive to put away enough savings to avoid cuts altogether,’’ she wrote in January.8 ‘‘But many states lack clear guidance about when to take money out of rainy day accounts, for what purposes and how much.’’ ‘Many states lack clear guidance about when to take money out of rainy day accounts, for what purposes and how much,’ Farmer said.

    Even when the rules are clear, they may be arbitrary. ‘‘In particular, savings targets for the funds have typically been a percentage of the state’s spending that’s politically palatable. During the growth years of the mid-2000s, 21 states hit their savings targets and then stopped putting money away,’’ Farmer said. That resulted in major spending cuts and tax increases during the recession, she reported, quoting a study from the Pew Charitable Trusts. That resulted ‘‘in most of those states relying more heavily on spending cuts and tax increases to balance their budgets during and after the Great Recession,’’ according to Pew.

    In another article, Farmer wrote that there are ‘‘essentially two types of people when it comes to state rainy day funds: Those who think the savings account is inadequate to buffer a future revenue downturn and therefore should not be touched. And those who think the fund is too large and want to use some of that money to supplement needy programs and services.’’ To that I would add those who think the government shouldn’t be holding on to large cash balances and that that money should be returned to the taxpayers — regardless of the future consequences.

    In addition to the list of tax issues, I asked Farmer to name the biggest ‘‘killer issue’’ facing the states that doesn’t involve taxes, as well as the biggest one facing local governments. She didn’t hesitate on the first, although she had a caveat. The biggest public finance issue that doesn’t involve taxes is the growing burden of pension and retiree health programs in some states, particularly those states that have systematically underfunded their programs. ‘‘Some states — not all, but some — are going to have growing problems in this area. We’ve heard a lot about it over the past few years, but we’ll hear much more in the future,’’ she said. At the local level, Farmer said her top issue is how local governments pay for services in the future without putting even more pressure on the unpopular property tax, a dilemma magnified not only by state mandates but also by the local fiscal pressures caused by state aid cuts.

    ‘‘Many local governments don’t have many alternatives to the property tax,’’ she said. ‘‘It’s both the easiest and hardest tax. Small changes can produce large increases in revenue but no change comes without creating a political reaction. It’s just a controversial tax.’’

    Farmer points out, though, that the importance of those issues and others for a particular state or local government generally depends on their circumstances. She said she has found no single, universal truth about state and local public finances. Some states are prospering since the recession, and some are struggling. Some have pension problems and some don’t. Some are taking risks with their tax systems and others aren’t. It’s like the old TV show: There are 8 million stories in the naked city, and her job is to recognize which of those stories matter at a given moment and what lessons state and local governments should draw from them.

    As a final question, I asked Farmer whether, after a few years on the public finance beat, she still finds the job more interesting than covering the three-ring circus of D.C. city politics. She said she does. ‘‘Sometimes it’s a little dull,’’ she said with a laugh. ‘‘But I get riled up about pensions and sales tax and crazy things I never thought I’d care about.’’

     

    1 Farmer, ‘‘States Try to Prepare for the Economy’s Wild Ride,’’ Governing, Aug. 2014.

    2 Farmer, ‘‘What’s Holding Up So Many State Budgets?’’ Governing, June 25, 2015.

    3 Farmer, ‘‘Pennsylvania (Begrudgingly) Has a Deal!’’ Governing, Mar. 24, 2016.

    4 Farmer, ‘‘New Rule Could Require Governments to Report Tax Incentives as Lost Income,’’ Governing, Oct. 31, 2014.

    5 Farmer, ‘‘The Fight for Jobs Intensifies Between Kansas and Missouri,’’ Governing, May 12, 2016.

    6 504 U.S. 298 (1992).

    7 Farmer, ‘‘Why States’ Increasing Reliance on Sales Taxes Is Risky,’’ Governing, Sept. 22, 2015.

    8 Farmer, ‘‘Having a Rainy Day Fund, but Not Knowing How to Spend It,’’ Governing, Jan. 26, 2016.

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