Advocacy parading as research

The National Center for Public Policy and Higher Education published a paper on the fiscal stress facing states that seems to have a clear ideological agenda.  They state the following:

Tax revenue will not grow as fast as the economy because:
1. Economic growth is not projected to generate major annual surges in capital gains income. Stock markets unlikely to repeat the extraordinary performance of the late 1990s call for more modest growth assumptions.
2. Sales tax revenues will decline due to the steady shift in consumption from goods to lightly taxed services, and the difficulty of collecting taxes on Internet-related transactions.
3. Excise taxes will not keep pace with overall economic growth.
1. Spending in many states will be increasingly dominated by the cost of Medicaid growth.
2. The federal budget outlook has deteriorated dramatically, resulting in federal proposals to substantially cut state and local grants. The reduction in federal grants is the main reason why the fiscal outlook for states currently shows a potential average budget shortfall of 5.7% instead of 3.4% as reported in the 2002 analysis.

The report makes an explicit criticism of those states that have not been "enlightened" enough to adopt income taxes.  In reality, the real swings in tax systems are most closely tied to those states with the most progressive tax systems.  California is a good example,  during the dot.com boom we had wild revenue swings up caused by capital gains and stock options.  In the early part of this decade we had a $12 billion swing in one year.  Just this year, which was not what anyone would call a stellar market, California had an $11 billion swing in revnue, caused in major part because of things like the growth of Google. ($400 million in revenue growth from that source alone)  The best estimates available are that in California the revenue elasticity of the income based systems is almost 6 times more volatile than the property tax - clearly making the state's revenues less predictable.

Yet state spending has increased in all the years by about 10% per year.  Some of that is medicaid but there are other "entitlements" that make the system more volatile.  Ultimately those states that begin to rethink their tax systems to less volatile sources are likely to be better off.

About the same time the National Center's report came out the Tax Foundation issued its report ranking the business climate in the states. Those calculations look at the breadth of tax systems in each state and rate them on a number of factors for personal and business climates. The report looks at all taxes. Those with the most progressive tax systems are rated lower than those with more moderate systems. However, there is an interesting comparison on those states with the worst business tax climates when compared to the states with the largest percentage shortfalls in the National Center's report.
The following summarizes the situation - the average projected shortfall in the Center report is 5.7%. The top ten worst business tax climates in the country are presented below (with their projected shortfalls in parens.) From 50-40 -

New York (5.2%), New Jersey (1.0%), Rhode Island (5.7%), Ohio(3.0%), Vermont (2.9%), Maine (1.6%), Kentucky (4.8%), Nebraska (4.3%), Iowa (6.3%), Arkansas (4.2%), California (6.2%).

Notice that there does not seem to be a reasonable correlation between shortfalls and good business climates (although one could surmise based on the California data that the relative movement in deficits is more likely to occur in those states with better systems. Another conclusion is that places with a high reliance on extractive taxes like Texas, which also does not have an income tax, face relatively high shortfalls (8.9%) In the end what the National Center report does not accomplish is a careful look at the relationship of the entire tax climate to the provision of higher education.

There are two other conclusions.  First, the comment about federal cuts (reductions in growth mostly) suggests that the federal partnership is not as wonderful as advertised.  The feds seem to be uncertain partners. Second, higher education could benefit if policy makers thought a bit more carefully about the mix of subsidy policies to encourage enrollment - the vast subsidies of low tuition in most public institutions do not aid in either encouraging a broad range of students to attend or in the efficient utilization of this precious resource.  There the Center has been mostly silent on proposing alternatives to the present system.