Institute for Economic Advancement

Arkansas Personal Income – 2014:Q4

By , March 25, 2015 2:44 PM

This morning, the Bureau of Labor Statistics issued its report on State Personal Income for the fourth quarter of 2014 and for calendar-year 2014.  The headline statistic was an national average growth rate of 3.9% from 2013 to 2014.  In Arkansas, the annual growth rate was 3.1%.  Per capita income in Arkansas rose by 2.9% to $37,751, while national per capita income rose 3.0% to $46,129.  Accordingly, Arkansas per capita income remained at 82% of the national average, with a ranking of 44th among the 50 states plus D.C.

Source:  Bureau of Economic Analysis

Source: Bureau of Economic Analysis

Total earnings — which includes wages and salaries, employer supplements to wages and salaries, and proprietors income — rose by 1.9% in 2014, compared to a 4.1% increase nationally.  The table below shows the growth rates of total earnings broken down by industry.  Growth rates in Arkansas were below the national average in most sectors.

Source:  Bureau of Economic Analysis

Source: Bureau of Economic Analysis

Quarterly Data
For the fourth quarter of 2014, Arkansas personal income increased 1.2% from the previous quarter, and was up 4.5% from the fourth quarter of 2013.  For the U.S., the comparable growth rates were 1.0% quarterly and 4.5% year-over-year. Since the recession of 2008-09, Personal income in Arkansas has been tracking fairly close to the national average.  Compared to the previous cyclical peak (2008:Q2), total income in Arkansas is up 20.6% (an average annual rate of 2.9%).  Since the trough of the recession (2010:Q1), Arkansas income has increased by 24.7% (a 3.5% annual rate).

Source:   Bureau of Economic Analysis

Source: Bureau of Economic Analysis

The table below shows some of the key components of personal income growth in the fourth quarter.  Two components are notable.  First, growth of Proprietors’ incomes in Arkansas significantly exceeded the national average in both the quarterly and year-over-year data.  Second, another area of strong income growth in Arkansas — particularly in the year-over-year figures — was personal current transfer receipts.  This component was boosted by payments associated with Medicaid expansion (a.k.a. the “Private Option”).  Today’s report from the BEA noted that “Medicaid transfer receipts increased 13.6 percent in the states where coverage expanded in 2014 under the Affordable Care Act and 7.3 percent in the states where coverage did not expand.”   In Arkansas Medicaid transfers increased by 29.2% from 2013:Q4 to 2014:Q4.  That was ore than twice the national average rate of 13.3%.

Source:  Bureau of Economic Analysis

Source: Bureau of Economic Analysis

 

 

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Metro Area Unemployment and Employment – January 2015

By , March 20, 2015 4:41 PM

New data on metro area employment and unemployment came out today.  The metro data were subject to the same data revisions that we’ve seen for the state-level data already.   The household employment and unemployment data were estimated using the “new generation of time-series models,”  and updated to incorporate updated estimation inputs and population controls, and the payroll data were revised to reflect the annual benchmarking process.  Just to make it more complicated, today’s report incorporated new geographic delineations for metropolitan statistical areas.   Three metro areas in Arkansas were affected by the new definitions:  Fort Smith, Memphis, and Texarkana  (see endnote*).  Moreover, the revision process is not over:  The not seasonally adjusted data from 2010 forward will be comprehensively revised again on April 21, and smoothed seasonally-adjusted metropolitan area estimates will not be available until after that revision.

Today’s report began with the summary statement that unemployment rates in January were lower than a year earlier in 339 of the nation’s 387 metro areas.  All eight of the metro areas that cover parts of Arkansas were included in this total.  As shown in the table below, unemployment rates in Arkansas have fallen by varying magnitudes, ranging from -0.2 percentage points in Memphis to 1.4 percentage points in Pine Bluff.  As of January 2015. five metro areas had unemployment rates lower than the statewide average of 6.5% (not seasonally adjusted).

Source:  Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)

Source: Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)

The revisions to metro area unemployment rates were generally not substantial.  As shown in the next table, revisions to the most recent month previously reported (December 2014) were quite minor, even for the metro areas with new geographic delineations.  The revisions had somewhat larger impacts on previous months’ observations, affecting the December 2013-December 2014 year-over-year changes.  Generally speaking, unemployment rates at the end of 2013 were revised downward, reducing the magnitude of unemployment declines measured over the course of 2014.

Source:  Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)

Source: Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)

 

Payroll Employment
The data for nonfarm payroll employment incorporate new metro area delineations, as well as the annual comprehensive benchmark revisions.  The latest data and growth rates are summarized in the following table:

Source:  Bureau of Labor Statistics, Current Employment Statistics (CES)

Source: Bureau of Labor Statistics, Current Employment Statistics (CES).   Note:  Data for Texarkana are not presently available on a seasonally adjusted basis and have been seasonally adjusted by the Institute for Economic Advancement.

From December 2014 to January 2015, employment dropped by 1.5% in Pine Bluff, and by 0.1% in Fayetteville and Fort Smith.  Other metro areas around the state saw month-over-month gains.  Compared to the previous January, employment in all metro areas except Pine Bluff have seen increases, with the largest gains in Jonesboro and Fayetteville.  Three metro areas are now showing higher levels of payroll employment than before the recession.

To get a sense of how the payroll data revisions affected recent employment growth, the following set of figures compares the revised data to previously published statistics.  In several metro areas, we see the same pattern as in the statewide data revisions; namely, a downward revision to employment growth in late 2013 and a stronger pick-up of growth in 2014.  The data for Northwest Arkansas show a substantial upward revision over the course of 2014 with the cumulative impact measuring nearly 8,000 additional jobs (+3.6%) counted by December 2014.  At the other extreme, the data for Pine Bluff were revised downward, with the cumulative impact amounting to nearly 1,000 fewer jobs (-2.6%) than previously estimated at the end of last year.  Data for Fort Smith, Memphis and Pine Bluff show level shifts associated with the revised metro area delineations.*

Source:  Bureau of Labor Statistics

Source: Bureau of Labor Statistics

*Note:  Fort Smith, Memphis, and Texarkana were subject to revised geographic boundaries (OMB Bulletin No. 13-01).  Fort Smith was redefined to exclude Franklin County, AR;  Memphis was revised to include Benton County, MS; and Texarkana’s delineation was expanded to include Little River County, AR.

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Arkansas Employment and Unemployment – January 2015

By , March 17, 2015 1:28 PM

With the data revisions for 2014 complete, the Bureau of Labor Statistics published the first state-level employment data for 2015.  From the household survey, the unemployment rate ticked down one-tenth of a percent to 5.6%.  As described in a previous post, some of the recent sharp swings in the household employment data were recently muted by data revisions.  But the January data showed an uncharacteristically large surge in employment, similar to those that were showing up in the recent data before revision:  From December to January, the number of employed was up by more than 9,000.   The number of unemployed was essentially unchanged, so the labor force figures also showed a sharp increase.

Source:  Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)

Source: Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)

At 5.6%, January’s unemployment rate in Arkansas was one-tenth of a percent lower than the national average for January, and one-tenth higher than the national average for February.  Arkansas’ unemployment rate continues to closely track that of the U.S. as a whole.

Source:  Bureau of Labor Statistics

Source: Bureau of Labor Statistics

Payroll Survey
The payroll data are similarly showing generally positive trends.  The not-seasonally adjusted data reported by the Arkansas Department of Workforce Services showed a sharp decline for the month, but that is typical of the change from December to January as the demand for holiday-related workers wanes.  After taking account of typical seasonal fluctuations, the seasonally-adjusted data showed an increase in Arkansas Nonfarm Payroll Employment of 2,000 jobs.  In the goods producing sectors, Manufacturing employment was down 1,800 but Construction employment was up 2,300.  Changes were mixed across service sectors:  Employment in Professional and business services was up for the month; Leisure and Hospitality employment was down slightly.

Source:  Bureau of Labor Statistics, Current Employment Statistics (CES)

Source: Bureau of Labor Statistics, Current Employment Statistics (CES)

Today’s release of Nonfarm Payroll Employment Data incorporated the annual benchmark revisions (more on that below).  In the context of the revised data, the year-over-year growth of Arkansas employment amounts to 26,800.  Gains were widespread, with only slight declines in Mining, Information Services and Government employment.  Since the employment trough of February 2010, the Arkansas economy has recovered 56,400 of the jobs that were lost during the recession.  The composition of employment in Arkansas has changed considerably over the past seven years:  Manufacturing employment has contracted by over 32,000 jobs, while job growth has been concentrated in service sectors.

As of January, total nonfarm payroll employment was 1,000 jobs (0.1%) lower than the pre-recession levels (December 2007).  For the U.S. as a whole, employment surpassed its pre-recession level in April 2014.

Source:  Bureau of Labor Statistics

Source: Bureau of Labor Statistics

Benchmark Revisions
The revisions to payroll employment data were about as expected:  The job growth in the latter part of 2013 that had been previously reported was largely revised away.  However, the new data show stronger growth in the first part of 2014 than the previously-published data.  As a result, revisions to recent statistics were relatively minor.  As of December, the revised data show only 3,100 fewer jobs than the pre-revision statistics.

Source:  Bureau of Labor Statistics

Source: Bureau of Labor Statistics

The table below summarizes the impact of the revision on various sectors.  Because the data for late 2013 were revised downward far more than the data for end of 2014, year-over-year growth in total employment is considerably stronger in the revised data.  This basically reflects the re-estimation of the timing of job growth:  More of the recent growth is now estimated to have taken place in 2014 instead of earlier.  The revisions to various sectors are mixed.  Levels of employment were revised downward for Construction, Wholesale Trade, Education and Health Services, Leisure and Hospitality Services and Government.  But again, the change in the estimated timing of job growth matters for the growth rates of the sectors.  The revised data generally show slower growth over the past year for goods-producing sectors, as well as for Education and Health Services.  The higher growth rate in total job growth is reflected in most of the other service sectors.

Source:  Bureau of Labor Statistics

Source: Bureau of Labor Statistics

 # # #

*Seasonally adjusted data for Arkansas nonfarm payroll employment, reported in a format compatible with the monthly news release from the Arkansas Department of Workforce Services, can be found hereTable-Seasonally Adjusted NFPE.

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Revised Unemployment Data for Arkansas

By , March 11, 2015 1:20 PM

Next week we will see revised data for Arkansas payroll employment.  Meanwhile, the Bureau of Labor Statistics has already released new, revised data for household employment and unemployment–including the unemployment rate.  This revision is more substantial than the routine annual re-estimation process, representing the implementation of a “new generation of time-series models.”  For Arkansas, the data revisions smooth out some of the puzzling fluctuations in employment and labor force over the past couple of years, while maintaining some of the overall trends that were apparent in the previously published data.

The chart below shows the effect of the revisions on the Arkansas unemployment rate.  As previously estimated and published, the unemployment rate reached 7.9% during the 2008-09 recession, peaking at 8.1% in 2011.  The revised data show higher rates of unemployment during the recession and its aftermath, with a peak rate of 8.4% in early 2011.  The revised data show a somewhat smoother path of recovery from 2011 through 2014, but both series show and end-of-year unemployment rate of 5.7%.

Source:  Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)

Source: Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)

The revisions to the unemployment rate are based on revised estimates of employment, unemployment, and labor force.  Over the past few months, the employment and labor force statistics have shown unusually large and somewhat inexplicable fluctuations.  As shown in the next set of charts, much of that volatility was revised away.  What remains is a gradual decline in employment running from the end of 2011 through late 2013, followed by a period of recovery during 2014.  The nearly two-year decline in employment totaled nearly 50,000 workers, with the subsequent recovery adding back about 30,000 by the end of 2014.  A similar pattern of revisions affect the labor force estimates.  On the number of unemployed, the revised data show more unemployed workers than previously estimated in 2010 and 2011, but with a larger and more persistent decline in 2013 and 2014.

Source:  Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS).

Source: Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS).

Before the revision, the data were showing that Arkansas’ unemployment rate moved above the U.S. average during 2013 and remained persistently higher throughout 2014 (see here, for example).  With the more monotonic downward path for unemployment in the revised statistics, Arkansas’ rate has more closely tracked the national average.  As of December 2014, the unemployment rate for Arkansas was 5.7% — one tenth of a percentage higher than the national rate.

Source:  Bureau of Labor Statistics

Source: Bureau of Labor Statistics

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Arkansas Home Sales – January 2015

By , March 10, 2015 3:54 PM

New data from the Arkansas Realtors® Association (ARA) show that home sales in January 2015 were up 5.1% from the previous year.  As shown in the figure below, January is typically the slowest sales month of the year, so it is not possible to conclude too much from the one month’s sales figures.   Nevertheless, the sales total of 1,678 homes reported is the highest sales total for the month of January since 2007.

Source:  Arkansas Realtors® Association

Source: Arkansas Realtors® Association

Weather is often a factor for home sales during the winter months.  A year ago, January was a particularly wintery month, whereas weather conditions have been more harsh this year in February.  Hence, the year-over-year comparison for January might be more favorable than the figures will be for February.

Setting aside seasonal fluctuations, it is clear that Arkansas home sales have been on an increasing trend for the past two years.  Using the statistical technique of seasonal adjustment, the chart below eliminates the predictable seasonal swings, leaving only the trend and monthly variability.  From this perspective, the January sales total is right in line with recent sales trend.

Source:  Arkansas Realtors® Association; Seasonally adjusted by the Institute for Economic Advancement

Source: Arkansas Realtors® Association; Seasonally adjusted by the Institute for Economic Advancement

 

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Arkansas House Prices – 2014:Q4

By , March 9, 2015 4:53 PM

The latest house price data from the Federal Housing Finance Agency (FHFA) showed continuing appreciation at the end of 2014.  According to the FHFA Expanded-Data Indexes, Arkansas house prices rose 0.6% in the fourth quarter (seasonally adjusted), and were up 3.0% for the year.  This compares to a quarterly increase of 1.3% nationwide, and a 6.0% annually.  As shown in the accompanying chart, the slower pace of house price appreciation in Arkansas is largely attributable to the fact that the drop in house prices from 2007-2011 was not as pronounced in Arkansas as in many parts of the country, so the rebound is not as rapid.  The fourth quarter figure for Arkansas shows house prices approximately 3.3% below their levels in the second quarter of 2007.  This is roughly consistent with the latest data from an alternative source of home-price data, CoreLogic®, which shows house prices being 3.8% below their previous cyclical peak in mid 2007.

Source:  Federal Housing Finance Agency

Source: Federal Housing Finance Agency

Patterns of house price changes differ dramatically around the state.  The chart below shows house price indexes for Arkansas metro areas, relative to the first quarter of 2007.  Only Fayetteville and Memphis showed house price declines from 2007-2011 that were comparable to the national average.  Other metro areas in the state experienced much more muted declines (or no decline at all).  Hence, several metro areas in the state have experienced net appreciation over that past 7 years.

Source:  Federal Housing Finance Agency;  seasonally adjusted by the Institute for Economic Advancement

Source: Federal Housing Finance Agency; seasonally adjusted by the Institute for Economic Advancement

The table below summarizes house price changes in Arkansas metro areas over the past 5 years.  Of the eight metro areas that include parts of Arkansas, only Hot Springs and Pine Bluff have shown recent declines.  Over the past two years, metro area which has exhibited the largest house price increases is Fayetteville, where house prices declined the most during the nationwide house-price decline.  A similar situation holds in Memphis, where the declines during 2007-2011 were larger than in other parts of Arkansas, but a significant rebound in prices has taken place in the past two years.   Texarkana is an unusual case:  Recent house price increases in Texarkana have been larger than in several of the other metro areas in the state, but there was never any significant house price declines recorded in Texarkana during the housing bust.  So over the past 5 years, house prices in Texarkana have increases more than any other metro area in the state.

Source:  Federal Housing Finance Agency;  seasonally adjusted by the Institute for Economic Advancement

Source: Federal Housing Finance Agency; seasonally adjusted by the Institute for Economic Advancement

 

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Arkansas Home Sales – 2014

By , February 20, 2015 2:51 PM

The final home sales report for 2014 from the Arkansas Realtors® Association showed December home sales at 2,107, up by 6.8% from December 2013. For the year as a whole, sales were 28,453, up 4.5% from the previous year.  As shown in the figure below, December is typically one of the slower months of the year for home sales so the monthly total contributes less to the annual total than do the summer months.  Nevertheless, the data for December 2014 show a slight uptick from the previous month.

Source:  Arkansas Realtors® Association

Source: Arkansas Realtors® Association

After smoothing out recurring seasonal fluctuations, however, the seasonally-adjusted data in the next figure show that December was actually a bit weaker than the trend that prevailed during 2014.  That is, the uptick in the raw data was smaller than would be expected for a typical December given the previous trend.  Overall though, the one-month downtick in the seasonally-adjusted series is not unusual and does not necessarily indicate any sign of a sustained slowdown.

Source:  Arkansas Realtors® Association; Seasonally adjusted by the Institute for Economic Advancement

Source: Arkansas Realtors® Association; Seasonally adjusted by the Institute for Economic Advancement

In fact, month-to-month fluctuations in the home sales data are common.  The home sales figures are based on closing dates, and there can be considerable variability in the accounting — particularly when weekends fall near the end or beginning of the month.  Moreover, the data are often revised when home sales are entered into the MLS database after the housing report has been issued.  So it is useful to look at the data after smoothing out seasonal fluctuations AND month-to-month variability.  The quarterly figure below makes both adjustments.  When considering the fourth quarter of 2014 as a whole, home sales continued to follow an increasing trend.

Source:  Arkansas Realtors® Association; Seasonally adjusted by the Institute for Economic Advancement

Source: Arkansas Realtors® Association; Seasonally adjusted by the Institute for Economic Advancement

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Arkansas Employment and Unemployment – December 2014

By , January 27, 2015 12:43 PM

The December report on state employment and unemployment showed continuing improvement in Arkansas labor markets.  For the fourth month in a row, the number of unemployed declined and the number of employed increased sharply.  In fact, the household survey shows a three month employment gain of over 29,000 — an unprecedented rate of increase.  As a result, the state’s total labor force has expanded by over 24,000 in the past three months, and the unemployment rate has declined by one-half percentage point to 5.7%.

Source:  Bureau of Labor Statistics - Local Area Unemployment Statistics (LAUS)

Source: Bureau of Labor Statistics – Local Area Unemployment Statistics (LAUS)

The volatility of statistics from the household survey has been particularly large in recent months.  When the annual averages are published on March 4, the labor force and unemployment data will be revised using a new generation of time-series models.  The updated statistics will also will also incorporate updated estimation inputs and population controls from the Census Bureau.  It will be interesting to see how these revisions affect the unusual patterns of the past year or so.  In the meantime, the existing data are clearly indicating improving conditions over the second half of 2014.

Payroll Survey
The improvement seen in the statistics from the household survey are reinforced by recent observations of employment growth from the payroll survey.  The report for November shows an increase of 4,300 jobs for the month (seasonally adjusted), with a 12-month cumulative increase of 22,600.  Assuming that these figures are sustained after the upcoming benchmark revisions (see below), December’s report marked a milestone:  Since the employment trough of February 2010 the Arkansas economy has now added more than 57,000 jobs, bringing total employment to a point slightly higher than it was before the recession officially hit the economy.

Source:  Bureau of Labor Statistics, Current Employment Statistics (CES)

Source: Bureau of Labor Statistics, Current Employment Statistics (CES)

The December employment increase was largely attributable to a gain in Leisure & Hospitality Services.  The not-seasonally adjusted data featured by the Arkansas Department of Workforce Services showed a slight decline in this category,  but the decline was far less than would be expected in a typical December — hence, the gain in seasonally-adjusted employment.  Similar seasonal factors affected Education and Health, and State & Local Government (in both cases, due to winter break at schools).

Over the past twelve months, payroll employment has increased 22,600, with notable gains in two sectors that have been slow to recover from the great recession:  Construction and Manufacturing.  Gains in Education & Health Services and Leisure & Hospitality Services also contributed to the overall year-over-year increase.

Upcoming Benchmark Revisions
When the next payroll data release comes out on March 17, the payroll data will be revised to incorporate new 2014 benchmarks.  We had previously estimated that the revised data will show significantly weaker job growth over the past two years — with downward revisions expected to be in the range of 9 to 10 thousand jobs.  Good news has arrived since those forecasts:  The Quarterly Census of Employment and Wages  statistics for the second quarter of 2014 indicates a sharp upward revision to the current data are in order.  As a result, while we are still anticipating downward revisions to the data for the second half of 2013, more recent data now appear to be more closely aligned with currently published data.  Hence, as shown in the figure below, the revised statistics will show that sluggish job growth prevailed through much of 2011 through 2013, but that growth accelerated sharply in 2014.  It is still possible that the revisions will incorporate QCEW data from the third quarter as well, but those data are not yet available to the public and so are not incorporated in our current expectations.

Sources:  Bureau of Labor Statistics; Institute for Economic Advancement.

Sources: Bureau of Labor Statistics; Institute for Economic Advancement.

After revision, our best estimate is that total payroll employment for the latter half of 2014 will be unaffected.  Nevertheless, some of the components of payroll employment are likely to show revised growth patterns.  The set of figures below illustrates the nature (and variety) of some of the expected revisions, using quarterly averaged data.

Sources:  Bureau of Labor Statistics; Institute for Economic Advancement.

Sources: Bureau of Labor Statistics; Institute for Economic Advancement.

These expected revisions are, at this point, only estimates.  Especially when it comes to the disaggregated sector-by-sector data, the new figures may differ from these projections.  And although some sectors are likely to experience some downward revisions in the level of employment, the trend over time is positive for the most part — with or without the revisions.

# # #

*Seasonally adjusted data for Arkansas nonfarm payroll employment, reported in a format compatible with the monthly news release from the Arkansas Department of Workforce Services, can be found hereTable-Seasonally Adjusted NFPE.

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The Governor’s Tax Cut Proposal – Some Details to Consider

By , January 22, 2015 12:23 PM

[A PDF-file version of this article is available HERE. ]

New details of Governor Hutchinson’s promised tax cut proposal came out last week in the form of proposed legislation (Senate Bill 6), as well as an explanatory note from the Governor’s office: Governor’s Tax Plan (original link here).  Some of the details are complicated, and even a bit quirky.  In this analysis, we consider how three considerations appear to have interacted to come up with the specifics of the plan.

First, the plan partly builds-upon and partly replaces the tax code established by Act 1459 of 2013 — which was scheduled to phase in fully only in the current tax year, 2015.  Second, the plan has been promoted as a tax cut for the “middle class,” so its impact is tightly targeted to taxpayers within a given range of incomes.  And third, as always, the state revenue impact was likely considered and factored into the phase-in aspects of the proposal.

We’ll leave it to the budget experts to explain the impact on state revenue, and take no position on the issue of whether this tax cut is “affordable.”  However, it does seem that some features of the proposal are overly complex, and some of the quirkier aspects of the plan have potentially unintended consequences.  Simpler modifications to the tax code might be proposed that would have very similar implications for  revenue and tax-burdens, without the potential for economic inefficiencies that are present in the proposed plan.

Details of the Plan
Table 1, below, summarizes the statutory marginal tax rates for the Governor’s tax-cut plan, which includes 2015 as a phase-in year and the full impact of the tax cuts taking effect in tax-year 2016.  The table also includes the tax rates from Act 1459 that went into effect as of January 1, 2015.  The Governor’s plan retains the tax cuts from Act 1459 for taxpayers with taxable incomes below $21,000 for 2015 and thereafter.  For taxpayers with incomes ranging from $21,000 to $75,000, however, the marginal rate cuts of 0.1% per tax-bracket from Act 1459 are removed, and replaced with reductions of one full percentage point in the top two tax brackets — but not until 2016.  Taxpayers with incomes above $75,000 face yet another tax schedule, which cuts the very top tax rate by 0.1% (after a one year delay) but eliminates the Act 1459 tax-rate reductions on all income under $35,100.

Sources:  Governor's Tax Plan; Act 1457 of 2013.

Sources: Governor’s Tax Plan; Act 1457 of 2013.

The major impact of the proposal comes from the reduction of marginal tax rates in the top two tax brackets that are specifically applied to taxable incomes in the range from $21,000 to $75,000.   That feature directly addresses the idea that the plan represents a “middle-class tax cut.”

But the fact that there are three separate marginal tax rate schedules for different categories of total taxable income is an unusual feature.  Typically, a progressive tax structure is implemented by having higher marginal tax rates apply to successively higher brackets of income.  However, it is unusual to have the tax rate on lower earnings brackets change after crossing an income threshold.  In cases where it does, as in this plan, there are discontinuities in average tax rates and total tax burdens that create spikes in effective marginal tax rates.

For example, after full implementation in 2016 the proposed tax plan would raise tax rates on incomes over $75,000 — not just on any income above $75,000, but on all earnings up to that point as well.  This would create strong incentives to avoid working harder and earning income above the $75,000 line.  In fact, without some adjustment, many taxpayers with incomes just above $75,000 would find themselves experiencing a significant reduction in after-tax income after receiving an increase in pay — that is, the effective marginal tax rate of greater than 100%.  Economists call this a tax-rate “cliff.”  It creates the potential for tax policies to influence taxpayer behavior, and thereby result in potential economic inefficiencies.

The cliff-effect was clearly anticipated by the architects of the Governor’s plan.  In order to soften the blow from this sharp spike in the effective marginal tax rate for taxpayers with incomes above $75,000, the Governor’s plan includes an explicit bracket adjustment that reduces tax burdens from $40 and $440 for people with incomes in the range of $75,000 to $80,000.   As noted in the Governor’s Tax Plan, “This bracket adjustment prevents a small amount of income above $75,000 from resulting in significantly higher income tax liability. (This is to avoid what is called the Cliff Effect.)”  The bracket-adjustments are described in Table 2, below:

Source:  Senate Bill 6

Source: Senate Bill 6

Taxes and Tax Savings
When we put it all together, the Governor’s tax-cut proposal can be illustrated graphically as in Figure 1, which traces out total taxes owed as a function of taxable income.  Figure 1 compares the fully-implemented Governor’s Tax Plan to 2014 tax burdens, as well as 2015 taxes under current law.   The main impact of the tax plan is clear:  A significant reduction in taxes for taxpayers with taxable incomes between $21,000 and $75,000.

Sources:  Governor's Tax Plan; Senate Bill 6; Act 1457 of 2013

Sources: Governor’s Tax Plan; Senate Bill 6; Act 1457 of 2013

The tax savings from the Governor’s plan clearly peaks at about $75,000, with the gap diminishing in a stair-step pattern for taxable incomes between $75,000 and $80,000 (due to the bracket adjustments described in Table 2).  Note that the proposed tax structure–when fully implemented in 2016–actually represents a tax increase for those with incomes greater than $80,000 compared to current law.  In fact, because the proposal would retain 2014 tax rates for all taxpayers with incomes above $21,000 in 2015, the Governor’s Tax Plan actually represents an overall tax increase in 2015 compared to current law.  These comparisons are summarized in Figure 2:

Sources: Governor's Tax Plan; Senate Bill 6; Act 1457 of 2013

Sources: Governor’s Tax Plan; Senate Bill 6; Act 1457 of 2013

The Governor’s office has understandably focused on the tax savings represented by the fully-implemented plan compared to 2014 tax rates.  By this measure (the blue line in Figure 2), taxes are reduced for anyone making more than $4,300, peaking at $540 taxpayer-savings at a taxable income of $75,000.  Table 3 summarizes these tax savings, as described in the Governor’s Tax Plan:

Source:  Governor's Tax Plan

Source: Governor’s Tax Plan

But if we compare the proposed phase-in for 2015 with 2014 actual tax rates (the purple line in Figure 2) we see that the tax savings for taxpayers with incomes under $21,000 are retained but there are no net tax savings for taxable incomes greater than $21,000.  This is due to the fact that marginal tax rate reductions that were scheduled to go into effect in 2015 under Act 1457 are repealed or postponed under the Governor’s plan, leaving the 2014 tax schedule in place for 2015 for all incomes above $21,000.

State Revenue Effects
When it comes to gauging the revenue effects on state government finances–and for that matter, how changes in tax policy affect taxpayer decisions–the relevant comparison is how the proposed plan compares to current law.  Figure 2 shows that the overall tax savings to taxpayers are negative in 2015 by this comparison (the red line).  By eliminating and/or postponing the marginal tax rate increases for 2015 that were built into Act 1457, the Governor’s Plan could be characterized as a tax increase for all taxpayers with incomes over $21,000.  Accordingly, the revenue effects of the Governor’s Plan are positive for tax year 2015 compared to the current-law baseline.

When the plan is fully implemented in 2016, the taxpayer savings relative to current law are a mix of tax cuts and tax increases (the green line).  For most taxpayers with incomes between $21,000 and $80,000, the plan represents an unambiguous tax cut.  However, taxpayers with incomes greater than $80,000 will face a tax bill that is approximately $30 higher than under current law.  In addition, there is another set of taxpayers with incomes ranging from $21,000 to about $22,500 who would pay higher taxes under the Governor’s Plan than under current law.

The comparison of proposed tax rates to current-law tax rates is relevant for evaluating the fiscal impact of the plan, where timing is everything.  Fiscal impact is gauged by fiscal year while tax-regime changes align with the calendar year.  By waiting until tax-year 2016 to fully implement the changes, the impact on state revenues in FY2016 (July 2015-June2016) represents the net effect of higher revenues in 2015 and lower revenues in the first half of 2016 (relative to current law).  This softens the blow to state revenues relative to the case where the tax cuts are made immediate in 2015.  The full effects of the plan are not fully reflected in the state budget until FY2017.

However, by deferring the bulk of the tax cuts to 2016, the Governor’s Plan does more than just reduce the short-run impact on state finances.  It also puts in place an incentive for influencing economic decisions over time.  When taxpayers know that their tax burdens will decrease next year, there are incentives to rearrange contracts and payments to take advantage of lower future tax burdens.  Whenever people are making decisions based on the timing of tax law changes instead of the true underlying costs and benefits, economic efficiency is potentially sacrificed.

Tax Rate “Cliffs”
Another important potential source of economic inefficiency in the Governor’s Plan is the introduction of tax rate “cliffs” into the tax structure.  As previously described, a tax rate “cliff” exists when an increase in earned income results in a negligible increase or even a negative change in disposable after-tax income.  In the absence of the bracket adjustments shown in table 2, for instance, an increase in income from $75,000 to $75,001 would engender a tax increase of $500.17, implying a marginal tax rate of 50,017%.  Clearly, earning that one extra dollar of income should be avoided, if possible.  The introduction of the bracket adjustments makes the effect of the cliff smaller, but in the process creates six cliffs where only one existed before.  These breakpoints are summarized in Table 4.

Source:  Senate Bill 6

Source: Senate Bill 6

By breaking the income range into 5 categories with a discrete tax change at each break point, the magnitude of the tax rate cliffs are smaller than if there was just one big cliff.  Moreover, the discrete nature of the tax tables used to actually calculate taxpayer obligations will smooth out some of the differences.  Nevertheless, these localized tax rate cliffs exist in the proposed tax structure, introducing the possibility of effecting taxpayer behavior.  Again, any time that economic decision-making is influenced by tax policies instead of underlying costs and benefits, economic efficiency is potentially sacrificed.

In addition to the discrete jumps in tax burdens associated with the bracket adjustments for incomes in the $75,000 to $80,000 range, there is an additional tax cliff at the $21,000 income level.  This particular break point is associated with the fact that marginal tax rates on the first $20,999 increase once a taxpayer hits the $21,000 threshold.  Although occurring at a lower income level with a smaller marginal tax-rate spike, the economics of this tax cliff is the same as those in the higher tax brackets — the potential to influence taxpayer behavior and create economic inefficiencies.  Even if taxpayer behavior is not explicitly affected, some might argue that there is a fundamental unfairness in a tax code where some taxpayers inadvertently find themselves in a situation of having lower after-tax income when their pre-tax income goes up.

Summary
Figure 3, which presents average tax rates, summarizes some of the features of Governor Hutchinson’s tax proposal.  When fully-implemented, average tax rates are reduced for taxpayers with incomes of less than $80,000.  The tax cuts are the largest for taxpayers with incomes in the “middle.”  During the transition year of 2015, average tax rates increase for all taxpayers making more than $21,000.  Even after full implementation, taxes paid by those with incomes over $80,000 will be higher under the proposal than under current law.  The “tax cliffs” discussed above show up in Figure 3 as discrete jumps in average tax rates.

Sources: Governor's Tax Plan; Senate Bill 6; Act 1457 of 2013

Sources: Governor’s Tax Plan; Senate Bill 6; Act 1457 of 2013

The features phase-in features and undesirable tax cliff features of the Governor’s proposal could be mitigated by eliminating the multiple tax schedule structure described in Table 1, and by implementing the new plan immediately instead of having a phase-in year.  However, such a modified plan would generate its own practical and political problems.  For example, the phase out of tax cuts for individuals with incomes over $75,000 could be accomplished by having those taxpayers pay the same rates as lower-income taxpayers, but facing a new income tax surcharge on incomes over $75,000.  Such a proposal would eliminate the tax-cliffs, but would be unpopular among many politicians and voters.

Ultimately, the adoption of tax structures depends on both economic and political considerations.  While recognizing political aspects of the issue, however, economists tend to focus more directly on issues of efficiency:  A tax code should be structured to raise the revenue necessary to finance government activities in the most efficient way possible.  It is in that spirit that we offer this analysis, recognizing the limitations of what is politically possible but pointing out what would nevertheless be economically desirable.

[A PDF-file version of this article is available HERE. ]

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Arkansas Home Sales

By , January 8, 2015 2:38 PM

This morning, the Arkansas Realtors® Association (ARA) announced that home sales in November were up 10.4% from the previous year.  As shown in the figure below, November is typically one of the slower months of the year for home sales.  At just over 2,000 units, however, sales in November 2014 were the highest for the month since November 2009 — the month in which the first Federal home-buyers’ tax credit expired.  The ARA total  for cumulative sales for the first 11 months of 2014 were 26,330, approximately 4.7% higher than same period a year earlier.

Source:  Arkansas Realtors® Association

Source: Arkansas Realtors® Association

To get a better sense of the trend in home sales, the figure below adjusts the home sales data for recurring seasonal patterns.  After seasonal adjustment, it is clear that the latest monthly home sales report extends a rising trend .  After the expiration of the second home-buyers’ tax credit in April 2010, Arkansas home sales were stagnant at a seasonally-adjusted pace of less than 2,000 homes per month.  Since mid-2012, we have seen steady improvement.  With only one month of the year yet to be reported, it is clear that 2014 will be the strongest year for home sales since before the recession.

Source:  Arkansas Realtors® Association; Seasonally adjusted by the Institute for Economic Advancement

Source: Arkansas Realtors® Association; Seasonally adjusted by the Institute for Economic Advancement

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