Institute for Economic Advancement

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.

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*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.

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. ]

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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