With changes coming locally in Pennsylvania, with the state’s Department of Health releasing permits for medical marijuana growers and processors as well as dispensaries late last month, it seemed high time to take a look at the economic impacts of marijuana legalization efforts in other states.
Colorado anticipated $70 million in marijuana tax collections per year, but it hit $121 million in 2015 and over $140 million in the calendar year 2016.1 One estimate put the economic impact for the state of Colorado at $2.4 billion.
In Washington, tax revenues are slowly ramping up, but still far short of the estimated $388 million annually estimated in the legalization effort. Excise tax revenues from marijuana were $62 million in FY 2015, $134 million in FY 2016 and expected to hit $270 million for FY 2017.
Whether all states will hit these targets is not yet clear, and there has not been any analysis of whether legalization has offset or increased other public sector costs. We don’t fully know if legalization has produced any savings from reduced drug enforcement costs, or if those savings are offset by increases elsewhere.
It may be some years before we can really examine the impact of legalization on public costs, but there are other impacts that are receiving less attention. The legalization of marijuana at the state level has created a fundamental conflict with federal law where it is still illegal and controlled as a Schedule 1 drug, the most serious category of illegal substances that have no currently-accepted medical use and a high potential for abuse. As a Schedule 1 drug, the funds for research on medical uses are restricted, so it is even harder to get marijuana reclassified (as could happen if research proved that its medical use was beneficial). As recently as August of 2016, the DEA rejected reclassification based on the recommendations of the FDA.
The US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) indicated in what is known as the Cole Memo that they would not charge a bank with federal crimes for accepting marijuana money if the financial institution ensures that all state laws and the directives of the Department of Justice have been followed. This situation puts a significant resource burden on institutions that effectively makes accepting these deposit not profitable. Some credit unions and “money service businesses” such as PayQwick are entering the marijuana market, but the uncertain legal patchwork they operate under provides a limited solution.
As a result, marijuana businesses that are legal in their home states cannot use banks or many traditional banking services.They have to pay all of their bills, taxes, and payroll in cash. They can’t get loans or mortgages, and they can’t build credit.
These problems can also extend to companies that supply marijuana businesses and all of their employees. If your income comes from an activity that is not allowed by federal law, then you as an employee may be barred from using a bank or getting credit. Furthermore, since these businesses are paying their workers in cash, any individual with a bank account would be subject to additional scrutiny for making large amounts of cash deposits. This is such a new industry that the potential problems facing employees in these businesses have not yet surfaced, but it is something that policymakers should be considering before significant problems emerge.
1. See Joseph Henchman, Marijuana Legalization and Taxes: Lessons for Other States from Colorado and Washington, Tax Foundation Special Report (Apr. 20, 2016).↩
City governments have experienced increasing financial strain over the past several decades – pension payments are coming due, infrastructure needs replacing, and the cost of providing social services is increasing. This leaves little room for local governments to get on the social finance innovation train that has been sweeping the private sector for the past few decades, where bright minds have been exploring social enterprise, low-profit limited liability companies, impact investment, and more. However, many have recognized the importance of bridging the gap between private sector innovation and government, leading to organizations across the sectors investing time and money devising ideas that may fill this void. Continue reading “How the Private Sector is Paying for Public Innovation”
Recently, The National Institute of Standards and Technology (NIST) announced the competition to award its first National Manufacturing Innovation Institute (NMII). Proposers may focus on any advanced manufacturing technology area not already addressed by another institute or open competition. Seven institutes have been funded to date with two currently moving through the review and negotiation process. After attending the Proposer Day session on March 8, 2016, it is clear that many proposal teams have already been formed. Continue reading “NIST Announces NMII Competition”
To many Americans, Canada is our friendly neighbor to the north, known for an affable attitude, a passion for pucks and a penchant for strong beer. What is perhaps less known is how critical trade with Canada is to the economy of the United States. Consider:
- Nearly 9 million U.S. jobs depend on trade and investment with Canada
- Canada is the top export destination for 35 states
- Canada is the number one supplier of crude oil, refined petroleum products, natural gas,
and electricity to the U.S. as well as a
leading supplier of uranium
- 400,000 people cross the Canada–U.S. border daily
U.S. unemployment peaked at 15.4 million persons in October 2009 and has been falling back towards 12 million ever since. Unemployment has always been the most troublesome statistic because it is one of the most widely recognized and flawed of the economic indicators. The recent drop has brought claims that the numbers have been manipulated. Of course, this would be very hard to do. Unemployment numbers are reported by companies to state bureaus that are staffed generally by civil servants. In 29 states, the Governors are Republican and it is not very likely that they would be manipulating numbers to make Obama look good. Continue reading “Numbers Behind the News: What is Driving Unemployment?”
If Social Security is the third rail in American politics, then tax loopholes are the sacred cows and we have a growing herd of tax dodge heifers. Whether you call them loopholes, expenditures, exclusions or deductions often characterize how you feel about them. Nobody likes loopholes, expenditures should be scrutinized, exclusions can be okay, but everyone loves deductions. We tend to think of loopholes as things that other people get and deductions are things we deserve. The Joint Committee on Taxation (JCT) has been publishing reports on tax expenditures since the 1970s, so that is what we’ll call them here. The debate on tax expenditures has been simmering for decades but it has attracted renewed attention with the ascendance of Paul Ryan as the Republican Vice Presidential nominee and his call for closing tax loopholes. A lot of attention is focused on “…loopholes that let politically-connected companies avoid paying taxes…” What is also less known is that most tax expenditures go to individuals (Figure 1). From 2001 to 2011, individuals get more than $800 billion in tax breaks compared to just $98 billion for corporations. Continue reading “Sacred Cows – The Political Economy of Tax Loopholes”
Admittedly it is awkward to boast about the economic recovery that is occurring in much of the Rust Belt. In our own neck of the woods, Akron, Cleveland, Pittsburgh and Youngstown have all experienced strong recoveries. According to Brookings Youngstown Ohio ranked 8th out of 100 metro areas for job growth. Yes, Youngstown Ohio. Here are a few insights from Brookings’ Metro Monitor:
- Manufacturing regions in general led the recovery – Recovery in the automotive sector has helped the auto-producing regions – Recovery in Information Technology has also helped the IT regions.
- There might be signs of the regional impact of stimulus – “The metropolitan areas with the strongest economic recoveries generally gained government jobs, while those with the weakest recoveries generally lost them. Eleven of the 20 strongest-recovering metropolitan areas (Bakersfield, Boston, Dallas, Des Moines, Houston, McAllen, New Orleans, Provo, San Jose, Worcester, and Youngstown) gained government jobs (federal (including military), state, and local combined) in the time since their total employment bottomed out, while one (Lakeland) had no change in government employment.?”
I think these findings have interesting implications for the national debate going on right now about our economy and the role of the federal government. We always seem to want a clear Yes or No, Stop or Go type of answer and in a complex economy like the U.S. that is never easy. The truth is that what works for one region does not work for another. Maybe what is wrong is our idea of a national economic policy. It might work better if we created regional policies and plans to address the unique needs of regional employers, workers and the environment. The Obama Administration has attempted to do this with their support for Regional Innovation Clusters, but I think it will take a more fundamental restructuring of how federal agencies work. As long as we try to fit square regional pegs into round national policies, we are going to continue to be frustrated with our economic policy.
In an period where we seem to have forgotten how we all got here, Dayton has decided to swim against the stream of anti-immigrant fervor. Tough new laws in Alabama and Georgia are proving effective in driving away undocumented immigrants and even more effective at slashing agricultural production. Even though all those juicy farm worker jobs are there for the picking (sorry), American workers have not picked up the slack and these states are turning to ex-cons and chain gangs to pick the produce before it rots on the vine.
We have traded a group of workers we have labeled criminal because of their overwhelming desire to be in this country for a group of workers that became criminals despite their status as full-fledged American citizens. It is ironic, but I am sure the humor is lost on both groups.
In this climate, Dayton has decided to go another way. They are embracing immigration and even the immigrants that are a necessary part of it. The Welcome Dayton plan hopes to use the economic and entrepreneurial energy of immigrants to grow its economy. They have developed a comprehensive plan that covers business development, the justice system, culture, education, health and social services. It is a model for other cities that want to return to America’s fundamental roots as a melting pot of people and ideas.
The analogy of job-killing taxes is dramatic but it is not supported by evidence. Michael Chase writing for The Rational Middle not only dissects the argument but also provides a how-to guide for readers to check the data themselves. Yet we can expect to hear a lot more about job-killing taxes, especially now with Obama’s proposed Buffet Tax. In all of this noise we never hear how the taxes will kill jobs, or why we’ve lost jobs when we’ve cut taxes. We must simply equate taxes with the “death” of jobs.
Businesses hire and fire based on their need to produce more, or less, to meet the demands of their customers. Taxes might shift the marginal threshold of those decisions, but taxes are generally insufficient to “kill” jobs. Taxes do take money out of people’s pockets so taxes do reduce consumer demand, but taxes do not take money out of the economy. The money circulates back into the economy, sometimes more efficiently than our individual spending. An individual might spend their tax cut largesse on dining out or going to a sporting event, whereas government makes investments in infrastructure and education that are much more productive. Not all government spending is more productive, there is certainly money that is wasted, or where the marginal gain is wiped out by the transaction costs of transferring that money. It also depends on whether the money is being used for consumption or investment.
Enough rhetoric, it is time to turn to the data. For more historical perspective, you can turn to Michael Chase again or go directly to the National Income and Product Account. Because employment and taxes are on vastly different scales, the numbers here have been indexed to 1998 values. During this period, employment has been stable while we have had two major spikes in tax revenue (Figure 1). You might argue that taxes have acted like a prophylactic – preventing the creation of jobs that might otherwise have been created. That is possible but we need to explore someother data.
Note: All data indexed to 1998 values.
If taxes are killing jobs – then they do so by siphoning off profits that might otherwise be converted into jobs. Yet when we look at taxes versus profits the linkage goes the other way – rising profits produce more tax revenue (Figure 2). There is no connection between higher taxes reducing profits. Beginning in 2003, profits began to increase much more rapidly than taxes.
Note: All data indexed to 1998 values.
Investment income, or capitals gains, are taxed at a lower rate than labor income because we desire that income to be re-invested. The problem with this logic is that there is nothing magical about a lower tax rate that encourages that re-investment, and the data show that very little of those gains are being reinvested in ways that generate jobs.
The linkage between profits and employment has been broken for some time. Private industry is generating profit but it is not translating that profit into jobs (Figure 3). Businesses have been able to wring greater productivity and profit out of an increasingly stressed labor force. There is significant variation around the country with some regions doing better in aligning growth in profits and output with job growth, but in many regions and many industries that is simply not happening.
Neither additional stimulus spending nor steeper spending and tax cuts are going to kickstart job creation until we fix the gap between wealth, growth and employment. Right now the outlook is grim for any real progress on employment.
In 1996 Alan Greenspan uttered the words “irrational exuberance” to describe the speculative fervor of the 1990’s economy. Assets in the dot.com days were over priced and value was driven by talk rather then demonstrated performance. We learned some lessons and forgot others from that time.
I am deeply concerned that state and local governments are being flooded by irrational exuberance of a different industry, the Shale play. Let me be clear, I think that having a U.S. sourced energy supply can prove to be a great catalyst for supporting our pursuit of energy independence. The concerns however come from the lack of honest planning and conversation about how the economic opportunity of Shale fits into any coordinated economic and business growth strategy for the state.
There have been two articles in the past few weeks that have highlighted my concern about ‘truthiness’ in the Shale industry.
First, there was an article by a research group, Keystone Research based in Harrisburg, PA that raised questions about the reports of job creation by the Shale industry in the Commonwealth. Keystone Research claims the industry has created less than 10,000 jobs while the Marcellus Shale Coalition cites a Pennsylvania Department of Labor Report that claims over 72,000 new hires. The spat even received coverage in the Wall Street Journal and will most likely continue to spur news coverage for months to come as the issue becomes one of what’s being counted and how you define a new job.
There has been a lot of debate and dialogue over job counts in other sectors including information technology, life sciences and more recently green jobs. The conversations have produced more standard and realistic ways of identifying industry contributions. For either side in these arguments to make the dialogue a political issue does not help the process and in fact impedes structured thinking.
Then this weekend an article in the New York Times, “Insiders Sound an Alarm Amid a Natural Gas Rush,” raised a number of questions about reported and real data. The article, citing numerous internal sources and external analysts indicates that there may be an unhealthy amount of hype driving the exuberance being placed on the gas industry by shareholders and politicians. If the amount of gas and the profits from it are not as great as we have been led to believe, then investors and the state may end up paying more for infrastructure and support costs than we get in benefits – whether they are jobs or revenue from gas production.
A Balanced Portfolio Survives the Bubble Bursts
So we have two articles that are highlighting issues around data and perceived differences between excitement and reality. The flaw in all of this rhetoric especially by our political leaders is that this is but one industry sector in a state that has learned painful lessons about economic peaks and valleys. Places like Pittsburgh have only recently turned the corner from an economically disastrous domination by a single industry sector.
Just a few years ago Pennsylvania maintained a healthy economic investment strategy, supporting programs and companies that ran from the life sciences, to information technology and robotics to advanced manufacturing. In addition, the state supported the redevelopment of communities to pave the way for new investments by public and private sector entities. I would argue that it was that strategy that has positioned us to do better than most during the latest financial downturn.
Today though we seem to lack any defined economic development strategy and have become tone deaf to the needs of many of the state’s core industries. If your industry is not related to the Shale play and yet to be defined upstream and downstream opportunities, then you really don’t seem to have a place within the current economic development plans. Putting the needs of one industry, whatever it is, above all others not only risks losing current growth opportunities in those industries, but also forces them to work harder in the future to make up the lost ground.
This should be a lesson learned to my friends in many other states that have political leadership that are deciding it is easier to focus on one industry sector in these tight budget times. The reality of this lack of a balanced economic portfolio won’t impact us for at least a few years and will become a different Governor’s issue. Unfortunately for the state’s residents it will be a another set back to recovery that could have been avoided with just a little planning and honest dialogue about what are opportunities are.