The media have accepted enthusiastically and unquestionably endorsed an analysis by James Moody, hereafter respectfully called “Moody”, of nine proposed initiative petitions – which we here at United for Missouri’s Future have dubbed the Missouri Jobs Act. The act calls for repealing the state income tax and replacing it with a broader, higher sales tax capped at 7 percent. I’ve always been amazed at the blind acceptance of Moody’s work even though it is often off base. The blind acceptance is particularly unfortunate in this case because his “analysis,” which he sent to the state auditor, is deeply flawed.
This is going to be a lengthy response because I think it’s important that you are fully informed. You need to also understand that I don’t think Moody is an evil person. I would have no problem having dinner and a drink with him as a friend but who is James Moody?
Moody was the state budget director in the Ashcroft administration. That and the fact that he has been around awhile leads the liberal and sometimes not so liberal media to claim that’s proof enough that his analysis must be fair and accurate. After all, it’s a lot of work to challenge an analysis by an expert.
But these days, Moody’s a lobbyist. There’s no shame in that position. As many of you know I am also a lobbyist and required to be one to advocate for things like the Missouri Jobs Act. The problem with lobbyists can be that they sometimes work an outcome that favors their current or wanna-be clients despite what the facts say. I’ve never possessed the ability to do that, but some of my friends seem to be able to do so.
As a prognosticator, Moody is a lot like Nostradamus. His predictions are general enough that at some juncture they may be considered accurate, but it’s more of a function of right place/right time than possession and transmission of facts.
Before I begin presenting a detailed look at the analysis results, here’s a general comment about Moody’s research.
Actually, the Moody submittal to the State Auditor indicates he did almost no original research. He relied instead on flawed work from others. I think a close, fair reading of the research shows that Moody spends the vast majority of his analysis arguing points that have nothing to do with the Missouri Jobs Act.
Most of his “analysis” is a critique of legislation, introduced in previous years, that has little in common with the Missouri Jobs Act; he dissects tax policy research that is unconnected to the Missouri Jobs Act; and he criticizes the “Fair Tax Book,” which has nothing to do with the Missouri Jobs Act.
So here goes the more detailed analysis.
- Moody makes many assumptions about the size of a prebate. Moody claims the prebate alone will require a 3 percent increase in the sales tax. But the initiative leaves the size and scope of the rebate up to state lawmakers. Moody is simply engaging in unsubstantiated conjecture based on “previous” versions, not an analysis of the nine petitions submitted in his discussion of the prebate.
- Moody says the Missouri Jobs Act does not exclude “business to business” transactions. One of the most egregious examples he uses is business rents both his own and that of others. His assertions are simply not true. The petitions specifically say that the sales tax will be applied to “all sales to individuals.”Additionally, the initiatives specifically excludes “sales or services to or for the benefit of … a business.” The rent Mr Moody pays to his own company would not be taxed. Neither would the rent a child care provider pays for their building or supplies be taxed. The Missouri Supreme Court uses the Webster dictionary definition of an individual.
- Moody claims that the higher sales tax will cause businesses to move to one of the eight border states, or consumers to cross state lines to avoid the tax. But Moody offers no economic research, no support for that theory. He can’t because it’s an economically flimsy argument. Moody also ignores the positive impact of eliminating the 6 percent income tax in attracting businesses to the state. He ignores the option for localities everywhere in the state to adjust their local rates downward to take advantage of the broader sales tax base. This adjustment would result in border cities remaining competitive with neighboring states if they choose the option. Tennessee has several major cities on its borders; Memphis, Chattanooga, Knoxville, and Johnson City/Bristol. The highest rate is around 9.75% and they have seen little impact. The nine states without an income tax have experienced far higher economic and population growth over the past decade than the 41 with an income tax.
- Moody discusses the regressive nature of a sales tax. Again, Moody provides no supporting research for that claim, although it is widely accepted. The problem is he fails to acknowledge that eight of the nine petitions leave it to the legislature to develop a prebate/rebate system specifically for low –income individuals. The ninth version does not preclude that from being the outcome either. It’s also hard to ignore that there is nothing more regressive than the state’s essentially flat 6 percent income tax. Consumers can choose cheaper products, or they can delay purchases, to avoid a sales tax. There is no avoiding the income tax for those who lack the means.
- Moody claims that low-income individuals and families spend a majority of their income on items that would fall under the sales tax. But he fails to recognize that Medicaid benefits, supplemental nutrition programs and a variety of services from non-profit and religious groups are exempt from the tax. See forgoing explanation as well.
- Moody claims that a .25 percent tax would be needed to replace the 1/8-cent conservation sales tax and 1/10-cent park and soils tax. But the Missouri Jobs Act doesn’t eliminate either of those taxes.
- At one point in his analysis, Moody claims that healthcare services are exempt (this is important, he says, because it shows that the tax won’t generate as much revenue as proponents claim). Wrong. Sales or services of non-governmental healthcare would be included – unless the legislature exempts it – in most versions of the initiative submitted. One of the nine versions exempts healthcare services.
- Moody says that gaming revenues would be taxed. In fact, gaming revenues and admission fees into casinos would not be taxed. Casinos pay a gross receipts tax, not a sale or service.
- Moody says that local governments would have to recalculate their sales tax rates to include the broader items and services. That’s not true. Local governments could expand their sales tax bases only with a majority vote of the public. There is no requirement that they do so.
- Moody says the corporate income tax would be repealed (which require more revenue to be replaced). That’s inaccurate. The corporate tax would remain in place in all but one version of the petitions filed.
- Moody spends a lot of space discussing the fate of tax credits, saying that tax credit investors will lose hundreds of millions of dollars. But the initiatives only say that the tax credits cannot be applied to individual income. They could be applied to the corporate income tax, franchise tax, bank tax, insurance premium tax or other taxes. There would still be a healthy market for existing tax credits.
- Moody claims that proponents relied on an “economic engine” myth in deriving the 7 percent cap. Untrue. That figure is based on a static projection and assumes no economic boost by eliminating the income tax. In other words, if there is an economic boost as we see in other states, the 7 percent rate can be reduced to prevent a windfall. And the nine states without an income tax have grown at a rate that’s twice as fast as the 41 with the income tax. Tennessee applies sales taxes to only about 35 percent of its GDP and collected over $6 billion in FY10. The nine initiatives, on average, would tax GDP approximately 45 percent, reducing or eliminating the dependence on economic growth.
- Moody says the increased sales tax will decrease consumer spending. Again, Mr. Moody offers no economic research to support that point. But even if we accept the possibility, I believe that it will be more than offset by the elimination of the state income tax. Tennesseans still spend a lot!
- Moody says that replacing the income tax will require a sales tax rate of 9 percent. This inaccurate estimate can be traced back to the faulty assumption on the prebate/rebate. It does seem plucked from the air. And I will make one final point. Of the nine states without an income tax, the highest state sales tax rate is 7 percent. And that’s Tennessee; a state which once trailed Missouri economically, but now has the Show-Me State in its rearview mirror.
- Moody suggests looking at a Dec. 15, 2010, paper by the Show-Me Institute, “Income Taxes vs. Sales Taxes: A Welfare Comparisons,” written by Grant Casteel and Joseph Haslag. This is perhaps one of the biggest stretches in Moody’s whole analysis. The paper to which he refers was not an analysis of the petitions, which were filed a month later. In fact, the paper was highly theoretical, based on a fictional economy as Haslag, a University of Missouri economics professor has stated and was never meant to represent any tax reform effort. It wasn’t even developed using Missouri data.
- Finally, Moody has gotten a lot of attention by saying the Missouri Jobs Act will either bankrupt the state or “the poor and working lower and middle income classes.” But his research supports none of that, while the collective experience of nine states without an income tax contradicts it. If Moody’s dire prediction is anywhere near true, we would see a gaping, worthless, giant sucking sound to our southeastern border with Tennessee. The fact is just the opposite of Moody’s prediction. Tennessee’s economy is stronger and growing faster, as is the population (11.5% growth versus 7% and loss of congressional seat), has a higher average teacher salary, has a lower property tax per capita, has a lower overall tax burden and the list goes on. Mathematic models can show prediction results but Tennessee is a real, live working model of what the Missouri Jobs Act can be for our state.
From beginning to end, Moody’s analysis is simply wrong. He uses wrong assumptions; he doesn’t support most of his economic assertions; and he clearly has misread key parts of the petitions. It’s clear that Moody went into the analysis with an outcome already in mind. That’s why it’s so absurd that the media have referred to his research as “independent.”