Friday, June 15, 2018

New Data Shows California Farm Employment Decreased Slightly in 2017, First Decline Since 2009

New data from the Quarterly Census of Employment and Wages (QCEW, shown below) shows total farm employment in California declined 0.5% between 2017 and 2016.  This breaks a streak of seven straight annual increases, which to the surprise of many, persisted through the worst drought in California's modern history.  Interestingly, the decline was entirely due to a sharp 4% year-year drop in the months of January and February 2017, farm employment was unchanged over the rest of the year.  Since these two negative months correspond to President Trump's inauguration, and are also in the low season, increased anxiety surrounding immigration policy may have had an impact.

Average wages paid increased 3.1%, enough to keep pace with inflation, but about half the percentage increase seen in 2015 and 2016 and the smallest gain since 2011.  An increase in the minimum wage from $8 to $10 per hour contributed to higher 2015 and 2016 wage increases, as 2017 brought a smaller 50 cent increase to the minimum wage that only applied to employers with at least 26 employees. 

Farmers are having an increasingly difficult time getting all the workers they demand as immigration has decreased and unemployment in California's farming regions have dropped to record lows.  While farm worker wages have increased somewhat faster than overall average wages, it is still the lowest paying industry in California by far, and farm worker wages have not increased as much as one might expect in response to the combination of reported shortages and the rising minimum wages.  Nevertheless, the farm labor situation is causing more change to California agriculture than water scarcity, as farmers across the state are adjusting crop choices, and exploring and implementing new labor saving technology.

Changing policies are likely to accelerate the pace of this in the coming years.  Between 2019 and 2022, California's minimum wage will rise from $12 to $15 per hour.  Over the same period, the state will phase in new overtime rules that will bring agriculture into alignment with rules governing other industries.  In addition, these increased labor costs will hit at a time that the new federal tax law increases incentives for business capital investment.

Thus, big changes are coming to agriculture labor markets and this data will be very interesting to track over the next 5 years.  While it will be a challenging time for farmers, I am optimistic that the Valley economy will benefit in the long-run from the transition of the industry to a more capital and technology intensive production with higher wages, even if it ultimately means fewer jobs.

Year Crop farm Anim Farm Ag Services Total % change
2007            172,222              29,955            180,454              382,631
2008            174,697              30,283            183,405              388,385 1.5%
2009            170,041              29,157            171,453              370,651 -4.6%
2010            170,068              28,299            181,386              379,753 2.5%
2011            170,333              29,140            186,546              386,019 1.7%
2012            171,501              28,987            195,225              395,713 2.5%
2013            174,776              28,266            205,552              408,594 3.3%
2014            175,127              28,140            209,131              412,398 0.9%
2015            176,537              28,496            213,178              418,211 1.4%
2016            172,847              28,476            219,839              421,162 0.7%
2017            169,252              28,672            221,155              419,079 -0.5%
Total Wages (in thousands)
Year Crop farm Anim Farm Ag Services Total % change
2007  $     4,416,340  $        848,165  $     3,680,430  $       8,944,935
2008  $     4,567,919  $        898,979  $     3,841,685  $       9,308,583 4.1%
2009  $     4,452,149  $        877,571  $     3,661,821  $       8,991,541 -3.4%
2010  $     4,526,888  $        860,390  $     3,973,411  $       9,360,689 4.1%
2011  $     4,667,911  $        905,600  $     4,237,943  $       9,811,454 4.8%
2012  $     4,931,875  $        913,074  $     4,634,998  $     10,479,947 6.8%
2013  $     5,274,135  $        913,979  $     5,087,808  $     11,275,922 7.6%
2014  $     5,483,877  $        950,215  $     5,359,878  $     11,793,970 4.6%
2015  $     5,734,489  $     1,021,973  $     5,856,656  $     12,613,118 6.9%
2016  $     5,947,906  $     1,064,181  $     6,541,821  $     13,553,908 7.5%
2017  $     6,024,487  $     1,119,909  $     6,757,423  $     13,901,819 2.6%
Average Wage
Year Crop farm Anim Farm Ag Services Total % change Min wage
2007  $          25,643  $          28,315  $          20,395  $            23,377 $7.50
2008  $          26,148  $          29,686  $          20,946  $            23,967 2.5% $8.00
2009  $          26,183  $          30,098  $          21,358  $            24,259 1.2% $8.00
2010  $          26,618  $          30,404  $          21,906  $            24,649 1.6% $8.00
2011  $          27,405  $          31,078  $          22,718  $            25,417 3.1% $8.00
2012  $          28,757  $          31,499  $          23,742  $            26,484 4.2% $8.00
2013  $          30,177  $          32,335  $          24,752  $            27,597 4.2% $8.00
2014  $          31,314  $          33,767  $          25,629  $            28,599 3.6% $8.50 (July 1 increase to $9)
2015  $          32,483  $          35,864  $          27,473  $            30,160 5.5% $9.00
2016  $          34,411  $          37,371  $          29,757  $            32,182 6.7% $10.00
2017  $          35,595  $          39,059  $          30,555  $            33,172 3.1% $10.50 (>25 employees), $10 (<26 font="">

Notes:  Employment is the average of monthly payroll employment over the year, and the average wage is just the total wages paid over the course of the year divided by the average number of jobs.  Data on hours worked or the hourly wage are not available from the QCEW.  The QCEW is a census of all employer tax filings and is considered the most reliable data on payroll jobs and wages.  The data includes NAICS codes 111 (crop farms), 112 (animal farms), and 115 (support services which includes a small amount of non-farm jobs but is dominated by farm labor contractors).  

Monday, June 11, 2018

Another small step towards a creative downtown Stockton

Mike Fitzgerald's weekend column profiled a group of young San Francisco transplants starting up a "maker space" in downtown Stockton.   While this is a slow developing movement, I still think encouraging more of this is one of the best economic development strategy for Stockton.   Nearly two years ago, I wrote this in another post,
Everybody is so impressed with Silicon Valley that far-fetched hopes for the tech industry often dominate economic development talk.  But the best assets of Stockton, proximity to Bay Area markets with relatively low real estate costs, are not that important to tech industries who aren't sensitive to rents and sell to a global market.  The tech industry has moved up the peninsula to even more expensive San Francisco.  Much of the attraction is the art and cultural attractions of the City, and there is much concern in SF that the tech workers are damaging the City's cultural fabric as they drive rents into the stratosphere.

I have long thought Stockton should focus its economic development on artists (broadly defined to include craftspeople, musicians, etc.), since they are more likely to be attracted to what the city has to offer.  They are sensitive to rents, and value access to the Bay Area market but do not necessarily have to live and work there every day.  Stockton's history, diversity, and urban environment can also be a plus.

Tuesday, May 15, 2018

Seattle Taxes Amazon As Other Cities Throw Subsidies At the Company

The irony.  Almost every city in the country has offered generous tax incentives to Amazon to attract their second headquarters, while the city council of the city with the actual headquarters has targeted them for a new tax on each employee as a response to rising rents and homelessness. 

Supporters of a head tax cheer as the Seattle City Council prepares to vote Monday. Amazon became a kind of symbol during weeks of discussion on the head tax. Some people said big businesses ought to pay a new tax to help address the homelessness crisis, while others worried about an anti-business message. (Bettina Hansen/The Seattle Times)

Is this a policy that could spread to California?  California cities, including Sacramento and LA, were among those offering Amazon subsidies while experiencing homelessness problems of their own.

More than the revenue, the measure seems to also be about trying to get Amazon and other fast growing companies to stop growing and attracting new high-paid residents.  It may work.  Seattle is the #1 destination for people leaving the Bay Area, but may not be for long.

Corporations like Amazon and Starbucks reacted angrily, and accused the City of financial mismanagement.  Indeed, it seems those soaring rents and property values ought to be filling the cities coffers with tax revenues.  This article suggests that Seattle City revenue has grown rapidly which raises questions about how much the revenue is needed.

I also wonder how this might affect Amazon's HQ2 decision.  It might make them more hesitant to go to cities with high rents, progressive politics, that have the potential to generate a Seattle like backlash in the future.  That would seem to make LA, Boston, Denver, DC less attractive while potentially boosting places like Atlanta, Austin, Pittsburgh, and Columbus.

Update 6/15:  Seattle repealed the tax this week, but I suspect it could still have an impact in how Amazon looks at cities for HQ2.  I wouldn't be surprised if it makes them consider splitting up the project rather than create more Seattle situations.

Thursday, April 26, 2018

Stockton Has Both the Longest and Shortest Commutes in the U.S.

The Stockton-Lodi area has a very interesting economy - there are many extremes and averages can be deceptive.  This is well illustrated by Stockton appearing at the top of the list in two recent studies: one that measured the share of the population that are super-commuters, and the other measured shortest commutes.  In other words, if you are a worker in the Stockton-Lodi area, your commute is likely to be either extremely short or extremely long.

Here are the stories/studies:

First, from this weeks San Jose Mercury News,
SJM-L COMMUTE-0425-90-01

Second, this slightly older Marketwatch story describing a Brooking Institution report that looked at commute length for people who live and work in the same metro area.
The longest commute is in sprawling Atlanta, followed closely behind by Dallas and Houston. The shortest commute is in the Stockton-Lodi, Calif., metro area.  
Metro Typical commute in miles
Stockton, CA 4.7
New Haven, CT 5
Scranton, PA 5.2
Oxnard, CA 5.3
Bridgeport, CT 5.4
Provo, UT 5.5
Bakersfield, CA 5.6
Fresno, CA 5.6
Spokane, WA 5.6
Ogden, UT 5.7

The top 10 are listed above, notice that other Central Valley Metros are here too.  And here is the link to the original Brookings study

This is a good example of how averages can be deceiving.  It is easy to see how a company or location consultant screening areas might use average commute time data and think that traffic and commuting is a terrible strike against it.  However, a closer look reveals that employee commutes are actually very short in Stockton for employers if they are a good fit for the regional workforce.

The relatively short local commutes of Central Valley metros in this ranking of local job proximity is interesting too.  With the exception of Sacramento, the large cities in the Central Valley (Stockton, Fresno, Bakersfield) are not characterized by sprawling suburbs full of workers commuting to an urban core of office jobs.  While these cities certainly have plenty of suburban, sprawl type housing in the city limits, often the city boundaries end abruptly into farmland rather than another suburb, followed by another suburb.      

Monday, April 9, 2018

Will the Metropolitan Water District Board Give Their Staff a Blank Check for WaterFix? Comparing language in MWD resolutions from October 2017 and April 2018

Last fall, when the Metropolitan Water District board voted to approve their share of WaterFix, the authorization of the General Manager was strictly limited to $4.3 billion (calculated as 26% of total estimated cost, but the limit was on the amount).

Tomorrow, the resolution before Board members does not limit the amount, but approves the General Manager to pay 64.6% of total project costs and grants the General Manager discretion in how the percentage is calculated.  While the staff report estimates this amount as "up to $10.8 billion," the actual resolution varies substantially from previous resolutions in that it does not include a specific dollar amount or any language to limit the total amount.  

This seems like a very substantial change to language that increases the financial obligation and risk to Metropolitan's ratepayers by much more than the difference between $10.8 billion and $4.3 billion.  I have pasted the relevant resolution language below.  Read it for yourself.

October 10, 2017 resolution: 

"2. Authorization of General Manager. The Board hereby authorizes the General Manager of the District, and any of the designees of the General Manager of the District, to do any and all things necessary or convenient in the best interests of the District to effect any financing of the California WaterFix through the Financing JPA (referred to herein as a “District Participation Action”) consistent with the CWF Project Arrangements, and to enter into any and all agreements and documents that the General Manager or his designee determines, in his or her sole discretion, to be necessary or convenient in the best interests of the District to carry out any District Participation Action, and to execute all papers, documents, certificates, agreements or other instruments that may be required in order to carry out any District Participation Action or to evidence said authority and its exercise; provided, however, that the District shall not make financial commitments to the California WaterFix in excess of $4.3 billion in 2017 dollars, which amounts to 25.9% of the estimated $16.7 billion in total capital costs of the California WaterFix. The term of bonds issued for the project shall not exceed 40 years and the total interest cost on debt issued will not exceed 8%. In implementing these actions, the General Manager of the District shall be authorized to use such reasonable assumptions, methods, approaches and calculations that it believes, in good faith, to be consistent with the authorizations herein and necessary to the implementation of the matters provided for in this Resolution." 

April 10, 2018 resolution:

"2. Authorization of General Manager. The Board hereby authorizes the General Manager of the District, and any of the designees of the General Manager of the District, to do any and all things necessary or convenient in the best interests of the District to effect any Unsubscribed Capacity Arrangements, and to negotiate, execute and deliver any and all agreements and documents that the General Manager or his designee determines, in his or her sole discretion, to be necessary or convenient in the best interests of the District to carry out any Unsubscribed Capacity Arrangement, and to execute all papers, documents, certificates, agreements or other instruments that may be required in order to carry out any Unsubscribed Capacity Arrangement or to evidence said authority and its exercise. 

3. Limitation of Authorization. The District shall not enter into any Unsubscribed Capacity Arrangement under Section 1 or 2 of this Resolution if, after giving effect to such Unsubscribed Capacity Arrangement, the District’s funding of such Unsubscribed Capacity Arrangement, together with the District’s estimated costs in its capacity as a State Water Project contractor, would commit the District to pay for more than 64.6% of the estimated costs of California WaterFix; provided, however, that the General Manager shall calculate the total amount of estimated costs of California WaterFix and the District's responsibility to pay for costs of California WaterFix based on such reasonable assumptions and methods as the General Manager shall determine in his or her reasonable discretion and judgment." 

Highlight and Bold added 4/10.
Links to original documents:
For October 10, 2017

For April 10, 2018

Wednesday, March 7, 2018

Revised Data Reveal Explosive Growth of E-commerce in the Stockton Area: Transportation and Warehousing Jobs Now Exceed Retail Jobs

The annual benchmark revisions of local area employment data was released today (benchmarking is a once a year process to sync the monthly survey data with complete tax filings data).  As I expected, there was a large positive revision to Stockton area growth that now more accurately captures the full growth of the logistics industry.

Specifically, the Stockton area year over year job growth is now reported at a sizzling 4.8% annual rate, rather than the underestimated 1.6% in last month's release of preliminary data.  The number of payroll jobs in the Stockton area for December 2017 is 7,800 more than previously reported (an increase from 232,400 to 240,200).  Of those 7,800 newly reported jobs, a full 6,000 of them are in the transportation and warehousing sector.  Wow!

Perhaps the most amazing tidbit in this data is that we believe that the Stockton is the first metro area in California where the number of transportation and warehousing jobs exceeds the number of retail jobs.  Is this a harbinger of the future for other areas?  [We haven't checked everyplace, but there are 3 retail jobs for every trans/warehousing job statewide, and even 1.5 retail jobs for every trans/warehouse job in the Inland Empire which is the other area in California seeing explosive fulfillment center job growth.]

Obviously, this change doesn't mean that Stockton residents are the biggest e-commerce shoppers in the country - these jobs are primarily serving the Bay area.  It is a sign about how the Northern California Mega-region is increasingly interconnected. 

If this shift to the e-commerce economy makes you a bit uneasy, you might want to read the previous post about a study from the Progressive Policy Institute.  It is disruptive change for sure, but the economic effects may be different than you think.

Tuesday, March 6, 2018

Fulfillment Centers and Jobs: Is Amazon replacing paid retail hours or unpaid household shopping hours?

Over the past year, I would estimate the most common press/public question we have received in the Center for Business and Policy Research is about the impact of Amazon and other fulfillment centers on employment and income.  Is the growth of this industry just destroying and replacing traditional jobs in shopping center, or do they provide a net gain to employment?

I recently heard Michael Mandel of the Progressive Policy Institute speak on this topic at the National Association of Business Economists meeting in DC.  His presentation and the full report are accessible to non-economists, and provide an interesting, and often overlooked, perspective on the issue.  While much of the data analysis in the report is oversimplified, I still found it insightful and believe the general conclusions are likely accurate.  It is an effective push back against the doom narrative that surrounds much public discussion around robots and automation.

Mandel compares e-commerce to a previous retail revolution, the rise of the big box store.  He finds that the rise of lower cost big box stores was truly negative for retail workers, and that at least some of the efficiency gains of big box stores was to shift hours from paid retail workers to unpaid household work (think of people driving farther to shop at a store with lower service, but lower prices.)

In contrast, he notes that e-commerce is substituting for household hours spent shopping and running errands.  Thus, while fulfillment centers are having some negative effect on paid retail jobs, they are also creating new jobs by converting unpaid household shopping time to paid shopping time fulfilling and delivering orders directly to households.  He documents a significant decrease in household shopping hours that parallels the rise in e-commerce, and estimates that unpaid household hours of work still exceed paid hours in America's goods distribution system.  Thus, there is still a lot of potential for growth here.

He also notes fulfillment center jobs pay somewhat higher wages than big box retail, and that they only require a high-school education but utilize "a mix of cognitive and physical skills not dissimilar to industrial workers." 

In economic development conversations around the North San Joaquin Valley, I have often wondered whether these new distribution center jobs could be part of a skill building ladder for their employees - and whether experienced fulfillment center "graduates" could be an attractive workforce employers with even higher paying jobs.  There is also a lot of talk about a new wave of innovation, involving technology like 3-D printers, that could lead to some goods production or customization attached to these fulfillment centers.

I understand why there is anxiety about the robots in these automated distribution centers and what they mean for the future of work.  It is disruptive change, but I see the potential for more positives than negatives.  Indeed, Mandel said he thinks the biggest economic losers will be owners of shopping centers and big box stores.  Converting all that space and parking lots to other uses (like housing) could help alleviate some other problems we have, and create another batch of new jobs.

If you are looking for a readable and refreshing take on e-commerce, Mandel's report is well worth reviewing. 

Monday, March 5, 2018

The Wall and The Tunnels: Multibillion dollar boondoggles share bait and switch financial plans and more

Donald Trump’s biggest campaign promise was building a $20+ billion wall along the Mexican border.  The financial plan:  “Mexico will pay!”

For a decade, Metropolitan Water District has been campaigning for the $16+ billion Delta tunnels.  The financial plan:  “Farmers will pay!”   Well, that hasn’t exactly been their line.  Instead, the promise has been, “The cost is the same as a latte a month” along with promises of “no subsidies for farmers.” 

There have been many dubious assumptions behind Met’s calculation that it will “only” cost the average southern California household a few dollars per month, but the biggest whopper has always been that Met’s ratepayers would only covering 25% of the bill – which meant Central Valley farmers would shoulder the vast majority of the costs.

Despite the fact that most knowledgeable people knew both Trump and Met’s financial claims were a joke, they stood by these myths when they were in campaign mode trying to build political support and a sense of inevitability behind their mega-projects.  But in recent months, both of them have faced the reality of switching from a political campaign to actually getting the billions of dollars needed to fund construction of their pet projects.

Trump has spent the past several month’s trying to get Congress to appropriate over $20+ billion for the wall, even threatening government shutdowns and a DACA solution in his effort to get taxpayers to pay.  His new financial promise:  “Congress will pay, but Mexico will reimburse us.” 

As first reported by the Sacramento Bee's Ryan Sabalow, Metropolitan is now trying to rush its board into voting to pay for the farmers share of the tunnels.  Met's new financial scheme: “Our ratepayers will pay, but the farmers will reimburse them.”

Congress has not agreed to pay for Trump’s wall.  Likewise, Metropolitan’s board should not agree to finance the Governor’s tunnels.  The Met board has been misled about financing the tunnels for a decade, and I would advise board members not to believe this latest plan either:  The farmers aren’t going to pay you back, AND you aren’t going to get a share of their water supply if they don’t. 

All the way back in 2012, I predicted in an economic analysis of the tunnels that they were financially infeasible unless urban ratepayers and/or taxpayers covered 90% of the cost.  I think that prediction is looking pretty good today.  It is certainly more accurate than the consultant and staff presentations the MWD board has been listening to for 10 years.

The parallels between the Tunnels and the Wall go beyond this synchronized pivot from “other people will pay” to “you will pay, but the other people will reimburse you.”  Both of these multi-billion dollar concrete mega-projects are not very effective at addressing the issue they are trying to solve. Furthermore, both of these projects are incredibly divisive concrete symbols of power that are truly offensive to large segments of the population.

For example, Congressman LuisGuiterrez famously tweeted this about the Wall, “It would be far cheaper to erect a 50-foot concrete statue of a middle finger and point it towards Latin America. Both a wall and the statue would be equally offensive and equally ineffective…”

Many Delta region residents and environmentalists feel similarly about the Delta tunnels.  

And Metropolitan’s new go it alone financing plan makes the tunnels even more divisive than ever, because it will open up a new hostile front in California’s water wars between the urban serving State Water Project and the agricultural serving Central Valley Project.  MWD’s Jeff Kightlinger acknowledged this when answering concerned questions from his board members:

"it puts the two projects in competition instead of in partnership and how to sync their operations. Now you would have CVP people saying we need to maximize south Delta, we need to politicize that issue as much as we can, and that’s not appropriate because we’re the one who made the investment to do the more environmentally friendly investment. How we would work that with the state and federal project at odds with each other, trying to work these out in the state and federal legislatures is challenging..."
This is an accurate assessment of the additional conflict, except that many disagree with him that the tunnels are an environmentally friendly investment.   

Metropolitan’s new financial plan would make a bad project even worse.  Will Met’s board be able to resist the political pressure to take a rushed vote on this ill-advised strategy?  Sounds like we will find out next month.

Tuesday, January 16, 2018

One Tunnel Confusion: Whether its downsizing or phasing, one tunnel won't fix the WaterFix.

In recent days, there have been multiple news reports that the WaterFix is shifting to a less costly one-tunnel, two-intake project as opposed to the current two-tunnel, three-intake proposal.  But the Brown administration issued a statement to clarify that WaterFix is still the same two-tunnel project, but construction could occur in phases because of funding issues.  Is this phasing language important, or is it a distinction without a difference?

When thinking of the potential impacts of the change, it is important to recognize that the WaterFix is not just a proposal for new conveyance facilities, it is a proposal for new operating rules that add significant new restrictions on the operation of existing pumps in the south Delta.  

Since a phased approach is the same WaterFix project according to the state, all the WaterFix operating restrictions on the south Delta pumps would presumably still apply, even though the ability to divert from the north Delta would be lower during the single-tunnel phase.  Those rules are part of the project, and I doubt they could be adjusted without creating a major setback in the permitting process.  It is not clear that lighter pumping restrictions could be justified anyway because one tunnel could be just as bad for fish.  

I have been told two reasons why one tunnel could be as harmful to fish as two tunnels even if it diverts less water from the Sacramento River.  First, the smaller tunnel capacity would mainly reduce exports during high-flow periods when diversions are least damaging to the environment.  Second, when lower amounts are diverted during lower-flow periods, fewer intakes would cause more concentrated, higher-velocity diversion rather than being spread over 3 intakes and 5-6 miles of river.  So the main effect of one tunnel is to cut in half the capacity to divert water during high-flows, which has been touted as the main benefit of the tunnels.

So how much less water would be exported compared to two-tunnels?  A scenario like this was modeled for BDCP "Alternatives to Take" analysis in 2013, and it found that compared to the proposed 9000 cfs twin tunnels; Delta exports would be 218,000 af lower with 6000 cfs conveyance and 517,000 af lower with 3000 cfs conveyance.  This suggests a 4500 cfs one-tunnel WaterFix would reduce water exports in an average year by about 400,000 af compared to the twin-tunnel proposal.  

Considering that the current 9000 cfs WaterFix only increases water exports by 200,000 af compared to No Action, that means one-tunnel WaterFix export about 200,000 af less than the No Action Alternative.  The other benefits to water agencies, water quality improvements and seismic protection, would also be lower with one tunnel.   

Finally, CVP contractors aren't participating in the WaterFix, and have been assured their south Delta diversions will not be harmed by WaterFix.  That could be hard to do in practice since the WaterFix permits depend on constraints to south Delta pumping, but it seems that the SWP would probably bear all of the costs of pumping constraints that were part of the WaterFix proposal.  If endangered and threatened Delta fish continue to do poorly, CVP contractors will be arguing that this is due to WaterFix - not their south Delta diversion - and they will find plenty in the WaterFix EIR to support their position.  The WaterFix could be blamed in the same way largemouth bass and water treatment plants are today.

Considering the reduction in benefits from a phased WaterFix and the prospect of new conflicts and more uncertainty, some water agencies that support WaterFix might want to reconsider their funding commitments under this phased approach.

As Michael Hiltzik with the LA Times wrote this fall, this is likely just another stumble as WaterFix "staggers to its deathbed." 

Monday, December 4, 2017

Update 3: Final Senate Tax Plan Eliminates Most of My Tax Increase, But at What Cost?

I have been chronicling how the various iterations of Republican tax "cuts" would increase my family's tax bill in order to illustrate its effect on an upper middle class, homeowner family in California.  Summarizing the results to date:

Original Trump "Framework": Over $4,000 tax increase
House Tax Plan: About a $3,000 increase
Senate Tax Plan (original  proposal): $2,100 increase next year, $3,250 increase in future years
Final Senate Tax Plan:  Little to No Change in my taxes.

The final tax plan included three changes to lower my taxes that mostly offset the tax increases that came from eliminating $30,000 worth of exemptions for dependents and deductions for state/local taxes.  These three changes to the final bill had a combined effect of cutting our estimated tax bill by about $3,000, eliminating the tax increase in the draft Senate Plan:

  • Marginal tax rates were further lowered (down to 24% in last version).
  • Child tax credit increased to $2,000, and $500 for non-child dependants.
  • Changes to pass through business deduction looks like it would now apply to a small portion of my wife and I's income that is reported on Schedule C, not W-2 wages. 
Of course, these changes had to be "paid for" by a number of provisions that increase the indirect effects on us such as:
  • Repealing individual mandate under Obamacare could destabilize health insurance markets and raise rates.  "Fixing it" outside of the tax bill as some Republicans have promised will cost significant money, further increasing the federal debt even if it stabilizes insurance.
  • Making individual taxes expire in less than 10 years.  Republicans promise that future congress won't allow these to expire.  Of course, that future "fix" will also further increase the federal debt.
  • Keeping the AMT (alternative minimum tax) at higher income thresholds.
Who knows what will come out of the Senate/House conference, but it will probably look more like the Senate plan since the vote margins are much smaller there.  If the final bill looks like the recently passed Senate bill, the bottom line effect on my family is this:

The direct effect on our tax bill appears to be minimal.

However, the indirect effects look negative.  These include:
  • an increase to the national debt that could lead to higher interest rates or larger tax increases in the future (or federal spending cuts).  
  • a decrease in home values (predicted by some to be a 10% decrease in our region), that might be partially offset by an increase in stock values.
  • negative effects on higher education that could affect me as an employee of this sector and parent of current and future college students
  • potential indirect impacts from increasing inequality, health insurance disruption, and other areas.
Putting aside my personal situation, as an economist, I do not support this bill for the reasons cited by most mainstream economists.  While there is a case to be made for some revenue neutral tax reform (i.e. cutting the 35% corporate rate, paid for by limiting deductions and broadening the corporate tax base), there is no case for deficit increasing tax cuts that further income inequality given current circumstances which include a) unemployment is nearly 4%, b) inequality is very high and rising, c) the economy is at/near potential, and d) the U.S. still has large budget deficit and record debt while facing very large increases in entitlement spending in the near future as the population ages. 

Tuesday, November 14, 2017

Update 2: Senate Republican Tax Plan would increase my taxes $2,100 next year & about $3,250 the following year

Last week, the Senate released its tax proposal.  It is a little better for my family than the House proposals and original framework that I blogged about in more detail previously (here and here).

The big beneficial difference for us in the Senate Plan is the change in the child tax credit which increases the phase out level to a million dollars in income so we would now qualify for child tax credits.  However, my youngest is 17 next year so we would only get $1,650 credit next year, before dropping to a $500 dependent credit the next year.

Add it all up and my tax increase for next year would be about $2,100 under the Senate bill, compared to my earlier estimates of $3,000 for the House bill and $4,000 for Trump "framework".  However, our 2019 tax increase would likely be back over $3,000 as my youngest turns 18.

There are significant differences in the plans on tax brackets, state and local tax deductions, mortgage interest deductions, and business income but these differences would have little or no effect on our personal situation.  Under all iterations of the Republican tax bills, we would fall back to the enhanced standard deduction, and thus lose benefits of personal exemptions and itemized deductions.  As discussed in earlier posts, this would increase our taxable income by about $30,000, and that is the primary reason our tax bill would increase despite a marginal decrease in rates and elimination of the AMT.

P.S.  (revised 11/22): I deleted a postscript note on taxability of tuition benefits as I received additional information about this item in the House tax bill.  It appears my previous interpretation was incorrect.

Thursday, November 2, 2017

Update: Republican/Trump Tax Plan Would Raise My Taxes by about $3,000

A few weeks ago, I estimated the Trump tax plan would raise my families taxes by over $4,000 and most likely close to $5,000 per year.  This morning, the detailed tax proposal was released and I have recalculated our tax increase to be between $2,500 and $4,000.  [The range is primarily due to my uncertainty about whether we would receive a new credit for $300 per individual that did not qualify for the expanded tax credit.  We would not qualify for the $1,600 tax credit due to my dependent children being 16 or over, and income phase outs.]

The three most significant changes:

  • Tax bracket details:  The most significant to me and most households is that the 12% tax bracket extends farther than the 15% tax bracket in current code.  Specifically, under current law, the 15% bracket ends at around $76,000 for married filing jointly, whereas the Republican proposal would have a 12% rate up to $90,000 for married filing jointly.  In my previous calculation, I assumed 12% rate ended at same income level as current 15% rate.  This extended bracket saves me about $1,800 in taxes compared to my initial calculations.  The proposal also retains the 39.6% rate for incomes over a million dollars but that doesn't affect my family.
  • Property Taxes deductible up to $10,000:  This is a compromise on the state and local tax deduction controversy.  For my household, it wouldn't matter.  It would bring our potential tax deductions from about $18,000 to just under $24,000, the new standard deduction, so we still wouldn't itemize.  However, this could help reduce the hit on some California households.
  • Future mortgage interest deduction capped at a $500,000 mortgage, reduced from current cap of $1 million.  This could have interesting effects on California housing, especially in high-cost coastal areas.  In some ways, you could think of this as paying for the return of the property tax deduction.  If you are buying a Bay Area house with a jumbo mortgage, you will still get to deduct property taxes under this new proposal but that will be offset by this new limit on your ability to deduct mortgage interest.
So people like me are still facing an unpleasant tax increase from the Republican/Trump plan, even if it is not quite as large as I originally thought.   

Wednesday, October 25, 2017

San Francisco-Stockton Regional Airport? Right Idea, But Wrong Name

There has been some rough press and a lot of making fun of the Stockton Metropolitan Airport's proposal to change it's name to the San Francisco Stockton Regional Airport.

I have written previously about the benefits of a broader regional vision for the Stockton airport that would include a renaming, but never suggested San Francisco-Stockton.  Given the backlash, I doubt the County will go forward with this name change, but the attention it has received could be used positively for the County to think about the airport's future and how it fits within a broader economic development strategy.

Airports are highly visible and valuable regional infrastructure, and thus are a great opportunity to link regional collaboration and regional branding.  There are two levels of regionalism that should be considered here.  At CBPR, we have written extensively about the need for North San Joaquin Valley counties (San Joaquin, Stanislaus, and Merced) to work together more to become a cohesive sub-region of the Northern California Megaregion.  We have identified 3 key areas to focus these efforts: 1) marketing/branding, 2) infrastructure planning/development, 3) workforce development and education.  This airport question touches the first two.

If I were to attach a second name to the Stockton airport, it would be the Stockton-Modesto airport.  That idea is not popular with those in Modesto who still hold out hope for reestablishing passenger service at their small runway airport, but I think people in Modesto will ultimately vote with their feet as Stockton airport grows.  Modesto should collaborate and help facilitate that growth as their citizens would benefit greatly from a decent regional airport within an easy 30 minute drive, and Stockton provides the best opportunity as it has better current infrastructure (much larger runway, easy freeway access, larger local population base, and existing passenger service). 

However, I think the best idea is to go with a name that positions it within the Northern California mega-region without upsetting any other specific cities, whether they are San Francisco or Modesto.  If done right, it could help rebrand not just the airport, but the region itself.

For example, why not "Northern California Gateway" airport? 

A real marketing professional would probably come up with something better, but the idea is brand as part of Northern California, not the Central Valley, Stockton (or even Modesto).  Rather than quickly adopt or reject this San Francisco-Stockton proposal, I suggest the County use the idea of renaming the airport as an opportunity to convene a broader discussion about regional identity, branding and collaboration.  At the end of the process, they would hopefully get broad buy-in around a new name for the airport, and perhaps a start towards broader initiatives to create a more positive regional brand. 

Sunday, October 15, 2017

Trump tax plan would raise my family's taxes by over $4,000.

I have been reviewing the new Republican tax plan framework, and noticed that my family pretty much defines the profile of households that would see a tax increase: upper middle-class families in a high-tax state that itemize deductions.   Following the assumptions of the Tax Policy Center, I used my 2016 tax return to calculate the potential change for my family and received quite an unpleasant shock from what the President calls the largest tax cut in history.

The big change in the proposal for households would be to eliminate exemptions and deductions for state and local taxes, while increasing the standard deduction and child tax credit.

Currently, my family takes $16,200 in exemptions (family of 4) and we had $38,000 in itemized deductions last year (of which about $20,000 were state/local income/property taxes, and the rest mortgage interest and charitable giving).  The exemptions and itemized deductions resulted in our taxable income being $54,000 less than our gross income.

Under the Trump Plan, we would no longer itemize deductions because we would lose the state/local tax deduction and the remaining interest/charity deduction of $18,000 would be less than the new standard deduction of $24,000.  We would also lose the exemptions, so our taxable income would be $30,000 more since the total of our exemptions and deductions would be reduced from $54,000 to $24,000.  This additional $30,000 in taxable income under the Trump Plan would have a 25% federal tax rate, and thus would raise our taxes by $7,500 per year.

However, we would get some offsetting tax reductions under the Trump/Republican plan.  It would eliminate the Alternative Minimum Tax, so I would avoid $450 in AMT from last year.  My kids are dependents between the ages of 16 and 25, too old for the child tax credit, but we might get up to a $500 tax credit for each one under the new non-child dependent tax credit (depending on an income phase out).  Finally, the tax rates are a little bit lower, our marginal rate would be 25% instead of 28%, the exact dividing lines for the brackets is uncertain but the lower rates look to save us about $2,000.  So I estimate $2,500 to $3,500 in offsetting tax reductions.

Put it all together, and our family is a clear loser, as our federal income tax bill will go up at least $4,000 and possibly by $5,000 depending on assumptions.  Most households would receive some level of tax cut, as only 30% of households itemize deductions that are most likely to trigger an increased tax bill.

One of the interesting economic questions is whether this will change the behavior of households like mine.  Losing the state and local tax deduction makes paying California taxes more painful, not enough to make us move, but it could affect a few decisions of whether to move in or out of the state.  Perhaps most importantly, it will make it harder to pass state and local income and property tax increases in the future.  The real estate market and charitable giving could also be affected.  This indirect loss of the mortgage interest deduction increases our cost of home ownership right now, but it has no effect on our past home buying decision.  But losing this mortgage subsidy will affect how much we are willing/able to spend on a home if/when we move again, and considering many households in the same situation, this should somewhat reduce demand for owner-occupied housing in heavily impacted state's like California.  Charities probably won't feel too much of an impact, but some could indirectly if they depend on middle/upper-middle class households who stop itemizing.

In theory, lower marginal tax rates will give us more incentive to work and earn income.  I teach my students some core tenants of tax efficiency (low rates on large base) and this structure of eliminating deductions with lower rates would seem to fit the bill.  However, this is eliminating a deduction that subsidizes my state income tax rate, so it doesn't do much to lower our combined marginal tax rate.  Here is some math to illustrate:  How much tax will my family pay on an additional $10,000 in income?  Under current law, we pay 9.3% state tax, then deduct this from federal income before applying a 28% rate.  State tax on $10,000 is $930, federal tax = .28*$9,070= $2539.60 for total tax of $3469.60 or 34.7% of $10,000.  Under this proposal, we can't deduct the state tax, but pay federal taxes at 25%.  Our state tax is the same, but the federal bill is .25*$10,000 = $2,500 for a total tax of $3,430 or 34.3% of $10,000 in income.  So while it seems like the Trump tax plan would lower our marginal tax rate by 3 percentage points, it only reduces the combined rate by 0.4 percentage points from 34.7% to 34.3%.  That's barely a change at all, and thus does little to impact incentives for work and investment for those who itemize deductions in California or any state with a significant income tax.

Not everyone in my extended family will get a tax increase, as most people who don't itemize deductions will see a small cut.  For example, my parents do not itemize and do not take exemptions for kids, and are in the 15% bracket.  They will do better with the new $24,000 standard deduction than their current exemption/st. deduction of $18,600, and will be paying 12% at the margin instead of 15%.  So my parents will probably save about $1,000 under this plan.  Maybe that will buy them some plane tickets to come visit us, because tickets for my kids to visit their grandparents could be one of the things we have to cut to pay for our new taxes.

All of this could change and Congress is being lobbied heavily to not eliminate state/local tax deductions (especially California republicans) and to not eliminate exemptions.  And Trump has had a very hard time getting things through Congress.  Thus, my guess is our taxes will not really go up by this much.  But I have more personally at stake in this debate than I realized - and maybe you do too if you are a Californian who itemizes deductions like most homeowners with a mortgage.

It's not necessarily bad tax policy just because my taxes would increase, and I admit that it is hard to be an objective analyst when you are one of the few looking at a steep tax increase in the context of a very large overall tax cut.  There is a case for eliminating the state/local tax deduction and even reducing exemptions.  However, I thought something like this would come with much larger offsetting cuts to individual marginal tax rates, but the Trump/Republican plan is reserving the large cuts in marginal rates for corporate taxes. 

November 2:  See my update as new details have been released.

Tuesday, October 10, 2017

Does Northern California Have a Chance To Get Amazon HQ2?

Everyone is speculating about where Amazon is going with its HQ2.  Does Sacramento or the Bay Area have a chance?  Given the national competition, it's obviously a long shot, but not impossible.  If forced to pick one city (and I have not seen any betting platforms for this, let me know if there is), I would bet on Denver, but I think NorCal's chances are better than the conventional wisdom.  Here are my current thoughts (originally published in our October economic forecast).

Last month, Amazon took the unusual step of issuing a public request for proposals for a second headquarters location. It is a massive project that the company states will bring 50,000 high-paying jobs and 8 million square feet of new investment to the winning city.  Hundreds of cities have announced that they will be submitting proposals for a rare project that has the scale to alter the economic trajectory of a region.  Speculating about where Amazon will land has been widespread in the business press, and the most frequently predicted cities are Denver, Austin, Boston, Atlanta, and Washington D.C.  Most commentators have written off California, primarily due to its high cost, regulatory climate, and its historical reluctance to offer big incentive packages to corporations.

Why did Amazon go to the unusual step of creating such an open and public competition?  Surely, they must have a short list of cities that meet their requirements.  Some think it is just a publicity stunt to enhance Amazon’s brand as an economic development prize, possibly to stimulate even greater local incentive offers for its growing network of less exciting facilities such as fulfillment centers.  Perhaps their preferred locations are in states and cities that are historically unlikely to offer large public incentives, and the open competition is a way of generating public pressure for these areas to get more aggressively in the incentive game.  This latter theory would suggest that California does have a chance.  Indeed, Amazon has some very good reasons to look at the Golden State.  The Bay Area has the largest concentration of tech industry talent that Amazon needs.  California is a global destination that has proven it can attract top tech talent from around the world.  Finally, a location in the same time zone as the Seattle headquarters would facilitate collaboration and travel between the two headquarters.  We conservatively estimate that Amazon HQ2 as described in the RFP would support 120,000 on-going jobs statewide, and over $6 billion in state general fund tax revenue during the first 20 years of developing the new locations.  While California is unlikely and shouldn’t match the massive tax abatement incentives that will undoubtedly be offered by some locations, state and city leaders should definitely put their best case forward, most likely with a package of tailored infrastructure and workforce development programs.

Are there locations in the Northern California megaregion that can compete?  Most people believe that the Bay Area is simply too costly and congested, and lacks well-located sites that could accommodate the growth Amazon seeks (although Concord does have a large intriguing site, and Oakland and some other cities also are arguing they can handle it, perhaps in clusters located around the BART network).  Sacramento is more affordable, meets the size and infrastructure requirements (assuming the expanded airport continues to add more flights) and has several interesting locations that could accommodate the growth.  But can a government dominated city with a small corporate presence convince Amazon that it is business-friendly and has the workforce and culture Amazon seeks?  Sacramento can offer Amazon an opportunity to grow into a region’s dominant corporate presence where it shapes the region’s future, and a location that is attractive for some Bay Area workers seeking a more affordable family-friendly environment.  Some have speculated that Amazon could end up splitting the new headquarters between two sites, a scenario which could create interesting possibilities for the Megaregion.  While the competition is fierce and it remains a long-shot, we believe a good case can be made for a Northern California location for Amazon HQ2 and encourage the state and regions to come together and put forward a competitive proposal.