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.

Sunday, October 8, 2017

In the nation's poorest big city, tunnel supporters push to raise water bills based on nostalgia instead of facts.

After 11 years of planning, the $17 billion WaterFix project has no viable financial plan (other than approving a blank check from southern california water ratepayers), no benefit-cost analysis justifying the project, a negative environmental assessment, and a small and highly uncertain water supply effect.

So how does the Governor, Metropolitan Water Districts and other leaders sell a rate increase of substantial magnitude to poor households to pay for such a poorly-justified legacy project?  With a mix of nostalgia, hyperbole and fear.

The LA Times editorial board echoed this weak case for the tunnels in its Sunday editorial, "Stop waffling over the delta tunnels and dig."  Without even mentioning the recent news that the tunnels' already shaky finances were blown up by Westlands Water District and Bureau of Reclamation's decisions not to pay for the tunnels, the Times gives a strong endorsement a few days before Metropolitan Water District votes.

One might expect some thoughtful discussion of ratepayer effects and how to pay the colossal costs.  This is especially true given that Los Angeles has the highest level of poverty of any big city in the U.S., with the enormous and rising cost of living for LA households the largest contributor to the city's biggest crisis.  Instead, ratepayer effects were brushed aside with this dismissive, fact-free statement at the end of the editorial.
One thing urban ratepayers can count on, though, is that their water bills will go up. The issue is whether they will be paying more because they are financing a project that keeps a sustainable amount of water coming to them, or because there is no project and water therefore becomes a scarcer and more precious commodity. 
Rather unbelievably, they are asserting that there will be no difference in rates with and without the project.  Even the most deceptive pro-tunnel propaganda doesn't make that claim.

When it comes to modern, more sustainable alternatives for water supply, the editorial says - yes, we need to build and pay for all of that too.  This argument that assumes household water bills are an unlimited resource in the nation's poorest city.  There is no need to prioritize, buy it all!

LA is a city with serious economic issues.  It needs a spark from new industries with growth potential, not higher household bills for outdated legacy projects.  It could be a worldwide hub for the next generation of water technology, a silicon valley of water tech, creating jobs and economic development while it solves its own water challenges by developing and deploying technologies that can be replicated and sold around the world.  Rather than direct LA ratepayer dollars in this forward-looking direction that would give the City an economic boost in the short and long-term, tunnel backers would prefer to cement (literally) its water future to an outdated approach that creates environmentally destructive one-time jobs hundreds of miles away.

The editorial boldly argues that the tunnels are good for the rest of the state too.  I guess those Westlands farmers who voted no and residents of the Delta counties are just too stupid to know what's good for them.  It says it will be good for the delta's environment, repeating advocates propaganda and ignoring the actual scientific assessments.  It says it will benefit agriculture, ignoring the assessment of the farmers who would supposedly benefit.  And it says it is good for the entire state's economy because we are all interconnected.  Wrong.  Because the state is interconnected, the whole state would benefit if LA were to choose to invest new technologies, greater regional self-sufficiency, and reduced reliance on the Delta.

Ultimately, the piece is nothing more than nostalgic praise for the great, "ingenious" water projects of the past, and a desire for one more giant project to complete the legacy of the last century.  It's impatient call to "stop waffling and dig" is reminiscent of Governor Brown's comments about "analysis paralysis" and "I want to get shit done."

These kind of statements feel good and sound decisive, but they actually prevent California from moving forward.  Absent an enormous, unjustified and unlikely subsidy, there is no viable path forward on the tunnels.  Rather than being decisive, these sentiments can only force the state into wasting another decade of time and money on a project that simply won't work.  The editorial should be titled, "Stop waffling, and vote no on the doomed delta tunnels."