Arnold Kling  

Fiscal Desperation in Mass. and Md.

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The Boston Globe editorializes


amendment to the House budget calls for a study of a 2.5 percent assessment each year on university endowments over $1 billion. The tax would affect nine of them, and in theory could generate an enormous amount of revenue; Harvard alone, with its endowment of $34 billion, would be on the hook for $840 million a year. But a tax of this magnitude on the state's universities and colleges would be economic suicide.

Major research universities are the closest thing Massachusetts has to a goose that lays golden eggs. The nine schools in question employ a total of 27,000 people and pay $4.5 billion a year in wages and salaries, according to the Association of Independent Colleges and Universities in Massachusetts. They bring in brainpower and outside research dollars. They fertilize the local healthcare, technology, and financial-services sectors - three other cornerstones of the local economy.

What would be the incidence of this tax? Would it affect students? Employees? Or is it more like a tax on land or some other natural resource?

Greg Mankiw thinks that Harvard would respond by changing its state of incorporation. Is this another opportunity for Delaware?

Elsewhere, The Washington Post reports,


The funds that pay pension and health benefits to police officers, teachers and millions of other public employees across the country are facing a shortfall that could soon run into trillions of dollars.

...State governments alone have reported they are already confronting a deficit of at least $750 billion to cover the cost of the retirement benefits they have promised. But that figure likely underestimates the actual shortfall because of the range of methods they use to make their calculations, including practices that have been barred in the private sector for decades.

James Hamilton, who blogs at Econbrowser, was onto this issue years ago. The accounting double standard is a particular sore point. However, it has its defenders.

"There's been a government in our city since 1779," said Mark Jinks, chief financial officer for Alexandria. "You can't be sure that the promises made to private sector employees will outlive their company."

In other words: we're the government, so we'll be around no matter what. Comforting.

On the same front page, The Post has a story that explains how state and local fiscal policy really works.


Over the past two decades, the influence of the unions representing public employees in the county has grown dramatically. Former and current government officials say Montgomery's bargaining system -- along with labor's political clout -- gives workers as strong a voice, if not stronger, than taxpayers in budget talks...

"Although you may know in your heart that the only way to deal with this particular deficit is to broach the union contracts, it is difficult for politicians who wish to be reelected to vote against the union contracts because the unions can rise up and defeat you," said former council member Nancy Dacek, who was defeated after three terms by a union-backed rival.


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CATEGORIES: Public Choice Theory



COMMENTS (8 to date)
Matt writes:

Anybody listening from the County Board in Fresno County California?

You, the county board of supervisors have not save education as you know it, you have simply insured that your union teacher supporters will suddenly be out of work rather than differentially change education over time.

Students are the first to discover the web and its ability to transmit information. Students are not going to wait the next ten years Fresno County needs to renegotiate the union pension plans that we students and parents refuse to pay.

Matt writes:

Follow this lawsuit:

http://www.sacbee.com/110/story/678621.html


"Orange County's legal attempt to cut deputies pensions may be moved to a Los Angeles court."

Bottom line, Orange County is still climbing out of bankruptcy and wants their contract with sheriff union overturned.

Fresno County sees his as an opportunity to overturn their own stupidity, as senior stupid person says:

"Former [Fresno County Stupid] Supervisor Juan Arambula, now serving in the state Assembly, said he wouldn't have supported the deal if he'd understood the consequences.

"I think fundamentally we were misled [Stupid] ," he said. "We were told there were savings and reserves to fully pay for the settlement wow, how Stupid!], and that hasn't been the case."

Mr. Arambula spent too many hours rambling around stupid people and now wants out, as do a host of other really stupid county supervisors around California.

Even Grey Daivs [the guy that overpaid Enron two billion] says California county supervisors were stupid to agree to these contracts.

Harvard could protect itself and participate in a marketing bonanza by taking 2% of it's endowment (surely a small fraction of the ROI such an endowment could generate) and GIVE it to its students.

With around 19,000 undergrads and graduate students, that would come to just over $35,000 per year per student, enough to cover their tuitions.

Getting the Mass legislature to approve a 2.5% endowment tax on such "good citizens" would then prove politically impossible. Imagine how Harvard would look at providing arguably the most prestigious education in the world for free!

They'd save half a percent and help their students and their image immeasurably. It's so crazy it could work.

John

dearieme writes:

I've been joking for years that some time soon the universities will undergo a new Dissolution of the Monasteries. It has to start somewhere.

I would love for MA to do this for the simple fact that it would have a devastating effect on the universities as a whole and on the humanities departments in particular, where the majority of socialists live. Perhaps they would change their minds about the good government does and the good of taxing everyone under the sun when they all got fired because of the cutbacks necessary due to the government being too big.

Dan Weber writes:

The New York Times Magazine called these deadly pensions "headless nails" a few years ago, because of the ease with which they are applied and the difficulty in removing them.

http://www.nytimes.com/2005/10/30/magazine/30pensions.html?pagewanted=print It's a really long article.

State governments have promised that future taxpayers will pay huge benefits. State governments are in worse shape than the US Government because they can't inflate their way out of their promises.

Dr. T writes:

I agree with Dr. Camplin's snarky comment. Massachusetts desires the title of Most Socialist Government in the Americas. Its universities contributed to this desire by hiring many communist, socialist, or left-leaning faculty and then graduating hundreds of thousands of students who believe that governments know best.

But, the hypocrites that elected the recent Massachusetts governments want exemption from taxation. The businesses want to keep their tax-free or tax-reduced status, and the individuals now live in New Hampshire and commute 180 miles a day. (House and land prices have skyrocketed in souther New Hampshire because of this exodus.) This proposed taxation of endowments might be just the thing to wake up more people to the evils of ever-enlarging, nanny-state governments.

dcpi writes:

I don't understand why the government workers need a union in the first place. Aren't unions designed to represent workers against rapacious capitalists who seek to exploit the people? Doesn't government take the side of said people against rapacious capitalists? Ergo, is not government then a beneficent employer that protects and fairly pays its workers? So where is the need for their union? I don't understand.

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