That is the title from new research in Journal of Regional Science by Nadia Greenhalgh-Stanley (Kent State), Shawn Rohlin (Kent State), and Jeff Thompson (Federal Reserve Bank of Boston). Here is the abstract:

We use panel fixed effects estimation with a border approach creating cross‐border county pairs to identify changes in food sales tax rates on employment, payroll, and hiring. Results suggest food sales taxes have a negligible effect on overall employment but adverse effects in the food and beverage stores industry. We find younger workers, who are more likely to work in the food and beverage industry, are more adversely affected when a neighboring state has preferential tax treatment for food. We also determine that omitting food sales tax rates when studying general sales tax effects on employment does not bias estimates.

That last finding is probably not a throw away result, and might turn out to be the most common reason for being cited over the next few years. A constant source of concern in research general sales taxes is both the definition of the tax base (especially the treatment of food) and the other selective sales taxes. This is some evidence that we can relax a bit on those. (Rohlin and Thompson have another article similarly finding that local sales taxes don’t seem to introduce bias either, also good for state sales tax research).

Another reason to check out the paper is if you are interested in attempting a border-discontinuity regression (discussed in section 4).* The opportunity of state border discontinuities is that you presumably have similar local conditions but different state policies. The new potential bias, as the authors point out, is that cross-border flows (like cross-border shopping) can bias the results. In this case, it seems to me the direction of the bias would be against the authors finding their results, so the estimates are probably conservative.

*For the very very interested, I also have a border discontinuity paper with that lays out the math of what type of bias is eliminated and does some other cool things with regard to border matching on this.

PS: Political Science and Politics  (a news and commentary journal that is a companion to American Political Science Review) has a new symposium issue available in firstview on the politics of the Federal Reserve. The symposium is titled “American Oligarchy? The Concealed Politics of the Federal Reserve Bank” and there are six articles to which I’ll hyperlink below. First, a few comments:

• Economists, which have otherwise not focused much on specific bureaucracy and political organizations, by contrast have thrown a lot of heavy hitters at the political independence (or lack thereof) of the Federal Reserve System. Not just in public choice or Austrian economics, but in macroeconomics and game theory. Generally speaking, this is math heavy theoretical models on things like time consistency problems and how to beat expectations of strategic actors.
• Political science and public administration have been much more expansive on the subject of political bureaucracies, particularly ones that contain technocratic experts. The theory is rich and they subsequently invest in lexicon rather than using math to clarify meaning (a generalization). The Federal Reserve has, however, not been a very common target of their interest.
• Therefore, one way in which a interdisciplinary vocabulary could be developed would be to read this symposium and the recent political science scholarship, as well as classics in economics on the subject of Fed independence. This being a political science symposium there are some blind spots in the overview of the coverage of economics and political economics on the Fed, but you nevertheless would undoubtedly gain a usable vocabulary of how to relate ideas across the two disciplines. Also, there are probably intellectual gains from trade in both directions.

Symposium” American Oligarchy? The Concealed Politics of the Federal Reserve Bank

“Clarifying How the Fed is Political” By Rick Valelly

“The Fed, Finance, and Inequality in Comparative Perspective” By Jonas Pontusson

“The Fed’s Political Economy” By Lawrence R. Jacobs and Desmond King

“The Missing Politics of Central Banks” By Christopher Adolph

“The Study of the Federal Reserve and Power in American Politics” By Alexander Hertel-Fernandez

“Why Study Monetary Politics?” By Sarah Binder and Mark Spindel

I’m on vacation this week, I don’t expect to blog much (or at all).

Here are some recent working papers and publications that have otherwise gone unmentioned at PPF:

“Support for contracting-out and public-private partnership: exploring citizens’ perspectives.” Hai (David) Guo and Alfred Tat-Kei Ho. Public Management Review.

“Cost-Benefit and Fiscal Impact Analysis of Ohio Historic Preservation Tax Credit.” By Tatyana Guzman. Journal of Benefit-Cost Analysis.

“The Political Economy of Municipal Pension Funding.”
By Jeffrey Brinkman, Daniele Coen-Pirani and Holger Sieg. American Economic Journal: Macroeconomics.

“Does Fiscal Oversight Matter?” By Désirée I.Christofzik and Sebastian Kessing. Journal of Urban Economics.

“Amenities, Affordability, and Housing Vouchers.” By David S. Bieri and Casey J. Dawkins. Journal of Regional Science.

“Court-Ordered Redistricting and the Law of 1/n.” By Dongwon Lee and Sangwon Park. Public Choice.

“How Sensitive is the Average Taxpayer to Changes in the Tax-Price of Giving.” By Peter Backus and Nicky Grant. International Tax and Public Finance.

“The Impact of Tax and Expenditure Limitations on Municipal Revenue Volatility.” By Tucker Staley, State and Local Government Review.

“Public Debt Stabilization: The Relevance of Policymakers’ Time Horizons.” By Giovanni Di Bartolomeo, Marco Di Pietro, Enrico Saltari, and Willi Semmler. Public Choice.

Given that President Trump has nominated Brett Kavanaugh for the Supreme Court, I thought I would skim over what looks interesting in the literature on judgeship and public finance. Citation followed by brief note on what is in the paper.

• “Judges as Fiscal Activists: Can Constitutional Review Shape Public Finance?” By Jaroslaw Kantorowicz in DANUBE: Law and Economics Review (2013). A panel study of EU countries correlating strength of judicial review with the size of government, contains a thick overview of institutions and constitutional public finance.
• “The Ideological Component of Judging in the Taxation Context.” By Nancy Staudt, Lee Epstein, and Peter Weidenbeck in Washington University Law Review (2006). A law review where the scholars infer the role of politics (partisanship or ideology) in tax cases. They say the previous literature found strong correlations in civil rights cases, but not in economic cases presumably because of the more apolitical nature. Exploring all supreme court cases between 1940 and 2005 that involve interpretation of IRS code, they find no systematic “government” or “taxpayer” bias among judges of either political identity.
• “Taxation, Compensation, and Judicial Independence.” By Jonathan Entin and Erik Jensen in Case Western Reserve Law Review (2005-2006). Another law review, this time an exploratory essay on the limitations of the Compensation Clause (preventing congress from using salary to affect judicial opinion) and describes how this clause has affected taxing power, with specific attention on a 2001 case in which Congress sought to expand OASDI (“social security”) taxes to federal judges.
• “Preferences for School Finance Systems: Voters Versus Judges.” By Colin Campbell and William Fischel in the National Tax Journal (1996). Not about federal supreme court judges, but it documents that one of the most important local public finance reforms in the last 40 years (the centralization of local school finance systems to the state) was at least partially a result of mistaken (so argues Campbell and Fischel) stylized facts about the influence of property rich districts on state legislatures.
• “The Politics of Court Budgeting in the States: Is Judicial Indepdendence Threatened?” by James Douglas and Roger Hartley in Public Administration Review (2003). Surveys state court administrators to uncover the tools state legislatures have over their respective judicial branch. For all that fiscal federalism research emphasizes political independence arising from fiscal independence in geographically overlapping governments, how public finances might undermine the separation of powers seems understudied.

This is a really cool paper by Kristof De Witte, Benny Geys, and Nanna Lauritz Schönhaged in Journal of Urban Economics. Mayoral salaries in Belgium are based on a population schedule, so you might expect politicians to favor policies that can bump up their pay grade.

Political economists have long maintained that politicians respond to both (re-)election and financial incentives. This article contributes to the latter literature by analysing whether, when and how local office-holders respond to the economic incentives embedded in exogenously imposed population thresholds leading to an increased number and remuneration of local politicians. Building on insights from the urban economics and public finance literatures, we argue that local politicians may strategically adjust fiscal and housing policies to stimulate in-migration when approaching a population threshold where their remuneration increases. Using data from all 589 Belgian municipalities over the period 1977–2016, our results confirm that approaching important population thresholds causes lower local tax rates and the granting of additional building permits (particularly for apartments). These policy changes occur early in the election cycle and, at least for housing policy, are restricted to incumbent mayors themselves expecting to benefit from crossing the population threshold.

The paper is written in an interesting way that I generally describe as the “detective novel.” The paper walks through a series of findings, asking interesting questions and answering them along the way. To some extent, the next question explored is conditional on the finding from the previous question. This is a different from a paper that asks a couple of different questions defined at the start because they can be independent from one another. I find these papers more compelling, but they are risky to write as an author because revisions have downstream effects on the paper, so the authors are to be commended for it.

Here is an outline of those questions and my summary of their findings:

1. “Is there evidence of population bunching around the threshold?” Not really, not to the eyeball or a few statistical tests, anyway. So perhaps they are not good at it because they don’t have a really sharp mechanism for manipulating the population figures.
2. “Is there evidence of attempted bunching from a plausible mechanism?” In building permits for apartments, local governments just below the threshold are more permissive than those above, albeit the confidence intervals are somewhat large. However, there aren’t comparable changes in placebo areas like renovation permits. On tax policy, local income and property tax rates suggest some bunching around thresholds, but they don’t seem to be particularly good at this approach in that the rates stick to either side of the threshold.
3. “Is the timing of the threshold determination date is important relative to the election cycle?” In other words, did the mechanisms demonstrate heterogeneity based on whether we are about to undergo another election? De Witte et al.’s results suggest the cycle does matter, as the results converge towards zero as the election date approaches. Perhaps mechanisms like building permits are too slow to be of any value within a few months, and are likely to disturb your current voters in the meantime, or you don’t want a big raise just as you are about to go up for reelection.
4. “Does it work to get you re-elected?” This is kind of important for guessing at the welfare inference. If getting across the population thresholds increases the probability of reelection, then this is less policy manipulation to get a raise and more doing what voters want. After all, a mayor who is doing well should attract new residents, and you could plausibly think voters would want to reward that. But it should not uniquely matter at the thresholds if that is the case. Indeed, mayors are no more frequently re-elected when they cross thresholds than not, so it seems unlikely that seeking rewards from the electorate is at least not a valid justification for mayors to attempt this (albeit, they may be doing so on the mistaken belief).

It is a neat paper. I would also recommend Ed Glaeser’s “The Curley Effect: The Economics of Shaping the Electorate” if you wanted to think about how to distinguish competing hypotheses over how political actors are motivated in altering the demographics of their populace.

Nathan Jensen (University of Texas-Austin) has an important new paper in Public Choice on “Bargaining and the Effectiveness of Economic Development Incentives: An Evaluation of the Texas Chapter 313 Program.” Here is the abstract:

Existing research has examined how the mobility of capital shapes bargains between firms and governments. The major barriers to examining bargaining behavior include the large number of dimensions to these bargains and differences in capacity and strategies firms and governments. In this paper, I examine data from a unique economic development incentive program in the state of Texas that holds almost all elements of bargaining constant, leaving only the ability of firms to walk away from a given location during the bargaining process. Using original data on the bargaining outcome as well as elite opinions, I document the extent to which firms that chose to locate in Texas made their decisions independent of this special economic development program. My findings suggest that only 15% of the firms participating in the program would have invested in another state without this incentive. The majority of these projects, and incentive dollars, were allocated to firms already committed to investing in Texas. Case studies of over 80 projects reveal that in many cases it was an open secret that companies had already committed to their investment locations prior to receiving the incentive. This implies that structure of the program encourages the overuse of incentives.

At the point estimates alluded to in the abstract, Jensen concludes that high end cost per job “created” estimates of $350,000/job are still too low.

Those that cover economic development incentives in their teaching might make use of some of the anecdotal cases covered in the paper. Many of the cases suggest that incentives were often approved even though the firms had already committed to their location. For example (p. 16):

The most surprisingly revelation is JD Wind’s application (Application #54) for a Chapter 313 agreement, 3 years after construction of a wind farm. In that application, JD Wind clearly points out that the original application for a wind project was submitted prior to construction by a previous project owner, but that that application never had been voted on by the school district. Thus, since only the fling of the application is technically required prior to construction, JD Wind applied for a 313 for those already built wind farms and for additional wind farms that would expand the project further. The project ultimately was approved by the school board and the Comptroller’s office for both the 3-year old facility as well as its expansion.

Check out Jensen’s Economic Development Incentive Evaluation Project and similarly themed blog from his website. His new book with Edmund Malesky, Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain (Cambridge Press), is available at Amazon (video).

The ANNALS of the American Academy of Political and Social Science has several articles on evidence based policy. The table of contents is here, and several are relevant to the field of public budgeting, particularly those interested in performance based budgeting:

Introduction

Evidence-Based Policy: The Movement, the Goals, the Issues, the Promise by Ron Haskins

Background 

A Brief History of Evidence-Based Policy by Jon Baron

The Role of Evaluation in Building Evidence-Based Policy by Larry L. Orr

Major Elements of the Evidence-Based Movement

Evidence-Informed Policy from an International Perspective by Thomas Chupein and Rachel Glennerster

Use of Administrative Records in Evidence-Based Policymaking by Robert M. Groves and George J. Schoeffel

The Role of Behavioral Economics in Evidence-Based Policymaking by William J. Congdon and Maya Shankar

Managing toward Evidence: State-Level Evidence-Based Policymaking and the Results First Initiative by Patrick Lester

Pay for Success Is Quietly Undergoing a Radical Simplification by George M. Overholser

The Contributions of Institutions  

The Office of Management and Budget: The Quarterback of Evidence-Based Policy in the Federal Government by Kathy Stack

The Institute of Education Sciences: A Model for Federal Research Offices by Grover J. (Russ) Whitehurst

The Role of Federal Agencies in Creating and Administering Evidence-Based Policies by Rebecca A. Maynard

The Roles Foundations Are Playing in the Evidence-Based Policy Movement by Robert C. Granger

The Role of Nonprofits in Designing and Implementing Evidence-Based Programs by James X. Sullivan

Significance of the Evidence-Based Movement  

Can Evidence-Based Policy Ameliorate the Nation’s Social Problems? by Virginia Knox, Carolyn J. Hill, and Gordon Berlin

Evidence-Based Policy in the Real World: A Cautionary View by Adam Gamoran

A Policy-Maker’s View  

Generating and Using Evidence Will Help to Reduce Social Problems by Senator Todd Young

Following the Evidence to Reduce Unplanned Pregnancy and Improve the Lives of Children and Families by Senator Thomas R. Carper, Andrea Kane, and Isabel Sawhill

“Does Taxation Lead to Representation?” Michael L. Ross, British Journal of Political Science (2004).

“Tax Revolts in Historical Perspective.” Joseph D. Reid, Jr. National Tax Journal (1979).

The article by Ross (no relation) uses panel data on countries to test the hypothesis that the need to tax forces authoritarian governments to democratize, but finds that support for the hypothesis depends on what that question is supposed to mean. The article by Reid covers theories of political revolt, and discusses the politics of tax administration in colonial America.

Social Impact Bonds are a relatively new financing mechanism in public policy. They are interesting because they look like an X-prize or a professional athlete’s incentive laden contract, but with social policy targets. A government writes a contract with a private sector entity that specifies a set of goals with rewards earned if targets are met.

Government Executive has published a nice, digestible, overview of what the literature has learned, drawing particularly from “Use of Social Impact Bonds to Address Social Problems: Understanding Contractual Risks and Transaction Costs” by Sheela Pandey (Penn State-Harrisburg), Joseph Cordes (George Washington University), Sanjay Pandey (George Washington University), and William Winfrey (Centers for Medicare and Medicaid Intervention) that appears in a recent issue of Nonprofit Management & Leadership. From the abstract:

 

We conduct an in-depth case study of the Social Innovation Financing Youth Recidivism project (SIF) in Massachusetts. Our case study is comprised of a qualitative analysis of the multi-party contract and multi-year quantitative benefit-cost analysis to understand transaction costs. We draw upon contract theory to develop an analytical framework for the case analysis and highlight the risks and safeguards for the various parties to the contract, and conduct a formal benefit-cost analysis to map out transaction costs. We conclude with a discussion of study implications and future research.

The most obvious advantage of SIBs is the idea that the government only pays for some degree of success, instead of taking on a new costly venture that may or may not work out. However, what much of the article does is attempt to explain these contracts within Contract Theory. Writing a contract is about solving a variety of information problems like adverse selection, moral hazard, and principle-agent problems. What Pandey et al. discuss is that the merits of social impact bonds depend heavily on the types of contracts the public entity can write, either with vendors who would run the program or with their own in-house staff, given their institutional constraints. In principle, this is the same problem underpinning the make-or-buy decision of the for-profit sector, where contracts generate incentives, create information, and provide accountability. A department store like Target and a shopping mall are similar entities that have organized their production with very different contracts. Target executives don’t know exactly the right amount of floor space to devote to women’s shoes in Bloomington or what mix of brands to carry, but they have contracts that attempt to internalize this decision with local management and information systems; the shopping mall attempts to auction off the square footage to the highest bidder, letting the market answer those questions. The former system requires Target executives to have a lot of top level information over how to run a store so they can manage their local managers correctly, while the shopping mall executives forgo those costs entirely but take significant transaction costs by repeatedly accessing the market system to negotiate their floor space. (N.B. “Bosses Don’t Wear Bunny Slippers.”)

What Target and the shopping mall have going is a lot of common interest in making profit, which is observable and the litmus test for participation. In the public space, Pandey et al. make the case that the underlying problems of information, incentives, and transaction costs remain with a political twist. Without a profit motive aligning all the vested stakeholders, many of the information problems are not as easily defined through contracting, and all parties have some incentives for opportunism. The authors provide a framework for thinking through dealing with different types of contractual hazards associated with the stakeholders party to the contracts (p. 513, Table 1):

1. Standard opportunistic behavior: the private sector agency taking the contract might be a source of risks associated with moral hazard, adverse selection, and other types of incomplete information.
2. Governmental opportunism: Private sector actors are subjected to risks from governmental agents (which can be much broader than the specific agencies undertaking the contracts). Governments necessarily consist of competing factions of power (e.g., political parties, legislative vs. executive vs. judicial, etc.) that can benefit from contract failure at the expense of their governmental rivals.
3. Third-party opportunism: A public contract undertakes scrutiny from the public and/or perhaps agencies associated with transparency or contract monitoring. For example, some of these third parties have their own opportunities for profiting from the attention received for being perceived as whistle-blowers.

The case studies provide many examples within this framework, and the paper is very nuanced. The discussion in section 5 is a must read.