Today the U.S. Census Bureau released their annual Consolidated Federal Funds Report which tracks federal spending by state.  The chart below shows federal spending in Maine by major type.  Total federal spending increased by $442 billion to $3.2 trillion in 2009 from $2.7 trillion in 2008, or 16.1 percent.  Federal spending jumped in Maine by $2.2 billion (18.9 percent) to $14.2 billion in 2009 from $12 billion in 2008–a greater increase than the national average.

As shown in the chart below, the largest percentage jump in spending was in “Grants to State and Local Governments” which increased by $1.1 billion (39.4 percent)–this category includes Medicaid spending.  The next largest percentage jump was in “Procurement” which increased by $301 million (26.6 percent).  Other categories were: “Other Direct Payments,” such as the Earned Income Tax Credit, increased by $450 million (18.5 percent); “Retirement and Disability,” i.e., Social Security, which increased by $314 million (7 percent) and “Salaries and Wages” which increased by $50 million (4.9 percent).

Unfortunately, this new data shows Maine’s continuing over-reliance on federal spending to power its economy.

Federal Spending by Type for 2009

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Maine average salary after taxesThe following is a concept I’ve been working on that I call Maine’s “Take-Home Pay” which equals Maine’s per capita personal income minus per capita state and local taxes.

In 2008, Maine’s per capita personal income was the 29th highest in the country at $36,368 for every man, woman and child in the state.  However, Maine’s per capita state and local taxes was the 14th highest in the country at $4,424–the ranking would be higher if you were to exclude Alaska and Wyoming which rely heavily on oil severance taxes.

Thanks to Maine’s high state and local taxes, the end result is that Maine’s take-home pay ranks as only the 33rd highest in the country at $31,944 (36,368 in income minus $4,424 in taxes).

Of course, it doesn’t have to be this way.  Consider that New Hampshire’s per capita personal income ($43,423) ranks as the 10th highest in the country, but their take-home pay ($39,751) ranks as the 8th highest thanks to their significantly lower per capita state and local taxes ($3,671) which ranks as the 31st highest in the country.

Addendum: Another way to understand Maine’s tax burden is to look at state and local taxes as a percent of personal income.  In FY 2008, Maine’s state and local taxes as a percent of personal income was 12.6 percent which is the 6th highest level in the country.

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Charles Lawton’s article in Sunday’s edition of the Portland Press Herald made a number of points that I wanted to chime in on.  First, he states:

Ignoring the fact that well more than 10 percent of New Hampshire’s income is earned by commuters working outside the state, it is still interesting to play out the analogy.

This implies that somehow comparing NH and ME is not appropriate–though I wonder what he thinks about NH versus RI.  Critics of NH versus ME comparisons always throw out the “Boston Commuter” angle as if that means something.  They never give a reason for why people commute from NH to Boston beside its “proximity.”

Well, Kittery is not all that far from Boston so why isn’t it a boom-town, especially with all that ocean-front property?  According to Google Maps, Manchester is 48 miles from Downtown Boston while Kittery is 60 miles . . . is 12 miles really a deal-breaker and don’t we have the Downeaster from Portland (and soon Brunswick) to level the playing field?  And what about tele-commuting?

I just don’t find the proximity angle all that convincing . . . here’s why.  I spent 12 long years working in Washington, D.C. and anyone who commutes to D.C. must decide where is the best place live–Northern Virginia or Maryland.  Now, proximity to either destination is exactly the same since D.C. is squarish–though MD may actually have a slight advantage since 3 of the 4 sides of D.C. border Maryland.  Yet, if you ask someone, the answer will inevitably be Northern Virginia.  Northern Virginia has the booming suburbs all the way out west to Leesburg (36 miles) and south to Fredericksburg (52 miles) to prove it.

Why the difference?  Virginia has a far better business climate(#1 according to Forbes) due, in part, to lower taxes.  New Hampshire attracts residents from Boston because of its better business climate which, yes, also includes lower taxes.  Its certainly not for better weather or ocean-front property.

That being said, Maine gets its fair share of income “from away” as well, as Lawton points out, from transfer receipts.  The chart below shows various types of income for NH and ME for 2009.  The “adjustment for resident” income represent income “from away” such as out-of-state commuters.  It is true that NH receives $3.6 billion more from out-of-state income sources.  However, when it comes to transfers, Maine receives $2.7 billion more “from away” or, more specifically, Uncle Sam.

In the end, NH’s “from away” income is still from private sector sources, be it from Boston or Mars, but ME’s “from away” income is from public sources.  My analysis shows that higher levels of public sector income, no matter the source, suppresses overall economic performance by crowding-out the private sector in the competition for labor and capital.

The chart shows one important clue in the final type of income shown called “Proprietors Income” which comes from sole proprietorship and partnerships–the fertile ground where entrepreneurship springs forth.  NH earns $1.2 billion more from proprietors income than does ME.  Only a bigger private sector and a better business climate can explain away that difference.

Rather than casually dismiss our differences with NH, Maine policymakers should learn from those differences.  Maine’s public sector can, and should, be scaled back starting with reforming Medicaid and reducing the state workforce . . . areas where NH and ME represent the two opposite ends of the policy spectrum.  The money saved could be used to improve Maine’s business climate, especially for entrepreneurs, by implementing immediate expensing, reducing the capital gains tax rate and eliminating the estate tax.

Different Types of Income in Maine and New Hampshire

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There is a lot of chatter on the internet about Amity’s article revolving around how comparing Maine and New Hampshire is bogus.  Well, after considering these arguments, I wonder how critics would respond to this comparison–New Hampshire versus Rhode Island.

It would seem based on all the arguments I’ve read that Rhode Island should, without a doubt, be the winner in the race for economic prosperity.  First, consider how they are equal:

  1. Their largest city (Manchester, NH versus Providence, RI) are nearly equidistant from Boston.
  2. As such, both equally benefit from the so-called “Boston Commuter” effect from a geographical perspective.
  3. Both have an Ivy League University (Dartmouth in NH and Brown in RI).
  4. Both are NOT right-to-work states.

Yet, on other points, Rhode Island is superior to New Hampshire according to the critics.

  1. Rhode Island is a small state (the smallest in the country) so transportation costs are minimized.
  2. Rhode Island’s coastline far exceeds New Hampshire’s (which has the smallest coastline of any state with oceanfront).
  3. Rhode Island is bordered on all sides by a wealthy state (MA is the 3rd highest and Connecticut is the highest).

The chart below shows the results of this horse-race.  Prior to RI’s enactment of the sales and corporate income tax in 1947, both RI’s private sector and per capita personal income were higher than NH’s by a comfortable margin.  After 1947, NH’s private sector decisively pulls away and the gap in per capita personal income beings to narrow.

Then the final nail in the coffin was driven in 1971 when Rhode Island enacted its individual income tax.  The gap between the two states private sector continued to widen, but, more importantly, per capita personal income in NH exceeds RI for the first time in 1978.  The gap has widened ever since with NH having, in 2009, the 8th highest per capita income while RI has the 16th.

So what advantage am I missing, other than a larger private sector, does NH hold over RI that explains this difference in economic performance?

New Hampshire versus Rhode Island Private Sector and Per Capita Personal Income

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Matt Rand and his Peaks Island Golf Cart Taxi - Portland, Maine

Matt with his Golf Cart "Taxi"

This morning Matt Rand faced off against City Hall – at City Hall. At a well-attended presser hosted by MHPC’s Center for Constitutional Government, Matt asked the City to reconsider its recent amendment to the Transportation Code that would put him out of business.

As you will recall from Sam Adolphsen’s prior post, Matt came up with an idea to provide a low-cost transportation service to residents and visitors on Peaks Island, a small island in Portland harbor. Over the last two summers, Matt has used the family’s battery-operated golf cart to provide rides to people coming across from the mainland on the ferry. He doesn’t charge a fare but instead relies on tips – which his passengers are free to give him as they choose. Peaks Island is 2 miles long by 1 mile wide with a maximum island speed limit of 20 MPH.

While we all hope that the City will reconsider its position, we are fully prepared to file suit to protect Matt’s rights. The suit would be based on the violation of Matt’s Fifth and Fourteenth Amendment due process right to pursue an occupation or earn a livelihood free of unreasonable government interference. Maine’s constitution also contains similar due process provisions.

As the facts show, the City Council acted not in the interest of public safety but to eliminate a competitor to a City-subsidized business.

Here is a timeline of events in this sorry tale:

April 2008. In order to earn money over the summer, 17 year-old Matthew Rand formulates an idea to offer a low-cost summer transportation service on Peaks Island, where his family summers. Matt’s mother queries Michael Langella, the Peaks Island liason, as to the possibility of setting up such a service. After some email correspondence and after Langella consults with the Peaks Island Council and the City of Portland, Langella offers his blessing to the proposal, suggesting that Matt not call his service a “taxi” so as to avoid “a lot of aggravation” with regulatory compliance.

Summer 2008. While Matt is unable to offer his service during summer 2008, he plans to do so the following year.

June 2009. Matt begins offering his service using a battery operated golf cart with a backward-facing jump seat and footrest. Attached to the roof of his cart is a sign offering a free ride. The ride is indeed free but Matt accepts tips after the ride is completed and the passengers disembarked. He parks at the very top of the ferry landing awaiting riders.

July 2009. Unbeknownst to Matt, Island Transportation System – a startup non-profit corporation – has received a $20,000 subsidy from the City of Portland to purchase a minivan and begin offering regular taxi service. ITS begins its own service two weeks after Matt begins his, parking its van closer to the ferry on the landing ramp. According to news accounts, ITS initially charges a $5.00 per person fare for its service after requesting – and receiving – from the City permission to charge a fare higher than the $1.50 island maximum. Jay Desmond is hired as the taxi’s first driver.

Summer 2009. While there is some friction between Matt and the ITS service, Matt continues to operate his cart without interruption. He is instructed by island police, however, that he must remove the sign from his cart.

Winter 2009. Jay Desmond quits during the winter. Passengers complain that the $5.00 fare is too high for a service rendered on an island 2 miles long by 1 mile wide.

May 2010. Matt resumes operations on Memorial Day weekend. After complaints by ITS, Officer Randy Richardson of the Portland Police presents Matt with a citation for operating an illegal taxi service. Upon advice of counsel, the City later drops the complaint. Meanwhile, Jay Desmond’s replacement driver quits. ITS drops its fare altogether in favor of donations and recruits volunteer drivers.

Summer 2010. After complaints to the City both by ITS and the Peaks Island Council, Portland City Councilor Kevin Donoghue proposes an amendment to the City’s definition of “taxi service” to include anyone who is paid anything for a trip in which the passenger determines the destination and route.

August 16, 2010. The Portland City Council votes 5-3 to approve Councilor Donoghue’s proposed amendment. It does so after testimony both by Matt and Thomas Bohan, ITS’ treasurer. Bohan claims that Matt is “unfairly competing” with the City-subsidized service. Matt charges that the City is attempting to protect its preferred – and subidized – provider by creating a monopoly. According to news reports, Councilor Donoghue responds that “there is no monopoly” and that “the market is open”. According to Donoghue, ordinance change is “about fairness and safety”.

Ironically, the August 16 meeting agenda reveals the City’s anti-competitive intent, stating that:

This ordinance amendment addresses a situation on Peaks Island in which an individual is operating a golf cart for compensation in direct competition with and to the detriment of the Peaks Island Transportation Service, which has to comply with all city ordinances related to vehicles for hire. The owner and operator of the golf cart business have not applied for or received the required city licenses to operate a vehicle for hire on Peaks Island.

Compounding the irony, Thomas Bohan first argues before the Council that the City should drop its insurance requirement for the ITS service – arguing in effect that the City should permit ITS to adopt Matt’s business model.

August 24, 2010. Matt retains MHPC’s Center for Constitutional Government to represent him in his dispute with the City. It is Matt’s intention to resume his service on Peaks Island during Summer 2011.

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The U.S. Department of Education has released the scoring data for the second round of the Race to the Top competition and why Maine ended up ranking near the very bottom of states that applied in this last round is becoming much clearer.

According to the detailed score sheet the feds released, Maine did well on “Standards and Assessment” and also did well on “Turning Around the Lowest-Achieving Schools”, scoring the equivalent of a “B” in both areas. It didn’t do quite as well on “Data Systems”, scoring an average of 33 points out of an available 40 (a grade of “C”), and got poor marks for its overall reform plan and the state’s capacity to implement it, earning a “F” in the “State Success Factors” section. The state got crushed, though, as I predicted it would, on the “Great Teachers and Leaders” section, scoring a humiliating average of only 51.8 points out of an available 138 – good for a 37.5 percent score. OUCH!

Looking through the scorer comments, some patterns quickly emerge:

  • Repeatedly, scorers mention that the application lacks needed details, specifically for how various reforms will be implemented.  Over and over again, scorers wanted to know HOW the state planned to make these things happen. In one section, a scorer writes that details for how the new data systems were to be implemented were “so general” as to be “effectively meaningless.” “Maine only talks in generalities,” another reviewer says, with a third writing that “the  proposal provides such activity descriptors as ‘designing,’ ‘adopting,’ ‘conducting,’ ‘performing,’ but does not provide any specific articulations of how the state will go about implementing these activities.” That theme reoccurs again and again, suggesting that the state should have more fully detailed the reform ideas it put forward. Who was it who said that the application was “too vague where it needed to be detailed”? Oh yeah, it was me.
  • Another theme that crops up is the lack of boldness in the plan, with one reviewer chastising the state for “low targets for implementation.”  Another reviewer went after the state for proposing that only 2% of the school districts in Maine make use of student achievement data in deciding whether to remove an ineffective teacher or administrator. “That is not an ambitious goal,” the scorer observed. Several scorers complained that aspects of the plan were optional for school districts, which meant that any real impact on student outcomes might be negligible. Who was it who said that the application was “too cautious where it needed to be bold”? Oh yeah, it was me.
  • If there was one factor that really hurt us, though, it appears to have been the lack of support from the school districts, the Maine Principal’s Association and, most especially, the teachers’ unions. Some quotes from the scorers:
  • “The lack of teacher support is a critical weakness”
  • “Key support from the state’s principal and teacher associations and parent constituencies is not included and considered a significant weakness.”
  • “The relatively low participation of districts statewide in combination with the low support of teacher associations and low targets for implementation indicate a low level of statewide impact on student achievement.”
  • “The lack of strong teacher support is cause for concern.”
  • “The lack of teacher union support raises questions about the capacity of commitment to make the plan successful across the state.”
  • “The most glaring concern [is] the lack of teacher support for the reform plan and this impact on capacity to implement.”
  • “The lack of broad LEA support weakens the proposal. In particular, only 30% of union leaders signed the MOU agreement, making it difficult to achieve broad statewide impact.”
  • “The Maine Education Association voted to not support the RTTT application. The Maine Principals Association did not provide a letter of support either. This is a definite detriment to implementing and sustaining the process.”
  • “Some 60 percent of teacher leaders did not sign off on the MOU — this leaves the possibility of lessened support by teachers statewide.”

Clearly, the lack of broad support for the plan is what hurt us in the “State Success Factors” section, but it also seems to have  cast a shadow of doubt over the rest of the proposal.

So at the end of the day, where do we point fingers? I would say we point them in three directions:

1. The Department, for putting together a plan that lacked boldness and, though heavy on platitudes, was far too light on details with regard to implementation. More and better is what we needed.

2. The 133 local school districts who failed to support the plan.  What, the status quo is really working so well for you districts that you couldn’t buy into a plan so benign that every reviewer criticized it for its lack of ambition?  That absence of support, detailed in the very first section of the plan, hurt the state’s chances from the get-go.

3. The education special interests in Augusta, namely the Maine Principal’s Association and the Maine Education Association.  Look around you, gentle reader, the system of schooling you see is their creation, and they would rather turn down $70 million in funding from Washington than change it in any way that threatens their stranglehold on power. Oh, they’ll take the money without the strings attached. You won’t see any of them turning their noses up at the $39 million in “edujobs” money coming from Washington. But ask them to reform, ask them to be more transparent and more accountable, and ask them to give up even one iota of their monopoly power (through the creation of charter schools, for instance), and you get nothing but howls of protest about “federal blackmail.”

Well, they won. We get no reform money from Washington and with budget shortfalls looming, there is little chance that funding will be available to launch any of the reform approaches outlined in the plan. So, like the Ark of the Covenant at the end of Raiders of the Lost Ark, the state’s Race to the Top application will likely be carted off to sit in some repository for government documents deep in the bowels of the state library and will never be heard from again. The establishment status quo will continue its stalwart defense of mediocrity and kids will return to schools both in the coming days and in the years ahead that are little different in the fundamental way that they do their jobs than schools of a half-century ago.

What a sad day for Maine.

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As readers of this blog will recall, Maine applied for the second round of grants under the federal Race to the Top program earlier this year and did not even make it to the final round.  I did a series of blog posts on the state’s application, ultimately coming to conclude that the application was simply too weak to win the state a grant.

How right I was.

We knew weeks ago that Maine did not make it to the final round, but we only found out today, with the announcement of the Round 2 winners and the publication of the Round 2 scores, that Maine ended up ranked 33rd out of the 36 states to apply. We’ll have to do more analysis in the days ahead to determine what the federal scorers thought of Maine’s application, but they evidently didn’t think much of it:

(How bad did we do? The cutoff to make the final round was a score of 400, but Maine would not have made it to the final round if the cutoff score had even been 300! Ouch!)

State Rank Total Score
Massachusetts 1 471
New York 2 464.8
Hawaii 3 462.4
Florida 4 452.4
Rhode Island 5 451.2
District of Columbia 6 450
Maryland 6 450
Georgia 8 446.4
North Carolina 9 441.6
Ohio 10 440.8
New Jersey 11 437.8
Arizona 12 435.4
Louisiana 13 434
South Carolina 14 431
Illinois 15 426.6
California 16 423.6
Colorado 17 420.2
Pennsylvania 18 417.6
Kentucky 19 412.4
Oklahoma 20 391.8
Arkansas 21 389.2
Iowa 22 382.8
Michigan 23 381.6
Nevada 24 381.2
Connecticut 25 379
Utah 25 379
Wisconsin 27 368.4
New Mexico 28 366.2
New Hampshire 29 335.2
Missouri 30 316.4
Nebraska 31 295.8
Washington 32 290.6
Maine 33 283.4
Mississippi 34 263.4
Montana 35 238.4
Alabama 36 212
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Today, author and columnist Amity Shlaes ran an article in Bloomberg citing my research on the Maine’s private sector in comparison with New Hampshire’s private sector.  For those who missed it, Amity came to Maine in August, 2008 to discuss her best-selling book “The Forgotten Man: A New History of the Great Depression.”

Here is a chart which visually summarizes Amity’s article.

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portland city council monopoly on taxi serviceNot since the Supreme Court ruled disabled golfer Casey Martin could ride one during PGA tournaments has a golf cart created this much controversy.

It all started back in the early part of summer 2009, when Peaks Island (part of Portland, Maine) summer resident Matt Rand, a 19 year-old Tufts University student, decided to embrace the American dream and put his entrepreneurial skills to work. Ferry loads of folks would head to Peaks Island, primarily in the summer, to visit their summer homes, stay on vacation or just sight see for the day. At the time, there was no way for these ferry passengers to get around the Island, which is a meager 2 miles long and 1 mile wide.

So the clever Mr. Rand decided to offer a shuttle service of sorts, using the family golf cart to transport ferry passengers around the island, even giving the occasional tour. He doesn’t charge folks anything for the service, but the entrepreneur in him certainly won’t turn down a tip when it’s offered. After all, textbooks for those Tufts University classes can’t be cheap.a young entrepreneaur had his golf cart taxi shut down

Just two weeks after the successful golf cart taxi got going, the local governments decided to set up there own transportation venture, under the guise of a “non-profit” called the “Island Transportation System”. The non-profit group bought a Dodge Grand Caravan, thanks to a $20,000 handout from the city, and hired a full-time driver, who was allowed to keep any of the money the “non-profit” earned, after expenses.

Before long, the government-run taxi business flopped (a nice little preview of Obamacare I’m afraid) and drivers started quitting for lack of profits. That’s when the bullying from big brother began in earnest, including a police officer issuing Matt a summons which was later rescinded on the advice of the city lawyer. But the city hasn’t stopped there.

Citing the “need” for $5,000 liability insurance, and under intense pressure from the city-funded taxi service, the city council voted specifically to require that people who offer rides on golf carts for tips on Peaks Island be licensed taxi drivers and carry insurance like any taxi operator. The vote was 5-3.

Matt says is going to finish the summer providing rides for folks, since the law doesn’t kick in for another 30 days. But the reality is that the $5,000 he would spend on insurance would go along way towards his tuition, so this will probably be the last summer he operates his genius little business. The Portland city council has effectively stamped out the competition that has outdone their feeble government-run program.

So sadly, Maine adds to the string of recent government takeovers that include the auto industry, our health care system, banks, and a lemonade stand run by a 7-year old girl in the other Portland. It’s a tragic day indeed when a young man with an entrepreneurs mind is squashed by a jealous, overreaching local government playing Monopoly and changing the rules mid-game  in their favor.

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Can Maine's Pension Crisis be Solved?In my previous blog, I highlighted a new study showing Maine’s pension crisis is worse than reported.  In a follow-up study, Robert Novy-Marx and Joshua D. Rauh, examine various policy options that can be used to reduce the pension liability.

While they discuss a number of options, there are really only two that could be used to make a significant dent in pension liabilities.  First, if all cost-of-living adjustments were eliminated that would shave off over 22 percent of current pension liabilities.  Second, they estimate savings under “social security parameters” which would increase the full retirement age to 67 years, increase the early retirement age to 65 years and implement early retirement age buyouts.  Under these parameters, another 22 percent could be saved.

However, as dramatic as these changes will seem to some, the authors conclude on this sour note:

“Even relatively dramatic policy changes, such as the elimination of COLAs or the implementation of Social Security retirement age parameters, would leave liabilities (for the 116 largest pension plans in the country) around $1.5 trillion more than plan assets under Treasury discounting.  This suggests that taxpayers will bear the lion’s share of the costs associated with the legacy liabilities of state DB (defined-benefit) plans.”

Keep in mind three things. First, the extent that any of these changes that can be made to existing employees and pensioners vary by state.  In this blog I’m not attempting to detail the political/legal reality of these options in Maine, I’m only trying to reveal the extent of the pension hole Maine taxpayer’s face.

Second, let’s not forget the key to getting the pension liability under control is to first stop digging the hole deeper.  The current defined benefit system must be scrapped and a defined contributions system put into its place for new employees.

Finally, Maine’s state government workforce is bloated by approximately 4,497 people in 2007.  Permanently eliminating these positions would not only save money today of approximately $190 million, but it would also reduce Maine’s pension liability.  And, the money saved could be reinvested back into the pension system in hopes of making it solvent with as little involvement of taxpayer dollars as possible.

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