Bob Pugh via The Derecho
The Derecho

As Prince William County government seemingly eschews serious economic analysis in favor of what can be best described as nothing but campaign spin and propaganda to justify enlarging government and thus increasing taxes, I thought input from a professional economist regarding how this new spending relates to inflation might be most relevant. Most reasonable people can support keeping pace with inflation, but not growing spending beyond that level. I asked Bob Pugh, a local economist and financial analyst, who worked for the County Government several years ago, to comment.

Here’s what Bob Pugh had to say:

Assuming even just the 4.0% annual tax increases in the adopted five-year fiscal plan, Peacor and the Board of Supervisors want to grow the burden of local government on taxpayers at nearly double the expected rate of inflation.

The National Association for Business Economics just released their updated inflation forecast (CPI) for 2013. It is 2.2%, which is down from their forecast for 2013 of 2.3% last March. Their outlook for the implicit GDP deflator, which is a broader measure of price changes in the economy and likely more relevant to the County budget than the CPI was only 1.9% for 2013. That outlook is down from 2.1% from their 2013 forecast last March. This forecast is a consensus from forty-four highly-respected, mostly private sector economists.

Morningstar/Ibbotson is using an expected annual rate of inflation of 2.54% in their investment research and portfolio analytics. I have their latest data because I license and subscribe to the full package of Morningstar/Ibbotson research resources for private financial advisors.

Federal Reserve Chairman Bernanke announced recently indefinite monthly $40 billion Fed purchases of mortgage-backed securities until we see substantial improvement in the labor market. Economists at the Fed expect inflation to be “subdued” through at least 2014, thus giving Bernanke room to maneuver on the bond purchases.

If the annualized rate of CPI inflation creeps over 2.5% on a sustained basis, Bernanke is almost certainly going to start tightening monetary policy to prevent it from rising above 3.0%. Moreover, the implicit GDP deflator is even less likely to break 3.0% on an annual basis before 2015 than is the CPI.

Economic expectations can change. However, the local government should be using numbers that fall within the consensus range of credible private and government sector economists when planning future tax and spending changes.

Assuming annual inflation of 3.0%, a rate of change that virtually no professional economists expect before later in 2014 or perhaps not even until 2015, or even at all if Bernanke tightens monetary policy, over those same five years results in a compounded increase in prices of 15.93%. Annual rates of inflation of 2.5% over five years results in a total increase of 13.14%.

Compounding the 4.0% annual increases results in taxes that are 21.67% higher in five years than they are now. Raising the annual growth rate of taxes to 4.5% results in the Prince William County government taking in 24.62% more taxes in five years than they do now.

Under either scenario, 4.0% or 4.5% annual increases in taxes, local taxing and spending will grow far faster than the amounts needed to maintain County services at their current level given the consensus views on inflation of professional economists.

Another important consideration is the impact on business development in Prince William County. Among Prince William County’s strongest competitive advantages in attracting businesses are its low tax rate, and low overall tax burden compared to jurisdictions closer in to Washington, DC such as Arlington, Fairfax and Alexandria. If businesses see taxes on the rise, and in particular if the County starts adding special taxes on businesses such as Peacor’s proposed additional levy on the real estate tax rate on commercial property, that advantage dissipates and we will find attracting employers and good jobs even more difficult than it is now. Fewer businesses means an even greater tax burden on residents to maintain the level of services they receive now

Often, those supporting higher taxes portray them in small, incremental increases. Your property tax bill might increase by $20 next year, they might say. Objective analysis of the numbers tells a different story. An annual increase of 4.5% for five years raises the overall tax burden by nearly a quarter. That means that if you are paying $4,000 in taxes now, you will be paying $5,000 then. All the while, inflation has increased prices far less. That number does not reflect the impact of lost revenue from businesses locating elsewhere to avoid Prince William County’s growing tax burden for which residents will have to pay even more to compensate.

In summary, virtually no professional economists are expecting inflationary pressure to accelerate much above 2.0% until 2014 at the earliest. Nonetheless, Prince William County wants to accelerate the growth of taxes and spending well above inflation now.

by
Bob Pugh

via The Derecho
The Derecho

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