Legislative Leadership Forum – March 16, 2007

Ending Oregon’s War on the Poor
10 Strategies for Reducing Economic Barriers
Cascade Policy Institute
Legislative Leadership Forum
Presented in HR 50, State Capitol
Salem, Oregon noon-1pm
March 16, 2007

Oregon is often seen as a “progressive” state. But many of the state’s policies make it unnecessarily difficult for the lowest-income members of society to gain a foothold on the economic ladder.

In this legislative briefing, Cascade Policy Institute explores 10 simple ways to lower the tax and regulatory burdens on the poor.

Presentations by:
John A. Charles, Jr.
John A. Charles, Jr., President and CEO of Cascade Policy Institute
(Points 1,2,3 below)

Steve Buckstein
Steve Buckstein, Director of Cascade’s Oregon Economic Opportunity Project
(Points 4,5,6 below)

Bina Patel
Bina Patel, Director of Cascade’s Oregon Asset Policy Initiative
(Points 7,8,9,10 below)

1. The effects of land-use regulation on housing

The largest single ongoing expense for the average family is the cost of housing. Oregon’s land-use regulatory system makes these expenses higher then they should be for several reasons:

• Due to zoning, it’s illegal to build any form of housing on most land in Oregon. Rural zoning for exclusive farm/forest use, combined with urban growth boundaries around cities, creates an urban cartel of landowners owning buildable land. This drives up the cost of land far above its true market value. It’s impossible to build modestly-priced housing on expensive land.
• Even on buildable land, Oregon’s unnecessarily complex system for planning and permitting adds substantially to the costs of construction. When new homes are delayed, the price of existing units goes up.
• The mantra of urban planners is, “build up, not out”. But construction costs rise dramatically with high-density housing. On a per/square foot basis, a five-story building is at least twice as expensive a one-story building.

Policy options

1) Abolish urban growth boundary regulations
2) Repeal minimum lot size requirements
3) Allow housing on farm or forestland, subject to strict enforcement of trespass and nuisance law to ensure that mixed uses are compatible.

2. Providing mobility options for the poor

Most elected officials tend to think that the best transportation option for lower-income households is mass transit. However, by virtually any criteria, it is now cheaper and more energy-efficient to move people in private automobiles. Government transit monopolies have labor costs that are typically 100% or more above the market rate, and the preference of big-city transit districts to focus on rail transit has driven the cost of construction and operation far beyond any reasonable level. And since rider surveys show that most rail passengers are upper-income riders who already own cars, the subsidies required to build and operate rail lines are regressive.

Moreover, even if this were not the case (if labor costs were low and only buses were used), research shows that automobile ownership lowers the unemployment rate among low-income workers and dramatically increases household income.

Policy options:

1) Divert a small amount of transit funding to create regional low-cost loan programs to help finance car ownership for low-income families.
2) Terminate plans for any further rail transit construction
3) Legalize jitneys, which provide both employment options for jitney drivers and low-cost transit services for riders
4) Expand Oregon’s highway system to improve the free flow of goods and people, thereby encouraging job creation.

3. The Regressivity of Sin Taxes

Taxes on alcohol and tobacco are frequently justified as a means of discouraging “unhealthy” behavior. But this objective quickly gives way to a different one: raising revenue. This creates what is called a “moral hazard” problem: sin taxes cannot simultaneously serve the purpose of both discouraging consumption and raising revenue. For one to succeed, the other must fail.

Nowhere has this problem become more visible during 2007 then in the health insurance field. Governor Kulongoski has proposed to fund an expensive new health insurance program through a substantial increase in the tobacco tax. By financing the program this way, the state will have a strong, vested interest in promoting smoking. Not only is this morally unacceptable, the revenue stream will be much less than anticipated because the tax increase will drive tobacco purchasing to alternative markets, such as internet outlets and lower-cost states. And since smokers tend to have less education and lower incomes than the population at large, this will be a regressive tax burden.

Policy options:

1) Lower alcohol and tobacco taxes to the estimated levels necessary to account only for “external” costs of drinking and smoking.
2) Use excise tax revenues only for purposes related to these activities, such as smoking cessation programs or victim compensation from drunken driving accidents.
3) Do not use the revenue stream as a base funding source for any program.
4) Sell the Oregon lottery and allow multiple private lotteries in a competitive market, so that gambling is no longer a key part of the state’s revenue stream.

4. Education

The poor have the fewest educational opportunities in the state. For most, where they can afford to live dictates where their children must attend school. Offering them more educational choices, from public school open enrollment, to charter schools, to grants to attend private schools can all help improve their chances of getting out of poverty.

This legislative session there are at least three bills that touch on these issues; the first one negatively and the other two positively:

SB 621 would limit educational opportunities by requiring that 80% of students in any charter school live in the district that chartered it. The bill would also limit the number of students in any district that can even enroll in charter schools to 10 percent of the kids in public schools. It also requires all charter school teachers to be members of the district collective bargaining unit which would end the kinds of innovations charter schools are now free to use that especially may help low income kids such as longer school days and years, different curriculum, uniforms, etc.

Two education bills that would help poor students are:

HB 2037 would remove the existing limitation on how many kids could attend an online charter school from outside the school’s district. Currently at least 50% of students enrolled in an online charter school must live within the district that charters that school. The Internet is great at breaking down geographic barriers; this bill would break down a political barrier that damages low income kids more than others because they already have fewer educational opportunities.
HB 3010 would create the Freedom to Choose My School Grant program for up to 1,000 low-income kids in Portland, allowing state education dollars to follow those students to the school of their choice. It also holds the school district financially harmless by replacing the funds that follow the students.

5. Prevailing Wage

Oregon’s prevailing wage law is another economic barrier facing the poor. The original federal prevailing wage law was passed by Congress in 1931. Its supporters made no secret of the fact that its purpose was to keep poor African American laborers from competing for white union jobs. Mandating above market wages has a similar effect even today by making it difficult for lower skilled, less educated workers to compete for public project jobs.

At least one bill this session could help lower this economic barrier:

HB 2557 would exempt certain low-income housing projects from prevailing wage laws. Lowering the cost of construction could increase the number of low-income housing units built, plus contractors may be able to hire more workers who otherwise would be kept out of those jobs because of union restrictions.

6. Barriers to employment and limitations on service choices

There are all kinds of laws that may be mere annoyances to most people but are significant economic burdens to the poor. Hundreds of occupations require professional licenses and hundreds or thousands of hours of education for certification, whether that education is truly necessary or not. To prepare an income tax return, give a massage, dig a grave, or cut someone’s hair all require government licenses. The cost of such licenses, both in money and time, is often more than low-income people can afford. They are therefore cut out of many opportunities the rest of us take for granted.

On the other side of this same coin, the very fact that so many services can only be performed by a select few providers artificially raised their cost, again causing the most harm to the very people in our society who can least afford such costs.

Oregon’s mass transit laws also hurt the poor in two ways. They keep people from going into the transit business themselves with their own private cars or buses because such competition with official buses and trains is prohibited. And again, this barrier to entry hurts poor transit riders the most because with fewer travel options they are forced to spend more of their limited time getting to the places they need to go such as work and daycare..

At least two bills this session will address one of these barriers:

SB 874 would set up a Task Force to examine whether cosmetology can be deregulated, thus allowing more poor people to enter the field. Unfortunately, a majority of the Task Force membership is proposed to consist of people with a vested interest in maintaining high entry requirements to the field, making it unlikely that any real reform will occur.
SB 399 would exempt the practice of reflexology from regulation by the State Board of Massage Therapists. Reflexology is the manipulation of feet, hands and ears. It probably doesn’t require 500 hours of study to get a state license.

7. Mandates on health insurance

Increasing coverage requirements on health insurers has the domino effect of increasing health care costs for employers and negatively effecting employees. Employers pass these costs onto the employee in the form of lower wages, more eligibility requirements, or by not hiring lower-income workers. Research shows that minimum wage workers’ annual pay ($10712) is less than health care cost for a family of four to an employer ($11500).

Oregon has 31 mandates already, with many more on the legislative agenda this year. Mandates individually raise costs about 1% – 3%, and together can translate into more than $1000 additional on premiums. Mandates create a Lexus model of health care as its basic model. Unfortunately, those who cannot afford this model are effectively pushed out of the system. As we see, the number of the uninsured is growing extremely quickly, largely due to unaffordable health care costs.

Policy Options

1) Provide a basic/catastrophic coverage plan. Several states have adopted the TONIK plan, for example. Although targeted at 20-somethings, it provides basic care at affordable costs, and eliminates the forced group purchase of services that do not apply.
2) Provide an option for a Health Savings Account with a high-deductible insurance plan. For many, HSAs provide tremendous savings and tax advantages, while providing medical coverage as needed.

8. Payday lending regulation

Payday lenders provide credit to high-risk individuals at a cost not unlike bank fees for bounced checks, late fees and raised interest rates on credit cards, and restart charges on utilities. When annualized, many of these charges amount into the thousands of percent. Regulating the charges on payday lenders 1) neglects the point of why any of these are taken, 2) limits available credit to high-risk borrowers, who are excluded from accessing credit at traditional lenders, and 3) pushes lending into the black market, where no regulation or paper trail is left.

Payday loans provided some option for individuals who could not pay the electric bill – who will now default on other basic needs sort of bills since no lending option is available.

Policy Options

1) Increase financial education services through non-profits, community organizations, and banks.
2) Encourage mainstream financial institutions to provide more inclusive services that supply credit to higher-risk borrowers. (Although many payday lenders are in fact the arm of large national lending groups).

9. Use-it-or-lose-it entitlements

Most public assistance and welfare programs are structured to increase full usage of the benefit, with little incentive to save or wisely maximize the benefit. For example, food stamp recipients are all too aware that if they do not regularly spend out their entire allocation, they will be penalized by a reduction of their monthly allocation. Unfortunately, this leads to over-shopping and stockpiling, as well as reinforcement of disincentives to not save or shop wisely. Entitlement programs tend not to develop self-sufficient behavior, or provide long-term vision for success.

A Policy Option

Develop an individual savings account funded from unused portion of benefits that can be used for asset building activities like car maintenance, health care costs, or education. These types of accounts already have a history of providing savings incentives and building assets, which change the way people think and behave in the long-term. Increasing economic opportunities in ways like this concretely helps low-income families accumulate necessary assets.

10. Unemployment insurance tax

Every employer pays a state and federal unemployment tax for each of their employees. If the employee never files for unemployment benefits, they lose access to the financial investment made on their behalf. Notably, this tax increases the cost to an employer for a worker, and again negatively affects the wage of an employee. And similarly to food stamps and health insurance, this is another forced purchase where no benefit may be seen on the part of the purchaser.

This system creates extremely high-cost and disfiguring disincentives. Recipients of unemployment funds have limited incentives to go back to work quickly, as this is “free money” paying for leisure time. And, the unemployment assistance program creates a welfare trap, where the cost of going back to work is higher than staying on public assistance, so they continue to accumulate benefits. Research shows that the job search and placement skyrockets in the 25th week. Of course, at some point (26 weeks), recipients lose their benefits, but not forever. They are eligible for 26 weeks of benefits again after meeting the quarterly income and work-time requirements.

A Policy Option

Create an individually held asset account funded by the unemployment tax employers pay, and personal contributions. This asset account would primarily be used to safeguard against unemployment spells, but can also help pay for home ownership, retirement, education, and can be passed on to heirs. Individuals owning this asset would be much less likely to see this as “free money”, and would make better decisions about employment stability, unemployment duration and financial behaviors, both during joblessness and employment.

Cascade Policy Institute is a non-partisan think tank promoting public policy alternatives that foster economic opportunity, personal responsibility, and individual liberty.

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