JACKSONVILLE STATE UNIVERSITY ECONOMIC UPDATE VOLUME 22 ISSUE 4 JULY - AUGUST 2012

Center for Economic Development & Business Research 700 Pelham Rd. North College of Commerce & Business Administration Jacksonville, AL 36265 Jacksonville State University (256) 782-5324

THE TROUBLE WITH OCCUPATIONAL TAXES By Christopher Westley

If you ever visited my part of the country, you would likely This strain of arch-populism brought about the creation hear about a long-standing controversy over occupa- of a broad occupational tax to Jefferson County in 1988. tional taxes and the right of my state’s most populous Whereas many local tax jurisdictions in the United county to impose them. States impose occupational taxes in the context of cur- sory licensing fees to business owners (which are bad That state would be Alabama, and that county would enough in themselves because they increase the cost be Jefferson County, established through extra-market of starting a business and hinder the wealth creation means in 1819 yet named for an anti-tax radical who process), JeffCo decided to go further and require oc- eventually became the third president of the United cupational tax payments for all workers who were not States. Although Thomas Jefferson would die five years already subject to existing license fees at the local or later, his eponymous county is still with us. state level. The law stated:

As a county, Jefferson was thankfully unremarkable It shall be unlawful for any person to engage in or throughout most of its history. It was not until the 1950s follow any vocation, occupation, calling or profes- sion ... within [Jefferson] County on and after the when the county made international news for its boor- 1st day of January, 1988, without paying license ish enforcement of state-mandated public segregation. fees to the County for the privilege of engaging in The county has paid a severe economic price for those or following such vocation, occupation, calling or episodes. In 1960, Birmingham, Alabama, was similar profession, which license fees shall be measured in size and socio-economic characteristics to Atlanta by one-half percent (1/2%) of the gross receipts and could have developed in a comparative manner in of each such person.[1] the ensuing decades. Happy days were here again, at least for those who But whereas Atlanta nurtured entrepreneurs like Carlyle believe in better living through increased levels of legal Fraser, George and Robert Woodruff, Ted Turner, and plunder. Looking back, however, JeffCo’s experience Oz Nelson while attracting capital and labor from the with the occupational tax illustrates Henry Hazlitt’s higher taxing and regulating northern states, Birmingham differentiation between good and bad economists. In became known for Bull Connor and the arch-populism particular, Hazlitt noted that whereas good economists that protected the union dominated steel industry and see the long-term consequences of policies or actions, generally made capital and labor relatively less secure. bad economists focus solely on the immediate effects. [2] The immediate effects of a broadly-defined occu- As a result, many longtime JeffCo residents lament what pational tax have been good for the county in terms of

might have been. its tax revenue. A new revenue stream was tapped that

Cont. on p. 3 Gasoline Prices Consumer Price Index - U.S. Average July 2011 - July 2012 June 2011 - June 2012 (3 County Average - Calhoun, Etowah, Talladega) 260 $4.00 $3.67 255 $3.57 $3.57 $3.62 $3.43 $3.44 $3.47 $3.50 $3.33 $3.26 $3.27 $3.27 $3.20 250 $3.02 $3.00 245

$2.50

Regular Unleaded 240 - 237.889 $2.00 234.669 235

233.598 $1.50 230 227.493 228.618 $1.00 225 224.304 Food

Average Price per Gallon Price Average $0.50 220 Energy All Items $0.00 215 JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL JUN JUL AUG SEPT OCT NOV DEC JAN FEB MAR APR MAY JUN

Source: AAA Alabama Source: Consumer Price Index Lumber Prices Building Permits July 2011 - July 2012 June 2011- June 2012 (3 County Average - Calhoun, Etowah, Talladega) 25 (New Construction) $20

20 Calhoun $16 $16.94 Etowah 16 Talladega 17 15 $12 $12.89 12FT 2X4 (AVG) 1/2" CDX PLYWOOD 10 $8 Number of Permits

5 5 $4 $4.05 $4.27 3 3 2

$0 0 JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN

Source: Data submitted by municipalities within the three counties Source: Phone Surveys Housing Units Sold Median Home Prices June 2011 - June 2012 2011 - 2012

120 $120,000

110

100 91 90 85 $99,417 $100,000 $95,433 80 $98,300 77 70 $94,083 60 59

50 Values Price Median $80,000 Number of Housing Units 40 Calhoun Calhoun 30 Etowah Etowah

20 $60,000 JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN 2Qtr11 3Qtr11 4Qtr11 1Qtr12 2Qtr12

Source: Alabama Center for Real Estate, University of Alabama Source: Alabama Center for Real Estate, University of Alabama

Page 2 (The Trouble With..., cont. from p. 1 ) ported the tax in public were clandestinely working in the background to defeat it, the legislature never voted on it — essentially allowing it to die.[4] allowed for new avenues for spending and expanding the number of people who became economically dependent The basic message of the email was one of shock that on the county. It also greatly benefited those special lying politicians and internecine squabbles might actually interests favored by JeffCo's political leaders. doom the occupational tax and all of the special inter- est spending it made possible, offered in exchange for Over time, the occupational tax grew in importance to financial and political support in the future. It’s those the county’s general fund. In the last budget year it was special interests that gain from the redistributive func- in effect, it raised over $70 million, equivalent to one- tion of Jefferson County government — through which fourth of the general fund. wealth is forcibly extracted from the productive to be doled out to the politically well connected — who are Hazlitt would not have been surprised that the long-term shocked (shocked!) to find that politics actually brought effects have proved devastating. Businesses attracted about the end to their beloved occupational tax. to the region have eschewed Jefferson County for the lower-tax counties adjoining it. Many businesses with On the other side of this fight, there are legislators actu- a long history in Jefferson County have relocated else- ally opposed to the tax on the basis of (brace yourselves) where, epitomized by the Red Diamond Coffee Com- popular opposition to the tax from constituents inside pany's 2009 decision to leave Birmingham — where and outside the county and a desire to force a long- it had been a fixture for over 100 years — for nearby term, post-bankruptcy change to the fiscal structure of Moody in adjacent St. Clair County. Meanwhile, wealth JeffCo government that does not include an occupational creating investment has bypassed Jefferson County tax. Such a change would make JeffCo more fiscally for lower-cost venues both in the state as well as in the competitive with Mobile and Madison Counties, both of southeast in general. Whereas Alabama in general has which have been more successful in attracting capital been successful in attracting investment, this success and generating economic growth and opportunity over has bypassed Jefferson County for places like Tusca- the last two decades. loosa (Mercedes), Talladega (Honda), Madison (Toyota and Boeing), and Montgomery (Hyundai) — all of which Nonetheless, supporters of the tax and of the interests must be grateful for JeffCo’s occupational tax. who benefit from it see this episode as a casus belli. The Birmingham News called the anti-tax legislators That's why many were grateful when, in 2011, the Jefferson County’s worst enemies—sort of like a local Alabama Supreme Court unanimously ruled the tax version of Afghan insurgents?—as if maintaining and unconstitutional due to procedural problems with provid- tweaking a system that has ended in bankruptcy is in the ing public notice of its likely effects. After the county public interest.[5] The News’ John Archibald, a popular declared the largest municipal bankruptcy in history last columnist, considers the legislators operating outside of November (based mostly in its inability to pay back mon- the establishment’s controls like Fredo Corleone from ies borrowed earlier to finance a federally-ordered sew- The Godfather—a traitor the family eventually killed.[6] age system), it commenced the process to re-impose the tax via its legislative delegation to the state legislature. In truth, the controversy has exposed a division between (In Alabama, such county taxes must be approved on those who want to run the county like it was still 2005 the state level.) and those who see the world has changed and are demanding that the county adapt to the times, or die. What followed was amusing to behold. This past May Lost in the huff and puff over traitorous legislators are 9th, news leaked out that the head of the Jefferson some very good reasons why Jefferson County should County Commission had sent an angry, incredulous have rid itself of this tax a long time ago. email [3] to members of the delegation in response to rumors that some of them were actually lobbying for First, it is a tax. Let’s not forget that taxes are involun- the occupational tax's demise. Once it became obvi- tary exchanges of income conducted under the threat ous that several members of the delegation who sup-

Cont. on p. 4

Page 3 (The Trouble With..., cont. from p. 3 ) parties within it include: • employees who now find their labor supply more affordable of legal violence and are therefore inconsistent with the • entrepreneurs who now can risk more labor-inten- goal of human freedom. Taking others’ wealth without sive ventures their permission is wrong—a violation of natural law. • businesses who now find the minimum prices they That we have taxes illustrates that most people assent require to cover their costs have fallen, and to such takings, and in the case of Jefferson County’s • consumers who now find lower prices and increased occupational tax, this assent lasted for roughly two de- purchasing power. cades. But there is a tipping point at which the general assent no longer exists, even when the assent is based All of whom would agree with this paraphrase of Thomas mostly on a prudent decision to tolerate the tax if only Jefferson: a little tax rebellion, now and then, is a good to avoid conflict with government. thing. Still, thwarting banditry is a positive good, even when REFERENCES: the offender is a stationary bandit.[7] To the extent it is thwarted, resources are more likely to be directed to their [1] Jefferson County, Ala., Ordinance 1120, § 2 (Sept. 29, most highly valued uses, compared to the uses chosen 1987) by public officials who spend other people’s money. [2] From Chapter 1 of Hazlitt’s classic Economics in One Les- son (Auburn, Alabama: Ludwig von Mises Institute, 2008 [p. Second, it is a tax on labor. Here we are in a weak labor 4]: “The bad economist sees only what immediately strikes market, with historically high unemployment rates mostly the eye; the good economist also looks beyond. The bad explained by discouraged workers’ exit from the local economist sees only the direct consequences of a proposed labor market over the last three years, and establish- course; the good economist looks also at the longer and in- ment politicians want to reinstate a tax on labor? These direct consequences. The bad economist sees only what the are the same “progressive” thinkers who advocate for effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of cigarette taxes to discourage smoking. Why wouldn’t the policy will be on all groups.” taxing labor discourage labor as well? [3] See Barnett Wright, “Delegates Accused of Fighting Jef- Third, it penalizes businesses in JeffCo relative to other ferson County Job Tax,” The Birmingham News, May 11, 2012 counties. If you are in a competitive industry committed to operating your business in North Central Alabama, the [4] See The Birmingham Business Journal, “Inaction Means JeffCo Occupational Tax Dead,” May 17, 2012, << http://bit. occupational tax makes Jefferson County less desirable ly/KYhGnt >> relative to the six counties that border it. The result: Talented JeffCo residents leave for better opportunities [5] See Birmingham News editorial, “Jefferson County Must elsewhere, while the poor suffer the most. This is no Do Everything They Can to Pass Desperately needed Oc- way to position JeffCo as a serious player in the fight for cupational Tax on Session’s Last Day,” May 13, 2012 capital flows in a competitive, global economy. [6] John Archibald, “Beware the Ides of DeMarco,” The Bir- mingham News, May 13, 2012 Finally, it allows politicians to put off hard choices for another day. It is long past time for county leaders to [7] ] See Mancur Olson’s classic article, “Dictatorship, Democ- examine the costs associated with defined benefit pen- racy, and Development,” American Political Science Review, sions, public-sector unions and public-employee retire- September 1993 (pp. 567-576). An excerpt from the abstract: ment ages, and prevailing-wage laws. Yet, occupational “Under anarchy, uncoordinated competitive theft by "roving bandits" destroys the incentive to invest and produce, leaving tax revenue allows them to avoid any serious discussion little for either the population or the bandits. Both can be bet- about these structural issues that may have made sense ter off if a bandit sets himself up as a dictator—a "stationary for the economy of 40 years ago but that today cost the bandit" who monopolizes and rationalizes theft in the form of county millions each year. taxes.” << bit.ly/KKqm2t >> ------No wonder they bemoan the occupational tax's demise. Christopher Westley, PhD, teaches Economics at Jacksonville Who doesn't bemoan it? The list is long, but important State University.

Page 4 Mortgage Rates Certificate of Deposit Rates July 2011- July 2012 July 2011 - July 2012 (3 County Average - Calhoun, Etowah, Talladega) (3 County Average - Calhoun, Etowah, Talladega) 5 1.80 4.8 4.608 30 Year Fixed 1.60 6 Month 4.6 1.40 1 Year 15 Year Fixed 1.40 3 Year 4.4 4.281 5 Year 1.20 1.12 4.2 1.00 0.95 4 3.84 0.80 0.76 0.67 3.8 in Percents Value

Value in in Percents Value 0.60 3.6 0.48

3.4 0.40 0.47 3.4 0.35 3.2 0.20

3 0.00 JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL

Source: Phone Surveys Source: Phone Surveys

U.S. Retail Sales Unemployment Rate May 2011- May 2012 June 2011 - June 2012 (3 County Average - Calhoun, Etowah, Talladega) $365,000 12.0

3 COUNTY AVG 11.0 359,625 11.0 ALABAMA U.S.

9.9 10.0

$355,000 9.2 9.2 9.0

8.2

Value in in Percents Value 8.0

Value in Millions of Dollars 7.8

7.0

346,741 $345,000 MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY 6.0 JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN

Source: Monthly Retail Trade Report, U.S. Census Bureau Source: Alabama Department of Industrial Relations Help Wanted Ads Civilian Labor Force & Employment July 2011- July 2012 June 2011 - June 2012 60 (3 County Average - Calhoun, Etowah, Talladega) 140,000

50 47 49 138,236

135,000 136,706 40

32 30 32 130,000

27 25 Number ofAds 125,605 20 125,000

Calhoun Number of Individuals 10 Etowah 121,774 Talladega 120,000 Labor Force 0 Employment JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL 115,000 JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN Source: Phone Surveys Source: Alabama Department of Industrial Relations

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William T. Fielding, PhD, Dean Pat W. Shaddix, Director, CED Jennifer G. Swafford, Editor Christopher A. Westley, PhD, Associate Editor

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Standard & Poor's Index Alabama Northern District U.S. Court July 2011- July 2012 Business Bankruptcies (Year Ending June 2011- June 2012) 1,500 350 Chapter 7 305 Chapter 13 300 288 277 273 1,385.30 247 1,292.28 250 1,300

200

150 1,100 100 Number of Bankruptcies

50 20 18 19 15 13 900 0 JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL 6/30/11 9/30/11 12/31/11 3/31/12 6/30/12

Source: Standard & Poor's Index Source: United States Courts - Bankruptcy Statistics

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