Tax Credit Refundability Would Yield Economic, Education, and Health Benefits

(Columbus, OH) – On Friday, Scioto Analysis released a cost-benefit analysis of proposals to make Ohio’s earned income tax credit refundable.

The cost-benefit analysis incorporated findings from policy research studying past earned income tax credit expansions and elements of its design to measure human development impacts of the policy.

“In this analysis, we found that refundability reforms would put an extra $150 to $900 in the pocket of the average low-income Ohioan,” said Rob Moore, principal for Scioto Analysis. "It would also bring anywhere from 3,000 to 60,000 new workers into the workforce, would prevent 20 to 120 cases of low infant birthweight per year, and would lead to 40-230 new college enrollments every year, generating anywhere from a $5 to $130 million in new economic activity,”

This analysis sheds new light on the state earned income tax credit, showing for the first time that human development benefits tied to education and health outweigh the tax distortion costs and potential labor market costs levied by the earned income tax credit.

“In all 10,000 simulations we ran of the change from a 30% nonrefundable to a 10% refundable tax credit, we found the change in policy would have net economic benefits,” said Tong Zhou, co-author of the analysis. “This was also the case in all but 7 of the 10,000 simulations we ran of the change to a more robust 40% refundable tax credit.”

This paper represents the first best-practices cost-benefit analysis on a state policy in Ohio in over a decade. Scioto Analysis looks forward to promoting the use of more cost-benefit analysis in the upcoming years.

For more information, please contact Rob Moore, principal, Scioto Analysis, (614) 743-1840, rob@sciotoanalysis.com

Tips for Conducting Cost-Benefit Analysis

By Tong Zhou

Politicians always argue that their policies will benefit citizens and society. However, we often have little information to assess how right they are about these claims. But how do we know when these claims are correct or not?

To create a standardized approach for objectively assess the economic efficiency of public policies, economists created cost-benefit analysis, a tool for weighing the economic costs and benefits of proposed policies. In this post, I will provide some tips for beginners doing cost benefit analysis.

Firstly, let’s look at the cost benefit analysis as laid out in Boardman et. al’s Cost-Benefit Analysis: Concepts and Practice. The following nine steps summarize the process of cost benefit analysis:

1.     Define the policy that we are analyzing and the set of alternative policies that could be adopted in place of the policy. 

2.     Define who has standing in the study, or whose benefits and costs count for the analysis. Sometimes the standing can be the citizens of a city, sometimes the standing can be broader like all human beings on Earth. Standing depends on the specific policy project.

3.     Then, we must determine all the impacts caused by the policy. Any policy will have benefit categories and cost categories just as a coin has two sides. We want to be as objective as possible in this process as biased determination of impacts can make your analysis meaningless. Sometimes we can be guardians and spenders unconsciously. Peer review is a good way to avoid this problem.

4.     Now we can quantify the impacts found in the last step. For example, in the study we are doing this summer, we found that the Earned Income Tax Credit (EITC) will increase the number of workers in the labor market. In this step, we want to determine how many more workers will enter the job market. Sometimes it can be hard to translate impact categories into numbers as translation requires serious analysis and literature review to find an accurate number. You will read a lot of literature to find the best sources of data and effect sizes. Reliable sources play a significant role here: we must stand on the shoulders of giants in cost-benefit work.  

5.     Monetize all impacts. Some people may argue that not everything has a price: things like time and life are often considered “priceless.” However, people make tradeoffs of their time and risks of life all the time. We can survey people to ask them their willingness to pay for these goods. Monetization is a key step in any cost-benefit analysis because it allows us to compare seemingly incomparable outcomes.

6.     Even though we have the monetized all impacts, not all benefit or cost are realized today. In order to get an accurate estimation of present value, or how we value these future outcomes now, we will discount all impacts occurring in the future. The discount rate usually ranges from 3% to 7%, though this is a point of contention in the world of cost-benefit analysis. 

7.     Finally, we have determined the cost and benefits of the policy. Simply subtract costs from benefit to calculate the net benefit. A positive net benefit suggests the policy is economically efficient, while a negative net benefit suggests the policy is economically inefficient.  

8.     Even though we have determined the results, we still want to know how accurate our results are. To do this, we perform sensitivity analysis such as a Monte Carlo Simulation, the best practice in determining the accuracy of cost-benefit analytical outcomes. Sensitivity analysis is a tool that will tell us the most likely net benefit.

9.     The final step is to report your findings in a format that provides guidance to policymakers. 

After carrying out all the steps above, we want to double-check that the policy impacts we found that are directly caused by the policy. We do not want to count correlated impacts that would not bear out as causal in a final report. Even though researchers may find that Nobel Prize winners usually eat more chocolate than normal people, eating more chocolates will not necessarily increase your likelihood to win a Nobel Prize. 

Although the steps listed above seem pretty straightforward, it is very easy to still encounter uncertainties in the model which may undermine the accuracy of the final results. For example, some impacts are more important than others so we might need to weight the impact for policymakers. Prices may fluctuate over time so we need to use the current price. My suggestion is to spend some time reading how others do cost-benefit analysis. Finding other similar examples can not only teach us innovative ways to deal with uncertainties but also let us compare different ways to find the best one.

My final suggestion for beginners is to keep practicing cost-benefit analysis. We cannot truly master it unless we practice. Practice goes a long way and only by refining our craft will we improve at it.

 Tong is a Data Analysis Intern at Scioto Analysis and a data science student at Denison University.

Moore Appears on The Wonk Podcast

Last week, Scioto Analysis Principal Rob Moore appeared on the Association for Public Policy Analysis and Management’s podcast The Wonk speaking about the use of cost-benefit analysis in the state of Ohio.

In April, Scioto Analysis released a report assessing the use of cost-benefit analysis in the state of Ohio from 2012 to 2018, building off a 50-state survey released by the Pew Charitable Trusts in 2013. In this study, Scioto Analysis found that there had not been a single best-practice cost-benefit analysis carried out in Ohio in the past decade.

“Policymakers aren’t getting data on the economic impacts of their policies,” said Moore on the podcast.

Other approaches to policy analysis such as cost-effectiveness analysis, well-being metrics, and measures of poverty and inequality were also discussed on the podcast.

“People who care about government working well should be interested in the use and prevalence of cost-benefit analysis because it provides something that we can argue about and discuss that is a bit more objective,” said Moore.

Later this summer, Scioto Analysis will be releasing a best-practice cost-benefit analysis of Ohio’s state earned income tax credit, exploring the implications of proposals to make the credit refundable.

Housing Fund Won't Solve Housing Affordability on Its Own

Late last month, a group of business and community leaders announced a $100 million fund for construction of new affordable housing in Franklin County.

The fund is financed entirely by private-sector investors and will provide low-cost loans to developers who agree to affordability requirements in their rental pricing.

It’s good to see private-sector players taking action on housing affordability, but these are just low-cost loans, meaning the true value of the contribution will likely shake out to only a few percentage points in reduced rates, or a few million dollars in actual subsidies.

This is likely to be a drop in the bucket when it comes to reducing housing cost burdens. A 2017 study by the Affordable Housing Alliance of Central Ohio found that in 2013 almost 100,000 Franklin County families were housing cost burdened, spending more than 30 percent of their income on rent. The number is likely even higher now with Franklin County’s population growth and increasingly hot housing market.

So what can we do to ease the burden of housing costs locally?

A recent analysis by Brookings Institution researcher Jenny Schuetz found that poor households in a sample of heartland metro areas pay almost 70 percent of their incomes towards housing. Schuetz said that direct subsidies will be needed to bridge the gap between incomes and monthly housing costs for the poorest families.

Across the country, other city councils and mayor’s offices are also looking at zoning codes. Often designed around increasing housing values and tinged with the dark past of racial segregation, zoning codes are getting major overhauls in cities like Minneapolis, Philadelphia and Seattle, as well as statewide reforms in California and Oregon, where lawmakers have angled to ease housing cost burdens by making it easier to build new housing in expensive cities.

Columbus’ “Insight 2050 Corridor Concepts” study released this spring suggested that easing zoning restrictions on the Broad/Main east/west corridor, Cleveland Avenue, Olentangy River Road and the Parsons to Groveport Road corridors could lead to reduced transportation, utility and environmental costs, in addition to the lower rental costs that density provides.

Another option would be to look at the other side of the cost burden leger: incomes. While reducing the cost of housing through targeted interventions is one way to reduce housing cost burdens, interventions that increase incomes can give families resources to pay for housing and other necessities they may have.

Programs like direct cash assistance, targeted economic development incentives and early childhood education investments are good tools to increase incomes. Economist Timothy Bartik has found that improving test scores, increasing educational attainment, improving public health and reducing crime can also boost local wages.

All in all, a few million dollars in private loan subsidies shouldn’t hurt families, but it falls far short of the impact city and county officials could have on reducing housing cost burdens for Columbus families.

This column originally appeared in Columbus Alive.

County’s poverty reduction blueprint ambitious, challenging

Earlier this month, the Franklin County Commissioners outlined a 120-point plan to fight poverty in Ohio’s largest county.

The Blueprint for Reducing Poverty in Franklin County is the culmination of a process that started almost a year and a half ago when the county first submitted a request for proposals for development of a county-wide poverty assessment and strategic plan.

Throughout this process, there has been a healthy dose of skepticism from many community members. Some balked at the price tag for the study. Some wondered why every steering committee member had a title like “CEO” or “Director” and none of them had “community member.”

In the end, though, the county emerged with a strong action plan. While 120 points seems audacious and unwieldy, the steering committee settled on three major priorities: creating living-wage jobs, increasing access to job training and growing the number of academically successful students living in poverty.

Even more exciting is the county’s additional commitment: to study an expanded child care subsidy program and a universal pre-K program, both of which could be massive levers for poverty reduction.

The county has also committed to action steps to carry out these goals. It will be creating an “Innovation Center” housed at the Columbus Partnership and funded by the county, with full-time staff overseen by a “Leadership Council” appointed by the Franklin County Commissioners.

The Innovation Center has the opportunity to be an incredible catalyst for poverty reduction in Franklin County, but it has a big task ahead of it to balance two competing ideals.

On the one hand, the Innovation Center is conceived as a policy analysis unit. It is being asked to “tackle ideas to treat the causes of poverty” and to “vet... big ideas,” and the center is funded by Franklin County Job and Family Services’ Strategic Transformation and Research Unit. This means it will be charged with analyzing the cost effectiveness of alternative poverty alleviation strategies.

On the other hand, the Innovation Center is charged with “bringing community partners together and implementing the blueprint,” and some of those community partners may disagree with the center’s policy analysis and may also have political reasons to support less effective poverty alleviation programs over more effective programs.

The center will have to be cautious to not be either a spineless community “yes man” or a detached ivory tower of research. This will mean staffing with a consideration for balancing community buy-in and analytic rigor. It will also mean tough conversations about priorities and use of community resources.

With all that in mind, Franklin County is off to a good start. Let’s hope this promising beginning leads to results for poverty reduction in Central Ohio.

Rob Moore is the principal for Scioto Analysis, a Columbus-based policy analysis firm.

Cost-Benefit Analysis for Foundations

On their face, foundation managers and government budgeting officers seem very different. One is focused on funding mission-based programs and the other is focused on paving roads and contracting for garbage pickup. One designs programs for the public while the other solicits input from the public for its programs. One serves the interest of private philanthropists, the other serves the interests of the public.

That being said, both private foundations and public budgeting offices face the same challenge: they must decide how to expend limited resources to fulfill a social mission. Whether it is reducing poverty, promoting economic growth, increasing educational attainment, improving public health, or any other social goal, both public-sector budgeters and private-sector foundations are interested in finding out the most effective way to make society better with limited resources.

One notable example of a foundation that has embraced this challenge of resource maximization is New York’s Robin Hood Foundation.

In 2017, Robin Hood spent $116 million on anti-poverty programs in New York City. Founded by hedge fund investors familiar and comfortable with quantitative methods, the foundation was inculcated from the start with a focus on what they call “relentless monetization,” a strategy that translates every benefit generated by their programs into dollar terms.

As Robin Hood economist and relentless monetization brainchild Michael Weinstein says in his book The Robin Hood Rules for Smart Giving,

A basic problem that plagues philanthropic decisions is that there is no natural yardstick by which to measure, and therefore compare, different philanthropic outcomes. Said another way, there is no one natural way to compare, for the purposes of fighting poverty, the value of providing job training to a would-be carpenter to the value of providing better middle school instruction.

So how does Robin Hood overcome this basic problem? They do it by using a tried and true method for comparing seeming incomparable options: cost-benefit analysis.

Robin Hood has created a playbook of 163 metrics, complete with equations designed to help suss out what the real impact of their programs are on their bottom line of reducing poverty in New York City. Some of these metrics are based off internal evaluation of their own programs, but most are pulled from comparable rigorous studies that are then applied to Robin Hood programs. These metrics are used to calculate the relative impact of different programs on their poverty-reduction mission.

The 168-page document looks a lot like the Washington State Institute for Public Policy’s benefit-cost database, full of equations and citations and addressing a considerable breadth of program options. While it does not include sensitivity analysis and focuses more narrowly on benefits accruing to program participants rather than society at large, Robin Hood’s metrics document does provide program officers with rigorous, relevant information about the relative cost-effectiveness of program options.

All this being said, Robin Hood’s scope is smaller than public sector players: its $116 million in annual spending is a drop in the bucket compared to New York City’s $139 billion in annual operating and capital spending. Even the largest foundation in the world, the Bill and Melinda Gates Foundation, only has a total annual budget of about half the size of the city of Phoenix’s total annual expenditures.

Nonetheless, foundations are getting more and more into the cost-benefit game. Savvy philanthropists and program officers who want to maximize their impact are turning to tried and true tools of applied economic analysis to guide budgeting decisions. And with more application of these tools, both program participants and results-oriented donors will be better off.

Moore Talks Food Insecurity on "Prognosis Ohio"

Scioto Analysis Principal Rob Moore joined Health Policy Professor and Prognosis Ohio Host Dan Skinner last month at the Columbus Arts Festival to talk about food insecurity and its impact on public health in the state of Ohio.

“We have a lot of evidence showing that if you are food insecure, your children are more likely to have birth defects, anemia, lower nutrient intakes, cognitive problems, risks of being hospitalized, asthma, behavioral problems, depression, and there’s also problems for adults when it comes to decreased nutrient intake, worse outcomes on health exams, poor sleep outcomes, etc,” Moore said.

Moore also talked about public policies that impact food insecurity in Ohio.

“Being a SNAP [food stamp] recipient reduces your chance of being food insecure by five to twenty percent,” said Moore, “so that means that about 65,000-260,000 Ohioans are pulled out of food insecurity by the SNAP program [every month].”

Moore also cited Scioto Analysis research that finds that SNAP Education financial literacy programs are cost-effective at reducing food insecurity, lifting one person out of food insecurity for every $700 spent on the program.

Prognosis Ohio is an Ohio health policy and politics report hosted by Dan Skinner.

Do Politicians Even Care About Research? Two Experiments Say “Yes”

When I tell people I do policy analysis, one of the most common questions I get is this: “Do politicians even care about what the research says?”

It’s a fair question, and usually I respond with anecdotes from history or from my personal experience that show that (at least sometimes!) policymakers do listen to research.

New research published in the National Bureau of Economic Research’s Working Paper series is now lending experimental credence to this claim. Researchers at Harvard, Columbia, UC Davis, and Innovations for Poverty Action collaborated with the National Confederation of Municipalities in Brazil to run two large experiments on policymakers’ demand for and use of policy analysis.

The first experiment involved 900 municipal-level officials across 657 municipalities in Brazil and was conduced at a series of Nation Confederation of Municipalities meetings across the country. The study gave local officials surveys on tablets with information on early childhood education programs, which are funded and administered at the municipal level in Brazil. The officials were then given lottery entries for a trip to Boston and a private tour of Harvard University. They were given the option to “purchase” information on the impact of early childhood education programs on outcomes like test scores and cognitive skills down the road by trading in these lottery entries for the results of peer-reviewed studies.

So did the local officials play along, trading their opportunity for a trip to Boston for information on the impact of early childhood education? Actually, they did. The average official was willing to trade a number of lottery entries for the trip, on average amounting to a value of $36 US. This means that officials, learning about a topic they did not seek out, were willing to pay the equivalent of $36 on average to find out more information on that topic. The study also found that policymakers were willing to pay more for the results of studies with larger sample sizes and changed their beliefs about the impact of early childhood in line with the research presented after exposure to results.

The second study randomly invited 881 Brazilian mayors via email and text message to a session on reminder letters for tax compliance at a large National Confederation of Municipalities meeting. Tax compliance is an important issue in Brazil where some estimate that about 20% of property taxes go unpaid every year. Reminder letters are also a low-cost and administratively simple policy to implement with a strong evidence base of its effectiveness, making it a strong candidate for a policy.

Of the invited mayors, 38% attended the session.[1] An additional 1% of uninvited mayors at the conference attended the open session as well. At the session, an instructor presented on policy impact, cost-effectiveness, and impact evaluation research around taxpayer reminder letters, then gave an overview of the literature, a list of characteristics of effective letters, and sample letters. Both treatment and control municipalities were interviewed 15 to 24 months to see if they were using reminders for tax compliance more than a year after the conference.

It turns out that the session had a significant impact on participants compared to the control group. Mayors who attended the session were 33% more likely to be sending tax compliance reminder letters 15-24 months out than mayors that did not attend the session. They also were more likely to have beliefs in line with the research 15-24 months than control mayors who did not attend the session.

There are reasons to still be skeptical. Maybe Brazil has a different political environment than the United States (though their most recent national election suggests the two countries have at least one thing in common) that makes them more amenable to research than the United States. Maybe these issues just work because they’re below the “policy waterline” as we’ve wrote about here before.

Despite these objections, this study does show one thing: there are certainly times when research and analysis matters and policymakers actually want it. More sources of rigorous, nonpartisan analysis will only improve policymaking at all levels of government, including in states and localities.

[1] Notably, younger and college-educated mayors were 7 to 15 percentage points more likely to attend the session.

Good budgeting puts people first

Columbus City Council recently voted to authorize the 2019 Capital Improvement Budget, a $940 million infrastructure plan for the city for the upcoming year.

The department that was awarded the most capital funds by far this year was the Department of Public Utilities, which will manage almost 60 percent of this year’s capital budget. This includes more than $340 million for improvements to the city sewer system and more than $190 million in improvements to the city water system.

Behind the Department of Public Utilities comes the Department of Public Service, which will manage about 18 percent of the capital budget. The vast majority of this funding is $160 million in transportation system funding. Another $9 million will go towards refuse collection.

Next comes the Department of Recreation and Parks, which will manage about 8 percent of capital budget funds, with $72 million allocated towards improvements to the city parks system.

Other departments receiving substantial allocations in the capital budget are the departments of Development (4 percent), Public Safety (4 percent) and Finance and Management (2 percent). These allocations include $34 million of economic development funds, $21 million in fire system improvements, $20 million for construction management, $8 million in police system improvements and $7 million in housing funds.

The remaining 4 percent of the capital budget funds technology administration, education, the City Auditor’s office, neighborhood programs, municipal courts and local health and human services.

It is sometimes said that “a budget is a moral document.” What can we learn about the values of the City of Columbus from its capital budget?

Unfortunately, “moral audits” are not simple. A press release from the city trumpeted $14 million in early childhood spending, $11 million for a new fire station, $30 million in road maintenance, $182 million in sewer, water and street lighting improvements, and $10 million on housing in the capital budget. This articulation of a quarter of the spending in the capital budget shows us items the city is proud to fund.

Internal reports by the city, though, have said that the city should be spending twice as much on road maintenance as it currently spends. This estimate may be high, though, since it is drawn from engineering assessments of roads, not economic assessments of their ability to promote safe, free movement throughout the city. Advocates for spending on other categories might have other reasons to quibble with the spending decisions in the capital budget.

The biggest limitation we have in budgeting is the imbalance between fairly comprehensive accounting of costs and minimal accounting of benefits. What will the economic impact of this capital budget be? How will it impact poverty and inequality in the city? What will it do for educational attainment, health, housing and food security of city residents?

Ultimately, these outcomes are the true indicators of the success of a city, and budgets that adhere closest to these goals will be most successful at attaining them.

This column first appeared in Columbus Alive.

Scioto Analysis Research Highlighted by Society for Benefit Cost Analysis

This Spring, Scioto Analysis carried out a study of Ohio’s policy analytic landscape. Today, Scioto Analysis Principal Rob Moore contributed a piece to the official blog of the Society for Benefit-Cost Analysis on the study. The piece contains an overview of the major findings of the study as well as information on the methodology and context for the study.

Moore’s piece can be found here.