Thoughts on New Jersey Taxes

Note: this post is in response to a debate on NJ Real Estate Report.

There are a few points I would like to respond to

Question for all those who think 10k a year in property taxes in a basic home in a middle class neighborhood is outrageous:

What amount of property taxes do you think would be fair?

would 10k in taxes be “fair” (in receipt of a commensurate level of services) if your hypothetical homeowner had two children in public school?



Taxation should generally be in line with the level of services provided by a government ( local, state, or federal). In the case of local taxes, the tax system is set up so that the community as a whole pays for the education of its children. Everyone pays taxes that go to education, not just the parents. The system is setup in this manner on the idea that having a communities children receive a basic education is in everyones best interest and so that a basic education is not limited to only the middle and upper class.

unfortunately taxation in NJ has far exceed its original intent. I have looked at the Montclair NJ district school budget as an example. While the taxes associated with the Montclair school budget are generally representative of much of NJ there are likely to be exceptions, both positive and negative.

Chart 1

This chart shows the Annual Montclair NJ district school budget from 1999 to 2008 and my projections of the school budget out to 2021. The school budget was projected forward by calculating the average (mean) annual budget increase (6.53%) as calculated from the annual increases between 1999-2008 (data source)

School Year	Tax Increase
99-00	5.35%
00-01	5.58%
01-02.	9.91%
02-03	8.90%
03-04	8.97%
04-05	6.42%
05-06	5.66%
06-07	6.04%
07-08	4.73%
08-09	5.60%

This chart shows that the Montclair school budget is increasing exponentially. The tax issue here is an exact match to the previous post in this blog, Our Greatest Short Coming, and that is that most people fail to recognize that a constant increase (linear growth rates) give rise to exponential growth.

An in depth analysis of the Montclair school budget would be needed to identify the source of the exponential growth. But the point here is that exponential growth is not sustainable by the tax payer and is not justified due to growth of student population, growth of inflation, or any other factors.

Reasonable and sustainable tax growth would be linear and would be tied to inflation, student population growth etc. you would also see a decrease in per student costs as the effect of economies of scale would increase as the student population grows. This applies to essentially all taxes not just school taxes.


Lets look at linear budget/tax rate growth vs exponential budget/tax rate growth:

Chart 2

Chart 2 shows the real Montclair Budget which exhibits exponential growth plotted against its annual % growth rate.

Chart 3

Chart 3 shows the calculated Montclair budget exhibiting linear growth plotted against its annual % growth rate.

What these two charts show us is that any budget/tax rate that exhibits a year-on-year (YOY) % growth rate that is greater than or equal to zero(0) ( YOY ≥ 0) exhibits exponential growth and a situation that will quickly become unsustainable.
A budget/tax rate that exhibits a year-on-year (YOY) % growth rate that is less than zero(0) ( YOY<0), exhibits linear growth and a situation that is most likely sustainable.

Chart 4 below shows a comparison of exponential and linear growth in relation to the Montclair district school budget. Note that the real budget ( that exhibits exponential growth) doubles every 10 years, while the calculated linear budget doubles every 17 years. Another point to consider is that if the growth rate of an exponential system is small enough, then it will appear to be linear for a period of time depending on how small the exponential factor is. In the real world growth rates that average around 1% or less for 10-20 years will show approximately linear growth. Even at 1%, after about 15-20 years a recognizable difference in growth can be seem in comparison to a linear system. Of course the easiest way to determine whether a system demonstrates linear or exponential growth is to to look at the net YOY growth rate and check to see if the value is less than zero (<0) or "greater than or equal to" zero (≥0)

Chart 4

So what is my point? My point is that tax growth must remain linear in order to be sustainable in the long term. Any tax system that is not linear will eventually become unstable. That instability can take many forms, form the exodus of the core tax base that is beginning to occur in NJ, to voters removing a large number of incumbent politicians in demand of tax relief etc. of course the other side of that coin is that any bureaucracy whether local, state or federal will fight to maintain every penny of tax revenue and to ensure exponential growth continues.

What I find interesting about the bureaucracies fight for continuous growth, is that I sincerely believe that very few if any of the individuals that influence/lead tax policies at any level actually understand the concepts that I have discussed here. The ultimate issue is that very few people understand how to consider non-linear implications. Lets hope that our politicians, and fellow citizens learn this lesson soon.

Our Greatest Shortcoming

"The greatest shortcoming of the human race is our inability to understand the exponential function" Albert A. Bartlett

Modern economies and societies are often based on the idea of continuous growth. Unfortunately there is a fundamental flaw in any such design. Any given resource, while potentially having vast reserves will always have some eventual limit. The question then is when do you reach that limit.

Any system with a constant growth rate will experience exponential growth. Whether we are discussing a national economy that experiences 2% growth every year for decades, or bacteria growing in a petri dish dividing at a constant rate.

The hazard of an exponential system is that by the time you realize that you are approaching a limiting factor, it may be to late to react. Observe the example chart below:



This chart shows series1 and series2. These are plots of US coal consumption at a constant growth rate of 2% per year but at different starting annual consumption. Series1 has a total reserve lifetime of 260 years and series2 has a total reserve lifetime of 120 years. Notice that in both cases after 50% of the available reserves have been consumed, only 30 years worth of reserves remains (this is because both series have the same growth rate).

How many people would become concerned about the amount of a vital resource available when you still have 50% of your initial supply available? Many people would consider becoming concerned when 75% or perhaps 80% have been used. The point to be taken from this graph is that by the time most people become concerned about the state of a vital resource, it may very well be too late to react. In series 2 it takes 90 years to consume the initial 50%, but only 30 years to consume the final 50%. if you wait until you have used 75% of your reserves in series2 then you would only have about 15 years to react. How long would it take for a society to recognize that a resource is becoming depleted and then make the required infrastructure changes to shift to a new resource? Historically it takes decades. This means that in a society experience constant growth, if you have not begun to shift to an alternative resource once you have used 50% of a resource, it is highly unlikely that you will be able to transition without the potential for significant disruption.

Constant growth in the context of this description does not mean or require that a system grow at exactly X%. It simply means that if the average (mean) growth rate for a given time span is greater then zero, then the system has experienced exponential growth (this sort of growth is also referred to as geometric growth/geometric progression). Therefore a system can experience negative growth, zero growth and positive growth all within the same time period and as long as the average growth rate is positive then rates of consumption are exponential.

Next time you hear an economy, a budget, or any other system is experiencing continuous growth, consider what the actual implications are. But also consider that this is not always a bad thing. Exponential growth is the power behind saving for retirement. By investing early at a continuous rate you can achieve substantial gains in the long term.

Can Coal Save Us?

Some people have suggested that by shifting our power generation to coal based and using CTL (coal to liquid) technology that we can replace a substantial amount of our oil usage with a local resource (coal). The question is then why put the effort to switch to coal when it is ultimately a limited resource and a substantially dirty one at that. If we are going to transition away from oil why not put that effort into long term renewable sources?

Lets look at the potential that coal may or may not hold....

From EIA (Energy Information Administration)
Annually, EIA reports remaining tons of coal in the demonstrated reserve base (DRB), which is comprised of coal resources that have been identified to specified levels of accuracy and may support economic mining under current technologies. As of January 1, 2007, the DRB was estimated to contain 491 billion short tons and recoverable reserve base to contain 264 billion short tons.

There are four major ranks of coal in the U.S. classification scheme. In the United States, coal rank is classified according to its heating value, its fixed carbon and volatile matter content, and, to some extent, its caking properties during combustion. The coal ranks from highest to lowest in heating value are:

• anthracite (53%)
  
• bituminous(37%)
• sub-bituminous (9%)
  
• lignite (1.5%)
  

Of the four ranks, bituminous coal accounts for over half (53 percent) of the DRB. Bituminous coal is concentrated primarily east of the Mississippi River, with the greatest amounts in Illinois, Kentucky, and West Virginia.

All sub-bituminous coal (37 percent of the DRB) is west of the Mississippi River. Most sub-bituminous coal is in Montana and Wyoming.

Lignite, the lowest-rank coal, accounts for about 9 percent of the DRB. Lignite is found mostly in Montana, Texas, and North Dakota.

Anthracite, the highest-rank coal, makes up only 1.5 percent of the DRB. Anthracite is concentrated almost entirely in northeastern Pennsylvania.

The price of coal varies widely depending on the state that it is being purchased in (states that are coal producers tend to pay substantially less for the coal that is mined within the state). price also varies widely according to the quality/type of coal being bought

Averaged 2006 US Coal Prices ($/Short Ton)

$39.92 Bituminous

$9.95 Sub-bituminous

$14.00 Lignite

$43.61 Anthracite


How does US coal consumption compare to US petroleum (all oil products) consumption?

the annual consumption of coal in 2007 was 1,128,836,000 short tons. Annual consumption growth from 1973 to 2007 averages 2%.

the annual consumption of petroleum in 2007 was 7,554,000,000 barrels (7.5 billion). Annual consumption growth from 1973 to 2007 averages 1%.

In order to make these two energy sources comparable we will look at the energy supplied (BTU's, a unit of energy) by source ( data from EIA)

in 2006 the US consumed 2.26 Quadrillion (10¹⁵) Btu of coal and 43.8 Quadrillion (10¹⁵) Btu of oil ( assuming an average of 5,800,000 BTU/barrel).

These figures show that the US uses approximately 19 times more oil energy the coal energy



How much Coal does the US have and how much oil can we replace?

the US has 264,000,000,000 (billion) short tons of coal in proven reserves. At out current rate of consumption (1.1 billion short tons) and assuming our current rate of growth in consumption (2%) remains constant then we have an estimated 260 year supply of coal. Well that sounds like a substantial resource, so what happens if we replace some of our oil consumption with coal?

Per EIA 69% of US oil consumption is for transportation, so lets assume that we replace the non-transportation oil consumption with coal (30%). 30% of current oil consumption(43.8 quadrillion BTU) in BTU's is 13 quadrillion BTU. Assuming coal averages 2.2 million BTU/ton (per EIA) then in order to replace all non-transportation oil use at 2007 consumption rates would require an additional 20,000,000,000 (billion) tons per year. that's about 20 times our current coal consumption

If we replace the non-transportation oil consumption with coal and assume the same average energy consumption growth rate for coal as above (2%) then current proven coal reserves would last about 120 years.

if we maintain our current rate of coal consumption and do not increase out utilization of coal outside of our average growth rate current proven reserves would last about 250 years


What does it all mean?
The US holds about 25% of the world reserves of coal. We have the capacity to replace a significant amount of oil usage with coal but are the potentially substantial costs worth it? Coal is of vital important to the steel industry and substantial utilization of coal could have negative impacts on the cost and availability of steel on the open market. Modern day construction is highly depended on steel and there is no ready alternative.
Coal mining is highly disruptive to the environment and is often opposed by surrounding communities. Coal combustion produces about 2.7 tons of CO2 for every ton of coal burned. Given the potential concerns about human driven climate change does it make sense to increase coal consumption?
Coal combustion is also known as the major source of radioactive release into the environment

Oak Ridge National Laboratory(Coal Combustion: Nuclear Resource or Danger)

"Using these data, the releases of radioactive materials per typical plant can be calculated for any year. For the year 1982, assuming coal contains uranium and thorium concentrations of 1.3 ppm and 3.2 ppm, respectively, each typical plant released 5.2 tons of uranium (containing 74 pounds of uranium-235) and 12.8 tons of thorium that year. Total U.S. releases in 1982 (from 154 typical plants) amounted to 801 tons of uranium (containing 11,371 pounds of uranium-235) and 1971 tons of thorium. These figures account for only 74% of releases from combustion of coal from all sources. Releases in 1982 from worldwide combustion of 2800 million tons of coal totaled 3640 tons of uranium (containing 51,700 pounds of uranium-235) and 8960 tons of thorium."


Everyone must come to their own conclusion, I hope you have found this information useful and enlightening. Please remember that the scenarios described above are based on specific assumptions. If you change the assumptions of the scenarios, then the results are likely to change substantially.

Who's Who

When discussions on resource sustainability and peak oil/energy arise, there are two individuals who's ideas are often at the center of the debate/s. (the 2 profiles are linked to the wikipedia articles for the individual)

Thomas Robert Malthus (1766-1834)

An English demographer and political economist. He expressed views on population growth and discussed the idea of geometric population growth.

Marion King Hubbert (1903-1989)

A geoscientist who worked at the Shell research lab in Texas. He made important contributions to geology and geophysics, most notably the Hubbert curve and Hubbert peak theory (or peak oil),




These two individuals are just two of the many people who have laid the ground work for understanding the dynamics of humanities resource use patterns. However, these are two names that you will probably hear fairly often the more you look into peak oil and sustainability. take a look at their wiki articles, the back ground may help you understand some of the arguments that are based on their work and will allow to recognize when their names are just being uses as an appeal to authority.

IEA World Supply/ Demand Vs Nymex Crude Spot Price

regarding yesterdays post on New Jersey Real Estate Report

jafo Says:
italic;">On energy prices.

The producers blame the speculators. The investors blame demand and the dollar. The reg agencies say supply is fine, and are mum on the dollar. As dollar sinks further, they get on the demand band wagon. The refiners/distributors say they don’t set price and are only making a percent on the carry. Bottom line, all of these groups have a vested interest in one explanation of another.

Lets try to answer this in the near term - Putting aside longer term issues, as such dollar devaluation, peak oil, and global warming.

1.Was there an increase in demand porpotional to price increase, given the marginality of oil?

2.Was there at any time insufficient supply, before run up?

3.Did the rise in prices reduce demand, or even growth in demand?

4.Was the run in price, proportional to dollar slide against euro - given above factors?

5.What precentage of long interest are non-consumers or producers?

6.What percentage of consumer, distributor, and refiner purchases are stock piling to hedge against future increases vrs. near term needs?

The chart above (world crude supply/demand Vs Nymex Crude Spot) along with the previous chart ( US DOllar Index VS WTI Spot Price)should help to answer points 1 thought 4.

1.Was there an increase in demand porpotional to price increase, given the marginality of oil?

Yes

2.Was there at any time insufficient supply, before run up?

No

3.Did the rise in prices reduce demand, or even growth in demand?

No demand destruction is apparent yet, but more data is needed.

4.Was the run in price, proportional to dollar slide against euro - given above factors?

No, the price of oil increased noticeably faster then any changes in the dollar index.

WTI Crude VS Dollar Index

Various US Dollar indices's VS the spot price of WTI Crude. Data taken from Atlanta federal Reserve and EIA

Family Income Spent on Gas

A visual presentation of the effect of gas prices on families at different income levels. The chart is based on families who make $25,000/yr, $45,000/yr, and $100,000/yr. 2002 US census data shows 20% of US families make $25,000 or less per year. The median US family income is $47,000, and that 20% of US families make 100,000 or more