Coyote Blog

Strong supporters of both political parties maintain a delusion that all government problems are the result of the incompetence of the other political team, rather than the inherent incentive and information problems facing all government efforts.

Republicans, for example, made fun of Obama's competence with the horrendously bad rollout of the Federal Obamacare exchange.  But now, Doug Ducey's Arizona Department of Revenue is having the same problem.

As of this month, the agency is requiring that all multisite businesses (like mine) must file online rather than with pen and paper.  So we logged in today to file our report.  What a disaster!  The only thing I can even compare it to is stories of the early days of the Obamacare exchange.  First, the site is set up so that even a relatively simple return must have data entered across scores of pages.  In basic layout, it  is probably the worst site of any of the ten states we do business in.

But what has really made today a nightmare is that it is taking 5-10 minutes to load each page.  The agency clearly was not ready for the load.  Combined with a site design that requires many many page loads to complete simple tasks, and it makes filing (a 10 minute or so job on paper) a multi-day nightmare.  Four hours into it and I have not completed one location out of 15 or so I need to enter.

When I called the DOR, they basically said I had to suck it up.  I begged them for some sort of simple accommodation -- I have filed by paper for 13 years, why not allow me to file by paper for one more month until they get their act together?  No dice.  They instead suggested that my accounting staff come in at midnight tonight to do the work when the load on their servers would be lower.

If anything, the response from Republican Doug Ducey's office was even more insulting.  They said to me that this change had been announced for months, as if it was my failing to enter the system in a timely manner that was the problem.  According to Ducey's staff, I could have avoided the whole problem by filing my June revenue numbers a few months back, lol.  I patiently explained that June numbers could not be reported until the bank statements had arrived and were reconciled, such that most all returns had to be filed between the 15th and the 20th of the month.  And what is more, if this had been in the works so long, why hadn't the Administration seen fit to do an adequate job of testing the site and preparing for adequate capacity?

The answers from the governor's office were just as absurd and arrogant as any coming out of the Obama Administration about the failures of the exchange.  Which again proves to this libertarian that there is no much real difference between the Coke and Pepsi parties.  The problem is the government -- without the accountability brought by market competition -- trying to do these sorts of things.

If you have worked in a large corporation, you probably have witnessed some end of quarter or end of year sales push, to buff up the current period's results.  People who buy cars often get the advice to buy at the end of the month or year to take advantage of this motivation.  A great example of this was in the book Barbarians at the Gate, where RJR would load the channel at the end of each quarter with tons of extra inventory to buff up quarterly profits.  Of course, this just creates the incentive next year to load the channel even more to top the previous quarter's profits that were pumped up by loading.

All of this is both rational and irrational.  From a shareholder standpoint it is irrational -- the end of the reporting period is arbitrary and all the company is doing is shifting some sales a few days, rather than generating new ones.  It can even be negative for shareholders, as in the RJR case when loading caused inventory to sit on shelves for longer and get stale and thereby less appealing to customers.   For employees of the company, this can be entirely rational depending on their incentives.  While pulling sales forward to get a better grade or commission for this quarter feels good now, it can make the next quarter harder.  But who knows what will happen in the next quarter?  In a high turnover world, I could be in a new job or new company next quarter.  Anyone who has worked with corporate incentive programs knows that it is impossible to eliminate all the unintended consequences -- all one can do is minimize them.

But supporters of government superiority to private enterprise argue that this is exactly why government is superior, because it does not have these short-term focused goals.  HAH!

Politicians are among the worst at this.  It used to be they would do short term things to get elected, leaving the following election to take care of itself.  Now, they will take short term actions just to dominate the current news cycle.  Next week? That's an eternity, we have problems now.  Every single action taken over the last two years by both this and the previous administration and the current one relative to the economy have been totally short-term focused.  Let's bail everyone out.  Moral hazard?  That's the next administration's problem.  Just look at cash for clunkers, where the government paid $4000 for cars that blue-booked for $1500 all to pull September sales into August.  But they won the news cycle in August!

But the actual reason for my rant is a note I got from the Arizona Department of Revenue.  Apparently they have a program where large filers have to do a special report to pre-pay June sales tax** collections by June 29  (rather than by July 20 when they would usually be due).  As is so often the case, the law has been changed such that a special requirement for large filers had its threshold changed such that small-medium filers like myself also now have to play.  This is a sort of 13th report one must file (we file reports monthly) and the processing of it takes a lot of private time, plus the state has to hire a number of temps and pay overtime to receive this filing.

So why the special requirement?  Well, Arizona is on a July-June fiscal year, so June 29 is just about the end of their fiscal year.  And they are on a cash accounting basis (like most governments) so any cash that comes in the door, even if it is for a pre-payment of a future liability, counts as current period income.  This means that the state is spending a lot of overtime money shifting income by 21 days just to make its current period look better -- just like RJR or any other dynsfunctional private company.

But what makes this even more short term is that it only works once -- the first time.  It will make the first year this trick is applied look better, but then every year after will go back to being the same, with July losses to the prior year offset by June gains from the forthcoming year.  In fact the only way this game can work twice is if the threshold for pre-paying is lowered -- which is why I am having to fill out an extra form and pay a large bill 3 weeks in advance.  Arizona is looking for another one time gain.  And the larger the gain, the harder it will be to unwind this stupid costly process in the future.

** Footnote:  Actually we don't have a sales tax but a "transaction privilege tax."  However, that term gets me so infuriated, as it is based on the premise that private commercial transactions can be made only as a privilege granted by the government, that I refuse to use the term.  Right from the AZ DOR web site:  "the tax is on the privilege of doing business in Arizona."  Barf.  Don't let anyone tell you Arizona is a wild, libertarian, free market state.

In this post, I called bullsh*t on this economic contribution number:

A study released today by the Arizona Super Bowl Host Committee
estimates professional football's championship game at University of
Phoenix Stadium in Glendale generated an economic impact of $500.6
million for the state.

I used some quick reality checks to show that the likelihood that this was a truly incremental economic contribution number was zero.  Now, Arizona has released its February sales tax numbers (the data I suggested was the best way to try to do this analysis).  As I suspected the numbers are not even close.  Let's start with this report from the Arizona Republic:

Sales-tax collections at hotels and motels showed the strongest gains
among tourism-related businesses as thousands of out-of-town visitors
booked rooms for the National Football League's Feb. 3 championship
game at University of Phoenix Stadium in Glendale.

The Arizona Department of Revenue said February sales-tax collections
jumped 12.4 percent at hotels and motels. It was the lodging industry's
best showing, as measured by sales-tax collections, since January 2007.

Bars and restaurants also rebounded from two consecutive monthly declines to post a 4 percent gain in tax collections.

Despite the improved showing in those tourism-related categories,
the state's overall collections continued a downward trend, punctuated
by slumping retail sales and the real-estate industry's decline.
Arizona's total tax collections for the month checked in at $444.1
million, a decline of nearly 1.2 percent from the month before.

Well, that sure doesn't sound like $500 millions worth.  Let's look at the hotel number.  From this Arizona DOR source document (Feb 2008 Tax Facts), the taxable hotel/motel sales in February were about $215 million.  A 12.4% jump, if you attributed it all to the Superbowl, would thus be $27 million.  Similarly, a 4% jump in restaurant would be $33 million.  As I predicted, these don't even add up to $50 million and it is unlikely all of this is due to the Superbowl. 

[The above is still substantially correct.  What follows is corrected in the update] But wait, there's more!  I then I started looking closer at the February tax report.  I don't know what copy the reporter was using [probably one "specially annotated" by the Sports Authority], but my copy shows hotel/motel revenues in Arizona going down by 9% in February 2008 vs. Feb 2007.  It shows restaurants and bars going down by 2%. I checked the Feb 2007 report, just to make sure, and sure enough the 2007 numbers were much higher, despite one more day in February in 2008!  One can find ZERO incremental impact from the Superbowl.

Now these are statewide numbers, and it is possible the author of the article mixed in Maricopa County numbers and that is where the increases were seen.  If true, though, this means the dollar increase was much less, because we are using a smaller base (ie just one county, though a very large one).  And it means that the County numbers may be misleading, because the Phoenix area just cannibalized sales from the rest of Arizona, which was way down.  Either way, it means the $500 million number the Republic keeps pushing is total BS  (incredibly, the author reprints the $500 million number in his article, as if it were consistent with the sales tax data he is quoting.)

Update:  OK, I was right and wrong.  Apparently, when the state of Arizona says "February 2008 Taxable Sales" they mean Taxable sales on reports that they receive in February.  Because reports come in after the tax month is closed, by February 2008 taxable sales they actually mean sales that occurred in January, 2008.  Many apologies to Arizona Republic writer Ken Alltucker who was kind enough to set me straight.  The Arizona DOR report for March 2008 sales, which we now know is actually February 2008 sales, has not been posted online but I am willing to take his word on it.  This is not the first time, alas, that I have been fooled by the fact that the government uses cash rather than accrual accounting.

The wasted effort I expended on the February report which is actually January is not wasted:  From it, we do know that from studying what is actually the sales for January, the Superbowl had no discernible effect on hotel or restaurant revenues in the weeks leading up to the game, since these numbers were down substantially.  I am sure that you will find a few people singing the praises of the Superbowl.  I have not doubt that a few exclusive Scottsdale clubs benefited from having a series of celebrity parties during the run-up to the Superbowl, but overall the impact is low for exactly the reason I already stated:  Superbowl week, due to the nice weather and the Phoenix Open golf tournament, is already a big one for Phoenix area hotels and restaurants.

The point still stands.  I got diverted off on the report discrepancy, but using what I now understand to be correct numbers in the article shows that the ASU B-school study seems to have exaggerated the Superbowl's financial impact by as much as an order of magnitude.

So maybe in the future I will show more respect for reporters who make dumb numerical errors.  Or maybe I won't, since I don't get paid to do this nor do I have 2 or 3 layers of editors looking over my shoulder.