The Area Economy

Some interesting articles in the Morning Call and its Parade insert today. Parade has its annual "What People Earn" issue. Surprisingly the dead (Einstein $20M and Picasso $339M) and fictitious (Harry Potter $$1.3B) did very well in 2006.

The Parade article notes that Americans are not very optimistic despite a strong economy and explains there is a legitimate reason for this belief. "Workers' productivity grew an impressive 18% between 2000 and 2006 - but most people's inflation-adjusted weekly wages rose only 1% during that time." Not 1% a year, but 1% over six years!

The Parade article continues and notes that the Consumer Price Index (CPI) does not reflect the budget of 'ordinary' Americans, but instead wealthier ones. As a result inflation appears under-reported to 'ordinary' Americans.

Keeping these facts in mind, turn to the Morning Call and Sam Kennedy writes "Is golden period over?" "John Micek writes "As newcomers surge, Valley feels growing pains" and Daniel Patrick Sheehan and Tom Coombe write "Ready or not, here's Act 1", each presents information that clarifies how the Nazareth area has been impacted by this economy and will be in the near future.

The fun one first, Micek's newcomer survey article. A poll was conducted by the Morning Call and Muhlenberg College. No surprise here, people from the Valley have a negative impression of all the new residents coming into the Valley and the people moving here like the area. Before everyone starts bashing transplants, let's keep in mind that local zoning and developers are the reason we have homes going in. Transplants are buying something that is for sale. Not a bad thing. For me, the heart of the issue is the resulting change. The economic impact I'll note in the next paragraph, but there is also a loss of open-space, fields, farms (and no I don't blame a farmer for selling his land for millions of dollars either), which are all unrecoverable and then there is the heavy traffic. On the plus side, after years of kids growing up and leaving the area for better jobs outside the cement plants, mills, and factories, we now have more professional opportunities and these opportunities are growing giving us a talent pool and educational support system (Lehigh, Lafayette, Moravian, Muhlenberg, etc) to make this area very attractive to new corporations.

The economic impact of the transplants has been a challenge because it has resulted in inflation in the Lehigh Valley that is more than double the national average according to Kennedy's article. Inflation was higher in 2006 here, than at any time over the last 23 years. People living here were pinched twice. Not only did nationwide inflation adjusted salaries increase by 1% over six years, but given our rate of inflation we probably didn't get an increase at all and instead went backwards (in adjusted terms). This is the hardest part and the most probable underlying resentment of long-time residents toward newcomers, whose salaries are oftentimes significantly higher and don't feel this pinch, but instead a relief.

Kennedy also notes, however, that the high inflation may have finally impacted the housing market. The average price of existing homes dropped 1% in March and over the past five years, 2006 had the lowest number of people move into the Valley. Kennedy reports that half the number of building permits were requested in February compared to year earlier.

So inflation is way up, housing is slowing, are you ready for a tax hike?

Sheehan and Coombe's article on Act 1 is something every resident ought to be aware of. It is not a tax hike per se, but a tax shift that will result in many residents paying more and others paying less.

The article indicates that six of eight Northampton County and all nine Lehigh County school districts chose the Earned Income Tax (EIT) over the Personal Income Tax. Of the fifteen districts choosing the EIT, Nazareth has the highest rate (1.6%, tied with Saucon Valley).

If the referendum is passed, everyone would pay their current property tax assessment plus a 1.6% Earned Income Tax and those who filed to receive a property tax reduction would receive a $486.00 'rebate' on the property tax portion. If you make $54,000 per year, your EIT increase will cancel the 'rebate', and you would pay the same amount. Everyone earning under this figure will pay less and everyone over this figure will pay more.

If you rent, you will also pay more because your landlord passes the property tax bill through to your rent, but is not eligible for a 'rebate', as a result you will continue to pay the same and will have to pay the EIT.

The shift does benefit seniors and personally I favor the plan because it moves us in the direction of getting school taxes off property.

Additionally, Act 1 requires School Districts to keep within an annual increase index. Nazareth is not to raise its taxes more than the index, set at 4.2%, but the law increases this amount by granting exemptions. The NASD applied and received every exemption bringing the index closer to 8%. If the NASD goes over the index+exemptions, the voters must approve the tax hike. The NASD has so far been unable to make the budget at 4.2% so you can anticipate the use of exemptions, but I wouldn't expect a referendum vote.

What I think will be interesting, however, is what impact Act 1, if passed, will have on the area economic statistics and on the already slowing housing market. Further, what impact the slowing house market has on enrollment projections (see the previous post). We've invested significantly in another MS that may not see the influx of students that were anticipated two years ago. Ironically, the shift in tax may further result in less people moving here given the higher taxes, which were of course needed to pay for the building to educate the anticipated new students.