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January 31, 2006

Oil sands

As the price of oil has increased we’ve heard more discussion about alternative energy sources such as oil sands. But what are oil sands, and are they the answer to high oil prices? N.C. State University's Mike Walden weighs in.

"Oil sands are essentially oil trapped in a mixture of sand, clay and water," says Dr. Walden, a professor and extension economist with the Department of Agricultural and Resource Economics.

"The supply is immense," he says. "Canada alone has enough oil in oil sands to satisfy world oil demand for 80 years.

"But there are some issues: First of all, getting the oil out of the oil sands is very expensive. There’s billions of dollars needed in capital investments," he says.

"Also it does take a large amount of energy, including water, to extract the oil from the sands. And then there are environmental issues: You have to obviously cut up and dig in the environment.

"But the investment in oil sands is increasing, and this may be a major source of oil for us down the road."

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January 30, 2006

Do higher tax rates dampen economic growth?

There’s an ongoing debate about whether tax rate increases slow economic growth. Dr. Mike Walden comments on state-level implications.

"Studies do find that higher what’s called marginal tax rates will deter some economic growth," says Walden, a professor and extension economist at N.C. State University.

"Now what is a marginal tax rate? Well, it’s the tax rate that a person would pay on additional income that they may earn," he explains. "Let me give you an example: Maybe you would pay 5 percent in terms of a state income tax on the first $50,000 of income you earn, but any income above that let’s say you pay 7 percent. What that means is that the marginal tax rate has gone up for higher levels of income.

"And that’s what this study finds: It finds that that kind of change where you pay a lower rate on initial income [and] a higher rate on later income may actually deter people from earning that additional income and may actually dampen economic growth in states."

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January 27, 2006

State income growth

While North Carolina’s economy has undergone considerable change in recent years, it did relatively well in 2005 compared to other states, says N.C. State University's Mike Walden.

"We actually did rather well, which I think may be surprising to many people," says Dr. Walden, a professor and extension economist with the College of Agriculture and Life Sciences. "If we look at one of the broadest measures of economic performance, the growth in personal income in three quarters of 2005 (We don’t yet have the data for the fourth quarter, so we can only look at three quarters.) First of all, we had positive income growth in North Carolina in those three quarters and secondly in two of those three quarters income growth in North Carolina actually exceeded income growth in the nation.

"So I think this is very good news especially considering the fact that our North Carolina economy, as many people know, is continuing to transform -- shrinkage of our traditional manufacturing, growth in other areas," he says.

"So we really seem to be staying on track and in fact doing better on average than the nation."

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January 26, 2006

Consensus forecasts

While every economist has his or her own forecast for the economy, a potentially more powerful forecast can be derived from averaging many individual projections. N.C. State University's Mike Walden takes a look at what such a consensus forecast tells us about the 2006 economy.

“What I’ve done here is I looked at the averages for a sample of about 30 industry economists. These are people who work for corporations and for security firms and so forth," says the extension economist. "So their forecasts very much put them on the line.

"And their forecasts, I think, are rather upbeat. They are looking for the economy in 2006 to grow at about 3.3 percent -– which is a good number, slightly lower than in 2005," Walden says.

"They are looking for the inflation rate ... to be fairly benign: 2.4 percent increase in the consumer price index.

"Interest rates, they think, will trend upward but not by much –- a quarter to half percentage point.

“And the all important oil price: The analysts overwhelmingly think that oil prices will actually come down in 2006," he says. "We are now around $60 a barrel. They think they will average out for the year at $53 a barrel.”

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January 25, 2006

How much should you save?

An old rule of thumb says that workers should save 10 percent of their pretax income for your retirement. But Dr. Mike Walden says the rule may need to be updated.

“This rate was developed in the days when most people had what are called defined benefit plans from their employer,” says Walden, a professor with the Department of Agricultural and Resource Economics in N.C. State University’s College of Agriculture and Life Sciences.

“These are much more generous retirement plans, but they are very rare now. So you probably need to pump that 10 percent up to about 15 percent."

“But remember what to include when figuring if you do have the 15 percent: not only money that you take out of your paycheck but you also want to include the equity increases in your home, your stock holdings and your other assets,” Walden notes.

“A very good thing to do is to try to take the savings rate that you are doing now and project what you will have when you retire see if this amount is enough to produce an annual value which when you add Social Security you can live on,” Walden advises. “If not, then you need to save more.”

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January 24, 2006

Consumer spending rolls on

Especially after last summer's hurricanes and the subsequent jump in gas prices, people have been concerned about the economic impacts on consumers. N.C. State University's Mike Walden says that it looks like consumers are holding up.

"This is certainly good news since two-thirds of the economy is based on consumer spending," says Walden, a professor and extension speicalist with the College of Agriculture and Life Sciences' Department of Agricultural and Resource Economics.

"In fact, in November both consumer income and spending were up. They increased at very healthy rates of 9 percent on an annual basis. And indeed that record in November was a better performance than in six of the previous nine months.

"It appears now that the effects of the hurricanes at least on the total economy are over. And indeed we can go back and look at this and see that the negative effects of the hurricanes were primarily confined to the months of August and September.

"So we are out of the woods on that," Walden says. "And right now the consumer situation both in terms of income and spending looks very good."

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January 23, 2006

Tax credits for hybrids

Hybrid cars are one way to achiever greater fuel efficiency, and 2006 brings a new financial incentive for U.S. taxpayers to consider these vehicles. N.C. State University's Mike Walden explains.

"There is a new federal tax credit, and of course a tax credit is much more valuable than a tax deduction because it reduces your tax bill dollar for dollar with a credit," says Walden, a professor and extension economist with the College of Agriculture and Life Sciences.

"These credits will range in value from a low of $250 per vehicle bought up to perhaps as high as $3,400. And again this is a direct reduction of your tax bill," he says.

"There are however two hitches to this: One is that taxpayers who are subject to something called the alternative minimum tax cannot use this. And more and more tax payers are being subject to this AMT. So that’s an issue that you have to discuss with your tax accountant.

"Also the credits will phase out once an automaker sells 60,000 hybrids," he adds. "So you need to check with the auto dealer that you are buying the hybrid from to make sure they haven’t exceeded that quota."

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January 20, 2006

A mileage tax

Funding roads is an important function of state governments, and in today's "Economic Perspective" N.C. State University's Mike Walden discusses a new way that some states are going about it.


"It’s called a mileage tax, and I think now may be an opportune time to talk about this in North Carolina because many people are upset with gas prices and the gas tax. In fact there’s a move to lower the gas tax in North Carolina," says Walden, a professor and extension specialist with the College of Agriculture and Life Sciences' Department of Agricultural and Resource Economics.

"A mileage tax would really divorce tax payments for roads and highways from gasoline. In fact what you would be charged on is not how much gas you buy but how many miles you drive," he explains. "This would actually replace the gas tax.

"What would happen is that a global positioning device would be put in cars. It costs about $100. It would keep track of your mileage you drive on highways. When you go to fuel up at the gas pump this information would be relayed to the gas pump, and you would be charged a fee based on how many miles that you’ve driven.

"So it would make sure that there is a direct link between miles driven, which really measures a driver’s use of the road, to what you pay for that road usage," Walden says.

"California and Oregon are actually running pilot programs using a mileage tax."

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January 19, 2006

The cost of reducing gasoline consumption

With the high cost of oil and gas, there is a renewed interest in getting people to reduce how much gasoline they use. N.C. State University's Mike Walden looks at two approaches.

"Two of the most commonly discussed are either forcing the auto manufacturers to improve the fuel efficiency of their cars or raising gasoline taxes and thereby causing people to want to purchase more fuel efficient cars," says Dr. Walden, a professor with the College of Agriculture and Life Sciences and economist with the North Carolina Cooperative Extension Service.

"I think there is a perception that the first approach is somewhat cheaper, because people don't understand that if you cause or force a manufacturer to do something -- in this case to perhaps make vehicles more fuel efficient -- that's probably going to cost that manufacturer more and he or she will have to try and add that to the price.

"So really what this comes down to," Walden says, "is do you pay for the fuel efficiency through the higher price? Or do you personally want to reduce your driving or look for more fuel efficient cars because the cost of gasoline is higher?

"Each approach will get you to the same place but the methods are different."

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January 18, 2006

Taxes and prices

There's a common perception that any tax levied on a business will be passed on to consumers in the form of higher prices. But N.C. State University economist Mike Walden says it's not always true.

"It really depends on how people respond to price increases," he says.

"Now if you have a product, for example, where people are going to buy it virtually regardless of price, then, yes, the higher cost faced by the businesses -- and, of course, taxes would be a cost -- that business will be able to pass that on to their customers and they won't necessarily lose much revenue because people will, in essence, buy virtually the same amount that they were buying before.

"Studies show, for example, that for products like cigarettes and alcohol, this is the case," explains Walden, a professor with the College of Agriculture and Life Sciences and an economist with the North Carolina Cooperative Extension Service.

"But there are other products where people are very sensitive to the price -- where if the price goes up they will dramatically reduce their purchases or maybe not purchase at all," he says.

"So in that case a tax paid by the business may not be able to be passed on to the consumers. If the business does try to do it, he or she will lose a lot of business.

"In fact, there was a very good example of this a few years ago when a new tax was placed on luxury boats. And what happened is people just stopped buying luxury boats.

"So it really does depend on the nature of the product in terms of whether taxes can be passed on to the buyer."

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