Economic Impacts of Possible Tax Policy Changes

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Economic Impacts of Possible Tax Policy Changes
Analysis of CP45C2

• Dr. Tony Villamil
• Dr. Robert D. Cruz
• Taxation and Budget Reform Commission
• Tallahassee, Florida
• April 4, 2008

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CP045C2

• Brief Description
• Provides for limits on future growth of state
  and local government revenues beginning in
  FY2009-10 and effectively provides limits on
  state and local government spending
• Local governments refers to
• Counties
• Municipalities
• Local School Districts
• Special Districts

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CP045C2

• Brief Description (continued)
• State revenues subject to limits under CP45 are
• Taxes, fees, licenses, fines and charges for
  services.
• State revenues not subject to limits are
• Revenues to comply with bond obligations prior to
  July 1, 2008 (amendment to Jan. 1, 2008 proposed)
• Proceeds from lottery returned as prizes
• Receipts from catastrophe fund or state property
  insurance corporation
• Revenues authorized by constitutional amendments
  after July 1, 2008 (Jan. 1, 2008 in amendment)
• Amendment 1 to CP45C2 would exclude revenue of
  Florida Prepaid College Fund

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CP045C2

• Brief Description (continued)
• Local government revenues subject to limits
  under CP45 are
• Taxes, fees, assessments, licenses, fines and
  charges for services.
• Local revenues not subject to limits are
• Revenues to comply with bond obligations prior to
  July 1, 2008 (amendment proposes Jan. 1, 2008)
• Voter approved ad valorem taxes levied for
  periods not exceeding 2 years
• Voter approved non-ad valorem taxes required by
  the constitution or general law

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CP045C2

• Brief Description (continued)
• Additional local revenues not subject to limits
  are
• Revenues for direct cost of providing electric,
  water, waste water, gas or other utility services
  (airports and seaports also excluded in proposed
  amendment to CP45C2)
• Revenues of government owned enterprise receiving
  less than 10 of its revenues from the State or a
  local government
• County taxes on lodging for promotion of tourism
  or related activities
• Revenues authorized by constitutional amendments
  after July 1, 2008. (Jan.1, 2008 in amendments)

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CP45C2 Revenue Cap Formula

• State and local revenues subject to limitations
  under CP45C2 are restricted to an increase over
  prior years revenues by
• Percent growth in population (enrollments for
  school districts) the rate of national
  inflation in the consumer price index 1
• The revenue limits begin in FY2009-10 and is
  calculated as if the revenue caps had been in
  effect in FY2008-09 (FY07-08 Revenues) x
  (population growth rate CPI inflation 1)

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CP45C2 Revenue Cap Formula

• CP45C2 allows local governments to override
  revenue growth limits by supermajority vote of
  governing board
• New taxes or fees can be introduced with approval
  of the electors
• Proposed amendments to CP45 allow state
  government to override state revenue caps by
  supermajorities in the legislature
• Proposed amendments allow for higher revenue caps
  for local governments that meet FL legislatures
  criteria (to be determined later)

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CP45 Simulation Parameters

• Economic impact simulations are based on the
  CP45C2 version of this proposal and not on
  proposed strike all amendment
• Florida Policy and Budget Council prepared
  estimates of State fiscal impacts from CP45 under
  revenue cap formula
• Their analysis begins with a projection of
  unconstrained growth in those State revenues that
  would be limited by CP45, calculates the revenues
  allowed under the cap formula, and computes the
  difference between the capped revenues and
  uncapped revenues

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CP45 Simulation Parameters

• It is necessary to project combined local
  revenues subject to growth limits under CP45 to
  estimate its economic impact
• Census data suggested that local government
  revenues subject to limitations under CP45 have
  been roughly stable since FY2001-02 at 77 of
  state government revenues subject to the same
  limitations (i.e., taxes, some fees and charges)
• The Policy and Budget Council projected state
  revenues subject to CP45 growth limits at 35.5
  billion in FY2007-08. The historical ratio noted
  above suggests that 27.2 billion is a reasonable
  estimate of local government revenues that would
  fall under the same growth limits

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The Baseline Projection of Local Revenues in the
Absence of CP45

• The increase in local revenues subject to CP45
  growth caps for property taxes and all other
  revenues are projected separately
• Baseline estimates of future growth in local
  property tax revenues are determined by
• New construction based on anticipated growth in
  households.
• Projected increase in taxable value under SOH and
  determined by inflation in consumer prices and an
  adjustment for real appreciation (or
  depreciation) in values.
• The anticipated growth in households is taken
  from the latest FL Economic Estimating Conference
  projections, and the CPI inflation rates are
  those projected by the Congressional Budget
  Office.

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The Baseline Projection of Local Revenues
(continued)

• Estimates of future growth in local revenues
  subject to CP45 limits from non-property tax
  sources are determined by
• Personal income growth
• The anticipated growth in personal income is
  taken from the latest Florida Economic Estimating
  Conference projections

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Baseline Growth Rates for Revenues Subject to
CP45 Limits
The growth caps for an individual local
governments revenues may differ from the growth
cap for State revenues, but the growth cap for
aggregate local government revenues must equal to
the growth cap for State revenues
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The Economic Impacts

• When the projected or baseline state and local
  revenues are below the revenue growth caps, there
  are no resulting fiscal or economic impacts
• When baseline state and local revenues exceed the
  caps, then the caps are binding and taxes and
  spending are lower than would otherwise occur
• When the caps are binding on state revenues,
  sales taxes and state government spending are
  reduced by an equivalent amount in simulating the
  economic impacts
• When the caps are binding on local revenues,
  property taxes and local government spending are
  reduced by an equivalent amount in the simulations

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Economic Impact Methodology

• The economic impacts were estimated using a
  Florida REMI model that explicitly recognizes the
  complex interactions that take place within a
  macroeconomy spending, income, costs of
  production, capital investment, population growth
  and capital migration are all inter-related
• The impacts from policy changes on productivity
  and regional competitiveness are also explicitly
  considered.
• The effects of policy changes over time are shown
  through changes in the capital stock (capital
  investments), population and productivity
• A general equilibrium analysis (or systems
  approach) is the preferred framework for
  examining the impact of changes in tax policy

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SummaryEconomic Impact Simulation Results

• No impacts occur in FY2009-10 because
  revenue/expenditure caps are not binding (i.e.,
  revenue cap greater than baseline revenue)
• In FY2010-11 and beyond
• The declines in state/local spending result in
  declines in public administration employment from
  the baseline
• The reduction in taxes increase real income,
  stimulate consumer spending and private sector
  employment increases above the baseline.
• Since public sector jobs per dollar of public
  sector revenues is higher than the jobs/revenue
  ratio in the private sector, the net impact on
  job growth is slightly negative
• There is a slight increase in total and per
  capita real disposable income
• Government expenditures is part of State GDP. The
  increase in private sector output is not large
  enough to cover the decline in GDP in the public
  sector total GDP declines very modestly from
  the baseline

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• There is a steady shift toward private-sector
  employment and economic activity relative to the
  public-sector employment
• Overall impacts on economic growth are small
  relative to the baseline since government revenue
  reductions from the baseline are projected to be
  small in relative terms, as well as the positive
  impacts on the private sector cushion, to an
  extent, the relatively larger decline in
  public-sector employment from baseline

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Caveats

• Model simulations do not account for legislative
  actions to override revenue caps
• Model does not account for economic impact from
  potential loss of public goods that simulate
  economic growth (e.g., education, infrastructure
  investments and economic development incentives)
• Model also does not account from the possible and
  long-term (beyond the model specified time
  period) productivity enhancing effects of
  resource shifts to the private sector and the
  prioritization of public spending due to the caps

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Impact Simulation Results