Revenue Trends in Midwestern States

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Revenue Trends in Midwestern States
Prepared forMSATA 46th Annual Conference August
21, 2006Traverse City, MI Patrick L. Anderson,
PrincipalAnderson Economic Group LLC
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Outline

• Introduction
• State Revenue Trends, 1990s v. 2000s
• Underlying Economics of State Tax Revenue
• Private Sector Employment
• Unemployment, Wages, and Poverty
• Business Taxes
• Case Studies of Recent Tax Changes
• Ohio
• Michigan
• V. Conclusions

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I. Introduction

• Anderson Economic Group, LLC
• Economic consulting firm specializing in public
  finance, tax, and fiscal impact analysis.
• Clients include state and local governments
  throughout the United States.
• Patrick L. Anderson
• Founder and CEO of AEG
• Author of Business Economics Finance (CRC
  Press, 2004)
• Author of 2006 SBT Repeal Law for Michigan
• Author of 2006 50-State Business Tax Benchmarking
  Study

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II. State Revenue Trends 1990s v. 2000s

• Revenue growth for Midwestern states varied
  between the 1990s and 2000s.
• Midwestern states include Illinois, Indiana,
  Iowa, Kansas, Michigan, Minnesota, Missouri,
  Nebraska, North Dakota, Ohio, Oklahoma, South
  Dakota, and Wisconsin.

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Annual Growth of State and Local Own Source
Revenue
Source Census of Governments, State and Local
Survey
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II. State Revenue Trends Revenue Sources

• States vary greatly in how they have shifted
  between revenue sources.
• Tax vs. non-tax sources.
• Business taxes vs. other sources.

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Change in of Revenue from Taxes, 1992-2004
Source Census of Governments, State and Local
Survey
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Change in of Revenue from Business Taxes (AEG
Estimates), 2002-2004
Sources Census of Governments, State and Local
Survey (Revenue) Anderson Economic
Group, LLC (Estimated Business Taxes)
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III. Underlying Economics of State Tax Revenue

• A. Private Sector Employment
• The fundamental strength of an economy comes from
  its private sector employment.
• Midwestern states had better private sector
  employment growth in the 1990s than thus far in
  the 2000s.

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Annual Growth in Private Sector Employment
Source Bureau of Labor Statistics
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III. Underlying Economics of State Tax Revenue
(Continued)

• A. Private Sector Employment (Continued)
• In general, Midwestern states that did very well
  in the 90s do better than average in the 2000s.
• Some states stuck out Michigan has experienced
  the most serious recent decline, followed by Ohio
  and Illinois.

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III. Underlying Economics of State Tax Revenue
(Continued)

• B. Unemployment, Wages, and Poverty
• Unemployment in the Midwest was lower than the
  national average in the 1990s, but higher more
  recently.
• High-wage sectors (e.g. information and
  manufacturing) have seen employment shrink.
• Low-wage sectors (e.g. leisure hospitality and
  retail trade) have seen employment grow.
• Note for this section, we use the BLS definition
  of Midwest, which does not include Oklahoma.

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Unemployment Rate U.S. and Midwest
Source Bureau of Labor Statistics
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High-Tech

• High-Tech employment is an underappreciated
  source of jobs and tax revenue.
• See AEGs report on Michigans Automation Alley
  region.
• Used a proper definition of high-tech industries.
• Found that high-wage jobs grew, except in
  automobile manufacturing.

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Wages and Employment in the Midwest, by Sector
Source U.S. Census Bureau
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III. Underlying Economics of State Tax Revenue
(Continued)

• C. Business Taxes
• AEG Business Tax Benchmarking Study
• Commissioned by Michigan House of Representatives
• Identify metrics that we could use to compare 50
  states business taxation.

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III. Underlying Economics of State Tax Revenue
(Continued)

• C. Business Taxes (Continued)
• AEG Benchmarking Study Approach
• Used Census of Governments State and Local Tax
  Data, IRS SOI, as our base data.
• Apportioned taxes on the basis of initial
  incidence.
• Business taxes include income (including on
  pass-through entities), property, selective
  sales, unemployment, licenses.
• Sales tax considered a consumer tax.
• Disclosed data and methodology.

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III. Underlying Economics of State Tax Revenue
(Continued)

• C. Business Taxes (Continued)
• AEG Benchmarking Study Approach
• Compared all states and D.C.
• Overall tax burden
• Total State and Local Taxes / Statewide Personal
  Income
• Three business tax burden measures
• Business Taxes / Statewide Personal Income
• Business Taxes / State GSP
• Business Taxes / State Profits

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Business Taxes as a Share of Personal Income
Source AEG Estimate Base Data U.S. Census of
Governments
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Business Taxes as a Share of Private GSP
Source AEG Estimate Base Data U.S. Census of
Governments
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Business Taxes as a Share of State Business
Profits
Source AEG Estimate Base Data U.S. Census of
Governments
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III. Underlying Economics of State Tax Revenue
(Continued)

• C. Business Taxes (Continued)
• Most Midwest states have higher business tax
  burdens than the U.S. average.
• A few, notably Missouri, South Dakota, and
  Minnesota, have relatively low business taxes.
• Business taxes affect location decisions and
  economic growth.
• However, it is not the only factor, or even the
  most important factor.

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IV. Tax Changes

• Taxes have been a hot topic since 2001 with
  changes occurring at the federal, state, and
  local levels.
• These changes affect the revenue coming into
  state government.
• Tax policy also affects the rate and composition
  of employment growth
• Consider, as case studies, two states with recent
  business tax changes driven primarily by the
  desire to stimulate economic growth Ohio and
  Michigan.

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Case Study Ohio

• Major Tax Changes
• Began phasing out its corporation franchise and
  tangible personal property taxes.
• Began phasing in the commercial activities tax
  (CAT).
• Cut the individual income tax rate by 21 for all
  tax brackets by 2009.
• Cut the state sales tax rate from 6 to 5.5.
• Increased the cigarette excise tax.

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Case Study Ohio (cont.)

• What is the CAT?
• It is a privilege tax on taxable gross receipts
  that applies to most business activity in the
  state.
• CAT taxes sales, performance of services, and
  rentals or leases.
• Corporations, sole proprietorships, partnerships
  pay the tax.
• Base rate is 0.26 of gross receipts.

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Case Study Ohio (cont.)

• Impact of the CAT on State Revenue
• Its too early to tell, butso far, the tax has
  raised more revenue than expected.
• Receipts in FY 2006 for the first 6 months
  totaled 185.1 million, which were over OBM
  estimates by 41.6 million (or 29).
• All corporate taxes were up 16.5 in FY 2006 over
  FY 2005.

Source State of Ohio, Office of Budget and
Management
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Case Study Michigan

• The Single Business Tax (SBT)
• A modified value-added tax.
• Brought in 1.9 billion in revenue for the state
  in 2004.
• 8.5 of state tax revenue.
• Less variable source of revenue than a profits
  tax.
• Current SBT places a disproportionate burden on
  manufacturing. (See 2005 AEG SBT study.)

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Case Study Michigan (cont.)

• Repeal of the SBT
• Initiated law (via petition).
• Purpose repeal and replace with less costly
  tax.
• Zero rate after December 31, 2007.
• Michigan Legislature approved initiated law on
  August 9, 2006.

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Case Study Michigan (cont.)

• Possible Replacements Form
• Tax on corporate profits or business profits
• Tax on gross receipts
• Extension of the sales tax to services
• Fair Tax
• SBT Redux
• Hybrid income-VAT as in 2005 reform proposal.

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Case Study Michigan (cont.)

• Impact on State Revenue
• Ballot language calls for a less costly tax.
• Current revenue is about 1.9 Billion.
• Estimates are difficult given current data on SBT
• We estimate a 0.5 tax on gross receipts would
  produce approx. 828 million in revenue.
• We estimate a 3.9 tax on corporate profits would
  generate 704 million.

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V. Conclusions

• Midwestern states have greatly varying revenue
  source trends.
• Tax vs. non-tax sources.
• Business tax vs. other sources.
• Underlying economic growth for most Midwestern
  states has slowed in the current decade. A few
  states are doing poorly.
• Business tax changes are driven by economic
  growth desires
• Case studies Ohio and Michigan
• Expect more demand for business tax changes in
  the coming 5 years.

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AEG Reports Related to this Presentation

• Benchmarking for Success A Comparison of State
  Business Taxes (2006)
• The Tax Burdens of Michigans Single Business Tax
  (2005)
• Automation Alleys First Annual Technology
  Industry Report (2005)
• Available at http//www.andersoneconomicgroup.com

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Contact Information

• Patrick L. Anderson, PrincipalCaroline Sallee,
  Senior AnalystAlexander Rosaen, Senior Analyst
• Anderson Economic Group LLC
• 1555 Watertower Place, Suite 100East Lansing,
  Michigan 48823Phone [phone]
• Reports and company information may be found at
• http//www.AndersonEconomicGroup.com