Economic Impacts of Possible Tax Policy Changes

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Economic Impacts of Possible Tax Policy Changes

• Dr. Tony Villamil
• Dr. Robert D. Cruz
• Finance and Taxation Committee
• Taxation and Budget Reform Commission
• Tallahassee, Florida
• February 11-12, 2008

2
Systems Approach to Tax Policy The Circular
Flow of Income and Expenditures
Source REMI, Inc., REMI Policy Insight User
Guide.
3

• Economic impacts of changes in tax policy are
  based on the circular flow of income and
  expenditures in an economy a systems approach
  is necessary to analyze impacts
• The income of economic agents is generated
  through the process of economic production and
  taxation
• Income directly affects the demand for goods and
  services through consumer and government spending
  and capital formation (economic growth)
• Therefore, tax policy changes impact net income
  and thus economic activity throughout the
  economic system
• (continued)

4

• In a regional economy there are important
  leakages over time from a change in tax policy
  (impacts on federal taxes, non-residents, tax
  avoidance, competitive factors)
• General equilibrium, models are dynamic,
  resulting in second and third order effects
  throughout the economic system
• These models, however, do not, by definition
  include so-called unintended consequences of tax
  changes (random events) that could impact the
  parameters of the relationships over time

5
State Business Tax Climate Index Rankings 2008
Source Tax Foundations State Business Tax
Climate Index.
FLORIDA One of the Best Tax Business Climates in
the Nation
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Connecting the Pieces in Public Finance is
Important to Economic Development
State and Local Tax Structure and Policies

• Tax revenue elasticity
• Efficiency of public spending
• Prioritization of public spending

• Support to Business Climate
• Educational outcomes
• Workforce development
• Smart infrastructure
• Tax burden

Sustainable, Innovation Driven and
Knowledge-Based Economic Development
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Proposal CP0002

• Description
• Revise the Florida Constitution to eliminate
  current exemptions to sales and use tax, extend
  the sales and use tax to cover services. Revenues
  from this proposal to be used to eliminate the
  portion of local property taxes used to fund
  education (Required Local Effort)
• Sales and use tax exemptions for food,
  prescription drugs, health services, residential
  rent, electricity and heating fuel are retained.
  Additionally, exemptions that advance or serve a
  public purpose are permitted
• (continued)

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• Assumptions
• Economic impact modeled by reducing local
  property taxes by 7.9 billion (RLE) and
  increasing sales and use taxes on goods and
  services on final users by an identical amount
  (4 billion goods/3.9 billion services)
• Property tax declines adjusted for property type
  (residential and commercial)
• Part of reduction in property taxes accrue to
  non-Florida residents, and Florida residents lose
  some deductibility of property taxes on federal
  income tax returns
• The above leakages leave a 6.3 billion increase
  in Disposable Income from the original 7.9
  billion in property tax declines

(continued)
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• Estimated Economic Impacts
• Modest economic impacts relative to size of
  Florida
• Employment drops by average of 56,000 from
  baseline (2010)
• State GDP declines by 20 billion over a ten-year
  period
• Real disposable Income declines by 3.5 billion
  per year from baseline
• Per capita real disposable personal income
  declines by average of 87 per year
• There is a slight impact on consumer prices

(continued)
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• Conclusions
• Reductions in property taxes that are paid to
  residents of other states leave and must be
  replaced by Floridians
• Increases burden of taxes paid by Floridians
  versus those paid by out-of-state residents
• Could impact competitiveness of Florida
  products/services as higher taxes are passed to
  final users in the form of higher prices (slight
  impact)
• Expansion of tax base could improve revenue
  elasticity for the State

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Florida Economic Impacts of CP0002 on Key
Macroeconomic IndicatorsImpacts shown as
difference from baseline
Represents percent change from baseline or
control simulation and includes housing
price. Simulations performed with 70-sector,
Florida REMI model, v.9.0
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Proposal CP0007

• Description
• Requires that the Legislature review all current
  exemptions to sales and use tax, and identify the
  15 of exemptions that are the least
  meritorious
• Legislature would then vote on whether to retain
  these exemptions
• Any additional revenues raised must be used to
  reduce the sales and use tax rate or the portion
  of Local Property Taxes (RLE) used to finance
  education
• (continued)

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• Assumptions
• Based on 2007 revenue projections approximately
  1.85 billion of exemptions could be eliminated
  by the Legislature
• Simulation assumes that the 1.85 billion of
  exemptions eliminated (State revenue increases)
  are then used to reduce the RLE by the same
  amount
• Structurally important exemptions, and specified
  necessities are excluded from this review

(continued)
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• Estimated Economic Impacts
• Total employment, Florida real GDP, Personal
  Income, Labor Earnings, Real Disposable Income
  all decline by very small amounts in the
  2010-2020 period
• The relatively small declines is due to the
  leakages from the decline in property taxes
• Out-of-State property tax owners and the loss of
  federal deductions due to the decline in property
  taxes (leakages) results in an increase in
  Disposable Income to Florida-based households
  that is less than the increase in taxes impacting
  the newly non-exempt items

(continued)
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• Conclusions
• Given the size of Floridas economy and
  employment base, the estimated economic impacts
  are very small
• Slight expansion of tax base could modestly
  improve the tax revenue elasticity for the State
• Provides tax relief to local property owners with
  almost no impact on States growth or
  competitiveness

16
Florida Economic Impacts of CP0007 on Key
Macroeconomic IndicatorsImpacts shown as
difference from baseline
Note Removal of sales tax exemptions raising
1.85 billion in revenue to offset an equivalent
reduction in property taxes for public
schools. Represent percent change from baseline
or control simulation and includes housing
price Simulations performed with 70-sector,
Florida REMI model, v.9.0
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Proposal CP0012

• Description
• Revise the Florida Constitution to require the
  Legislature to review all services not subject to
  the sales and use tax
• Services exempt from taxation must
• Encourage economic development and
  competitiveness
• Support educational, governmental, religions, or
  charitable initiatives or institutions
• Secure tax fairness by reducing or eliminating
  regressive tax burdens
• (continued)

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• Assumptions
• Three simulations were conducted to estimate
  economic impacts on Florida
• The first simulation (I) is an extreme case
• Total state 6 sales and use tax on all service
  transactions yield annualized receipts of 23.4
  billion in FY2007-08
• The significant increase in State revenues is
  then spent on prioritized budgetary items
• The second simulation (II) continues to exempts
  3.5 billion in healthcare services
• Total State 6 sales and use tax on all service
  transactions yield annualized receipts of 20
  billion on FY2007-08

(continued)
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• The significant increase in State revenues is
  used to buy down the Required Local Effort
  (RLE) to fund education at the local level
• The rest of the receipts are then used to
  increase State spending
• The third simulation (III) utilizes the
  annualized receipts on services taxed in 1987
• The total State 6 sales and use tax on service
  transactions amount to 7.3 billion
• The 7.3 billion in receipts is then utilized to
  buy down the RLE of 7.9 billion
• The increase in State revenues is used to buy
  down the RLE

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• Estimated Economic Impacts
• Simulation I significantly impacts private-sector
  jobs as employment growth shifts to the public
  sector
• An average of 104,000 jobs are lost in the
  private sector over 10 years
• Total employment increases due to the growth of
  public-sector jobs, but at a decreasing rate
• Real Disposable Income declines by 127 billion
  over the 10-year period
• There is also a notable loss of competitiveness
  as the widely based increase on services taxes
  are passed to final users. The Florida CPI
  increases by an average of 2.4 during the
  2010-2020 period of the simulations compared to
  baseline

(continued)
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Simulation I
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Florida Economic Impacts of CP0012 on Key
Macroeconomic IndicatorsImpacts shown as
difference from baseline
Note Taxation of all services raising 23.4
billion in revenue combined with an equivalent
increase in state government spending. Represent
percent change from baseline or control
simulation and includes housing price Simulations
performed with 70-sector, Florida REMI model,
v.9.0
23
Simulation II
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Florida Economic Impacts of CP0012 on Key
Macroeconomic IndicatorsImpacts shown as
difference from baseline
Note Taxation of all services, except medical,
raising 19.9 billion in revenue used to reduce
RLE property tax by 7.9 billion and increase
general state government spending by 12 billion
Represent percent change from baseline or
control simulation and includes housing
price Simulations performed with 70-sector,
Florida REMI model, v.9.0
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Simulation III
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Florida Economic Impacts of CP0012 on Key
Macroeconomic IndicatorsImpacts shown as
difference from baseline
Note Taxation of services not exempt in 1987
services tax, raising 7.3 billion in revenue
used to reduce RLE property taxes by an
equivalent amount. Represent percent change
from baseline or control simulation and includes
housing price Simulations performed with
70-sector, Florida REMI model, v.9.0