Economic Impacts of Possible Tax Policy Changes

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Economic Impacts of Possible Tax Policy Changes
Analysis of CP2C1 with Wealth Effect

• Dr. Tony Villamil
• Dr. Robert D. Cruz
• Taxation and Budget Reform Commission
• Tallahassee, Florida
• April 24-25, 2008

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Additional Analysis of CP02

• Background
• This new analysis of CP02 has been prepared
  adding a wealth effect from RLE elimination
• In our opinion, the analysis of CP02 we submitted
  for the March 17th meeting of the TBRC (without
  the wealth effect of RLE elimination) is the most
  accurate assessment of the potential impacts from
  CP02 on Floridas economy
• However, we have conducted an additional
  simulation estimating how our March 17 results
  would change if the reduction in RLE were to lead
  to an 80 billion increase in property values as
  suggested by Dr. Hank Fishkinds analysis of this
  proposal

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In our research, we have not found empirical
evidence at State level indicating that a
reduction in property taxes leads, by itself to,
an increase in property values. Many other
variables affect property values
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Additional Analysis of CP02

• New Simulation Parameters
• This simulation assumes that property values
  within Florida will rise by 80 billion with
  elimination of 8 billion in RLE (as indicated in
  Dr. Fishkinds presentation)
• Approximately 73 of assessed taxable value is
  comprised of residential properties, and we
  estimate that 10 of those properties are owned
  by non-Florida residents
• The above data implies that the household wealth
  of Florida residents would then rise by 52.6
  billion under Dr. Fishkinds increase in property
  value calculation

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Additional Analysis of CP02

• Wealth Effects The Evidence
• Empirical studies estimating the impact on
  consumer spending from an increase in net worth
  (without regard to its source) cover a broad
  range
• The most recent long term study covering 1953 to
  1997, found a consumption impact of 4 per 100
  increase in net worth, but the impacts ranged
  from a high of 10 (1976-1985) to a low of 2
  (1987-1997)
• Ludvigson and Steindel (1999). How Important is
  the Stock Market Effect on Consumption, Fed Bank
  of NY Policy Review, July

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Additional Analysis of CP02

• Wealth Effects The Evidence (concluded)
• Two empirical studies estimating the impact on
  non-housing consumer spending from changes in
  housing prices suggest a weak correlation at best
• Englehard (1996). House Prices and Home Owner
  Savings Behavior, Regional Science and Urban
  Economics, Vol. 26
• Skinner (1996). Is Housing Wealth a Sideshow,
  in D. Wise, Advances in the Economics of Aging.
  Univ. of Chicago Press
• Based on the results of these studies, the
  simulation results shown below assume that each
  100 increase in residential home value leads to
  an additional 3 of consumer spending

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Simulation Results

• All other estimates and assumptions used in our
  previous analysis of the economic impacts of CP02
  e.g., the funding sources to be used for
  replacing the RLE and the amount of RLE taxes to
  be replaced were used in this simulation as
  well
• Including the assumption that property values
  increase by 80B reduces the decline in economic
  growth from the baseline, but does not eliminate
  it
• The results of the simulation with an increase in
  household wealth and the results of the prior
  simulation are summarized below

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Summary of Results for CP2C1

• Positive economic stimulus from elimination of
  RLE is smaller than the contractionary effects of
  increase in sales taxes and net reduction in
  state and local government spending when a
  systems or general equilibrium analytical
  framework is used (REMI model)
• Floridas economy grows more slowly than under
  the baseline simulation as reflected in lower job
  growth, lower population growth, lower GDP
  growth, and lower income growth in absolute and
  per capita terms

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Summary of Results for CP2C1 (continued)

• Even when assuming an unlikely 80 billion
  increase in property values, CP02 is likely to
  reduce slightly economic growth (from baseline
  trend)
• The economic stimulus from the elimination of the
  RLE is not sufficient to overcome the anti-growth
  and competitive pressures of higher sales taxes
  and reductions in state budgets necessary to
  replace RLE revenues
• The tax swap in CP02 will not likely increase
  population migration since, on an aggregate level
  CP02 reduces real, after tax, income per capita