Transcript Economic Impacts of Possible Tax Policy Changes

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
1
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
Florida’s 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
Fishkind’s analysis of this proposal
2
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
3
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. Fishkind’s
presentation)
Approximately 73% of assessed taxable value is
comprised of residential properties, and we estimate
that 10% of those properties are owned by nonFlorida residents
The above data implies that the household wealth of
Florida residents would then rise by $52.6 billion
under Dr. Fishkind’s increase in property value
calculation
4
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 (19871997)
• Ludvigson and Steindel (1999). “How Important is the
Stock Market Effect on Consumption,” Fed Bank of NY
Policy Review, July
5
Additional Analysis of CP02
• Wealth Effects – The Evidence (concluded)
 Two empirical studies estimating the impact on nonhousing 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
6
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
7
Economic Impacts of CP2CI on Key Macroeconomic Indicators:
Assumes $80 Billion Increase Property Values from Elimination of RLE
8
Economic Impacts of CP2CI on Key Macroeconomic Indicators:
Without Wealth Effects
9
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)
• Florida’s 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
10
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 11