Transcript Local Tax Revenues and the Tax Base

Local Tax Revenues and the Tax Base
• “High taxes, sometimes by
diminishing consumption of the
taxed commodities, and sometimes
by encouraging smuggling,
frequently afford a smaller revenue
to government than what might be
draw from more moderate taxes.”
Adam Smith, The Wealth of Nations
New York bust nets counterfeit
cigarettes, $6M in fake tax stamps
Thursday, April 10, 2008
By DAVID B. CARUSO
The Associated Press
from The Southeast Missourian
NEW YORK — Millions of dollars' worth of
counterfeit tax stamps were seized and a
Jordanian man arrested as part of a major
undercover investigation into tobacco
smuggling in New York….The fake stamps
would have allowed unscrupulous cigarette
dealers to evade nearly $6.1 million in state and
city taxes, authorities said.
• It is a signal advantage of taxes on
articles of consumption that they contain
in their own nature a security against
excess…If duties are too high, they lessen
the consumption; the collection is
eluded; and the product to the treasury
is not so great as when they are confined
within proper and moderate bounds.”
Alexander Hamilton, Federalist Papers, No.
21.
Revenue Hills-The Laffer Curve
Tax Revenues = rate x base
T*
Tax Rates
t*
Evidence at the Federal Level
• Income tax revenues grew in the 1980s after
the Reagan income tax rate cuts.
• Growth in tax revenues was likely due to
continued growth in income, not because the
decline in tax rates stimulated workers to work
so much harder.
• Reagan actually raised taxes during his term.
• No strong evidence (if any) that US was on
negatively sloped portion of Laffer curve.
City and County Tax Rates and the Base
• Recent research by Haughwout, Inman, Craig,
and Luce (2004) found evidence of local
revenue hills in four cities: Houston,
Minneapolis, New York, and Philadelphia
• Easy to see gas stations on the Missouri side of
the Emerson bridge, but not the Illinois side.
Until recently, wide gap in gas excise taxes
between the two states.
Why Revenue Hills Might be more
Likely at Local Level
• People can more easily choose where to shop
in response to differential sales tax rates.
• Local governments “compete” by offering tax
breaks, etc.
• Online shopping is becoming a more effective
substitute for shopping at a bricks and mortar
business.
• Residence is chosen with an eye toward local
school quality and property tax rates.
Taxes and Competition between Public
and Private Sectors
• Private goods and services compete with
publicly provided goods and services.
• People who want high quality schools may
vote against school tax increases and send their
children to private schools.
• Private vs. Public water delivery/trash pickup.
• Dahlhousie, Kimbeland country clubs vs.
Jaycee golf course in Cape/Jackson
Taxes and the tax base
• Value of public services provided by tax
increases may be fully or partially capitalized
into property values.
• Various tax revenue sources (sales taxes and
property taxes) may compete with each other.
• Ex: Passage of a sales tax increase might
make it harder to pass a school levy increase.
The Cost Disease of the Public Sector
• Baumol and Bowen (1966, 1967)
• Productivity grows slower in public sector than
in the private sector.
• Education, police protection, courts, etc. are
labor intensive; not much opportunity for
capital/labor substitution.
• Private sector- entrepreneurs search for ways
to substitute high cost labor for low cost
capital.
Cost disease cont.
• Workers in the private sector earn higher
incomes because they use more capital and
become more productive.
• Workers in the public sector have to earn as
much as their private sector counterparts.
• Consequence of slower public service
productivity growth is that costs per unit of
output rise in public sector relative to private
sector.
• Governments need more and more revenue to
finance the same amount of public services.
Missouri Local Government Revenue
from Own Sources, billions of dollars
General
Revenues
Tax Revenues Property Taxes
(% of general (% of general
revenues)
revenues)
Sales Taxes
(% of general
revenues)
1992-93
5.3 B
3.5 B (67%)
2.0 B (38%)
.7 B (14%)
1995-96
6.9 B
4.5 B (65%)
2.6 B (38%)
1.0 B (15%)
1999-00
9.0 B
5.7 B (63%)
3.4 B (37%)
3.2 B (15%)
2003-04
11.1 B
7.1 B (64%)
4.3 B (39%)
2.2 B (20%)
2004-05
11.8 B
124%
7.8 B (66%)
122%
4.7 B (39%)
130%
2.4 B (21%)
232%
Growth rate,
1992-2005
1990-2006
A simple model of sales taxes
• How do sales taxes change as income changes?
• How do sales taxes change as property values
change?
• How do sales taxes change over time?
• Data from 1990 to 2006, SE Missouri Counties
• Sales taxes per capita =
f( Income per capita, AV per capita, time)
Results
• When per capita income changes by 1%, sales taxes
per capita change by 1.32%.
• When per capita assessed valuation changes by 1%,
sales taxes per capita change by 0.1%
• Holding per capita income and assessed valuation
constant, sales taxes per capita are falling by about
4% each year.
• Why? Internet, shift over time in consumer
preferences toward services (health care, education)
that are not taxed.
• Transportation has made it easier to purchase where
sales taxes are relatively lower.
Things to consider when
designing local tax/spend policies
• Substitution between various taxes-pass one kind of
tax (sales) might make it harder to increase another
kind of tax (property).
• Citizens choose where to work, live, and shop, partly
based on tax rates and level of public services.
• Holding income and property values constant, sales
taxes per capita have been falling since 1990.
• Cost disease of the public sector means taxes will
have to rise to continue current levels of public
services.