Transcript Economic Impacts of Possible Tax Policy Changes

Economic Impacts
of Possible Tax Policy Changes
Analysis of CP2C1
Dr. Tony Villamil
Dr. Robert D. Cruz
Taxation and Budget Reform Commission
Tallahassee, Florida
March 17, 2008
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CP2C1 (3/11/2008)
• Brief Description
 Replaces required local effort (RLE) ad
valorem taxes for education with one or
combination of the following:
• A one cent increase in sales tax rate
• Revenues gained from repeal of some sales tax
exemptions, and
• Offsetting reductions in other components of state
budget or set-aside of funds from growth in state
revenues
 Mandates replacement of RLE in FY2010-11
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CP2C1 Simulation Parameters
• Developing an impact simulation requires a
projection of future RLE
• RLE grew by 7% from FY2006-07 to FY2007-08
(current). For simulation purposes we projected an
increase of 6.4% per year over current RLE to
project its value in 2010-11
• The projected required funding to replace RLE in
FY2010-11 is $9.52B
 Actual growth in RLE will depend on actions by
legislature and governor
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CP2C1 Simulation Parameters
• How will the required RLE replacement
revenues be raised?
 Two simulations are performed, representing
the range of possible policy choices
• Simulation CP2C1-A
 Penny sales tax to raise $4.55B in FY2010-11
 Removing exemptions on “non-protected”
goods resulting in projected revenues of $4B
 $970M gap ($9.52B less $8.95B) filled by
using growth in state revenues or spending
reductions
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CP2C1 Simulation A Parameters
• The direct effects from CP2C1
 Elimination in RLE saves Florida households $4.7B on
an after income tax basis
 Elimination in RLE increases capital income of rental
residential and commercial property owners by $2.4B
(model takes care of calculating income tax liability)
 The projected increase in sales tax revenues falls short
of funds needed to eliminate projected FY2010-11
RLE, requiring redirection of funds from state
spending.
 Eliminating some exemptions broadens the tax base
and allows local option tax revenues to rise by $488M.
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Systems Approach to Tax Policy:
The Circular Flow of Income and Expenditures
Source: REMI, Inc., REMI Policy Insight User Guide.
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Advantages of Using a REMI Model
for Significant Policy Change
• These types of models explicitly recognize the complex
interactions that take place within a macroeconomy –
spending, income, costs of production, capital investment,
population growth and capital migration are all inter-related.
• Policy changes are examined within a “general equilibrium” as
opposed to a piecemeal, “partial equilibrium” framework.
• The impacts from policy changes on productivity and
regional competitiveness are explicitly considered.
• The effects of policy changes over time are shown through
changes in the capital stock, population and productivity.
• General equilibrium analysis is the preferred framework
among economists, and REMI models are the “gold standard”
for regional economic impact analysis.
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Decline in Population from Baseline Values
CP2C1 Simulation A
140.0
120.0
Thousands
100.0
80.0
60.0
40.0
20.0
0.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Ages 25-64
All Others
Net migration is driven by state employment prospects relative to
those in the rest of the nation, as well as relative real earnings
potential.
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CP2C1 Simulation B Parameters
• The actual approach that a future legislature and governor will
take to replace the RLE is unknown.
• Simulation B considers the case where no additional taxes are
imposed and only state revenue growth between now and
FY2010-11 are used to replace RLE.
• The academic literature does not demonstrate an empirical
correlation between property tax rates and either state
population migration or economic growth. The view that lower
property taxes, by themselves, will stimulate an increase in
state tax revenues that can finance the replacement of RLE
without a compensating decline in state spending is without
sufficient scientific support to be include in the analysis.
• If replacement of RLE is financed solely from revenue growth,
then the analysis of economic impacts must consider the effect
of displaced state spending from what would have otherwise
occurred.
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The greater reduction in economic growth from the baseline occurs because
the macroeconomic impact from decline in government spending is greater
than the impact from an equivalent level of tax relief.
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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.
• Florida’s economy grows more slowly than under the
control simulation as reflected in lower job growth,
lower population growth, lower GDP growth, and
lower income growth in absolute and per capita
terms.
• Reduction in economic growth from CP2C1
increases with greater reliance on reduction in state
spending.
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