State Tax Revenue Performance over the Business Cycle• ‐1.153 (0.081) pp growth in state and...
Transcript of State Tax Revenue Performance over the Business Cycle• ‐1.153 (0.081) pp growth in state and...
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StateTaxRevenuePerformanceovertheBusinessCycle
LeslieMcGranahan&
RichardMaCoon
ThispresentaEonexpressestheviewsoftheauthorsanddoesnotreflecttheviewsoftheFederalReserveBankofChicagooroftheFederalReserveSystem.
WhatdoWeFind?
• StategovernmentrevenuehasgrownfarmoresensiEvetoeconomiccondiEonsduringthepastdecade
• Thischangeisconcentratedinthestateincometax
• MuchofthechangecanbeaCributedtochangesinunderlyingincometrends
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WhatDoesTaxRevenuePerformanceLookLikeOvertheBusinessCycle–
HasthisChanged?• MoEvaEon– 2001Recessionasawatershedevent–amildbusinesscyclecontracEonledtoamajorcrisisinstategovernmentfinances.
– Why?Whatchanged?– Whatdoesthisimplyforthemoresevererecessionthatweareexperiencing.
• Data– QuarterlySummaryofStateandLocalGovernmentTaxRevenue• Collected(moreorless)conEnuouslysince1962• ReleasedinaEmelyfashion(90daysaYerthequarterends)• Quarterlyfrequencyabigplus
TotalQuarterlyStateTaxRevenues(Smoothed)
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PerCapitaStateTaxRevenues(Smoothed)
TaxRevenueasaFracEonofEconomicAcEvity
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TaxRevenueShares
RevenueResponsivenesstoEconomicCondiEons
• WelookatthisquesEonintwoways• Beginbylookingataggregaterevenues–revenuesforthenaEonasawhole– OneEmeseries
• Wethenturntoanalysisusingdataoneachofthe50statesseparately– FiYyEmeseries
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RevenueResponsivenesstoEconomicCondiEons:AggregateRevenues
• DefinethebusinesscycleusingthecoincidentindexofreleasedbytheFederalReserveBankofPhiladelphia– Nonfarmpayrollemployment– Averagehoursworkedinmanufacturing– Unemploymentrate– Wageandsalarydisbursements– Trendforeachstate’sindexissettothetrendofitsGDP.
• NaEonalCoincidentIndex• SeparateindexforeachofthefiYystates
RevenueResponsivenesstoEconomicCondiEons:AggregateRevenues
• Pre‐19981ppChangeinCoincidentIndicator(i.e.jumpsfrom3%to4%)• 0.756ppgrowthintotalstateandlocalgovernmentrevenues• 1.095ppgrowthintotalstategovernmentrevenues• 0.276ppgrowthintotallocalgovernmentrevenues• 0.081ppgrowthinstateandlocalpropertytaxrevenues• 1.339ppgrowthinstateandlocalsalestaxrevenues• 0.834ppgrowthinstateandlocalindividualincometaxrevenues• 3.340ppgrowthinstateandlocalcorporateincometaxrevenues
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RevenueResponsivenesstoEconomicCondiEons:AggregateRevenues
• ThePre‐1998landscape– Revenuesareprocyclicalonthestatelevelalthoughnotsomuchsoonthelocallevel.• PropertytaxrevenuespreCyflat
– Thismakessense
– Corporateincometaxeshavethestrongestcyclicalresponsiveness(byalongshot)
– SalestaxisslightlymoreresponsivethantheincometaxtobusinesscyclecondiEons(althoughusingstaEsEcaltests,wecannotrejectthattheyarethesame)
RevenueResponsivenesstoEconomicCondiEons:AggregateRevenues
• 1998andaYer1ppChangeinCoincidentIndicator(i.e.jumpsfrom3%to4%)• 1.319(0.756)ppgrowthintotalstateandlocalgovernmentrevenues
• 2.327(1.095)ppgrowthintotalstategovernmentrevenues• ‐0.502(0.276)ppgrowthintotallocalgovernmentrevenues• ‐1.153(0.081)ppgrowthinstateandlocalpropertytaxrevenues• 1.727(1.339)ppgrowthinstateandlocalsalestaxrevenues• 4.361(0.834)ppgrowthinstateandlocalindividualincometaxrevenues
• 5.014(3.340)ppgrowthinstateandlocalcorporateincometaxrevenues
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RevenueResponsivenesstoEconomicCondiEons:AggregateRevenues
• 1998andAYerLandscape– OverallstategovernmentrevenueshavegrownmorecyclicallysensiEve
– DuetomassiveincreaseinthesensiEvityoftheindividualincometax
– Localgovernmentslookmodestlycountercycical• (Can’trejectindependentofthebusinesscycle)• ThiscanlargelybeaCributedtotheconEnuinghousingboomduringthe2001recession
Somethoughts
• IfwewanttounderstandtheincreasingsensiEvityofthestateandlocalsectortothebusinesscycle– Wewanttolookatstates– Wewanttolookatthepersonalincometax
• Notsomuchalongtermswitchfromastablesource(sales)toavolaElesource(income)
• InsteadachangewithintheincometaxwhererevenueshavebecomemoresensiEvetoeconomiccondiEons
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WhatabouttheFederalGovernment?
• Pre‐19981ppChangeinCoincidentIndicator(i.e.jumpsfrom3%to4%) 1.387ppincreaseinpersonalincometaxreceipts
• 1998andaYer1ppChangeinCoincidentIndicator(i.e.jumpsfrom3%to4%)6.232ppincreaseinpersonalincometaxreceipts
RevenueResponsivenesstoEconomicCondiEons:StateLevelData
• Whydowewanttolookatstateleveldata?– MorevariaEontoexploit
– DifferencesinbusinesscycleEmingandintensity– Wecanlookatdifferentgroupsofstates
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RevenueResponsivenesstoEconomicCondiEons:StateLevelData
• DefinestatebusinesscyclecondiEonsusingthestatecoincidentindexdevelopedbytheFRBPhiladelphia– Averagestatedown2.2%overayearago(2008:Q4vs2007:Q4)
• Mean1980‐20082.9%St.Dev3.7%
• Pre‐1998– 1ppChangeinCoincidentIndicator
• 0.707ppChangeinTotalPerCapitaRevenue• 0.810ppChangeinPerCapitaSalesTaxRevenue• 0.568ppChangeinPerCapitaIndividualIncomeTaxRevenue• 1.449ppChangeinPerCapitaCorporateIncomeTaxRevenue
• 1998andAYer– 1%ChangeinCoincidentIndicator
• 1.074ppChangeinTotalPerCapitaRevenue• 0.568ppChangeinPerCapitaSalesTaxRevenue• 2.004ppChangeinPerCapitaIncomeTaxRevenue• 3.249ppChangeinPerCapitaCorporateIncomeTaxRevenue
RevenueResponsivenesstoEconomicCondiEons:StateLevelData
• Similarpicturetotheaggregatedata– IncreaseinsensiEvityleadbylargechangeintheincometax• Priorto1998,thesalesandincometaxeswerenotverydifferent.
– Differencebecausetheaggregatedatagivesmoreweighttobiggerstates(largerimpactonaggregates)whilewithstateleveldata,eachstateistreatedequally
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LookingatCaseofIllinois
RevenueVariability–IllinoisIncomeTax
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RevenueVariability–IllinoisSales
ExplanaEons
Whowe’retaxing
Whenwe’retaxingHowwe’retaxingWhatwe’retaxing
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WhoWe’reTaxing
– IncreasingincomedispersioncombinedwithtaxprogressivitymayhavemadeusmorereliableonthemorevolaEletopendoftheincomedistribuEon.
– Testthisbydividingstatesintogroups– MoreProgressiveversuslessprogressivestates• Stateswithlowestmarginaltaxrates<=6%in2008
– 0.623pppre1998to2.005pp1998andaYer• Stateswithhighestmarginaltaxrates>6%in2008
– 0.511pppre1998to2.004pp1998andaYer• Increaseissimilar,wesawthisforIllinoiswithlowrates
WhoWe’reTaxing
– Stateswithhighincomeinequalityversusstateswithlowinequality • Stateswithlowerginicoefficients(lowerinequality)
– 0.761pppre1998to1.744pp1998andaYer• Stateswithhigherginicoefficients(higherinequality)
– 0.375pppre1998to2.249pp1998andaYer• GrowthhasbeenmoredramaEcinstateswithgreaterincomeinequality
– Increasehasalsobeenlargerinmorepopulousstates,stateswithhighermedianincome,andstateswithmoremillionairespercapita
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Whenweretaxing
• Lookatincometaxrevenuegrowthduringthefourquartersofthecalendaryear– Jan‐Mar 0.533to2.269– Apr‐Jun 0.672to3.595– Jul‐Sep 0.395to0.991– Oct‐Dec 0.708to0.986– BiggestjumpinApril‐JuneQuarter,followedbyJan‐MarchQuarter,smallincreaseinJuly‐SeptQuarter,noincreaseinOct‐Decquarter.
– Aprilsurprises
HowWe’reTaxing
• HastherebeenachangeinthewaypolicyrespondstoeconomiccondiEons?
• DidweusedtoincreaseincometaxrateswhenEmeswerebadtostabilizerevenues?
• IthinkofthisastheFlorioEffect(aYerJamesFloriotheGov.ofNJ1990‐1994)
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ChallengingtoImplement
• Welackgooddataonthelongtermeffectsofstateincometaxchangesfromaconsistentandcomprehensivesource
• Plantolookatrevenuecyclicalityinthestateswheretheincometaxwaslargelyunchanged
CanWeLearnSomethingfromtheFederalExperience?
• FederaltaxsensiEvityfrom1.387to6.232• WeusetheCongressionalBudgetOffice’sEsEmatesoftheeffectsoftheBushtaxcuts(EGTRA2001andJGTRA2003)onpersonalincometaxrevenues.– GoodesEmates,6yearsout
• AdjustedrevenuesimplyFederaltaxsensiEvityfrom1.387to4.501– Notaperfectcounterfactual
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WhatWe’reTaxing
– Whatwe’retaxing• CapitalGainsbecameamoreimportantshareofAdjustedGrossIncome
• Timingisright
– DerivethreemeasuresofstateincomebyyearbasedondatafromtheIRSStaEsEcsofIncome• TotalAdjustedGrossIncomebyState
• WageandSalaryIncomebyState(alreadyincorporatedintothecoincidentindicators?)• Capitalgains,interestanddividendincomebyState
ControllingforYearoverYearChangesinIncome
• Withoutincomecontrols• Pre‐19980.568ppChange• 1998andaYer2.004pp• Increaseof1.436
• Controllingforincome,constrainingeffectsofincometobethesameacrossthetwoperiods– AGI
• 0.396to1.586(increaseof1.190)– WagesandSalary
• 0.504to1.824(increaseof1.320)– CapitalGains,InterestandDividends(with1yearlag)
• 0.552to1.401(increaseof0.849)– Allincomesources
• 0.475to1.214(increaseof0.739)• Thisisbeyondthestate’scontrol
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ControllingforIncome
• Withoutincomecontrols• Pre‐19980.568ppChange• 1998andaYer2.004pp• Increaseof1.436
• Controllingforincome,allowingtheeffectsofincomeonrevenuestodiffer(couldbeduetochangesinpolicy)– AGI
• 0.453to1.603(increaseof1.150)– WagesandSalaries
• 0.659to1.744(increaseof1.085)– CapitalGains,InterestandDividends(with1yearlag)
• 0.554to1.195(increaseof0.641)– Controllingforallthreetogether
• 0.598to0.867(increaseof0.269)
ControllingforIncome
• AbouthalfoftheincreaseinthesensiEvityofincometaxrevenuetothebusinesscyclecanbeexplainedbythedynamicsofincome,parEcularlyinvestmentincome.
• WealsofindthatstateshavegrownmoresensiEvetoincomedynamicsthisexplainsabout2/3oftheremaininggapinsensiEvity.– Maybeduetopolicy,changesinincomeamongspecificgroupsetc…
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GroupsofStates
• Smallest– MSMDNHINOKNDHIIAKYMNDEMTWVID
• Middle– MONCORILVTMESCNMPAARMIGAALMA
• Biggest– NYCOKSNELAOHUTVACARIWITNAZCTNJ
2009andBeyond
• Obviouslynotshapingupwell.– U.S.coincidentindex‐3.2%inQ2(YearoverYear)– Puvngitthroughaggregatemodelpredictsincometaxrevenuesfor2009:Q2down22.5%overayearago
• FederalIncomeTaxRevenuesarefalling– FederalTaxrevenuesrelaEveto2008
• Withholding‐7.1%(YTDJuly24)• Refunds‐12.0%(YTDJuly24)
– Excluding2008SEmuluspayments+20.1%• FinalPayments‐30.2%(YTDJuly24)• Combined(exsEmulus)‐20.5%
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CumulaEveFederalIndividualIncomeTaxRevenuesandRefunds,2008vs.2009
PolicyOpEons:AMenu• Worktosmoothrevenuesmoreaggressively
– RaisetaxratesduringbadEmes(historicstrategy)• TheFederalGovernmentgivesandthestatestakeaway?
– SelloffassetswhenEmesarebad(andperhapsbuyassetswhenEmesaregood?)• Buyhighandselllow?• Needbuyerstogetfinancingwhenthingsarebad(Midwayairport)
– Changerevenuestructuretowardssomethingmorestableeitherwithinincometaxortodifferenttaxes• DecreasingrelianceoncorporateincometaxmaypartlybeduetovolaElity• CorporateincometaxissubstanEallymorevolaElethanindividual(about2.5x)
• Worktosmoothexpendituresmoreaggressively(takingrevenuecyclicalityasgiven)– Rainydayfunds.ThesemayneedtobelargerthanispoliEcallyfeasible.Huge
swings.(AppealstoneithersideofpoliEcalspectrum)• IsthereamorecreaEvewaytodothis?Capitalgains/Businessincomedrivenfund?
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PolicyOpEonsaMenu
• RunDeficits– Maybethestatesshouldbemorelikethefederalgovernment
ratherthanvisaversa• Acceptthatexpenditureswillneedtobeprocyclical
– RunscountertotheautomaEcstabilizingrollofgovernment– Makehaywhilethesunshines
• Buyingthingswhentheyaremostexpensive.Helpingpeoplewhentheyleastneedit.
• AsktheFederalGovernmentforhelpwhenEmesarebad– 2001recessionandnow.– Takemoney/pushexpensesontolocaliEes
• MoreofanopEonin2001thannow