State Revenue Systems and State Revenue Systems and Principles of - - PowerPoint PPT Presentation

State Revenue Systems and State Revenue Systems and Principles of Tax Policy Principles of Tax Policy

Blue Ribbon Tax Structure Commission Vermont General Assembly

Bert Waisanen National Conference of State Legislatures September 1, 2009

State Revenue Systems State Revenue Systems

First, What is a Revenue System?

The entire means of government funding Variety of revenue sources, diversification Apply criteria to systems, not sources

State Revenue Systems State Revenue Systems

Where State Revenue Comes From Total income and total sales taxes represent

more than 80 percent of revenues

Property taxes are 2 percent of state

revenues nationally, Vermont is an exception.

Components of Federal Tax Components of Federal Tax Collections Collections

Individual Income 43% Social Insurance and Retirement Receipts 35% Selective Sales/Excise 3% Other 4% Corporate Income 15%

Components of State Tax Components of State Tax Collections Collections

Property 2% Other 10% Individual Income 34% Corporate Income 7% General Sales 32% Selective Sales/Excise 15%

Components of Local Tax Components of Local Tax Collections Collections

Other 6% Individual Income 5% Selective Sales/Excise 5% Corporate Income 1% General Sales 11% Property 72%

State Revenue Systems and State Revenue Systems and the Personal Income Tax the Personal Income Tax

41 states have an income tax, 7 have flat

rates, others graduated rates.

27 states use adjusted gross income as

starting point; 10 states use federal taxable income.

Deductions, exemptions reduce the base but

may boost progressivity.

Conformity with the federal tax system

eases compliance and simplifies administration.

State Sales Tax Systems State Sales Tax Systems

45 states have them. 34 states allow local

sales taxes.

The average state rate is 5.75%, the average

state-local rate is 6.5%.

Few rate increases the past few years, until

2009, except to pay for property tax relief.

Few expansions to services.

Consumption of Goods and Consumption of Goods and Services, 1960 Services, 1960-

• 2007

2007

0.35 0.4 0.45 0.5 0.55 0.6 0.65 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Consumption of Goods Consumption of Services

Sales Taxes on Services Sales Taxes on Services

10 to 20 Services More than 100 Services 50 to 90 Services 0 or 1 Service 20 to 40 Services Rhode Island Delaware

Business Taxes Business Taxes

Corporate income is taxed in 46 states. Not a large

• r growing source of overall state revenues.

Why? Erosion risk due to exclusions from

(incentives) the base, business tax planning, or tax cuts.

Some states are experimenting with alternative tax

systems to broaden the tax base.

Sustainability is the New Key Sustainability is the New Key Driver for State Tax Policy Driver for State Tax Policy

Prices set the retail sales tax calculation so

potential tax base growth will be in services.

Future developments - consumer behavior, higher

inflation or federal fiscal changes - have implications for state tax systems.

Revenue source and base diversification reduces

volatility, spreads tax burden, and helps match a tax system to a state's economic activity.

Origin of Tax Policy Principles Origin of Tax Policy Principles

From The Wealth of Nations to NCSL

Adam Smith spoke of equity, explicitness,

simplicity and economy of administration.

NCSL convened legislators and policy experts;

its 1992 principles also consider evolution in federalism and economies.

Tax Policy General Principles: Tax Policy General Principles: Ability Ability-

• to

to-

• Pay

Pay

Regressive, proportionate or progressive

impacts

Earned income credit, circuit-breakers and

grocery exemptions are examples

Rules of thumb (progressive income tax,

regressive sales tax) are affected by duration or design.

Tax Policy General Principles: Tax Policy General Principles: The Benefit Principle The Benefit Principle

Assumes a market relationship between

citizen and government: a price is assigned to public services.

Assumes taxpayers should pay for what

they receive, and tax policy should not redistribute income.

Tax Policy General Principles: Tax Policy General Principles: Equity and Simplicity Equity and Simplicity

Horizontal Equity

Similar income, similar tax obligation

Vertical Equity

Income variance, tax burden variance

Associated rules of thumb

Broad Base, Low Rates Simplicity

NCSL Principles of High NCSL Principles of High-

• Quality

Quality Revenue Systems Revenue Systems

• 1. A high-quality revenue system comprises

elements that are complementary, including the finances of both state and local governments.

NCSL Principles of High NCSL Principles of High-

• Quality

Quality Revenue Systems Revenue Systems

• 2. It produces revenue in a reliable manner.

Reliability involves stability, certainty and sufficiency.

NCSL Principles of High NCSL Principles of High-

• Quality

Quality Revenue Systems Revenue Systems

• 3. A high-quality revenue system relies on a

balanced variety of revenue sources.

NCSL Principles of High NCSL Principles of High-

• Quality

Quality Revenue Systems Revenue Systems

• 4. It treats individuals equitably. At a

minimum, it imposes similar tax burdens on people in similar circumstances, minimizes regressivity, and minimizes taxes on low- income persons.

NCSL Principles of High NCSL Principles of High-

• Quality

Quality Revenue Systems Revenue Systems

• 5. A high-quality revenue system facilitates

taxpayer compliance. It is easy to understand and minimizes compliance costs.

NCSL Principles of High NCSL Principles of High-

• Quality

Quality Revenue Systems Revenue Systems

• 6. It promotes fair, efficient and effective
• administration. It is as simple as possible to

administer, raises revenue efficiently, is administered professionally, and is applied uniformly.

NCSL Principles of High NCSL Principles of High-

• Quality

Quality Revenue Systems Revenue Systems

• 7. A high-quality revenue system is

responsive to interstate and international economic competition.

NCSL Principles of High NCSL Principles of High-

• Quality

Quality Revenue Systems Revenue Systems

• 8. It minimizes its involvement in spending

decisions and makes any such involvement explicit.

NCSL Principles of High NCSL Principles of High-

• Quality

Quality Revenue Systems Revenue Systems

• 9. A high-quality revenue system is

accountable to taxpayers.

NCSL Tax Policy NCSL Tax Policy Principles Summary Principles Summary

Distribute burdens equitably Provide timely and appropriate revenues

(adequacy)

Promote economic efficiency and growth

(neutrality)

Achieve workable compliance and

administration

Have accountability and transparency

Current Fiscal Situation and Current Fiscal Situation and Other State Reform Actions Other State Reform Actions

Overview Overview

The state fiscal situation is growing

increasingly dire.

The current revenue situation is nearly

unprecedented, at least in recent decades.

To date, states have reported a total estimated

budget gap of $348.3 billion (FY 2008 through FY 2012).

States are bracing for prolonged fiscal

problems.

U.S. Business Cycle Downturns U.S. Business Cycle Downturns 1929 1929-

• 2009: Duration in Months

2009: Duration in Months

43 13 8 11 10 8 10 11 16 6 16 8 8 19

5 10 15 20 25 30 35 40 45

1929- 1933 1937- 1938 1945 1948- 1949 1953- 1954 1957- 1958 1960- 1961 1969- 1970 1973- 1975 1980- 1980 1981- 1982 1990- 1991 2001 2007-?

Source: National Bureau of Economic Research

State Tax Collections and GDP: State Tax Collections and GDP: Annual Change by Quarter, 1989 Annual Change by Quarter, 1989-

• 2009

2009

• 15%
• 5%

5% 15%

2009 2nd Quarte r 2008 2nd Quarte r 2007 2nd Quarte r 2006 2nd Quarte r 2005 2nd Quarte r 2004 2nd Quarte r 2003 2nd Quarte r 2002 2nd Quarte r 2001 2nd Quarte r 2000 2nd Quarte r 1999 2nd Quarte r 1998 2nd Quarte r 1997 2nd Quarte r 1996 2nd Quarte r 1995 2nd Quarte r 1994 2nd Quarte r 1993 2nd Quarte r 1992 2nd Quarte r 1991 2nd Quarte r 1990 2nd Quarte r 1989 2nd Quarte r

State Tax Collections GDP Recession

Sources: NCSL calculations based on data from the Bureau of the Census, Bureau of Economic Analysis and the National Bureau of Economic Research, 2009.

FY 2010 Revenue Outlook FY 2010 Revenue Outlook

Rhode Island Delaware

Source: NCSL survey of state legislative fiscal offices, April 2009. Stable n = 1 Concerned n = 28 Pessimistic n = 21 Optimistic n = 0 No response n = 1 Puerto Rico

Year Year-

• Over

Over-

• Year Percent Real

Year Percent Real Change in Major Taxes Four Change in Major Taxes Four-

• Quarter Average of Percent Change

Quarter Average of Percent Change

Source: The Nelson A. Rockefeller Institute of Government. State Revenue Report, July 2009 .

FY 2009 Net State Tax Changes by FY 2009 Net State Tax Changes by Type of Tax Type of Tax

100% $24,348.7 Net Change 4.4% $1,066.3 Miscellaneous 0.7% $179.7 Alcoholic Beverage 7.4% $1,807.6 Motor 6.5% $1,589.3 Tobacco 6.4% $1,544.0 Health Care 25.3% $6,163.0 Sales and Use 5.7% $1,387.4 Corporate Income 43.5% $10,601.4 Personal Income Percent of Total Dollars (in millions) Type of Tax

Source: National Conference of State Legislatures, 2009.

Net State Tax Changes by Year of Net State Tax Changes by Year of Enactment Enactment

$8.7 $15.4 $2.6

• $3.3 -$4.0 -$2.6 -$7.1
• $1.5

$9.1 $8.8 $4.1 $3.4 $1.1 $4.1 $3.8 $24.3

• $7.3

$1.8 $1.4

• $9.9

1.6% 1.6% 0.8% 0.6% 0.2% 0.6% 0.5% 3.1%

• 0.3%
• 1.7%

0.5%

• 1.6%
• 0.6%
• 1.0%

0.9% 3.3% 5.4% 0.9% 0.4%

• 2.0%
• $12
• $10
• $8
• $6
• $4
• $2

$0 $2 $4 $6 $8 $10 $12 $14 $16 $18 $20 $22 $24 $26 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

• 10%
• 8%
• 6%
• 4%
• 2%

0% 2% 4% 6% 8% 10%

Billions of dollars Percent of previous year's collections

Source: NCSL survey of legislative fiscal offices, various years

Use of Spending Cuts as Percentage of Use of Spending Cuts as Percentage of Actions To Close FY 2010 Budget Gaps Actions To Close FY 2010 Budget Gaps (preliminary) (preliminary)

Rhode Island Delaware Source: NCSL survey of state legislative fiscal offices, July 2009. Used spending cuts to close FY 2010 budget gaps, n = 24 Puerto Rico 44.7% 43.0% 17.0% 3.9% 40.0% 20.8% 19.1% 19.5% 58.0% 32.0% 23.7% MD - 28.0% NJ- 38.7% 22.7% RI- 48.7% 36.7% VT- 25.0% 26.6% 45.1% 45.5% 100.0% WV-100.0% 48.0% 40.0%

Rhode Island Delaware Source: NCSL survey of state legislative fiscal offices, July 2009. Used ARRA funds to close FY 2010 budget gaps, n = 25 Puerto Rico 96.7% 88.0% 28.6% 26.0% 54.0% 33.0% 3.0% 60.0% 45.5% 43.0% 57.3% 64.3% 68.4% 30.0% 29.0% 30.2% MD - 47.0% NJ- 27.3% 27.1% RI- 40.3% 39.2% VT- 62.0% 61.4% 43.4% 21.0%

Use of ARRA Funds as Percentage of Use of ARRA Funds as Percentage of Actions To Close FY 2010 Budget Gaps Actions To Close FY 2010 Budget Gaps (preliminary) (preliminary)

Federal Outlays for Major Provisions of Federal Outlays for Major Provisions of ARRA Affecting State and Local ARRA Affecting State and Local Governments Governments

($ in billions) ($ in billions)

$11.8 $0.1 $16.1 $2.4 $96.9 $50.6 $12.5 $43.9 $33.9 $28.4 $6.5 $47.4 $0.0 $10.0 $20.0 $30.0 $40.0 $50.0 $60.0 $70.0 $80.0 $90.0 $100.0 2009 2010 2011 2012

Medicaid/State Fiscal Relief (Enhanced FMAP-Plus) State Fiscal Stabilization Fund Total Source: Congressional Budget Office

$49.1 $78.4 $36.3 $26.9 $40.3 $142.6 $58.5 $21.1 $37.2 $29.9 $5.3 $12.8 $72.9 $0.7

$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Fiscal Year Billions of Dollars $79.0 $83.7 $37.0

$113.2

43 states 45 states 42 states 33 states 26 states 1 state 20 states* 44 states* 46 states* 24 states** 9 states***

State Budget Gaps FY 2002 State Budget Gaps FY 2002-

• FY

FY 2012 2012 (projected)

(projected)

No estimate * Includes Puerto Rico

** 31 states and Puerto Rico forecast FY 2011 gaps. The amount shown for FY 2011 indicates the 24 states that provided gap estimates. *** 15 states forecast FY 2012 gaps. The amount shown for the FY 2012 indicates the nine states that provided gap estimates. Source: NCSL survey of legislative fiscal offices, various years

Amount After Budget Adoption Amount Before Budget Adoption Projected Amount (expected to grow)

Current and Past Recession Budget Current and Past Recession Budget Gap Numbers Gap Numbers

Past Recession Current Recession Year Amount (in Billions) Year Amount (in Billions) 2002 $37.2 2008 $12.8 2003 $79.0 2009 $113.2 2004 $83.7 2010 $142.6* 2005 $37.0 2011 $58.5** 2006 $26.9 2012 $21.1** Total $263.8 Total $348.2*

Past Recession: March 2001 to November 2001 (8 months). Current Recession: Began December 2007 to present (19 months and counting) *Preliminary figure (expected to increase) ** Projected figure (expected to increase)

Source: NCSL survey of state legislative fiscal offices, various years.

Fiscal Summary Fiscal Summary

The states are facing a "cliff" once ARRA

funding ends.

State governments will face severe budgetary

problems at least 12-24 months after the US recession ends.

Lawmakers' endurance to resolve massive

budget gaps will be tested in the coming years.

State Update State Update -

• Maryland

Maryland

In 2007, Maryland raised top rate on

income tax, increased sales tax rate and added IT services to close $1.5 billion gap.

In 2008, Maryland repealed the services tax

and further expanded top income bracket taxes.

In 2009, commissioned a business tax

reform panel to report this year.

State Update State Update -

• Utah

Utah

In 2006-07, Utah followed its tax reform

study and dialogue with a reform package that cut the grocery tax and changed income tax from a bracketed system, to a transition two calculation system to a modified flat system by 2008. AGI is starting point.

Recent revenue projections "hanging in

there".

State Update State Update -

• Indiana

Indiana

Indiana in 2008 completed a property tax

and sales tax reform plan that reduced property tax burdens, and increased the sales tax rate by 1%.

Follows with permanent assessment caps,

tax credits redirected to replace property tax revenue, senior protections.

State Update State Update -

• Maine

Maine

Maine 2009 reform package on income and sales

tax followed review.

Flattening of rates offers relief for higher income

• earners. Expansion of sales tax base (rentals,

lodging, amusements). Most of base change affects tourism by design.

Progressivity retained with new household credit

to replace deductions and exemptions.

Seniors protected.

State Update State Update -

• Nevada

Nevada

Gaming decline, foreclosure crisis, and

construction decline hit state hard.

No personal income or corporate income

tax.

This year, lodging and car rental taxes were

increased.

Payroll tax was increased. Slight sales tax

increase 0.35%.

Looking toward 2010 Looking toward 2010

Colorado interim Commission on Long-

Term Fiscal Stability

California Commission on 21st Century

Economy

South Carolina tax review panel

Themes: Changing economy's fiscal impact, the role of government, financing it long term.

Age, Taxes and State Age, Taxes and State Revenue Revenue

September 2009 Ron Snell, National Conference of State Legislatures

Blue Ribbon Tax Structure Commission Vermont General Assembly

Major points: Major points:

Population change will affect state tax

policy

The U.S. population is growing older

because of greater longevity and lower birthrates

One consequence of this will be challenges

for state governments that rely on personal

U.S. Population by Age U.S. Population by Age 1980 to 2050 1980 to 2050

5 10 15 20 25 30 35 40 45 50 55 60 65

1980 1990 2000 2010 2020 2030 2040 2050

Year Percent of Total U.S. Population 0-19 20-65 65+

Source: Bureau of the Census, Statistical Abstract, 2009, Tables 7 and 10. http://www.census.gov/compendia/statab/cats/population.html

Life Expectancy at Birth Life Expectancy at Birth 1900 1900-

• 2005

2005

35 40 45 50 55 60 65 70 75 80 85

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2005

Year Age

Male Female

Source: CDC; http://www.cdc.gov/nchs/data/nvsr/nvsr56/nvsr56_09.pdf Data for 2005: http://www.cdc.gov/nchs/data/hus/hus08.pdf#026

Life Expectancy at 65 Years of Life Expectancy at 65 Years of Age Age 1900 1900-

• 2005

2005

2 4 6 8 10 12 14 16 18 20 22

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2005

Year Life expectancy in years

Male Female

Source: CDC; http://www.cdc.gov/nchs/data/hus/hus08.pdf#026

U.S. Birthrate per 1000 Population U.S. Birthrate per 1000 Population 1910 1910-

• 2007

2007

12 14 16 18 20 22 24 26 28 30 32 34

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2007

Year

Birth Rate per 1000 in Population

Source: US National Center for Health Statistics, CMMS 2007 Data: same, http://www.cdc.gov/nchs/data/nvsr/nvsr57/nvsr57_12.pdf

16% to 19.9%, n = 1 Less than 11.9%, n = 14 12.0% to 15.9%, n = 36 More than 20%, n = 0 Rhode Island Delaware District of Columbia

Percent of State Population Percent of State Population 65 and Over: 2000 65 and Over: 2000

Source: U.S. Census Bureau, Statistical Abstract, 2009 http://www.census.gov/compendia/statab/tables/09s0016.xls

16% to 19.9%, n = 13 Less than 11.9%, n = 4 12.0% to 15.9%, n = 34 More than 20%, n = 0 Rhode Island Delaware District of Columbia

Percent of State Population Percent of State Population 65 and Over 65 and Over: : 2015 2015

Source: U.S. Census Bureau, Population Projections http://www.census.gov/compendia/statab/tables/09s0017.xls

16% to 19.9%, n = 17 Less than 11.9%, n = 0 12.0% to 15.9%, n = 5 More than 20%, n = 29 Rhode Island Delaware District of Columbia

Percent of Population Aged Percent of Population Aged 65 and Over: 2030 65 and Over: 2030

Source: U.S. Census Bureau, Population Projections http://www.census.gov/population/projections/PressTab3.xl

Population and State Revenues Population and State Revenues

How does the fact of an aging population

affect state revenues?

Both of the major sources of state tax

revenue -- the personal income tax and the general sales tax -- will be unpredictably affected by changing demographics

Spending Patterns for People over Spending Patterns for People over 65 Affect Sales Taxes 65 Affect Sales Taxes

People over 65 spend less than younger

people on

Housing and utilities Cars, travel and restaurant meals Clothing, furniture, appliances, cosmetics,

entertainment

About the same or a little less on

Household repairs and maintenance Groceries, books, gifts

Incomes Fall as People Age, Incomes Fall as People Age, Affecting Income Tax Liability Affecting Income Tax Liability

Median Incomes In 2007 $28,305 Households whose head was more than 65 years

• ld:

$57,386 Households whose head was 55 to 65 years old:

Federal and State Government Federal and State Government Policy Response Policy Response

Federal Policies:

Federal government supports major programs for the elderly --

Social Security, Medicare, Medicaid.

Income tax policy for the elderly is similar to that for the rest of the

population

State Policies:

The state share of Medicaid is the principal state income support

program.

Increasingly favorable tax policy for the elderly.

Federal Income Tax Policy Federal Income Tax Policy

Federal income tax policy provides a limited additional

benefit for people over 65.

Additional standard deduction of $1,400 ($1,100 for a married

taxpayer) over 65 --about 20% more than for those under 65.

Up to 85% of Social Security benefits are taxed and the percentage

will grow over time.

State Income Tax Policy State Income Tax Policy Contrasts with Federal Contrasts with Federal

• Social Security Benefits:

Nine states have no income tax. 27 states fully exempt Social Security and Iowa will do so by

2014.

Remainder have a benefit equal to or greater than the federal

exemption.

State Income Tax Policy State Income Tax Policy Contrasts with Federal Contrasts with Federal

Some states provide additional age-based tax exemptions

for any kind of income, usually with an income test -- the exemption is phased out at higher income levels.

Most states with an income tax provide additional

exemptions for public pension income (state, local and federal), and increasingly for private-sector pensions and individual retirement accounts.

Aged Aged-

• based Exemptions

based Exemptions--

• Examples

Examples

New Mexico

$10,000 exemption for taxpayers aged 62 and older ($16,000 for

those filing jointly) phased out at higher incomes, ending at $51,000 for joint filers, $25,500 for single.

Virginia

$12,000 exemption for taxpayers aged 65 and older, phased out at

higher incomes, ending at $50,000 (single) or $75,000 (joint).

West Virginia

$8,000 exemption for each taxpayer aged 65 and older.

State Exemptions for Pension State Exemptions for Pension Income Income

Ten states fully exempt federal civilian and military

pensions and their own state and local pensions from income tax.

Six states treat them like any other income (including

Connecticut, Rhode Island and Vermont).

Other states' pensions exemptions range from $2,000 to

more than $40,000 (single).

Trends in State Taxation of Trends in State Taxation of Retirement Income Retirement Income

Add or increase an exemption:

Georgia exemption increased from $25,000 in 2006 to $35,000 in

2008.

Iowa adopted a $24,000 exemption for 2007 and 2008, to grow to

$32,000.

Expand a state/local pension exemption to other retirement

income—IRA's, 401a's, 457b's and so on.

As much as $84,000 in Michigan

What's the Rationale for Such What's the Rationale for Such Exclusions? Exclusions?

Years ago, state exclusion of public pensions from income

taxes was a way to supplement low pensions.

Increased exclusions reflect assumption that the elderly

have low incomes.

Desire to prevent elderly from leaving a state, or to attract

them to a state.

What's the Rationale for Such What's the Rationale for Such Exclusions? Exclusions?

First rationale is less applicable.

State exclusions have been broadened to far more people than

retired public employees.

Retirement benefits are increasingly comparable to, or better than,

those provided by the private sector.

What's the Rationale for Such What's the Rationale for Such Exclusions? Exclusions?

Poverty among the elderly has declined sharply.

From 35% in 1959 to 9.7% in 2007 for those 65 and older; For working-age Americans (18 to 64) the decline was from 17%

to 10.9%;

For those under 18, from 27% to 18% in poverty.

Census Bureau, American Community Survey, CB08-129, August 26, 2008

States Compete for Retired States Compete for Retired People People

Attracting the retired population is a means of economic

development.

Many have resources. They make few demands on state services other than Medicaid. Florida contends that every 2.5 adult in-migrants yield the creation

• f one job.

Competing with Tax Policy Competing with Tax Policy

Florida's neighbors compete to reduce taxes on pensions:

Increasing exemptions in Georgia; Repealed in Alabama and Mississippi

Northern states reduce taxes to retain retired people.

Not clear that this tactic affects decisions about staying home or

going somewhere warm.

Does Tax Policy Affect Does Tax Policy Affect Choices? Choices?

2006 study of Wisconsin (a high-tax state) suggests only

the wealthiest are affected and that even on them the effect is uncertain.

Wisconsin loses people over 65 to warmer states but also it attracts

people over 65 from neighboring states with lower taxes on the elderly.

Maine, another high-tax state, according to one study, has

a net gain of people over 65 while New Hampshire, with no income tax, has a net loss of people over 65.

So, some evidence is contrary to what you'd expect.

Tentative Conclusions Tentative Conclusions

An aging population will adversely affect tax collections in

states that rely on sales and income taxes.

Tax breaks targeted to the elderly have an uncertain effect

• n migration.

They can have an adverse effect on state revenues and

equity.