The Changing Revenue Landscape - comm.ncsl.org · Growing reliance on sin taxes (gambling,...

The Changing Revenue LandscapeNCSL Legislative Summit, 2018

July 30, 2018

Lucy Dadayan

State Revenue Trends and VolatilityTCJA, South Dakota vs. Wayfair, Sports Betting

July 30, 2018

Lucy Dadayan

Overview

▪ State fiscal challenges

▪ Slow economic recovery

▪ Demographic changes

▪ Slower tax revenue recovery

▪ Growing reliance on non-traditional taxes

▪ Growing revenue volatility

WWW.TAXPOLICYCENTER.ORG 3

State fiscal challenges

▪ 10+ years later still feeling the pain of the Great Recession

▪ Variables that drive revenue hit harder than broader economy, harder than before

▪ Revenue recovery is very slow

▪ Employment and wage recovery is slow

▪ Major cuts in state-local government employment

▪ Longer-term spending pressures loom

▪ Growing pension liabilities

▪ Growing Medicaid costs due to higher recession-related enrollment

▪ Growing uncertainty due to TCJA and other federal policies


Slow economic recovery

▪ Employment trends

▪ Slow recovery for private sector employment

▪ Deep cuts in state-local gov’t jobs

▪ Personal income trends

▪ Slower growth in wages & salaries then in prior recoveries

▪ Retail sales

▪ Weak and slow recovery

▪ Goods and services

▪ Slow recovery in services and non-durable goods

▪ High volatility in durable goods

▪ Steep declines in energy goods and services, but currently rebounding


Employment trends since the Great Recession: Dire picture for government employment


Dec-07 Jun-18 Peak empJune 2018

vs Dec

June 2018

vs Peak

Total nonfarm 138,411 148,912 138,419 Jan-08 7.6 7.6

Total private 116,035 126,571 116,035 Jan-08 9.1 9.1

State and local government 19,620 19,552 19,801 Aug-08 (0.3) (1.3)

State government 5,139 5,100 5,214 Aug-08 (0.8) (2.2)

State gov education 2,327 2,430 2,383 Aug-08 4.5 2.0

State gov, non-education 2,812 2,669 2,830 Aug-08 (5.1) (5.7)

Local government 14,481 14,452 14,610 Jul-08 (0.2) (1.1)

Local gov education 8,055 7,956 8,119 Jul-08 (1.2) (2.0)

Local gov, non-education 6,426 6,496 6,507 Dec-08 1.1 (0.2)

Percent change

Source: U.S. Bureau of Labor Statistics, Current Employment Statistics (seasonally adjusted).

Employment Sector

Employment (in 1,000s)Recession

peak date

Private sector employment recovery much slower compared to past recoveries


-9%

-6%

-3%

0%

3%

6%

9%

12%

15%

18%

21%

24%

0 1 2 3 4 5 6 7 8 9 10

Cu

mu

lati

ve p

erc

en

t ch

ange

sin

ce s

tart

of

rece

ssio

n

# of years since start of recession

Private sector employment in selected recessions

1973-Nov 1980-Jan 1990-July 2001-March 2007-Dec

Source: U.S. Bureau of Labor Statistics (CES, seasonally adjusted). Notes: Data are shown only until the start of the next recession; 1980 & 1981 recessions treated as single recession.

Deep cuts in state-local government jobs; Deeper than any other recession in the last 50 years


-6%

-3%

0%

3%

6%

9%

12%

15%

18%

21%

0 1 2 3 4 5 6 7 8 9 10

Cu

mu

lati

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erc

en

t ch

ange

sin

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tart

of

rece

ssio

n


State and local government employment in selected recessions

1973-Nov 1980-Jan 1990-July 2001-March 2007-Dec

Source: U.S. Bureau of Labor Statistics (CES, seasonally adjusted). Notes: Data are shown only until the start of the next recession; 1980 & 1981 recessions treated as single recession.

State-local government employment still declining, in contrast to the rebound in private employment


-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Cu

mu

lati

ve p

erc

en

t c

han

ge s

ince

sta

rt o

f re

cess

ion

Employment in selected industries in the current recession

Private State gov. Local gov. State-local gov.

Source: U.S. Bureau of Labor Statistics (CES, seasonally adjusted).

Growth in salaries & wages slower compared to past recoveries


-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0 1 2 3 4 5 6 7 8 9 10

Cu

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ch

ange

sin

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tart

of

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n


Salaries & wages for U.S. since start of recessionAdjusted for inflation

1973 1980 1990 2001 2007

Source: Author's analysis of data from Bureau of Economic Analysis (NIPA Table 2.1). Notes: Data are shown only until the start of the next recession; 1980 & 1981 recessions treated as single recession.

Personal savings as share of disposable personal income


0%

2%

4%

6%

8%

10%

12%

14%

16%

Personal savings as share of disposable personal income

Sources: Author's analysis of data from Bureau of Economic Analysis (NIPA Table 2.1).

Real retail sales are weak compared to historical levels


-15%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

15%

18%

21%

24%

27%

30%

33%

0 1 2 3 4 5 6 7 8 9 10

Cu

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ch

ange

sin

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tart

of

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n


Real retail sales in selected recessions

1973 1980 1990 2001 2007

Sources: Cleveland Federal Reserve Bank (pre-1990 retail sales), U.S. Census Bureau (1990+), Bureau of Labor Statistics (CPI).Notes: Data are shown only until the start of the next recession; 1980 and 1982 recessions are treated as single recession.

Consumption of durable & non-durable goods was hit hard


-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Year-over-year percent change in personal consumptionFour-quarter moving average, adjusted for inflation

Durable Goods

Nondurable Goods

Services

Energy goods and services

Source: U.S. Bureau of Economic Analysis, National Income and Product Accounts, Table 2.3.5.

Ageing population: Growth in elderly population as share of total population


12%

14%

16%

18%

20%

22%

24%

26%

28%

Age 0-18 and age 65+ as share of total population

Age 0-18 Age 65+

Ageing population forecasts


12%

14%

16%

18%

20%

22%

24%

26%

28%

Age 0-18 and age 65+ as share of total population

Age 0-18 Age 65+

Problems associated with aging population:Lower income and lower income tax for older individuals

▪ Total income falls for older individuals

▪ Retirement income usually less than pre-retirement earnings

▪ Aggregate retirement income is growing rapidly, but total income of retirees is lower than before retirement

▪ Tax breaks! For example:

▪ Exclusion of Social Security income, public pensions, private pensions, IRA/401(k) withdrawals

▪ Additional personal exemptions and credits for the elderly

▪ 36 of 41 states with broad-based income tax provide exclusion for some retirement income (beyond Social Security), or elderly tax credit

▪ NOT: CA, NE, ND, RI, VT


State taxes & the economy: States taxes are far more volatile


-18%

-15%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

15%

18%

Year-Over-Year Change in Inflation-Adjusted State Government Taxes and Real GDPPercent Change of Two-Quarter Moving Averages

Real GDPReal state tax revenue

Sources: U.S. Census Bureau (tax revenue) and Bureau of Economic Analysis (GDP).Notes: (1) Percentage change of 2-quarter moving averages; (2) No legislative adjustments; (3) Recession periods are shaded.

Slower tax revenue recovery

▪ 10+ years after recession start, state-local taxes only 13.4% above prior peak

▪ State government tax recovery is weak and slow

▪ Sales taxes: above pre-recession level, but stagnant

▪ Personal income taxes: stronger recovery, but quite volatile

▪ Corporate income taxes: NO recovery

▪ Local property taxes: continued but soft growth

▪ Oil & coal states hit hard

▪ Declines in taxes & employment

▪ Growing reliance on sin taxes (gambling, marijuana, etc.)

▪ Gambling revenues: declines & cannibalization


State & local government tax revenues:Only 13.4% above prior peak


-10%

0%

10%

20%

30%

40%

50%

60%

0 1 2 3 4 5 6 7 8 9 10

Cu

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sin

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Percent change in state & local government major tax revenue since start of recession(PIT + CIT + Sales + Property) Four-quarter moving average, adjusted for inflation

1973 1980 1990 2001 2007

Sources: U.S. Census Bureau (taxes) and Bureau of Economic Analysis (GDP).Notes: Data are shown only until the start of the next recession; 1980 & 1981 recessions are treated as single recession.

Volatile income tax; weak sales tax; stagnant “other” taxes; corporate incomes taxes still below prior peak


-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Cu

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ch

ange

sin

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tart

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n

Major tax revenues since the start of the 2007 recessionFour-quarter moving average, adjusted for inflation

Sales tax (state) PIT (state) CIT (state) Other (state) Property (local)

Sources: U.S. Census Bureau (taxes) and Bureau of Economic Analysis (GDP).Notes: (1) 4-quarter moving average of inflation-adjusted tax revenue; (2) No adjustments for legislative changes.

State taxes, adjusted for inflation & population growth, still below pre-recession in 22 states


Percent change<-10%-10% to 0%0% to 10%> 10%

Percent change in 4-quarter moving average of state tax revenues, 2018q1 vs 2007q4Adjusted for inflation & population change (U.S. average = 2.9%; U.S. median = 2.5%)

MI

VT

FL

OH

WV

AZ

CA

WI

NV

HI

PA

TN

MN

AR

IN

MO

ME

IA

MS

IL

VA

AK

GA

NM

OR

NY

KY

AL

NH

KS

ND

OK

SC

SD

NE

NC

ID

CO

MT

WA

TX LA

UT

WY

RI

MA

MD

NJ

CT

DE

State government sales taxes: Recovery is extremely weak


42.5%

16.1%

8.1%

-20%

-10%

0%

10%

20%

30%

40%

50%

0 1 2 3 4 5 6 7 8 9 10

Cu

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ch

ange

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Years since start of recession

State sales tax revenue since the start of the recessionFour-quarter moving average, adjusted for inflation

1990 2001 2007

Sources: U.S. Census Bureau (taxes) and Bureau of Economic Analysis (GDP).Notes: 4-quarter moving average of inflation-adjusted tax revenue. Data are shown only until the start of the next recession.

Sales tax base and collections: Shift to services


0%

10%

20%

30%

40%

50%

60%

70%

Goods and services as percentage of personal consumption expenditures

Durable goods

Nondurable goods

Services

Goods

Source: U.S. Bureau of Economic Analysis, National Income and Product Accounts, Table 2.3.5.

State government personal income taxes:Stronger recovery, but volatile


69.9%

12.5%

20.4%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0 1 2 3 4 5 6 7 8 9 10

Cu

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State personal income tax revenue since the start of the recessionFour-quarter moving average, adjusted for inflation

1990 2001 2007


April-June personal income tax collections are very volatile


-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2 2015 Q2 2016 Q2 2017 Q2 2018 Q2

Year-Over-Year Nominal Percentage Change for April-June Quarters

Withholding Estimated payments Final Payments Total PIT

Source: Individual state data, analysis by the author.

Preliminary figures

(April & May)

State personal income taxes:Shortfalls last April; windfalls (?) this April


6%

-1%-3%

-10%

-7%-8%

-7%

5%

-4%

3%

10% 10% 11% 12% 13%15%

42%

14%

-15%

-5%

5%

15%

25%

35%

45%

RockyMountain

FarWest

Plains NewEngland

South-west

Mid-Atlantic

South-east

GreatLakes

UnitedStates

Year-Over-Year Nominal Percent Change; April 2017 vs. April 2018

Apr-17 Apr-18

Source: Individual state data, analysis by the author.

Income shifting and capital gains

▪ In concept, taxpayers can shift many kinds of income, but…:

▪ “Regular” wages – not so easy - work less now, more later

▪ Bonus wages – easier – firms could shift out of q4 into q1 or vice versa

▪ IRA distributions – maybe not so hard

▪ Dividends - boards of closely held firms could delay payouts

▪ Capital gains - easiest - defer stock sales (rearrange assets); concentrated – 70% of cap gains claimed by just 0.7% of taxpayers


Capital gains: Big contributor to income tax volatility


1986

2000 2007

2012

0%

1%

2%

3%

4%

5%

6%

7%

8%Capital Gains as Percentage of GDP

Source: (1) Capital gains for 1960-1994 are from US Treasury and for 1995-2016 are from CBO at www.cbo.gov/about/products/budget-economic-data#7. (2) GDP from Bureau of Economic Analysis.

Capital gains are loosely related to the stock market


-60%

-40%

-20%

0%

20%

40%

60%

80%

Per

cen

t ch

ange

vs.

yea

r ag

o

Percent Change in Capital Gains Realizations vs S&P 500, by Tax Year

Capital Gains S&P 500

Sources: Congressional Budget Office, https://www.cbo.gov/about/products/budget-economic-data#7 and S&P500 from Yahoo Finance, http://finance.yahoo.com/q/hp?s=^GSPC.

2012: Fiscal cliff acceleration of capital

gains

2013: Capital gains trough after acceleration

2014: Rebound from trough

State government corporate income taxes:There is NO recovery


28.4%

32.8%

-22.4%

-30%

-20%

-10%

0%

10%

20%

30%

40%

0 1 2 3 4 5 6 7 8 9 10

Cu

mu

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ch

ange

sin

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tart

of

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n


State corporate income tax revenue since the start of the recessionFour-quarter moving average, adjusted for inflation

1990 2001 2007


Local government property taxes:Continued growth


29.7%

34.9%

13.5%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0 1 2 3 4 5 6 7 8 9 10

Cu

mu

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ch

ange

sin

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tart

of

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ssio

n


Local government property tax revenue since the start of the recessionFour-quarter moving average, adjusted for inflation

1990 2001 2007


Continued Growth in Housing Prices and in Local Property Taxes


-9%

-6%

-3%

0%

3%

6%

9%

12%

Year-Over-Year Change in Housing Prices vs. Local Property Taxes Percent Change of Four-Quarter Moving Averages

Recession

Housing Price Index

Local Property Taxes

Sources: U.S. Census Bureau (tax revenue) and Federal Housing Finance Agency, House Price Indexes data.

Oil and trouble


Oil & coal states: State tax revenues rebounding after 7 consecutive quarterly declines


5.6% 5.5%

7.6%

4.9%3.8% 4.2%

-0.1%

2.6%1.9%

3.6% 3.2%2.4%

7.3%6.3%

4.8%3.5%

-2.9%

-6.1%

-12.7%

-11.3%-10.4%

-7.4%

-3.1%

4.1%

6.0%

4.5%

13.5%12.9%

-15%

-10%

-5%

0%

5%

10%

15%

Year-Over-Year Percent Change in State Taxes

Non-oil states Oil states

Source: Author's analysis of Census Bureau data.

Oil & coal states: Despite recovery, state taxes still below 2015 q1 levels


-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

15%

Cumulative percent change in state total tax revenues

Oil states Non-oil states

Oil & coal states: Employment is also still below peak levels


-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Cumulative Percent Change in Employment

Non-oil median state

Oil median state

Source: Author's analysis of Bureau of Labor Statistics data.

Gambling fever


Gambling Landscape Since Great Recession

▪ 10+ states legalized lottery, casino, and racino operations

▪ Raise revenue in response to poor state fiscal conditions

▪ Stimulate economic development

▪ Counteract interstate competition for gambling revenue

▪ Attract tourism & keep gambling residents & tax dollars in-state


More Gambling, Not Much More Revenues Since The Great Recession


$27.7$26.7 $27.2 $26.7

$28.0$28.6 $28.2 $28.1

$18.2$17.5 $17.9 $17.4

$18.4 $18.6 $18.4 $18.2

$5.4 $4.9 $4.9 $5.0 $5.2 $5.5 $5.4 $5.4

$2.8 $2.9 $3.0 $3.1 $3.2 $3.2 $3.2 $3.3

$1.1 $1.1 $1.3 $1.1 $1.1 $1.1 $1.1 $1.0

$0

$5

$10

$15

$20

$25

$30

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

Bill

ion

s

Real State & Local Government Gambling Revenue, FYs 2008-2015

Sub-total Lottery Casino Racino Pari-mutuel Indian casinos (7 states)

Wide Regional Disparity in Lottery Revenue Growth Rates


-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

Co

mp

ou

nd

An

nu

al G

row

th R

ate,

FY

20

08

-20

15

Compound Annual Growth Rates for Real Lottery Revenues, FY 2008-2015

Sources: Author's analysis of lottery revenue from state lottery financial reports.

Wide Regional Disparity in Tax and Fee Revenues from Casinos and Racinos


-20%

-10%

0%

10%

20%

30%

40%

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015Cu

mu

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nt

chan

ge

Cumulative Percent Change in Inflation-Adjusted Casino and Racino Taxes and Fees, By Region

Northeast Midwest South West

Steep Declines in Casino and Racino Tax & Fee Revenues in Early Adopter States


-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

Cu

mu

lati

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eal p

erce

nt

chan

ge

Cumulative Percent Change in Inflation Adjusted Casino and Racino Taxes and Fees, All States vs. Late Adopter States

All States Early adopter states

Sources: Author's analysis of data retrieved from state gaming regulatory agencies.Notes: The following three states - Kansas, Maryland and Ohio, are identified as late adopter states since all three states started casino/racino operations after FY 2008.

Lessons from gambling revenues: Short-term relief, long-term disappointment

▪ Gambling expansion brings in more revenue, until a saturation point is reached

▪ Stiff inter-state competition for the same pool of customers

▪ Significant increases in tax and fee revenues in newly adopted casino and racino states

▪ Significant declines in tax and fee revenues in the older casino and racino states

▪ Some new revenue represents a shift, rather than net growth

▪ Future growth in gambling revenue will not keep pace with tax revenue, or spending

▪ If gambling revenue is intended to support part of the overall budget, gaps may emerge

in future years

▪ Gambling is a slow-growing revenue source & not a solution in the never-ending quest

to balance the budget


Recap: Slow revenue recovery & growing revenue volatility

▪ The revenue recovery is weak & prolonged compared to previous recessions

▪ Differing fiscal, tax & economic structures play important roles

▪ State tax revenues increasingly more reliant on economically sensitive taxes

▪ Income taxes rely more heavily on volatile income – capital gains, bonuses

▪ Sales tax bases are eroding (taxation of goods & services sold over the Internet)

▪ Many services hard to tax: politically, legally, administratively

▪ Higher reliance on more regressive taxes

▪ Demographic changes and taxes

▪ Single-year cash balance is the goal (gimmicks, one-time solutions)

▪ No serious multi-year financial planning


Thank you!

Lucy Dadayan

[email protected] or [email protected]

With many thanks to my former colleague, Donald Boyd

July 30, 2018


mailto:[email protected]

mailto:[email protected]

The Changing Revenue Landscape - comm.ncsl.org · Growing reliance on sin taxes (gambling,...

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