Download - State Tax Revenue Performance over the Business Cycle• ‐1.153 (0.081) pp growth in state and local property tax revenues • 1.727 (1.339) pp growth in state and local sales tax

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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


•  Pre‐19981ppChangeinCoincidentIndicator(i.e.jumpsfrom3%to4%)•  0.756ppgrowthintotalstateandlocalgovernmentrevenues•  1.095ppgrowthintotalstategovernmentrevenues•  0.276ppgrowthintotallocalgovernmentrevenues•  0.081ppgrowthinstateandlocalpropertytaxrevenues•  1.339ppgrowthinstateandlocalsalestaxrevenues•  0.834ppgrowthinstateandlocalindividualincometaxrevenues•  3.340ppgrowthinstateandlocalcorporateincometaxrevenues

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•  ThePre‐1998landscape–  Revenuesareprocyclicalonthestatelevelalthoughnotsomuchsoonthelocallevel.•  PropertytaxrevenuespreCyflat

–  Thismakessense

–  Corporateincometaxeshavethestrongestcyclicalresponsiveness(byalongshot)

–  SalestaxisslightlymoreresponsivethantheincometaxtobusinesscyclecondiEons(althoughusingstaEsEcaltests,wecannotrejectthattheyarethesame)


•  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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•  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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•  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


•  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