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Dr. Matthew Knittel: Implications of Economic Demographic Trends for State and Municipal Tax Policy

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Dr. Matthew Knittel: Implications of Economic Demographic Trends for State and Municipal Tax Policy

  1. 1. Matthew Knittel, Director Independent Fiscal Office Implications of Economic and Demographic Trends for State and Municipal Tax Policy Urban Economic Policy Conference April 27, 2016
  2. 2. Office Began Operations September 2011. • Similar to the Congressional Budget Office. • Non-partisan analysis. No governing board. Our Primary Duties: • General Fund Revenue Estimate: May 1. • Five-Year Economic and Budget Outlook: Nov. 15. • Special studies at request of General Assembly. Office Makes NO Policy Recommendations. 27.Apr.2016 The Independent Fiscal Office 2
  3. 3. 1. Demographics – A Rapidly Aging Population. • Very large wave of Boomers turn age 65 next decade. • Affects everything: labor force, spending patterns… 2. Clear Winners and Losers Across Industries. • Will targeted industries contract in future? What is the cause? • Will there be sufficient demand over the next decade? 3. Casual and Mobile Workforce. • Increase in independent contractors and self-employed. • Smaller, non-corporate entities driving most growth. 4. Don’t Forget Interaction with Other Taxes. • Specific case: federal income tax. Relevant Facts & Trends for Tax Policy 27.Apr.2016 3
  4. 4. Tax Base 2004-2015 Avg. Ann. Growth Non-Corporate Business Profits 5.5% Personal Consumption - Healthcare 4.5% Personal Consumption - All Services 3.8% Personal Consumption - All 3.3% Pennsylvania Economy (Nominal GDP) 3.2% Wages-Salaries 3.1% Personal Consumption - All Goods 2.2% PA Corporate Profits (apportioned) 2.2% Source: U.S. Bureau of Economic Analysis (consumption, wages, GDP); PA personal income tax return (non- corporate business profits, includes losses); annual CAFRs (corporate profits, taxable income only). Major Tax Bases - Pennsylvania 27.Apr.2016 4
  5. 5. # Residents (000s) Gain / Loss (000s) Avg. Ann. Growth Age 2005 2015 2025 2005-15 2015-25 2005-15 2015-25 0-19 3,226 3,062 3,048 -164 -14 -0.5% 0.0% 20-39 3,122 3,238 3,378 116 139 0.4% 0.4% 40-59 3,622 3,545 3,107 -77 -438 -0.2% -1.3% 60-79 1,900 2,338 3,001 439 663 2.1% 2.5% 80+ 580 619 705 39 86 0.6% 1.3% Total 12,450 12,803 13,239 353 436 0.3% 0.3% Note: thousands of residents. Source: Pennsylvania State Data Center projections for Independent Fiscal Office, January 2016. Pennsylvania: 2005 - 2015 - 2025 27.Apr.2016 5
  6. 6. # Residents (000s) Gain / Loss (000s) Avg. Ann. Growth Age 2004 2014 2024 2004-14 2014-24 2004-14 2014-24 0-19 417.9 393.5 418.7 -24.4 25.2 -0.6% 0.6% 20-39 433.6 511.8 473.9 78.3 -38.0 1.7% -0.8% 40-59 362.8 378.4 417.4 15.6 39.0 0.4% 1.0% 60-79 193.2 222.1 285.4 28.9 63.3 1.4% 2.5% 80+ 62.7 54.4 63.1 -8.3 8.7 -1.4% 1.5% Total 1,470.2 1,560.3 1,658.5 90.1 98.2 0.6% 0.6% Note: thousands of residents. Source: Pennsylvania State Data Center. Philadelphia: 2004 - 2014 - 2024 27.Apr.2016 6
  7. 7. PA Population Distribution - 2015 thousands of residents 0 200 400 600 800 1,000 Gen Y or Millennials 26.0% Gen X or Baby Bust 24.7% Baby Boomers 26.4% Silent Generation 10.6% 0.9% Gen Z 11.4% 27.Apr.2016 7 entering retirement
  8. 8. Pennsylvania (000s) Philadelphia (000s) Sector Number Percent Number Percent Manufacturing -144.0 -20.2% -12.7 -37.6% Financial -22.4 -6.6% -10.1 -20.2% Prof. Services 164.7 27.0% 2.5 3.0% Healthcare-Social 190.1 24.6% 30.2 25.7% Leisure-Hospitality 76.0 16.1% 16.6 32.0% Trade-Transport 16.7 1.5% -3.4 -3.6% All Government -46.8 -6.2% -14.6 -14.1% All Other -9.8 -1.5% -5.2 -8.3% Total 224.5 4.0% 3.3 0.5% Source: U.S. Bureau of Labor Statistics. Professional Services includes Management and Administrative sectors. Job Gain / Loss: 2003 to 2015 27.Apr.2016 8
  9. 9. Pennsylvania (000s) Philadelphia (000s) Sector Number Percent Number Percent Manufacturing -5.9 -1.0% -4.9 -18.7% Financial -2.3 -0.7% -3.9 -8.9% Prof. Services 100.4 14.9% 9.3 12.4% Healthcare-Social 72.5 8.2% 13.8 10.3% Leisure-Hospitality 52.9 10.7% 11.7 20.7% Trade-Transport 45.1 4.2% 7.2 8.7% All Government -63.4 -8.3% -5.8 -6.1% All Other 21.6 3.6% 1.1 2.0% Total 220.8 3.9% 28.6 4.6% Source: U.S. Bureau of Labor Statistics. Professional Services includes Management and Administrative sectors. Job Gain / Loss: 2009 to 2015 27.Apr.2016 9
  10. 10. 27.Apr.2016 Source: U.S. Bureau of Economic Analysis. Self-employed includes individuals who file a federal Schedule C income tax return and general partners as reported on Form 1065. Self-employed figures and trends are likely overstated due to individuals filing more than one Schedule C or engaging in minimal business activity. Data from the Current Population Survey suggest that the self-employed comprised roughly 8%-9% of total PA employment in 2015 (includes self-employed whose businesses are incorporated). For more information, see “Philadelphia’s Independent Economy: Implications for Office Space,” Knight Foundation (September 2015). More Mobile Labor Force 0.8 1.0 1.2 1.4 1.6 1.8 1998 2002 2006 2010 2014 US Self-Employed +61% Cumulative Growth of Employed and Self-Employed 1998 = 1.0 10 PA Self-Employed +47% US Payroll Jobs +9.8% PA Payroll Jobs +5.6%
  11. 11.  Federal Tax Code Subsidizes State and Local Taxes. • Assume federal marginal tax rate (MTR) = 15%. • Then a $1,000 deduction = $150 federal tax savings.  Consider All Pennsylvania State and Local Income Taxes. • Roughly 2/3 of total income tax claimed as a tax deduction. • Federal AGI = $25,000; MTR = 15%; 10% itemize (2% offset). • Federal AGI = $75,000; MTR = 25%; 50% itemize (13% offset). • Roughly 15-18% of income tax offset via federal savings.  Consider a Local Property Tax on Corporations. • All claim the deduction on the federal income tax return. • For vast majority of income, the MTR is 35%. • Roughly one-third of tax offset. More if PA CNIT included. Deductibility Matters! 27.Apr.2016 11
  12. 12.  Tax Policy Should Consider Broad Trends. • Anticipate and work with those trends. • What will national, state and local economies look like a decade from now?  Traditional Taxation Becoming Less Effective. • Due to demographics and technology / innovation. • More mobility: workers, purchases and profits. • Taxation of business entities more difficult.  Consider Interaction with Other Taxes. • We care about the effective tax rate, not the statutory rate. • What is the combined tax rate? What can be deducted? Wrap Up 27.Apr.2016 12

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