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PROPERTY, INCOME, AND SALES TAX
PERFORMANCE THROUGH ECONOMIC
FLUCTUATIONS
John E. Anderson
University of Nebraska-Lincoln
...
Riding
the state
and local
revenue
roller
coaster
New Estimates of State and Local Tax Resilience
• Estimate relationship between changes in state GDP and changes in state
...
Two Measures of Resilience
• Buoyance measures the long-run relationship between changes in state GDP
and changes in tax r...
Tax Buoyancy and Error Correction Estimates, Overall
Estimates for the 50 States and D.C.
Property Tax Income Tax Sales Ta...
Long-Run Tax Buoyancy—New England States
Property Tax Income Tax Sales Tax
Connecticut 0.82*** 4.63*** 0.52***
Maine 0.53 ...
Long-Run Tax Buoyancy—New England States
• Property tax:
• CT, NH and VT have property tax buoyancy in the range of 0.8 to...
Error Correction Terms—New England States
Property Tax Income Tax Sales Tax
Connecticut -0.11 -0.37*** -0.76***
Maine -1.1...
Error Correction Terms—New England States
• Property tax:
• Error correction terms are strongest for property tax systems
...
Policy Implications
• Volatility through the business cycle depends on the state and local portfolio of
revenue sources
• ...
State and Local Tax Revenue Shares (%)
New England States, 2013
Property Tax (%) Income Tax (%) Sales Tax (%)
Connecticut ...
Conclusions
• State revenue source portfolios have a direct impact on the buoyancy and
resilience of state tax systems
• E...
Optional Middle Atlantic slides for comparison
State and Local Tax Revenue Shares
Middle Atlantic States, 2013
Property Tax Income Tax Sales Tax
New Jersey 52 24 24
New ...
Long-Run Tax Buoyancy—Middle Atlantic States
Property Tax Income Tax Sales Tax
New Jersey -0.51 1.57 0.73***
New York 1.13...
Error Correction Terms—Middle Atlantic States
Property Tax Income Tax Sales Tax
New Jersey -1.10*** -0.19*** -0.80***
New ...
Property, Income and Sales Tax Performance Through Economic Fluctuations
Property, Income and Sales Tax Performance Through Economic Fluctuations
Property, Income and Sales Tax Performance Through Economic Fluctuations
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Property, Income and Sales Tax Performance Through Economic Fluctuations

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John E. Anderson of the University of Nebraska, Lincoln and the Lincoln Institute of Land Policy discusses the volatility and resilience of property, sales and income tax revenues, focusing on how they relate to changes in GDP.

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Property, Income and Sales Tax Performance Through Economic Fluctuations

  1. 1. PROPERTY, INCOME, AND SALES TAX PERFORMANCE THROUGH ECONOMIC FLUCTUATIONS John E. Anderson University of Nebraska-Lincoln and Lincoln Institute of Land Policy
  2. 2. Riding the state and local revenue roller coaster
  3. 3. New Estimates of State and Local Tax Resilience • Estimate relationship between changes in state GDP and changes in state and local tax revenue • Property, income, and sales tax data • Property tax data: 1967-2012 • Income and sales tax data: 1972-2012 • Estimate two relationships: • Long-run buoyance: change in revenue in response to change in state GDP • Error correction: response following a GDP shock, returning to long-run equilibrium
  4. 4. Two Measures of Resilience • Buoyance measures the long-run relationship between changes in state GDP and changes in tax revenue • No adjustments for policy offsets (i.e. tax rate or base changes) • A buoyancy estimate of 1.0 indicates that a one percent change in GDP results in a one percent change in tax revenue • An estimate less than 1.0 indicates a less than proportionate change in tax revenue • An estimate more than 1.0 indicates a more than proportionate change in tax revenue • Error correction term measures how a tax system responds to a GDP shock as it adjusts to its long-run equilibrium • A negative sign indicates that a positive error in the previous year (revenues above trend) is followed by a negative adjustment in the following year
  5. 5. Tax Buoyancy and Error Correction Estimates, Overall Estimates for the 50 States and D.C. Property Tax Income Tax Sales Tax Long-run buoyancy 0.78 1.06 0.90 Error correction -0.75 -0.21 -0.81 • The property tax is the most stable revenue source with a long-run buoyancy estimate less than one; followed by the sales tax which is more buoyant • The income tax is the least stable revenue source, reacting more than proportionately to state GDP shocks • In terms of error correction, adjusting to shocks that displace states from their long-run equilibrium, the sales and property tax systems adjust more quickly, while income tax systems adjust much more slowly
  6. 6. Long-Run Tax Buoyancy—New England States Property Tax Income Tax Sales Tax Connecticut 0.82*** 4.63*** 0.52*** Maine 0.53 0.68 0.83*** Massachusetts -1.57 1.17*** 0.78*** New Hampshire 0.86*** Rhode Island -0.31 1.09** 0.83*** Vermont 1.02*** 1.17*** 1.02*** ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels
  7. 7. Long-Run Tax Buoyancy—New England States • Property tax: • CT, NH and VT have property tax buoyancy in the range of 0.8 to 1.0, somewhat less than proportional responses to changes in state GDP • ME, MA, and RI have no buoyancy, i.e. fluctuations in state GDP have little or no impact on property tax revenues • Income tax: • CT has an extremely volatile income tax system (4.6) • MA, RI, and VT have buoyancy estimates that are greater than one indicating more than proportional responses to changes in state GDP (1.1 to 1.2) • Sales tax: • VT has unitary buoyancy (1.0) • ME, MA, and RI have buoyancy of about 0.8, indicating less than proportional response • CT has a less response sales tax system (0.5)
  8. 8. Error Correction Terms—New England States Property Tax Income Tax Sales Tax Connecticut -0.11 -0.37*** -0.76*** Maine -1.14*** -0.07 -0.83*** Massachusetts -1.11*** -0.38*** -1.03*** New Hampshire -0.98*** Rhode Island -1.12*** -0.13 -1.22*** Vermont -0.76*** -0.62*** -0.90*** ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels
  9. 9. Error Correction Terms—New England States • Property tax: • Error correction terms are strongest for property tax systems • For all New England states, except CT, the error correction terms are in the range of 1.0 to 1.1, indicating quick recovery after a GDP shock • Income tax: • Error correction terms for CT, MA, and VT are much smaller, in the range of 0.3 to 0.6, indicating slow corrections after GDP shocks • ME and RI terms are essentially zero, indicating little to no correction after a shock • Sales tax: • Error correction terms are in the range of 0.8 to 1.2 indicating relatively strong corrections after GDP shocks • RI has the strongest correction process
  10. 10. Policy Implications • Volatility through the business cycle depends on the state and local portfolio of revenue sources • Reliance on property tax revenue produces relative stability and resilience • Reliance on income taxes produces greater volatility and slower recovery resilience to shocks • Reliance on sales tax revenue also produces relative stability and resilience • Individual state performance depends on the portfolio of revenue sources
  11. 11. State and Local Tax Revenue Shares (%) New England States, 2013 Property Tax (%) Income Tax (%) Sales Tax (%) Connecticut 40 32 28 Maine 43 26 31 Massachusetts 40 27 33 New Hampshire 77 2 21 Rhode Island 48 21 31 Vermont 47 21 32
  12. 12. Conclusions • State revenue source portfolios have a direct impact on the buoyancy and resilience of state tax systems • Evidence indicates that states more heavily reliant on property and sales taxes experience more stable revenue streams and faster error corrections following GDP shocks • Evidence also shows that states more heavily reliant on income taxes experience less stable revenue streams and have slow error correction processes • If the policy objective is to have a stable revenue stream and a resilient tax system, this evidence points toward greater reliance on property and sales taxes
  13. 13. Optional Middle Atlantic slides for comparison
  14. 14. State and Local Tax Revenue Shares Middle Atlantic States, 2013 Property Tax Income Tax Sales Tax New Jersey 52 24 24 New York 36 36 28 Pennsylvania 34 30 36
  15. 15. Long-Run Tax Buoyancy—Middle Atlantic States Property Tax Income Tax Sales Tax New Jersey -0.51 1.57 0.73*** New York 1.13*** 1.39*** 0.73*** Pennsylvania -0.01 1.25*** 0.95*** ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels
  16. 16. Error Correction Terms—Middle Atlantic States Property Tax Income Tax Sales Tax New Jersey -1.10*** -0.19*** -0.80*** New York -0.10 -0.57*** -0.92*** Pennsylvania -1.09*** -0.68*** -0.87*** ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels

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