State Tax Systems. PNREC, 2014

OFFICE OF ECONOMIC ANALYSIS

State Tax Systems, Arbitrage and Equity

May 8th, 2014 Oregon Office of Economic Analysis

Josh Lehner

1


Overview

• In Memoriam

• Border Tax Effect• Early Sales Tax Work

• Updated Sales Tax Work

• Sin Taxes

• Sales vs Income Tax• Revenue Systems

• Equity

2


In Memoriam

• Lorrie Brown“Lorrie was a beloved and highly valued member of the OFM family and, before that the Department of Revenue. She was a talented economist, and the benefits of her expertise and professionalism have extended well beyond Washington State through her consultative advice, public speaking engagements and expert testimony. I greatly appreciated Lorrie's insight and strong work ethic. In addition to her forecasting skills, we knew her to be an avid world traveler and could always count on her to share stories about her latest or upcoming adventures. Lorrie was a pleasure to know, and she will be dearly missed."

-Jay Inslee, Governor

3


Border Tax Effect

4


What is the Border Tax Effect?

5

• Why it occurs:• Neighboring jurisdictions with different tax structures• Border residents purchase goods in lowest taxing jurisdiction to

avoid higher costs

• What it affects:• Governments’ tax revenue

• Public goods and services

• Societal welfare• Illegal tax evasion

• Other Issues• Political “3rd rail” in Northwest• Economic efficiencies (consumption tax)


Washington State

6

• No income tax

• Rely heavily on sales tax

• 20% of population lives in border counties (2013)

• Most regressive tax structure in nation (Institute of Taxation and Economic Policy)

6.0%7.5 – 9.5%

0.0%


The Border Tax Effect is Real

7

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

Statewide InteriorCounties

BorderCounties

OregonBorder

IdahoBorder

CanadianBorder

Per Capita Taxable Retail Sales, 2013Washington Department of Revenue

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

Washington-Oregon Washington-Idaho Idaho-Oregon

Border Tax Effect in the NorthwestPer Capita Retail Trade Sales in Border Counties

2007 Economic Census


Early Border Tax Work

8

• West Virginia – 1988

• 2 Previous Washington studies• Lorrie Jo Brown (1990)

• 1975-1987 data

• Price elasticity -1.8 (SR), -2.4 (LR)

• John Beck (1992)• 1984-1988 data

• Legislative Changes

• Price elasticity between -2 and -3.2

• Other Examples: State-level analysis, Event studies, Alcohol taxes, Canada and E.U. (tax harmonization)

85%

69%70%

48%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Total Retail Sales Durable Goods

Washington Border vs Interior CountiesPer Capita Sales Relative to Interior Counties, 1988,

Source: Lorrie Brown (1990)

All Other Washington Idaho Border Oregon Border


The Model: Variables

Variable Type Description Expected Sign

Sales Dependent Real Per Capita Taxable Sales NA

Inc Standard Real Per Capita Personal Income +

Price Standard Home County Tax Rate Relative to

Neighboring County Tax Rate

-

Border Standard Binary Indicator For Border Counties NA

Travel Standard Mileage Distance Between Counties,

Adjusted By Gasoline Index

+

Unemp Control County Specific Unemployment Rate -

Youth Control Percentage of County 18 Years And

Younger

+

Elderly Control Percentage Of County 65 Years And

Older

-

RetailEst Control Retail Establishments Per 1,000

Population

+


Updated Border Tax Work & Model Specification

• West Virginia (2007) and Washington (2009)

• 4 Models: Fixed Effects & SAR, Semi-Log & Log

• 1992-2006

• Fixed Effects

• Spatial Autocorrelation

itcontrolit

itiititit

Xtravel

incomeborderpricepricesales

54

3210

ln

ln)*ln(ln

ititit MeasureSalesWVariablesDemandMeasureSales )(10

10


Spatial Specification

ititit MeasureSalesWVariablesDemandMeasureSales )(10

Rho – coefficient, check significance level

W * SalesMeasure – spatially lagged dependent variable

W – weighing matrix, row standardized, symmetric, queen contiguity

SalesMeasure – per capita sales

Epsilon – normal error term

11


Model (2): Double-Log

Specification; Dependent

Variable = ln(Sales)it

FE SAR

Intercept-3.094 *

(1.591)

-2.474

(3.460)

Ln(Real, Per Capita Income) 0.856 ***

(0.090)

0.856 ***

(0.085)

Ln(County Relative Price)6.730 ***

(2.182)

6.730 ***

(2.069)

Ln(CountyPrice*Border) -9.843 ***

(3.397)

-9.843 ***

(3.221)

Ln(Travel)0.249 ***

(0.035)

0.036 *

(0.019)

Ln(Unemployment Rate)0.028

(0.021)

0.028

(0.020)

Ln(Youth Percentage)1.160 ***

(0.265)

1.160 ***

(0.251)

Ln(Elderly Percentage)-0.499 *

(0.262)

-0.499 **

(0.249)

Ln(Retail Establishments)0.143 ***

(0.048)

0.143 ***

(0.046)

Spatially Weighted Retail

Sales (W ∙ Sales Measureit)

5.54e-08

(0.339)

Time Dummies Yes Yes

Number of Observations 585 585

R2 / Log-Likelihood 0.3193 694.08

Price Elasticity

-3.113

Good, Expected Result

Significant at 1% level

Previous Literature: -2 to -11

Washington Studies:

Brown, 1990: -1.8, -2.4

Beck, 1992: -2 to -3.2

Why Larger?

Time Span Of Study

Consumer Behavior

Internet

Bargain Shopping


Model (1): Semi-Log

Specification; Dependent

Variable = Salesit

FE SAR

Intercept-117.268 ***

(18,622)

-110,203 ***

(17,438)

Ln(Real, Per Capita Income) 10048 ***

(1,003)

10,048 ***

(951)

Ln(County Relative Price)71,078. **

(32,193)

71,078 **

(30,523)

Ln(CountyPrice*Border) -104,389 **

(40,371)

-104,389 ***

(38,277)

Ln(Travel)2,455 ***

(370)

181

(163)

Ln(Unemployment Rate)-83.902

(208)

-83.902

(197)

Ln(Youth Percentage)8,678 ***

(2,748)

8,678 ***

(2,605)

Ln(Elderly Percentage)-4,956 *

(2,775)

-4,956 *

(2,631)

Ln(Retail Establishments)1,614 ***

(471)

1,614 ***

(447)

Spatially Weighted Retail Sales

(W ∙ Sales Measureit)

3.80e-08

(0.339)

Time Dummies Yes Yes

Number of Observations 585 585

R2 / Log-Likelihood 0.3547 -4742.84

Price Effect

When Converting Units, A 1%

Increase In The Tax

Differential, Results In $333

Decrease In Per Capita Sales

Following Brown and Beck

Calculate “Lost” Sales And

Revenue Due To The Border

Tax Effect


Border Tax Effect Summary

• Purpose: Quantifiably Show Border Tax Effect In Washington State

• -3.11 Price Elasticity

• Full Harmonization “Lost” Revenue: • State $145.6 Million & Local $21.2 Million (2006)

• 1% Tax Rate Differential Reduction:• State $28.3 Million & Local $4.7 Million (2006)

• Future Work• WA Dept of Revenue (forthcoming, May 2014)

• Internet Sales

• Economic Census – 1992, 1997, 2002, 2007, 2012• Oregon and Idaho Data

14


Sin Taxes TooAlcohol and Tobacco, plus Video Lottery

15


Income vs Sales

16


Volatility: Risk vs Return

• Major Tax Instrument (FY12)

• WA Retail Sales: 45% of GF

• OR Personal Income: 85%

• Volatile but growth advantage builds over time

• How do you value stability vs return?

17

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Washington RetailSales

Oregon PersonalIncome

Revenue GrowthFY85 - FY13

5.6%7.5%


Long Run Revenue Challenges

18

0%

1%

2%

3%

4%

5%

1980 1985 1990 1995 2000 2005 2010

Fiscal Year

Major Tax as Share of Personal Income

WA Sales Tax OR Personal Income Tax

• Demographics are changing consumer behavior and slowing growth

• Retirees have less annual income –lower income taxes –and spend larger percentage on housing, food and health care – non taxable in most states


Aging Revenues

19

$

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

Under25

years

25-34years

35-44years

45-54years

55-64years

65-74years

75 yearsand older

Income and Spending by Age2012 Consumer Expenditure Survey, All Consumer Units

Income Expenditures Taxable Income General Sales Tax Base

-80% -60% -40% -20% 0% 20%

Health care

Reading

Cash Contributions

Miscellaneous

Personal care

Housing

Food

TOTAL

Entertainment

Transportation

Alcoholic beverages

Apparel and services

Tobacco & supplies

Insurance & pensions

Education

Expenditure Chage for 65+ Households Relative to 55-64 Year Old Households


Equity and Tax Incidence

20

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Lowest Second Middle Fourth Next 15% Next 4% Top 1%

20% 20% 20% 20% Top 20%

Family Income Group

State & Local Taxes, Share of Family Income (2007)

All States

Oregon

Washington

Source: Institute on Taxation & Economic Policy, 2009Who Pays? A Distributional Analysis of the Tax Systems in All 50 States

http://www.itepnet.org/


Conclusion & Contact Information

• Pacific Northwest provides unique opportunity to study the border tax effect

• It is very real and policy makers take into consideration

• Income taxes have clear risk vs return nature

• State revenues face downward pressure due to demographics moving forward

Contact Information

[email protected] (503) 378-4052

www.OregonEconomicAnalysis.com

21

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State Tax Systems. PNREC, 2014

Economy & Finance