2004-2011 Lincoln Institute of Land Policy. All rights reserved.

Principles and Evidence about State and Local Business Taxes

Prepared for ECONOMIC PERSPECTIVES ON STATE AND LOCAL TAXES

DAVID MERRIMAN, PROFESSOR U OF ILLINOIS CHICAGO AND VISITING FELLOW, LINCOLN INSTITUTE OF LAND POLICY

December 4, 2015

Agenda Although businesses do not pay taxes (people do),

businesses remit a lot of taxes.

As a state-local tax remitted by businesses, property tax is much larger than income or sales taxes.

Rationale(s) for business taxes: conventional wisdom

Previous studies show that businesses pay more in property taxes than they receive in benefits.

The business/household split varies substantial across cities (some data about New England)

Rationale(s) for business taxes: alternative to the conventional wisdom

2

Business and state and local govt taxes Fundamental economic principle is that business dont

pay taxes, people do Yet, business have significant tax liabilities

In most states there are parallel individual and business tax systems for

Income tax Property tax

There are also significant business user fees/license fees. Business are also central to administration of household

taxation Businesses withhold income from wages and remit to tax

authorities Businesses are primary sales tax collectors (Landlords collect property tax on behalf of tenants)

3

Business and tax administration

What is the justification for business involvement in tax administration? There are economies of scale from having businesses

involved in tax administration. Monitoring and enforcement is less costly when businesses are

responsible for collecting and remitting taxes. Combination of business and individual participation in tax

administration facilitates cross-validation which contributes to tax compliance.

4

What are business taxes and how big are they?

Inherent ambiguity in the term business tax since burden of all taxes eventually falls on some individual

Despite this, consensus in applied policy literature that business taxes include most taxes with an impact incidence on business.

Stylized facts from many studies show that business taxes account for almost half of all S&L tax revenue. For example, Phillips et. al. (2014) find that the business share

of total S&L taxes is 44.9%

5

Among S&L business taxes property tax is the largest

6

Rationales for direct business taxation: conventional wisdom

What is the justification for business taxes? Why should businesses pay taxes when the

ultimate burden must fall on some individual (consumer, supplier, or owner)?

Conventional wisdom (among economists) Oakland and Testa (1996).general business

taxation should recover the costs of public services rendered to the business community Rationale: If business taxes are

less than the cost of govt business services firms will operate even when the resource cost of their production is above the amount consumers are willing and able to pay.

more than the cost of govt business services firms will not operate even when the resource cost of their production is below what consumers are willing and able to pay.

7

8

S&L business tax payments exceed the cost of services

No benefit25%of cost of education expense

50%of cost of education expense

Ratio of taxes paid to value of benefits to business

3.26 1.75 1.2

Assumption about how much education expenditures benefit business

Ratio of S&L tax payments to value of S&L gov't services to business(US in 2013)

Source: Phillips, Andrew, Caroline Sallee, Katie Ballard and Daniel Sufranski 2014. Total state and local business taxes for fiscal year 2013. Ernst and Young and Council on State Taxation. (http://www.cost.org/WorkArea/DownloadAsset.aspx?id=87982)

Sheet1

Ratio of S&L tax payments to value of S&L gov't services to business(US in 2013)

Assumption about how much education expenditures benefit business

No benefit25%of cost of education expense50%of cost of education expense

Ratio of taxes paid to value of benefits to business3.261.751.2

Source: Phillips, Andrew, Caroline Sallee, Katie Ballard and Daniel Sufranski 2014. Total state and local business taxes for fiscal year 2013. Ernst and Young and Council on State Taxation. (http://www.cost.org/WorkArea/DownloadAsset.aspx?id=87982)

Sheet2

Sheet3

9

2

4

6

8

12 12

4

2

4 4

6

32

1 1 1 1 1

05

1015

20Fr

eque

ncy

0.000 0.010 0.020 0.030 0.040Home ETR

Home ETR

1

3

76

9

54

3

54

3

6 6

3

1 1 12

3

1

05

1015

20Fr

eque

ncy

0.000 0.010 0.020 0.030 0.040Commercial ETR

Commercial ETR

20 20

7

4

23 3

4

1

32

1 1 1 1 1

05

1015

20Fr

eque

ncy

1 2 3 4 5Ratio commercial to home ETR

Ratio

Source:Minnesota Center for Fiscal Excellence (various years) and author's calculations.Home ETRs are for the median-valued owner-occupied house in each city. Commercial ETRs arefor a parcel with a nominal market value of $1 million and $200,000 worth of fixtures.

Distribution of home and commercial ETRs and their ratioin 2013

10

0.00

00.

010

0.02

00.

030

0.04

0

1995 2000 2005 2010 2015year_

commercial ETR home ETR

Burlington, VT

0.00

00.

010

0.02

00.

030

0.04

0

1995 2000 2005 2010 2015year_

commercial ETR home ETR

Providence,RI

0.00

00.

010

0.02

00.

030

0.04

0

1995 2000 2005 2010 2015year_

commercial ETR home ETR

Manchester, NH

0.00

00.

010

0.02

00.

030

0.04

0

1995 2000 2005 2010 2015year_

commercial ETR home ETR

Boston, Mass

0.00

00.

010

0.02

00.

030

0.04

0

1995 2000 2005 2010 2015year_

commercial ETR home ETR

Portland, ME

0.00

00.

010

0.02

00.

030

0.04

0

1995 2000 2005 2010 2015year_

commercial ETR home ETR

Bridgeport, CT

Source:Minnesota Center for Fiscal Excellence (various years) and author's calculationsTax rates as a share of market value

New England CitiesHome and Commercial Effective Property Tax Rates

Data on relative business property tax rates

11

Year Home Commercial Ratio Home Commercial Ratio1998 0.021 0.031 1.666 0.014 0.021 1.7722000 0.021 0.030 1.611 0.014 0.021 1.7072002 0.021 0.027 1.531 0.014 0.020 1.6422004 0.019 0.025 1.764 0.014 0.020 1.6072005 0.015 0.024 1.888 0.015 0.020 1.5462006 0.013 0.021 1.876 0.014 0.019 1.5642007 0.013 0.020 1.847 0.013 0.019 1.6152008 0.015 0.021 1.735 0.013 0.018 1.6292009 0.016 0.022 1.809 0.013 0.018 1.5902010 0.016 0.023 1.681 0.014 0.019 1.5602011 0.019 0.025 1.653 0.014 0.019 1.5402012 0.019 0.026 1.719 0.014 0.020 1.6092013 0.022 0.027 1.637 0.015 0.020 1.551

New England Cities Non-New England Cities

Source: Minnesota Center for Fiscal Excellence (various years) and author's calculations. Home ETRs are for the Median-Valued Owner-Occupied House in each city in each year. Commercial ETRs are for a parcel with a nominal market value of $1 million and $200,000 worth of fixtures

Table 1Home and commercial effective property tax rates (ETRs) and their ratios in

New England and Non-New England Cities in Various Years

read_me

This workbook created by David Merriman 11/29/2015 for talk at Lincoln to be given 12/4/2015

table 1

Table 1Home and commercial effective property tax rates (ETRs) and their ratios in New England and Non-New England Cities in Various Years

New England CitiesNon-New England Cities

YearHomeCommercialRatioHomeCommercialRatio

19980.0210.0311.6660.0140.0211.772

20000.0210.0301.6110.0140.0211.707

20020.0210.0271.5310.0140.0201.642

20040.0190.0251.7640.0140.0201.607

20050.0150.0241.8880.0150.0201.546

20060.0130.0211.8760.0140.0191.564

20070.0130.0201.8470.0130.0191.615

20080.0150.0211.7350.0130.0181.629

20090.0160.0221.8090.0130.0181.590

20100.0160.0231.6810.0140.0191.560

20110.0190.0251.6530.0140.0191.540

20120.0190.0261.7190.0140.0201.609

20130.0220.0271.6370.0150.0201.551

Source: Minnesota Center for Fiscal Excellence (various years) and author's calculations. Home ETRs are for the Median-Valued Owner-Occupied House in each city in each year. Commercial ETRs are for a parcel with a nominal market value of $1 million and $200,000 worth of fixtures

stata code table 1

***************************************************** this program written by David Merriman* February 5, 2015 to merge extracted data* revised 3_24_2015* revised 04_01_2015 to run multivariate regressions** revised 04_02_2015 to run multivariate regressions* revised 5/15/2015 to run multivariate regressions with land prices instead of or in addition to population*******************************************************;clear#delimit ;version 12.1;tempname location;*scalar `location'="laptop3";scalar `location'="laptop4";*scalar `location'="igpa";display "$S_TIME $S_DATE";*************************************************;* ****************************************************** boiler plate code*****************************************;**************************************;set more off;di c(current_date);di c(current_time) ;di c(sysdir_personal); di c(pwd);di c(adopath); scalar list;#delimit ;clear;

if `location'=="laptop4" use"C:\Users\Merriman\Documents\lincoln 2014_15\major research project on business taxes\data\extracted_data_to_merge\effective_tax_rates_w_state_pop.dta";

if `location'=="laptop3" use13"C:\Users\David\Documents\lincoln 2014_15\major research project on business taxes\data\extracted_data_to_merge\effective_tax_rates_w_state_pop.dta";

if `location'=="igpa" use13"C:\Users\dmerrim\Documents\lincoln 2014_15\major research project on business taxes\data\extracted_data_to_merge\effective_tax_rates_w_state_pop.dta";

sort comm_I_State comm_J_City year_;

if `location'=="laptop4" merge 1:1 comm_I_State comm_J_City year_ using "C:\Users\Merriman\Documents\lincoln 2014_15\major research project on business taxes\data\extracted_data_to_merge\minnesota_names_id_STPLACE_codes.dta", generate(_merge_codes);

if `location'=="laptop3" merge 1:1 comm_I_State comm_J_City year_ using "C:\Users\David\Documents\lincoln 2014_15\major research project on business taxes\data\extracted_data_to_merge\minnesota_names_id_STPLACE_codes.dta", generate(_merge_codes);

if `location'=="igpa" merge 1:1 comm_I_State comm_J_City year_ using "C:\Users\dmerrim\Documents\lincoln 2014_15\major research project on business taxes\data\extracted_data_to_merge\minnesota_names_id_STPLACE_codes.dta", generate(_merge_codes);

generate year4=year_;sort id year4;

*********************************************************************************** statement below merges in a bunch of data MUch of it I did not use.* I did use population***********************************************************************************;if `location'=="laptop4" cd "C:\Users\Merriman\Documents\lincoln 2014_15\major research project on business taxes\data\extracted_data_to_merge\";if `location'=="laptop3" cd "C:\Users\David\Documents\lincoln 2014_15\major research project on business taxes\data\extracted_data_to_merge\";if `location'=="igpa" cd "C:\Users\dmerrim\Documents\lincoln 2014_15\major research project on business taxes\data\extracted_data_to_merge\";merge 1:1 id year4 using"sample_of_cities_w_prop_tax_data.dta",generate(_merge_fiscal);drop functioncode-in_prop_tax_data ;list year_ comm_I_State comm_J_City if _merge_fiscal==1 & year_=2002 & year_=2002 & year_=2002 & year_=2010; gen lnpop=log(population); ************************************************ * state population ***********************************************; gen lnpop_state=log(state_pop); gen ln_home_MedianValue_Median_Value=log(home_MedianValue_Median_Value); gen pay_per_emp=(s_payant/ s_emp);gen pay_per_estab=(s_payant/ s_estab); gen ln_pay_per_emp= log(s_payant/ s_emp);gen ln_pay_per_estab=log(s_payant/ s_estab);

******************************************** work on data from fisc*********************************************;destring directexpenditures, replace ignore(,);destring generalexpenditures , replace ignore(,);destring elemsecondeducexpend , replace ignore(,);gen share_school=elemsecondeducexpend/directexpenditures;destring interestondebt, replace ignore(,);gen share_interest_on_debt=interestondebt/directexpenditures;destring debtoutstanding , replace ignore(,);gen ratio_debt_outstanding=debtoutstanding/directexpenditures;destring shorttermdebtoutstanding , replace ignore(,);gen ratio_short_term_debt=shorttermdebtoutstanding/directexpenditures;

******************************************************************************* value-added data*************************************************************************;gen ln_VA_net_total=log(VA_net_total);gen ln_VA_net_commercial_component =log( VA_net_commercial_component );gen comp_per_empl_total=( CA6N_total/ CA25N_total);gen ln_comp_per_empl_total=log( CA6N_total/ CA25N_total); sort year4; by year4: egen pop_rank=rank(population),field; count if comm_L_ETR~=. & ln_VA_net_commercial_component~=. & share_school~=.; count if comm_L_ETR~=. & ln_VA_net_total~=. & share_school~=.;*********************************************************************************************** maximum number of observations with all three curcial variables is 494* or 545 if I use total gmp rather than commercial gmp*********************************************************************************************;xtset id year4;

label var comm_L_ETR "ETR commercial"; label var home_S_ETR "ETR home";label var ln_home_MedianValue_Median_Value "median home value";label var Ratio_commercial2home "ETR ratio";label var share_school "Share exp on K-12 school";

format %9.3f home_S_ETR comm_L_ETR Ratio_commercial2home;

*format %9.3f home_S_ETR comm_L_ETR Ratio_commercial2home debt_tax_ratio education_exp_share pc_trev;format %9.1f value;format %9.0fc home_MedianValue_Median_Value population ; ******************************************************************** * first put together some descriptive stats * use Donald Bruce idea for panel data stats of begining and end of period * * variables to look at include * comm_L_ETR share_school ln_VA_net_total ln_comp_per_empl_total home_S_ETR presdem_2008 * ln_land_value lnpop rural_comm_ETR value ratio_debt_outstanding ln_home_MedianValue_Median_Value *********************************************************************;format rural_comm_ETR %4.3f;format share_school %3.2f;format presdem_2008 %4.3f;format LandValue s_LandValue %6.0fc;format ratio_debt* %3.2f;format VA_net_total comp_per* %3.1f;

label var comm_L_ETR "commercial ETR";label var home_S_ETR "home ETR";label var rural_comm_ETR "rural commercial ETR";label var share_school "share of spending going to K-12 education";label var VA_net_total "per worker Value added net of compensation";label var comp_per_empl_total "per worker compensation";label var presdem_2008 "share of presidential vote for Barack Obama in 2008";label var LandValue "value of land for typical home";label var s_LandValue "tax rate adjusted value of land for typical home";label var population "population";label var value "unemployment rate";label var ratio_debt_outstanding "ratio of debt outstanding to annual expenditures"; label var home_MedianValue_Median_Value "value of median home";

***************************************************************************** I want to create a table of descriptive stats* unfortunately I can figure out how to attach variable labels so have to it with var names* edit var labels later** code below takes output generated by stata and writes it to three xml files* these have to be combined to make the tables.************************************************;

if `location'=="laptop4" cd "C:\Users\Merriman\Documents\neppc\revision_may_2015\merriman_business_property_taxes_6_19_2015\table4folder" ;if `location'=="igpa" cd "C:\Users\dmerrim\Documents\neppc\revision_may_2015\merriman_business_property_taxes_6_19_2015\table4folder" ;

*if `location'=="igpa" cd "C:\Users\dmerrim\Documents\neppc\revision_may_2015\merriman_business_property_taxes_6_5_2015\table4folder" ;*if `location'=="laptop4" cd "C:\Users\Merriman\Documents\neppc\revision_may_2015\merriman_business_property_taxes_6_5_2015\table4folder" ;

summarize comm_L_ETR home_S_ETR rural_comm_ETR share_school VA_net_total comp_per_empl_total presdem_2008 LandValue s_LandValue population value ratio_debt_outstanding home_MedianValue_Median_Value if comm_L_ETR~=. & year4==1998, format separator(20); summarize VA_net_total comp_per_empl_total if comm_L_ETR~=. & year4==2002, format separator(20) ; summarize comm_L_ETR home_S_ETR rural_comm_ETR share_school VA_net_total comp_per_empl_total presdem_2008 LandValue s_LandValue population value ratio_debt_outstanding home_MedianValue_Median_Value if comm_L_ETR~=. & year4==2012, separator(20) format; gen NewEnglandState=0; replace NewEnglandState=1 if comm_I_State=="Vermont"|comm_I_State=="Rhode Island"|comm_I_State=="New Hampshire"| comm_I_State=="Massachusetts"|comm_I_State=="Maine"|comm_I_State=="Connecticut"; keep year_ comm_I_State comm_J_City state_city home_MedianValue_Median_Value home_S_ETR comm_L_ETR rural_city rural_home_ETR rural_comm_ETR NewEnglandState; gen ratio=comm_L_ETR/home_S_ETR; format comm_L_ETR home_S_ETR ratio %4.3f;sort year_ NewEnglandState;by year_ NewEnglandState: summarize home_S_ETR comm_L_ETR ratio;collapse home_S_ETR comm_L_ETR ratio, by(year_ NewEnglandState);sort NewEnglandState year_;list , separator(100); exit;

12

If business taxes are so high in

some places why dont business

relocate to lower tax places?

Rationales for direct business taxation: alternative (complementary) explanations

Business property taxation transfers excessive business profits to residents.

Businesses locate where profit is maximized. Locations that are more profitable than the next best alternative can be attractive locations even when business taxes exceed the cost of business public services.

Govt has some bargaining power. Govt must balance desire for business tax revenue against

desire for investment and jobs. Govts use a combination of taxes, business tax incentives,

regulation (e.g. zoning) and regulatory relief to balance competing interests.

13

Principles and Evidence about State and Local Business TaxesAgendaBusiness and state and local govt taxesBusiness and tax administrationWhat are business taxes and how big are they? Slide Number 6Rationales for direct business taxation:conventional wisdomSlide Number 8Slide Number 9Slide Number 10Data on relative business property tax ratesSlide Number 12Rationales for direct business taxation:alternative (complementary) explanations