I had thought about making this month’s contribution to
Oregon Economics on the looming
teacher shortage in Oregon or the misunderstandings reflected in the
public reaction to the Secretary of State’s audit of the $3
billion that citizens and businesses owe the State, but when I went looking for
numbers to back up my analysis on the first topic I found I was too late to say
much of anything new. Educators have been predicting
a crisis for the past two years and even PBS
has covered the topic, although they haven’t taken account of the
implications of improving job prospects elsewhere for teacher recruitment and
retention. As for responding to the audit’s reception this is probably not the
best place for that.
Consequently, I decided to comment on the Legislative
Revenue Office’s (LRO) roll out of the updated Oregon Tax Incidence Model
(OTIM), which was presented by LRO’s head, Paul Warner, to the House Interim
Revenue Committee during legislative days at the end of September. I’ll briefly
describe the model and the simulations run by the LRO for the committee,
showing how OTIM works. (Disclosure, I am a member the Oregon Tax Incidence
Modeling team’s academic advisory board.)
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| Paul Warner Testifying |
The Oregon
Tax Incidence Model is dynamic, general-equilibrium, simulation tool based
on a dynamic-scoring
model developed for the California State Department of Finance, modified by
the LRO and academics from Oregon State University and the University of
Washington. OTIM sits on an Impact Analysis for Planning (IMPLAN) software platform,
using current (2012) state-level data from the Departments of Revenue and
Employment. The model estimates the long-term equilibrium effects of tax
changes on state income and output in aggregate and by industry, state, local,
and federal tax revenue, and tax incidence by income group. The recent update
is the first comprehensive overhaul of the OTIM since 2001.
The LRO reported on the simulated effects of three
“revenue-neutral” tax changes. The
first looked at the effects of adopting a 0.4 percent gross-receipts tax
like Ohio’s Commercial Activities Tax, offset by an increase in the
personal-income-tax standard deduction to $14 thousand for a single person and
$28 thousand for a joint return. The
second looked at a 0.5 percent gross-receipts tax offset by a ‘homestead property-tax
exemption” of $125 thousand and the
third at restoring property tax assessments to Real Market Value (the
situation prior to the enactment of Measure 47) offset by a ‘homestead
exemption’ of $200 thousand. All three
of these changes would almost certainly tend to make Oregon’s state and local
tax system, arguably the most progressive/least regressive in the nation, even
more progressive. However, I’ll focus on the first of the simulations because
its results are probably more reliable than are the other two and, in any case,
more defensible, since they are, in fact, pretty straightforward.
The following Table shows the gross effects (in millions of
dollars) of a gross-receipts tax, offset by an increase in the standard
deduction.
Note that the main effect is to increase economic activity,
although not by a lot. This is primarily a result of a redistribution of income
to households with higher propensities to spend and, thereby, somewhat
increased aggregate demand. Since the model starts where we are now, i.e., with
some economic slack, it predicts that the tax changes will result in increased
economic activity rather than higher prices.
The distributional consequences of this change are shown in
the following graphics. They reflect the design of Oregon’s existing personal
income tax system and the effects of a gross-receipts tax under the proposed
changes. They are fairly noteworthy.
What’s a gross-receipts tax? Ohio’s commercial activity tax
(CAT) is, for example, a tax imposed on gross receipts from all business
activities, including most commercially provided services. The CAT applies to most
businesses located within the state and also to out-of-state businesses that
have ‘minimum contacts’ with the state, but not to non-profit organizations,
governmental entities, public utilities, dealers in intangibles, financial
institutions, or insurance companies. While not
exactly sales taxes (gross-receipts taxes are levied at each stage in a
product or service’s value chain creating effective rates for some goods that
are many times higher than others), it is not unreasonable to
treat gross-receipt taxes as if they were (as does the OTIM) or to presume that
their cost will fall entirely to consumers, more or less proportionally to
purchases of goods and services that are subject to the tax. The income-tax
consequences of increased standard deductions are estimated directly from
household tax records, understanding that most high-income taxpayers will
continue to itemize rather than take the standard deduction. Hence, like
everyone else, they will pay their share of the gross-receipts tax, but would
not benefit from the personal-income-tax break (that is also true of low-income
households, since they seldom pay income taxes under the status quo).
This is both useful and reliable information. Perhaps the
most important point made by the OTIM is that the benefits produced by this tax
change are due entirely to the increase in the standard deduction. It also
tells us that paying for such a tax cut by gross-receipts tax would not wipe
out its gains altogether. Nevertheless, it’s also clear that the net effect
would be fairly small.
Moreover, there are policy relevant tax facts that the OTIM
doesn’t address. In this case, no estimate is made for the increased
administrative cost associated with collecting a new tax. Chances are that the
incremental cost would not exceed increased collections, but that is by no
means certain (and, in any case, this increase depends on the persistence of a
sluggish economy). Furthermore, the model is silent about the dead-weight
efficiency costs (compliance and misallocation of resources) a gross-receipts
tax would impose upon the economy. Based on Washington’s
dissatisfaction with its gross-receipts tax, it is not unreasonable to
assume that these are significant,
if not necessarily substantial.
Finally, the OTIM is a computational dynamic model, not a
stochastic one. It doesn’t tell us what the effect of tax changes will be with
respect to the volatility of the economy (in this case almost certainly
trivial) or on the volatility of revenues. One thing we know for certain is
that revenue volatility is driven primarily by the progressivity of the tax
system. This change would make the tax system more progressive, ergo it should
increase revenue volatility. That’s not necessarily a bad thing, of course, but
it has implications for expenditure smoothing via saving or borrowing that should
be addressed prior to a move in this direction.
