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Written Testimony about Gambling Control Board Revenue Estimates

On April 27, 2012, I provided the following written testimony about the Gambling Control Board estimates to the Minnesota Senate Tax Committee hearing on SF 2391: Providing for a New National Football League Stadium.

Dear Chairwoman Ortman and Members of the Committee,

I have been asked to provide some information about the economics of revenue estimates for your consideration by members of the Legislature.  My testimony and all errors are my own.

As Yogi Berra might have said, “forecasting is difficult, especially when it involves the future.”  Yet forecasting the gross and net receipts and change in state revenue from the proposed changes in lawful (charitable) gambling is especially difficult.  It is so difficult that no economist can claim accuracy in forecasting lawful gambling revenue from the gambling behavior of Minnesota consumers encountering new forms of gambling.

Forecasting sales of any new product launch accurately for decades is an impossible challenge.  In this case, it would require knowing how consumers will respond to the novel forms of gambling versus existing gambling.  It also requires knowing how paper lawful gambling receipts and lottery sales will fall due to the newly introduced forms of gambling.

The multiple Revenue Analyses for HF 1486/SF 702 and HF 2810/SF2391 show the difficulty of this estimation because of their wildly different guesses.  In several of the early iterations of Revenue Analyses, the Gambling Control Board said:

This estimate assumes that 50% of paper pull-tabs and tip boards would be eliminated in FY 2012, 75% in FY 2013, and by FY 2014 95% of paper pull-tabs and tip boards would be eliminated.

Then beginning in December 4, 2011 the Gambling Control Board said:

The introduction of electronic pull-tabs and electronic linked bingo will reduce the amount of paper pull-tabs sold by 20%.

There is obviously a large difference in revenue between the Gambling Control Board’s estimate that 95% of paper pull-tabs and tip boards would be eliminated and its estimate that 20% would be eliminated.  One thing we know for sure is that not all of the Gambling Control Board estimates can be close to being correct.

It is hard to understand how the Gambling Control Board estimated that the new forms of gambling would reduce paper lawful gambling but not have any negative effects on lottery sales and state revenue from the lottery.  Perhaps they just didn’t consider effects on the lottery in their estimation process.  This is a significant omission.

I am not able to vouch for the estimates provided to you from the Gambling Control Board.  Those Gambling Control Board estimates are highly uncertain.

In addition, reporters Elizabeth Dunbar, Marlys Harris, and Don Davis quoted me about the uncertainty surrounding forecasting revenue from novel forms of gambling.

Goods Versus Services: Economist Alan Viard’s Important Call for Sales Tax Neutrality

In this article, first published in State Tax Notes in 2011, Alan Viard, a serious scholar of tax policy, argues for the important tax policy principle of neutrality between consumer purchases of goods and services.  This article is required reading for any serious student of state tax policy.

Here are some highlights of Viard’s economic analysis of state sales taxes:

The sales tax exemption for consumer services has drawn scathing criticism from tax policy experts, who have uniformly condemned it as a source of economic inefficiency, complexity, and other problems.  The near unanimity on this issue resembles the consensus, documented in my article last June, condemning sales taxation of business purchases. Although it is both unnecessary and impractical to list all of the voices on this issue, I cite a few sources.

Hellerstein, Stark, Swain, and Youngman said:

Whatever the historical explanation for the limitation of the sales tax to sales of tangible personal property, it certainly does not lie in the dictates of sound fiscal or economic policy.  Indeed, tax economists long have deplored the exclusion of consumer services other than health and, in some cases, utility services from state taxation…

The most glaring flaw of the exemption of consumer services is that it causes resources to be inefficiently allocated, with too many resources allocated to consumer services and too few to consumer goods…

The economic case for neutral taxation of services is equally compelling, whether the economy is weak or strong…

Efficiency and simplicity both call for the transformation of state and local sales taxes into broad-based consumption taxes, with neutral treatment of the consumption of goods and the consumption of services.

Minnesota’s Tax Expenditure Review Report Rejects Tax Pyramiding

The Minnesota Tax Expenditure Review Report (which I co-authored with Marsha Blumenthal, Laura Kalambokidis, P. Jay Kiedrowski, Judy Temple, and Jenny Wahl) agrees with economist Alan Viard’s call for treating state sales taxes as consumption taxes on final consumer purchases of goods and services.  The Tax Expenditure Review Report rejects tax pyramiding:

Economists and public policy analysts generally think of the sales tax as a consumption tax. As such, it should be levied only on sales to consumers, and not on sales between businesses. Taxing intermediate purchases – including capital equipment, office supplies, and building materials – will cause tax pyramiding as one business passes the tax cost along to the next. Ultimately, this creates an additional (and hidden) tax burden on consumers who purchase the final goods and products, as noted in a 2009 presentation to lawmakers:

Pyramiding occurs when a tax applies at multiple levels of business production and distribution. The result of this typically would be to pass the tax along in higher prices at the next level of production (e.g., a manufacturer  who sells to a wholesaler). The tax burden “pyramids” or cascades at each level, so that the total burden on the consumer is higher than the statutory or nominal rate. Pyramiding favors vertically integrated or larger businesses. These businesses can minimize the multiple levels of tax by performing functions – that would be taxable if purchased from a third party – with employees.  Pyramiding also undercuts statutory exemptions (e.g., the sales tax paid by grocers gets passed along in higher grocery prices, despite the exemption for food products) that are intended to reduce regressivity or exempt necessities.

Sales Taxation of Business Purchases: Economist Alan Viard Explains A Tax Policy Distortion

Economist Alan Viard is one of the leading scholars of tax policy in the United States.  In this article, first published in State Tax Notes in 2010, Viard explains the logic behind the broad consensus of economists that state sales taxes should generally exclude business to business purchases to avoid tax pyramiding.

Viard’s article, Sales Taxation of Business Purchases: A Tax Policy Distortion, is required reading for any serious student of state tax policy.

Here are some highlights of Viard’s careful analysis and rejection of sales tax on intermediate business purchases:

actual state and local sales taxes diverge dramatically from the popular and textbook vision of the tax. One major flaw is the exclusion of a wide range of consumer services from taxation, which renders the consumer tax base much narrower than the textbook description suggests. The other crucial flaw, which is the focus of this article, is the imposition of tax on a wide range of business purchases; taxes on those purchases account for roughly 40 percent of nationwide sales tax revenue. The taxation of business purchases impedes economic efficiency and hides the true tax burden from the public…

A wide range of authors have discussed the economic distortions arising from taxation of business purchases. The following sources of inefficiency have been noted:
• The taxation of capital goods imposes a penalty on saving and investment, replicating the key flaw of income taxation. A recent Cato Institute report finds that state sales taxes, along with asset-based taxes on property, add about 7 percentage points to the effective corporate income tax rate in the United States.
• The choice between production processes is distorted, because firms have an incentive to use inputs and capital goods that are exempt from sales tax in place of those that are subject to sales tax.
• Firms have an incentive to vertically integrate, because production within a single firm is not subject to the tax imposed on sales between firms.
• The tax on inputs pyramids into the price of the final goods in an uneven manner, causing effective tax rates to vary across goods subject to the same statutory tax rate, which can distort consumers’ choices between different goods.

Evidence from statistical studies and simulations of economic models suggests that that the taxation of business purchases significantly impedes economic efficiency…

In 2002 Charles E. McLure Jr. identified the taxation of business purchases as one of many ‘‘nutty’’ features of state and local tax systems. Hellerstein et al. list the taxation of business purchases as a ‘‘structural flaw’’ of state sales taxes. State Tax Notes contributing editor David Brunori noted the ‘‘near unanimity among public finance scholars’’ against the practice and nominated it as one contender for the most egregious flaw of state tax systems…

Despite their image as consumption taxes, state and local retail sales taxes are actually imposed on a large volume of business purchases, resulting in significant economic inefficiency. Whether reform is pursued within the sales tax context or outside it, a reduction in the taxation of business purchases should be a high priority in efforts to improve state and local tax systems.

The 2013 Progressivity of the Federal Tax Code

Source: Tax Policy Center http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=3756&DocTypeID=2

Hat tip: http://gregmankiw.blogspot.com/2013/01/tax-progressivity-update.html

A Reward for Job Creators: Higher Taxes?

By John Spry

St. Paul Pioneer Press (MN) – Sunday, October 21, 2012

Jobs are the leading concern of voters as the election nears. People want to get the economy moving again. So why are some of Minnesota’s leading lawmakers sponsoring bills to create a “jobs tax” on Minnesota payrolls?

Jobs tax” is the term Rep. Ann Lenczewski, DFL-Bloomington, uses to describe a poorly written corporate income tax code that penalizes the expansion of payrolls in Minnesota.

State corporate income taxes are based on the share of a firm’s payroll, property and sales that are located within the state.

Bills by DFL leaders Rep. Paul Thissen and Sen. Tom Bakk would base a third of the state corporate tax on the size of firms’ Minnesota-based payroll.

Corporations creating more jobs in Minnesota would get a larger tax bill as punishment for their expended payrolls. Minnesota would have the worst corporate tax environment in the industrialized world under the DFL leaders’ proposal.

These bills lack economic or common sense.

When you tax something you get less of it.

Taxing firms based on their Minnesota payroll sends a powerful message that Minnesota doesn’t want job-creating investments. Accounting firms will warn their clients against growing jobs in Minnesota.

The effect of the DFL leaders’ tax bill would be significantly higher taxes on Minnesota-based firms, like General Mills, and lower tax bills for their out-of-state competitors, like Michigan-based Kellogg’s, because of the larger Minnesota payroll of our homegrown companies.

Democratic economists agree with the common-sense notion that taxing Minnesota payrolls is harmful to our state economy.

Taxing the payrolls of corporations in Minnesota would reduce employment in Minnesota, according to research published in the peer-reviewed Journal of Public Economics by Professors Austan Goolsbee and Edward Maydew. Goolsbee was chairman of President Obama’s Council of Economic Advisors.

The proposed tax hike on Minnesota payrolls would cost Minnesota around 70,000 permanent jobs in the long run, according to the Goolsbee and Maydew estimates.

They also warn policymakers to consider the lost individual income tax revenue from lower Minnesota payrolls when evaluating a corporate tax increase.

Former Rep. Julie Bunn, DFL-Lake Elmo, a former Macalester College economist, sponsored legislation to end this tax on Minnesota job creation. She says ending the corporate tax formula that penalizes Minnesota-based payrolls will “make Minnesota more competitive relative to other states.”

In-state payrolls are reduced by taxes on in-state payrolls, according to data from individual businesses analyzed by non-partisan economists Kelly Edmiston of the Kansas City Federal Reserve and Javier Arze del Granado of the International Monetary Fund in the peer-reviewed journal Public Finance Review.

Thissen says he wants to tax “rich corporate interests” instead of ordinary Minnesotans. He may believe that government can collect taxes from the legal fiction of corporations without ever having to impose a tax burden on ordinary people. Nevertheless, experience and evidence reject this.

Professor James Hines of the University of Michigan and Kansas City Federal Reserve economist Alison Felix observe, “It has long been understood that it is nonsensical to say that businesses bear tax burdens.” Instead, real people bear the entire tax burden.

The Minnesota Tax Incidence Study says the corporate income tax is a regressive tax. A regressive tax hits the poor and the middle class harder than the rich. The DFL leaders’ tax bill disproportionately increases taxes on lower-income workers.

If we really want job growth, we should move from taxing jobs, investment and saving toward taxing consumption.

The 21st Century Tax Reform Commission proposed replacing the corporate income tax with broader consumption taxes to modernize our tax code. Political leaders should take another look at its evidence-based recommendations if they want to maximize Minnesota’s job growth potential.

John Spry is an associate professor in the Opus College of Business at the University of St. Thomas and was a member of the 21st Century Tax Reform Commission.

The Regressive Tax Incidence of H.F. 2480

The non-partisan Research Division of the Minnesota Department of Revenue has analyzed the tax incidence of part of H.F. 2480 that would directly tax Minnesota jobs by penalizing firms that increase their payrolls in Minnesota.

Some of the highlights from the Minnesota Department of Revenue’s analysis:

The share of a multistate corporation’s total income that is taxed in Minnesota is defined by Minnesota’s corporate apportionment formula. The share taxable in Minnesota is based on a weighted average of the shares of the corporation’s (1) sales, (2) property, and (3) payroll that are located in Minnesota.

Under current law – for tax year 2013 – the Minnesota share of sales is weighted 96% and the Minnesota shares of property and payroll are each weighted 2%. Starting in tax year 2014, under current law, the weight on the Minnesota share of sales will increase to 100%.  The proposal would repeal replace current law apportionment it with an equal-weight apportionment formula – 1/3 sales, 1/3 property, and 1/3 payroll.

The move to an equal-weights apportionment formula would have no effect on the taxes paid by a “100% Minnesota” corporation. All of its sales, property, and payroll are located in Minnesota, so all of its income is subject to tax regardless of the apportionment formula.

The change would increase tax for corporations whose payroll and property are more concentrated in Minnesota than their sales. For example, a manufacturer with all of its production in Minnesota and only 2% of its sales in Minnesota would see an increase in tax when the production factors (payroll and property) are weighted more heavily…

Many states have moved from equal-weight apportionment to (or toward) 100% sales apportionment in the belief that it provides an incentive for businesses to move (or keep) production facilities in the state. Although the estimated impact on revenue is not adjusted for behavioral changes, the incidence analysis below does assume that behavioral changes will reduce wages for Minnesota workers…

The proposal is estimated to increase tax year 2013 liability by $252.8 million. The industries with largest tax increases include manufacturing ($149 million), retail ($48 million), banking ($26 million), and transportation and warehousing ($16 million). Industries that would see a net reduction in tax include telecommunications (-$10 million), professional, scientific and technical services (-$2 million), utilities (-$1 million), and accommodations and food service (-$0.2 million)…

The business incidence model estimates that the $252.8 million net tax increase will be borne as follows:

o 40.3% will be borne by nonresidents (including the federal government’s loss in revenue)

o 59.7% will be borne by Minnesota residents.

    • 24.8% will be borne by Minnesota consumers in higher prices
    • 34.6% will be borne by Minnesota labor in lower wages
    • 0.3% will be borne by Minnesota investors in lower profits…

The high share borne by workers is mostly due to the relatively large share of the tax increase that would fall on manufacturing…

The proposal would increase the regressivity of the overall tax system.

The entire analysis is available here: HF2480_Article_1_Section_8-9__Incidence_Analysis_1

Save millions: Trade the Saints to Minneapolis for the Timberwolves

By John Spry

St. Paul Pioneer Press (MN) – Wednesday, August 29

Minnesota has some of the very best sports facilities in the nation in Target Field and the Xcel Energy Center. So why are we planning to spend more than $200 million to build a second professional baseball stadium and remodel Target Center?

Gov. Dayton wants to spend $150 million to update Target Center for the Timberwolves, $54 million to build a new ballpark for the St. Paul Saints in Lowertown and $54 million to support other sports facilities in St. Paul, such as Xcel Energy Center.

Apparently, the idea is to have both new ballparks and state-of-the-art indoor sports arenas at each end of the new Central Corridor light-rail line. This wasteful duplication shows a lack of respect for taxpayers’ dollars.

A better idea would be to trade the St. Paul Saints to Minneapolis in exchange for the eventual move of the NBA’s Timberwolves to the beautiful Xcel Energy Center. The Saints’ baseball team could play in Target Field when the Twins are on road trips, and the Wild and Wolves could share the Xcel Energy Center.

ESPN the Magazine rated Target Field as the best fan experience in the nation, while Xcel Energy Center won honors as the third-best sports facility nationally. Target Field is a better ballpark than the proposed Lowertown Saints’ stadium. Even a remodeled Target Center still will not be as nice as Xcel.

The Staples Center in Los Angeles provides an example of how multiple teams can share a facility. The LA Lakers, Clippers and Stanley Cup-champion Kings all play at the Staples Center. Sharing sports facilities increases revenue for the existing facilities and avoids squandering valuable public dollars on unnecessary construction.

Greater revenue and avoiding needless building costs for duplicative sports facilities creates a larger economic pie that can be divided among the public sport facility authorities and the teams through future negotiations.

For example, the Twins could benefit from their suites’ increased value because of the opportunity to use the suites on more days. Additional baseball revenue for the public Minnesota Ballpark Authority operating Target Field could sunset the 0.15 percent Hennepin County sales tax sooner.

A bipartisan legislative coalition and Gov. Dayton have already approved diverting Minneapolis tax revenue to remodel Target Center and $47.5 million in economic development bonding authority. From that, St. Paul is asking for $27 million for the Lowertown Saints’ ballpark. In a classic example of pork barrel politics, they also approved $2.7 million per year for 20 years for St. Paul, which could be used for the Xcel Center.

Fortunately, it is not too late to protect taxpayers’ dollars by repealing this imprudent spending.

There are three likely objections to this cost-saving proposal.

First, parochial interests may object to cooperation between Minneapolis and St. Paul. Each city’s political establishment tends to fight for its own narrow interests instead of the more general interest of Minnesota citizens. Respect for Minnesotans’ tax dollars should trump parochial special interests.

Secondly, Target Field has more seats than the minor-league Saints could expect to sell. The Saints could use only the approximately 12,000 lower-level seats between first base and third base that offer the best views.

Finally, politicians erroneously claim that construction spending for these sports facilities will create jobs for Minnesotans. These claims ignore the basic economic concept of opportunity cost. Instead of building duplicative facilities, we could have either more productive public spending, such as improved courts or roads, or reduced taxes on private-sector investments.

The argument against constructing these new sports facilities is deeper than the dollars-and-cents logic of reducing wasteful spending. Subsidies for sports stadiums are an egregious example of crony capitalism.

The St. Paul Saints propose contributing only $10 million dollars toward the construction of their $54 million stadium. St. Paul taxpayers would pay $17 million and Minnesota taxpayers would pay $27 million. Similarly, the Timberwolves would not pay the full cost of renovating Target Center.

When we subsidize the owners of these professional sports teams, we redistribute income from everyone to a handful of wealthy individuals. This redistribution to the rich should trouble both principled liberals and conservatives.

John Spry is an associate professor in the department of finance at the University of St. Thomas.

The Progressivity of the Tax Code

Source:  Congressional Budget Office (http://www.cbo.gov/sites/default/files/cbofiles/attachments/43373-06-11-HouseholdIncomeandFedTaxes.pdf, p. 8 )

 

The Revenue Not Taken: Tax Expenditures and the Budget Process

Professor Jenny Wahl from Carleton and I gave a presentation on The Revenue Not Taken: Tax Expenditures and the Budget Process at the 27th Annual Conference on Policy Analysis at the University of Minnesota on October 12, 2011.