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The Role of Taxes and Education Funding in Charting Michigan’s Economic Future: Richard G. Sims Sierra Institute on Applied Economics Carson City, Nevada.

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Presentation on theme: "The Role of Taxes and Education Funding in Charting Michigan’s Economic Future: Richard G. Sims Sierra Institute on Applied Economics Carson City, Nevada."— Presentation transcript:

1 The Role of Taxes and Education Funding in Charting Michigan’s Economic Future: Richard G. Sims Sierra Institute on Applied Economics Carson City, Nevada November 2006

2 A quick look at Michigan state and local tax effort, by taxpayer income catagory Richard G. Sims Sierra Institute on Applied Economics

3 Source: Who Pays?: A Distributional Analysis of the Tax Systems of All 50 States, Second Edition, Institute on Taxation and Economic Policy, 2003.Who Pays?: A Distributional Analysis of the Tax Systems of All 50 States, Second Edition Richard G. Sims Sierra Institute on Applied Economics Michigan Taxes

4 Source: Who Pays?: A Distributional Analysis of the Tax Systems of All 50 States, Second Edition, Institute on Taxation and Economic Policy, 2003.Who Pays?: A Distributional Analysis of the Tax Systems of All 50 States, Second Edition Richard G. Sims Sierra Institute on Applied Economics …and how they have changed.

5 FY Source: Michigan Department of Management & Budget, Comprehensive Annual Financial Report, and Senate Fiscal Agency, Updated March 2006.

6 What Public Policies Influence State Economic Growth? Richard G. Sims Sierra Institute on Applied Economics

7 Do low business taxes lead to economic growth? Richard G. Sims Sierra Institute on Applied Economics

8 10 FASTEST GROWING STATES PER CAPITA PERSONAL INCOME GROWTH U.S. RANK (High to Low) TOP CORPORATE TAX RATE U.S. RANK (Low to High) Wyoming5.4%1No taxTied 1 st District of Columbia 5.2%29.975%48 North Dakota5.0%310.50%50 Vermont4.8%49.75%46 Massachusetts4.7%59.50%45 South Dakota4.7%6No taxTied 1 st Minnesota4.6%79.80%47 Colorado4.6%84.63%8 Maine4.5%98.93%40 Nebraska4.5%107.81%31 AVERAGE: 7.1% NOTE: States in italic are "no income tax" states; Rates are in percent and are those in place 1/1/2004. SOURCE: Income data from U.S. Department of Commerce, Bureau of Economic Analysis; tax rates from Federation of Tax Administrators, Chart A: The 10 Fastest Growing States’ Corporate Income Tax Rates: Average 7.1% Richard G. Sims Sierra Institute on Applied Economics

9 10 SLOWEST GROWING STATES PER CAPITA PERSONAL INCOME GROWTH U.S. RANK (High to Low) TOP CORPORATE TAX RATE U.S. RANK (Low to High) Delaware3.8%428.7%38 Oregon3.8%436.6%21 Indiana3.7%448.5%35 Idaho3.7%457.6%29 North Carolina3.7%466.9%23 Ohio3.6%478.5%37 Michigan3.3%48No tax1 Alaska3.3%499.4%44 Nevada3.1%50No tax2 Hawaii2.5%516.4%17 AVERAGE: 6.25% NOTE: States in italic are "no income tax" states; Rates are those in place 1/1/2004. SOURCE: Income data from U.S. Department of Commerce, Bureau of Economic Analysis; tax rates from Federation of Tax Administrators, Chart B: The 10 Slowest Growth States’ Corporate Income Tax Rates: Average 6.25% Richard G. Sims Sierra Institute on Applied Economics

10 In fact, over the last decade… High growth states actually had comparatively high average corporate income tax rates. Slow growth states had corporate tax rates below the U.S. average. Richard G. Sims Sierra Institute on Applied Economics

11 But doesn’t being “Business Tax Friendly” or being seen as having a favorable Business Climate encourage a states economic growth? Let’s see-- Richard G. Sims Sierra Institute on Applied Economics

12 Chart A: States ranked MOST ‘Business Tax Friendly’ SOURCE: Tax Foundation, Inc.,State Business Tax Climate Index 10 MOST ‘TAX FRIENDLY’ STATES U.S. RANK ‘TAX FRIENDLY’ PERSONAL INCOME INCREASE U.S. RANK South Dakota14.7%6 Florida23.9%38 Alaska33.3%49 Texas44.3%14 New Hampshire54.4%11 Nevada63.1%50 Wyoming75.4%1 Colorado84.6%8 Washington94.3%17 Oregon103.8%43 TOP 10 AVERAGE: 4.2% Richard G. Sims Sierra Institute on Applied Economics Tax Foundation Rankings

13 Chart B: States ranked LEAST ‘Business Tax Friendly SOURCE: Tax Foundation, Inc.,State Business Tax Climate Index 10 LEAST ‘TAX FRIENDLY’ STATES U.S. RANK ‘TAX FRIENDLY’ PERSONAL INCOME INCREASE U.S. RANK Maine424.5%9 Arkansas433.8%40 Kentucky444.2%24 Vermont454.8%4 Rhode Island464.2%22 West Virginia474.0%34 Minnesota484.6%7 New York494.0%32 Hawaii502.5%51 District of Columbia515.2%2 BOTTOM 10 AVERAGE: 4.2% Richard G. Sims Sierra Institute on Applied Economics

14 In addition, the Actual Effective Rates that Corporations pay on their Profits has Declined Substantially Over the Last Several Years… Richard G. Sims Sierra Institute on Applied Economics

15 Source: Data from Federation of Tax Administrators and the U.S. Department of Commerce. Richard G. Sims Sierra Institute on Applied Economics

16 How about the effect of the overall “Business Climate”… Richard G. Sims Sierra Institute on Applied Economics

17 Site Selection Magazine, November, 2006

18 Only 7 of the Top Ranked 25 states grew as fast a the US average- Only 2 of the Top Ranked states were in the top 10 growth states- 7 of the Top Ranked states were among the 10 slowest growing states. Site Selection magazine, Nov. 2006; Bureau of Labor Statistics website; calculations by the author.

19 One Reason Corporate Income Taxes Don’t Have Much Influence on State’s Comparative Growth- Rates Don’t Vary Greatly from State-to-State-- Richard G. Sims Sierra Institute on Applied Economics

20 State Corporate Income Tax Rates WISCONSINWISCONSIN ILLINOISILLINOIS MINNESOTAMINNESOTA IOWAIOWA ¾ of states have rates between 6%-9% The 45 States with a Corporate Income Tax Maximum Corporate Tax Rate Richard G. Sims Sierra Institute on Applied Economics Mid-Point 7.5%

21 From the previous chart Lowest rate– Kansas, 4%: growth rank 26 th Highest rate—Iowa, 12%: growth rank 27 th Richard G. Sims Sierra Institute on Applied Economics

22 Another Reason Corporate Income Taxes Don’t Determine a State Economic Growth… Richard G. Sims Sierra Institute on Applied Economics

23 Source: U.S. Department of Commerce, National Income and Product Accounts, Richard G. Sims Sierra Institute on Applied Economics

24 What Firms Say Are Their Major Cost Considerations When Relocating Source: Robert M. Ady, “The Effects of State and Local Public Services on Economic Development,” New England Economic Review, March/April, Richard G. Sims Sierra Institute on Applied Economics

25 Similarly, taxes on individuals don’t appear to determine states’ growth… Richard G. Sims Sierra Institute on Applied Economics

26 In general, states with high economic growth had relatively higher taxes. Richard G. Sims Sierra Institute on Applied Economics

27 A note on international comparisons--

28 TOP 10 STATES IN EDUCATION SPENDING U.S. RANK K-12 SPENDING PER CAPITA PERSONAL INCOME GROWTH PER CAPITA BOTTOM 10 STATES IN EDUCATION SPENDING U.S. RANK K-12 SPENDING PER CAPITA PERSONAL INCOME GROWTH PER CAPITA Alaska13.3%Idaho423.7% New Jersey24.4%Utah434.0% New York34.0%Florida443.9% DC45.2%Louisiana454.0% Connecticut54.3%Mississippi464.1% Wyoming65.4%Arizona473.8% Michigan73.3%Tennessee483.9% Minnesota84.6%Kentucky494.2% Wisconsin94.2%Arkansas503.8% Vermont104.8%Hawaii512.5% TOP 10 AVERAGE INCOME GROWTH 4.3% BOTTOM 10 AVERAGE INCOME GROWTH 3.8% Elementary & Secondary Spending Average growth for the 50 states and DC: 4.1% SOURCE: Education spending data from National Center for Education Statistics, income data from U.S. Bureau of the Census, Bureau of Economic Analysis.http://nces.ed.gov

29 ELASTICITIE$ELASTICITIE$ How revenues grow over time determines states’ ability to fund future services- Personal Income Tax1.04 Corporate Income Tax0.95 Sales Taxes0.97 Property Taxes0.96 Cigarettes (avg. all states)0.48 Lottery (avg. all states)0.52 Typical Long-Term 50 State Averages These all grow slower than the economy Richard G. Sims Sierra Institute on Applied Economics

30 Heavy reliance on sales and excise taxes and lotteries constrain state’s ability to fund future services, many of which are crucial to economic growth and development.

31 A look at economic interaction between taxes, spending and state economic growth.

32 A Dynamic General Equilibrium Analysis of a Balanced Budget Tax and Spending Increase Richard G. Sims Sierra Institute on Applied Economics

33 A Dynamic General Equilibrium, Balanced Budget Analysis of Proposal 5 Source: Richard Sims, using the REMI economic model for Michigan.

34 Source: The Long-Term Effects of TABOR on the Michigan Economy, Sierra Institute on Applied Economics, September,

35

36 Source: Tax Limitations, Education Funding Measures and Economic Growth: A Look at Michigan, Sierra Institute on Applied Economics.

37 Source: The Economic Impact of the Georgia Lottery, Carl Vinson Institute of Government, University of Georgia.

38 “I know of no valid economic theory that suggests that tax cuts provide more economic stimulation than would a similar amount of government spending.” Former Congressional Budget Office Director, Robert Reischauer Richard G. Sims Sierra Institute on Applied Economics

39 Long-Term: -Amenity value -Source of productivity -Source of competitiveness So, why does education spending have such a large impact on job creation? Near-Term: -Labor intensity -Local purchase intensity -Larger share of total business costs Richard G. Sims Sierra Institute on Applied Economics

40 A Concern for Michigan’s Future Over the decade of the 1900’s, Illinois lost 121,000 college graduates to other states. Richard G. Sims Sierra Institute on Applied Economics

41 CONCLUSIONS Low taxes are not the key to creating jobs and income in a state. Low taxes are associated with low levels of public services. Spending on K-12 education can be a significant contributor to economic growth. Richard G. Sims Sierra Institute on Applied Economics


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