Diversifying Municipal Revenue in Connecticut Report Prepared for the Connecticut Tax Study Panel Presentation November 17, 2015 David L. Sjoquist Professor of Economics Andrew Young School of Policy Studies Georgia State University Atlanta
Arguments For and Against Local Revenue Diversification
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- Policy Option: Allow Local Sales Taxes
- Estimated Revenue
- Economic Effects
Arguments For and Against Local Revenue DiversificationThe principal reasons for adopting a local option tax or increasing charges and fees are that they will diversify the local revenue structure and can reduce the property tax burden. The Advisory Commission on Intergovernmental Relations (1988) outlined several arguments supporting or justifying local revenue diversification. Allowing use of alternative revenue sources would allow towns to better capture local revenue raising capacity, would reduce reliance on the property tax, and would collect revenue from tourists and commuters who impose costs on local governments but do not pay any property taxes to the local government. There are counter arguments, the principal one being that if a local government gains access to additional revenue options, it will increase revenue, and thus expenditures, beyond what citizens truly desire; however, the empirical evidence on this possibility is mixed. In addition, property tax revenues are less cyclical than sales and income tax revenues, and the property tax base is less geographically mobile than the bases for sales and income taxes. Policy Option: Allow Local Sales TaxesOptions for Local Sales TaxesWe considered two alternative local sales taxes, a local sales tax where the revenue collected in a town goes to that town, and a regional sales tax in which total local sales tax revenue across all towns in each of the nine planning districts (i.e., Councils of Government) is allocated to the towns in the planning district using a formula in which half of the revenue is allocated to the town from which the revenue was generated and half is allocated on a per capita basis. (Of course, there are many other options for defining regions and for allocating such revenue across towns.) Estimated RevenueUsing estimated taxable sales by town, the estimated revenue from a one percent local sales tax, ignoring revenue from out-of-state vendors, is $473.5 million. The available data on state sales taxes due by town do not include sales taxes collected from out-of-state vendors, which are 21.3 percent of total sales taxes due. Thus, our estimated revenues by town under estimate the likely revenue in the aggregate by this percentage. One possible objective for adopting a local sales tax is to reduce property taxes. A one percent local sales tax, if adopted statewide and used just for property tax relief, could reduce total local property taxes, including school property taxes, by about 6.1 percent on average. Local sales tax revenue per capita by town ranges from $5 to $717, a result due to the large disparity across towns in sales tax base per capita. The range for the regional sales tax is from $42 to $230, a substantially smaller range. As expected, the regional sales tax shifts the revenue from towns with high local sales tax revenue per capita to towns with low local sales tax revenue per capita. It needs to be stressed that the estimates by town are reasonable indications of local sales tax revenue for informing state tax policy, but not for local government budget making. Economic EffectsIn considering whether to recommend allowing local governments to use local sales taxes, the following factors are relevant.
Economic theory suggests that an increase in the sales tax rate will reduce the sales tax base since the increase in the sales tax rate is the same as a price increase. Assuming a price elasticity of 1.0, and using state sales taxes due, the local sales tax revenue from a one percent local sales tax adopted by all towns would be $603.9 million (this includes sales taxes collected by out-of-state vendors), and state sales tax revenue would fall by an estimated $36.4 million.
One of the effects of differential sales tax rates is on cross-bordering shopping. Studies generally find that a one percentage point higher interstate sales tax rate differential is associated with per capita sales along a state’s border that are between one and 7 percent lower. Connecticut’s basic state sales tax rate is currently 6.35 percent. Connecticut borders three states, New York, Rhode Island, and Massachusetts. Rhode Island and Massachusetts do not have local sales taxes; their state tax rates are 7.0 percent and 6.3 percent, respectively. Along New York’s border with Connecticut, the total sales tax rates in New York are generally in the range of 8.125 percent to 8.375 percent. If Connecticut towns adopted a one percent local sales tax, Connecticut border cities would lose some sales to Massachusetts, and might experience a small drop in sales that are made to buyers from New York. One should expect a similar effect from inter-town sales tax rate differentials.
Local jurisdictions currently compete for property tax base. If local governments adopt a sales tax, one should expect that towns will compete for sales tax base as well. The difference is that the competition will be for retail facilities such as shopping centers rather than business facilities more generally.
A recent report from the New England Public Policy Center at the Federal Reserve Bank of Boston (Zhao and Weiner 2015) provides an index of fiscal disparities for all Connecticut cities. The index is the difference between the cost of providing non-school public services (costs) and the economic resources available to pay for those services (capacity).There is not much of a consistent pattern between the index and either local or regional sales tax revenue per capita, although the correlation coefficients suggest that larger sales tax revenue per capita is associated with greater fiscal health. We get a similar result if we use the property tax base (i.e., Grand List) per capita rather than the index of fiscal disparities. So, it appears that neither a local or regional sales tax will on average reduce fiscal disparities between towns.
If structured as an add-on to the state sales tax, the cost of administration and compliance would be small. A local sales tax would generate tax revenue from commuters and visitors, thus offsetting some of the service costs associated with commuters and visitors. Sales tax revenue are expected to be more cyclical than property tax revenues. Sales taxes are also more regressive than property taxes. Directory: wp-content -> uploads -> 2016 2016 -> 2017 afoCo Landmark Scholarship Program 2016 -> Instructions for the Preparation of Camera-Ready Contributions to the Conference Proceedings 2016 -> Step student Scholarships for Year 10-13 2016 -> The united church of canada 2016 -> Idan raichel biography – May 2016 Brief Producer, keyboardist, Lyricist, composer and Performer Idan Raichel 2016 -> An introduction to centre’s interventions expanding access to justice 2016 -> Sanchar Shakti 2016 -> Unit analysis should help here. We want number of bananas 2016 -> The Autobiography of Elder Joseph Bates 2016 -> The Great Heat and the Rhode Island Deep Water Bay Scallop (Argopecten irradians) Fishery 1875-1905 Download 1.02 Mb. Share with your friends:
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