Economic Impacts of Possible Tax Policy Changes

1. Economic Impacts of Possible Tax Policy Changes Dr. Tony Villamil Dr. Robert D. Cruz Taxation and Budget Reform Commission Tallahassee, Florida April 4, 2008 Analysis of CP45C2

2. CP045C2 • Brief Description • Provides for limits on future growth of state and local government revenues beginning in FY2009-10 and effectively provides limits on state and local government spending • “Local governments” refers to • Counties • Municipalities • Local School Districts • Special Districts

3. CP045C2 • Brief Description (continued) • State revenues subject to limits under CP45 are • Taxes, fees, licenses, fines and charges for services. • State revenues not subject to limits are: • Revenues to comply with bond obligations prior to July 1, 2008 (amendment to Jan. 1, 2008 proposed) • Proceeds from lottery returned as prizes • Receipts from catastrophe fund or state property insurance corporation • Revenues authorized by constitutional amendments after July 1, 2008 (Jan. 1, 2008 in amendment) • Amendment 1 to CP45C2 would exclude revenue of Florida Prepaid College Fund

4. CP045C2 • Brief Description (continued) • Local government revenues subject to limits under CP45 are • Taxes, fees, assessments, licenses, fines and charges for services. • Local revenues not subject to limits are: • Revenues to comply with bond obligations prior to July 1, 2008 (amendment proposes Jan. 1, 2008) • Voter approved ad valorem taxes levied for periods not exceeding 2 years • Voter approved non-ad valorem taxes required by the constitution or general law

5. CP045C2 • Brief Description (continued) • Additional local revenues not subject to limits are: • Revenues for direct cost of providing electric, water, waste water, gas or other utility services (airports and seaports also excluded in proposed amendment to CP45C2) • Revenues of government owned enterprise receiving less than 10% of its revenues from the State or a local government • County taxes on lodging for promotion of tourism or related activities • Revenues authorized by constitutional amendments after July 1, 2008. (Jan.1, 2008 in amendments)

6. CP45C2 Revenue Cap Formula • State and local revenues subject to limitations under CP45C2 are restricted to an increase over prior year’s revenues by • Percent growth in population (enrollments for school districts) + the rate of national inflation in the consumer price index + 1% • The revenue limits begin in FY2009-10 and is calculated as if the revenue caps had been in effect in FY2008-09: (FY07-08 Revenues) x (population growth rate + CPI inflation + 1%)

7. CP45C2 Revenue Cap Formula • CP45C2 allows local governments to override revenue growth limits by supermajority vote of governing board • New taxes or fees can be introduced with approval of the electors • Proposed amendments to CP45 allow state government to override state revenue caps by supermajorities in the legislature • Proposed amendments allow for higher revenue caps for local governments that meet FL legislature’s criteria (to be determined later)

8. CP45 Simulation Parameters • Economic impact simulations are based on the CP45C2 version of this proposal and not on proposed “strike all” amendment • Florida Policy and Budget Council prepared estimates of State fiscal impacts from CP45 under revenue cap formula • Their analysis begins with a projection of unconstrained growth in those State revenues that would be limited by CP45, calculates the revenues allowed under the cap formula, and computes the difference between the capped revenues and uncapped revenues

9. CP45 Simulation Parameters • It is necessary to project combined local revenues subject to growth limits under CP45 to estimate its economic impact • Census data suggested that local government revenues subject to limitations under CP45 have been roughly stable since FY2001-02 at 77% of state government revenues subject to the same limitations (i.e., taxes, some fees and charges) • The Policy and Budget Council projected state revenues subject to CP45 growth limits at $35.5 billion in FY2007-08. The historical ratio noted above suggests that $27.2 billion is a reasonable estimate of local government revenues that would fall under the same growth limits

10. The Baseline Projection of Local Revenues in the Absence of CP45 • The increase in local revenues subject to CP45 growth caps for property taxes and all other revenues are projected separately • Baseline estimates of future growth in local property tax revenues are determined by • New construction based on anticipated growth in households. • Projected increase in taxable value under SOH and determined by inflation in consumer prices and an adjustment for real appreciation (or depreciation) in values. • The anticipated growth in households is taken from the latest FL Economic Estimating Conference projections, and the CPI inflation rates are those projected by the Congressional Budget Office.

11. The Baseline Projection of Local Revenues (continued) • Estimates of future growth in local revenues subject to CP45 limits from non-property tax sources are determined by • Personal income growth • The anticipated growth in personal income is taken from the latest Florida Economic Estimating Conference projections

12. Baseline Growth Rates for Revenues Subject to CP45 Limits The growth caps for an individual local government’s revenues may differ from the growth cap for State revenues, but the growth cap for aggregate local government revenues must equal to the growth cap for State revenues

14. The Economic Impacts • When the projected or baseline state and local revenues are below the revenue growth caps, there are no resulting fiscal or economic impacts • When baseline state and local revenues exceed the caps, then the caps are binding and taxes and spending are lower than would otherwise occur • When the caps are binding on state revenues, sales taxes and state government spending are reduced by an equivalent amount in simulating the economic impacts • When the caps are binding on local revenues, property taxes and local government spending are reduced by an equivalent amount in the simulations

15. Economic Impact Methodology • The economic impacts were estimated using a Florida REMI model that explicitly recognizes the complex interactions that take place within a macroeconomy – spending, income, costs of production, capital investment, population growth and capital migration are all inter-related • The impacts from policy changes on productivity and regional competitiveness are also explicitly considered. • The effects of policy changes over time are shown through changes in the capital stock (capital investments), population and productivity • A general equilibrium analysis (or systems approach) is the preferred framework for examining the impact of changes in tax policy

16. SummaryEconomic Impact Simulation Results • No impacts occur in FY2009-10 because revenue/expenditure caps are not binding (i.e., revenue cap greater than baseline revenue) • In FY2010-11 and beyond: • The declines in state/local spending result in declines in public administration employment from the baseline • The reduction in taxes increase real income, stimulate consumer spending and private sector employment increases above the baseline. • Since public sector jobs per dollar of public sector revenues is higher than the jobs/revenue ratio in the private sector, the net impact on job growth is slightly negative • There is a slight increase in total and per capita real disposable income • Government expenditures is part of State GDP. The increase in private sector output is not large enough to cover the decline in GDP in the public sector – total GDP declines very modestly from the baseline [continue]

17. There is a steady shift toward private-sector employment and economic activity relative to the public-sector employment • Overall impacts on economic growth are small relative to the baseline since government revenue reductions from the baseline are projected to be small in relative terms, as well as the positive impacts on the private sector cushion, to an extent, the relatively larger decline in public-sector employment from baseline

18. Caveats • Model simulations do not account for legislative actions to override revenue caps • Model does not account for economic impact from potential loss of public goods that simulate economic growth (e.g., education, infrastructure investments and economic development incentives) • Model also does not account from the possible and long-term (beyond the model specified time period) productivity enhancing effects of resource shifts to the private sector and the prioritization of public spending due to the caps

19. Impact Simulation Results