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Tax Reform Initiatives: The Impact According to Research. Ken Heaghney. Columbus, Georgia December 11, 2007. Outline of Tax Reform Strategy. Eliminate all property taxes Broaden the sales tax Remove current sales tax exemptions Does this include business exemptions?
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Tax Reform Initiatives: The Impact According to Research Ken Heaghney Columbus, Georgia December 11, 2007
Outline of Tax Reform Strategy • Eliminate all property taxes • Broaden the sales tax • Remove current sales tax exemptions • Does this include business exemptions? • Add services to the sales tax base • How aggressive in taxing services? • Replace lost property tax revenues with grants • Provide a tax credit for low income household • ESPLOST: half for operations
Agenda • Background data on property tax and sales tax revenues • Some preliminary data on winners and losers • Estimating the net fiscal impact
Georgia Local Government General Revenues = $19.4 Billion Source: U.S. Bureau of the Census
Net of Offsets, $9.0 Billion in Property Tax Revenue Must Be Replaced Offsets Assessor Costs Property Tax Deduction HTRG Net = $9.0 Billion Total Property Taxes
Agenda • Background data on property tax and sales tax revenues • Some preliminary data on winners and losers • Estimating the net fiscal impact
Who Pays the Property Tax? Revenue by Property Class ($Millions)
Summary of Current Sales Tax Exemptions ($Millions) Total = $10.9 Billion
How Does Broadening the Base Change the Sales Tax Burden? Low High Source: Fiscal Research Center
Key Issue – Property Taxes are Deductible • In 2006, itemized deductions related to property tax reduced Georgia taxpayers income tax liability: • Federal liability reduced by $930 million • State liability reduced by $105 million
Agenda • Background data on property tax and sales tax revenues • Some preliminary data on winners and losers • Estimating the net fiscal impact
Issues in Broadening the Sales Tax Base • Measurement – We lack good data to precisely measure the expected revenue from a broader base. • Several methods used to narrow the potential range • Policy - How aggressively do we want to tax services and eliminate exemptions? Rent? Health care? Business? • Scenarios created to identify revenue impacts from different strategies • Compliance and Avoidance – It may be difficult to collect from some service providers and some consumers may increase cross border & internet shopping. • Estimates should be considered upper bound impacts
Using State GDP Data to Estimate the Sales Tax Base (Laffer Method) Total State & Local Sales Tax Revenue $22.2 billion This method shows a net increase in tax revenues
Alternative Estimate Using Laffer’s Methodology Total State & Local Sales Tax Revenue $16.1 billion This method shows a net decrease in tax revenues; estimate includes about $5.2 billion on new homes & health care services
Added Revenue from Eliminating Current Exemptions on Goods (in $millions) Alternative 1 Alternative 2 Alternative 3 Alternative 4 Source: Fiscal Research Center
Added Revenue from Taxing Additional Services (in millions) Alternative 1 Alternative 2 Alternative 3 Source: Fiscal Research Center
Summary – Added Revenue from Broadening the Sales Tax Base (in millions) Benchmark: exempts most B2B sales, tax household purchases of services except health care and education. Aggressive: add services provided to businesses, 30% not taxed. Source: Fiscal Research Center
Summary of Alternative Estimates ($ billions) Total Sales Tax Revenue Total Required to Breakeven Estimates indicate that a very aggressive approach to eliminating exemptions and taxing services is required to fully replace all property tax revenue