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Revenue Trends in Midwestern States

Explore the shifts in state revenue sources, economic factors impacting tax revenue, and changes in business taxes in Midwestern states between the 1990s and 2000s. This report provides in-depth analysis and case studies from Ohio, Michigan, and more.

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Revenue Trends in Midwestern States

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  1. Revenue Trends in Midwestern States Prepared forMSATA 46th Annual Conference August 21, 2006Traverse City, MI Patrick L. Anderson, PrincipalAnderson Economic Group LLC

  2. Introduction State Revenue Trends, 1990’s v. 2000’s Underlying Economics of State Tax Revenue Private Sector Employment Unemployment, Wages, and Poverty Business Taxes Case Studies of Recent Tax Changes Ohio Michigan V. Conclusions Outline

  3. I. Introduction Anderson Economic Group, LLC • Economic consulting firm specializing in public finance, tax, and fiscal impact analysis. • Clients include state and local governments throughout the United States. Patrick L. Anderson • Founder and CEO of AEG • Author of Business Economics & Finance (CRC Press, 2004) • Author of 2006 SBT Repeal Law for Michigan • Author of 2006 50-State Business Tax Benchmarking Study

  4. II. State Revenue Trends: 1990’s v. 2000’s • Revenue growth for Midwestern states varied between the 1990’s and 2000’s. • “Midwestern” states include Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, and Wisconsin.

  5. Annual Growth of State and Local “Own Source” Revenue Source: Census of Governments, State and Local Survey

  6. II. State Revenue Trends: Revenue Sources • States vary greatly in how they have shifted between revenue sources. • Tax vs. non-tax sources. • “Business” taxes vs. other sources.

  7. Change in % of Revenue from Taxes, 1992-2004 Source: Census of Governments, State and Local Survey

  8. Change in % of Revenue from Business Taxes (AEG Estimates), 2002-2004 Sources: Census of Governments, State and Local Survey (Revenue) Anderson Economic Group, LLC (Estimated Business Taxes)

  9. III. Underlying Economics of State Tax Revenue A. Private Sector Employment • The fundamental strength of an economy comes from its private sector employment. • Midwestern states had better private sector employment growth in the 1990’s than thus far in the 2000’s.

  10. Annual Growth in Private Sector Employment Source: Bureau of Labor Statistics

  11. III. Underlying Economics of State Tax Revenue (Continued) A. Private Sector Employment (Continued) • In general, Midwestern states that did very well in the 90’s do better than average in the 2000’s. • Some states stuck out: Michigan has experienced the most serious recent decline, followed by Ohio and Illinois.

  12. III. Underlying Economics of State Tax Revenue (Continued) B. Unemployment, Wages, and Poverty • Unemployment in the Midwest was lower than the national average in the 1990’s, but higher more recently. • High-wage sectors (e.g. information and manufacturing) have seen employment shrink. • Low-wage sectors (e.g. leisure & hospitality and retail trade) have seen employment grow. • Note: for this section, we use the BLS definition of “Midwest,” which does not include Oklahoma.

  13. Unemployment Rate: U.S. and Midwest Source: Bureau of Labor Statistics

  14. High-Tech • High-Tech employment is an underappreciated source of jobs and tax revenue. • See AEG’s report on Michigan’s Automation Alley region. • Used a proper definition of high-tech industries. • Found that high-wage jobs grew, except in automobile manufacturing.

  15. Wages and Employment in the Midwest, by Sector Source: U.S. Census Bureau

  16. III. Underlying Economics of State Tax Revenue (Continued) C. Business Taxes • AEG Business Tax Benchmarking Study • Commissioned by Michigan House of Representatives • Identify metrics that we could use to compare 50 states’ business taxation.

  17. III. Underlying Economics of State Tax Revenue (Continued) C. Business Taxes (Continued) • AEG Benchmarking Study Approach • Used Census of Government’s State and Local Tax Data, IRS SOI, as our base data. • Apportioned taxes on the basis of initial incidence. • “Business” taxes include: income (including on pass-through entities), property, selective sales, unemployment, licenses. • Sales tax considered a consumer tax. • Disclosed data and methodology.

  18. III. Underlying Economics of State Tax Revenue (Continued) C. Business Taxes (Continued) • AEG Benchmarking Study Approach • Compared all states and D.C. • Overall tax burden • Total State and Local Taxes / Statewide Personal Income • Three business tax burden measures: • Business Taxes / Statewide Personal Income • Business Taxes / State GSP • Business Taxes / State Profits

  19. Business Taxes as a Share of Personal Income Source: AEG Estimate Base Data: U.S. Census of Governments

  20. Business Taxes as a Share of Private GSP Source: AEG Estimate Base Data: U.S. Census of Governments

  21. Business Taxes as a Share of State Business Profits Source: AEG Estimate Base Data: U.S. Census of Governments

  22. III. Underlying Economics of State Tax Revenue (Continued) C. Business Taxes (Continued) • Most Midwest states have higher business tax burdens than the U.S. average. • A few, notably Missouri, South Dakota, and Minnesota, have relatively low business taxes. • Business taxes affect location decisions and economic growth. • However, it is not the only factor, or even the most important factor.

  23. IV. Tax Changes • Taxes have been a hot topic since 2001 with changes occurring at the federal, state, and local levels. • These changes affect the revenue coming into state government. • Tax policy also affects the rate and composition of employment growth • Consider, as case studies, two states with recent business tax changes driven primarily by the desire to stimulate economic growth: Ohio and Michigan.

  24. Case Study: Ohio • Major Tax Changes • Began phasing out its corporation franchise and tangible personal property taxes. • Began phasing in the commercial activities tax (CAT). • Cut the individual income tax rate by 21% for all tax brackets by 2009. • Cut the state sales tax rate from 6% to 5.5%. • Increased the cigarette excise tax.

  25. Case Study: Ohio (cont.) • What is the CAT? • It is a privilege tax on taxable gross receipts that applies to most business activity in the state. • CAT taxes sales, performance of services, and rentals or leases. • Corporations, sole proprietorships, partnerships pay the tax. • Base rate is 0.26% of gross receipts.

  26. Case Study: Ohio (cont.) • Impact of the CAT on State Revenue • It’s too early to tell, but…so far, the tax has raised more revenue than expected. • Receipts in FY 2006 for the first 6 months totaled $185.1 million, which were over OBM estimates by $41.6 million (or 29%). • All corporate taxes were up 16.5% in FY 2006 over FY 2005. Source: State of Ohio, Office of Budget and Management

  27. Case Study: Michigan • The Single Business Tax (SBT) • A modified value-added tax. • Brought in $1.9 billion in revenue for the state in 2004. • 8.5% of state tax revenue. • Less variable source of revenue than a profits tax. • Current SBT places a disproportionate burden on manufacturing. (See 2005 AEG SBT study.)

  28. Case Study: Michigan (cont.) • Repeal of the SBT • Initiated law (via petition). • Purpose: repeal and replace with “less costly” tax. • Zero rate after December 31, 2007. • Michigan Legislature approved initiated law on August 9, 2006.

  29. Case Study: Michigan (cont.) • Possible Replacements: Form • Tax on corporate profits or business profits • Tax on gross receipts • Extension of the sales tax to services • “Fair Tax” • SBT Redux • Hybrid income-VAT as in 2005 reform proposal.

  30. Case Study: Michigan (cont.) • Impact on State Revenue • Ballot language calls for a “less costly” tax. • Current revenue is about $1.9 Billion. • Estimates are difficult given current data on SBT • We estimate a 0.5% tax on gross receipts would produce approx. $828 million in revenue. • We estimate a 3.9% tax on corporate profits would generate $704 million.

  31. V. Conclusions • Midwestern states have greatly varying revenue source trends. • Tax vs. non-tax sources. • Business tax vs. other sources. • Underlying economic growth for most Midwestern states has slowed in the current decade. A few states are doing poorly. • “Business tax” changes are driven by economic growth desires • Case studies: Ohio and Michigan • Expect more demand for business tax changes in the coming 5 years.

  32. AEG Reports Related to this Presentation • Benchmarking for Success: A Comparison of State Business Taxes (2006) • The Tax Burdens of Michigan’s Single Business Tax (2005) • Automation Alley’s First Annual Technology Industry Report (2005) Available at: http://www.andersoneconomicgroup.com

  33. Contact Information Patrick L. Anderson, PrincipalCaroline Sallee, Senior AnalystAlexander Rosaen, Senior Analyst Anderson Economic Group LLC 1555 Watertower Place, Suite 100East Lansing, Michigan 48823Phone: (517) 333-6984 Reports and company information may be found at: http://www.AndersonEconomicGroup.com

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