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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 November 2006. A quick look at Michigan state and local tax effort, by taxpayer income catagory. Richard G. Sims

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the role of taxes and education funding in charting michigan s economic future

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

slide2
A quick look at Michigan state and local tax effort, by taxpayer income catagory

Richard G. Sims

Sierra Institute on Applied Economics

slide3

Michigan Taxes

Source: Who Pays?: A Distributional Analysis of the Tax Systems of All 50 States, Second Edition, Institute on Taxation and Economic Policy, 2003.

Richard G. Sims

Sierra Institute on Applied Economics

slide4

…and how they have changed.

Source: Who Pays?: A Distributional Analysis of the Tax Systems of All 50 States, Second Edition, Institute on Taxation and Economic Policy, 2003.

Richard G. Sims

Sierra Institute on Applied Economics

slide5

FY 2004-2005

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

slide6
What Public Policies Influence State Economic Growth?

Richard G. Sims

Sierra Institute on Applied Economics

slide7

Do low business taxes lead to economic growth?

Richard G. Sims

Sierra Institute on Applied Economics

slide8

Chart A: The 10 Fastest Growing States’ Corporate Income Tax Rates: Average7.1%

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, www.taxadmin.org.

Richard G. Sims

Sierra Institute on Applied Economics

slide9

Chart B: The 10 Slowest Growth States’ Corporate Income Tax Rates: Average6.25%

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, www.taxadmin.org.

Richard G. Sims

Sierra Institute on Applied Economics

in fact over the last decade
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

slide11
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

chart a states ranked most business tax friendly
Chart A: States ranked MOST ‘Business Tax Friendly’

Tax Foundation Rankings

SOURCE: Tax Foundation, Inc.,State Business Tax Climate Index

Richard G. Sims

Sierra Institute on Applied Economics

chart b states ranked least business tax friendly
Chart B: States ranked LEAST ‘Business Tax Friendly

SOURCE: Tax Foundation, Inc.,State Business Tax Climate Index

Richard G. Sims

Sierra Institute on Applied Economics

slide14
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

slide15

Source: Data from Federation of Tax Administrators and the U.S. Department of Commerce.

Richard G. Sims

Sierra Institute on Applied Economics

slide16
How about the effect of the overall “Business Climate”…

Richard G. Sims

Sierra Institute on Applied Economics

slide18

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.

one reason corporate income taxes don t have much influence on state s comparative growth
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

slide20

State Corporate Income Tax Rates

Maximum Corporate Tax Rate

¾ of states have rates between 6%-9%

IOWA

Mid-Point 7.5%

MINNESOTA

ILLINOI

S

WISCONSIN

The 45 States with a Corporate Income Tax

Richard G. Sims

Sierra Institute on Applied Economics

slide21
From the previous chart

Lowest rate– Kansas, 4%: growth rank 26th

Highest rate—Iowa, 12%: growth rank 27th

Richard G. Sims

Sierra Institute on Applied Economics

another reason corporate income taxes don t determine a state economic growth
Another Reason Corporate Income Taxes Don’t Determine a State Economic Growth…

Richard G. Sims

Sierra Institute on Applied Economics

slide23

Richard G. Sims

Sierra Institute on Applied Economics

Source: U.S. Department of Commerce, National Income and Product Accounts, 2003.

what firms say are their major cost considerations when relocating
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, 1997.

Richard G. Sims

Sierra Institute on Applied Economics

slide25
Similarly, taxes on individuals don’t appear to determine states’ growth…

Richard G. Sims

Sierra Institute on Applied Economics

slide26

In general, states with high economic growth had relatively higher taxes.

Richard G. Sims

Sierra Institute on Applied Economics

slide28

Elementary & Secondary Spending

Average growth for the 50 states and DC: 4.1%

SOURCE: Education spending data from National Center for Education Statistics, http://nces.ed.gov; income data from U.S. Bureau of the Census, Bureau of Economic Analysis.

slide29

ELASTICITIE$

How revenues grow over time determines states’ ability to fund futureservices-

Typical Long-Term 50 State Averages

Personal Income Tax 1.04

Corporate Income Tax 0.95

Sales Taxes 0.97

Property Taxes 0.96

Cigarettes (avg. all states) 0.48

Lottery (avg. all states) 0.52

These all grow slower than the economy

Richard G. Sims

Sierra Institute on Applied Economics

slide30

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.

slide32

A Dynamic General Equilibrium Analysis of a Balanced Budget Tax and Spending Increase

Richard G. Sims

Sierra Institute on Applied Economics

slide33

A Dynamic General Equilibrium, Balanced Budget Analysis of Proposal 5

Source: Richard Sims, using the REMI economic model for Michigan.

slide34

Source: The Long-Term Effects of TABOR on the Michigan Economy, Sierra Institute on Applied Economics, September, 2006..

slide35

Source: The Long-Term Effects of TABOR on the Michigan Economy, Sierra Institute on Applied Economics, September, 2006..

slide36

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

slide37

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

slide38
“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

slide39

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

Long-Term:

-Amenity value

-Source of productivity

-Source of competitiveness

Richard G. Sims

Sierra Institute on Applied Economics

a concern for michigan s future
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

slide41

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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