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


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

Richard G. Sims

Sierra Institute on Applied Economics


Michigan Taxes taxpayer income catagory

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


…and how they have changed. taxpayer income catagory

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


FY 2004-2005 taxpayer income catagory

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


What Public Policies Influence State Economic Growth? taxpayer income catagory

Richard G. Sims

Sierra Institute on Applied Economics


Do low business taxes lead to economic growth? taxpayer income catagory

Richard G. Sims

Sierra Institute on Applied Economics


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


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… Tax Rates: Average

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


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 seen as having a favorable Business Climate encourage a states economic growth?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 seen as having a favorable Business Climate encourage a states economic growth?LEAST ‘Business Tax Friendly

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

Richard G. Sims

Sierra Institute on Applied Economics


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


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

Richard G. Sims

Sierra Institute on Applied Economics


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

Richard G. Sims

Sierra Institute on Applied Economics


Site Selection Climate”… Magazine, November, 2006


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


State Corporate Income Tax Rates Influence on State’s Comparative Growth-

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


From the previous chart Influence on State’s Comparative Growth-

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


Richard G. Sims State Economic Growth…

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


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

Richard G. Sims

Sierra Institute on Applied Economics


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

Richard G. Sims

Sierra Institute on Applied Economics



Elementary & Secondary Spending higher taxes.

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.


E higher taxes.LASTICITIE$

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


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.



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

Richard G. Sims

Sierra Institute on Applied Economics


A Dynamic General Equilibrium, Balanced Budget Analysis of Proposal 5

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


Source: Proposal 5The Long-Term Effects of TABOR on the Michigan Economy, Sierra Institute on Applied Economics, September, 2006..


Source: Proposal 5The Long-Term Effects of TABOR on the Michigan Economy, Sierra Institute on Applied Economics, September, 2006..


Source: Proposal 5Tax Limitations, Education Funding Measures and Economic Growth: A Look at Michigan, Sierra Institute on Applied Economics.


Source: Proposal 5 The Economic Impact of the Georgia Lottery, Carl Vinson Institute of Government, University of Georgia.


Proposal 5I 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


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 job creation?

Over the decade of the 1900’s, Illinois lost 121,000 college graduates to other states.

Richard G. Sims

Sierra Institute on Applied Economics


CONCLUSIONS job creation?

  • 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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