Economic Impacts of Possible Tax Policy Changes

1. Economic Impacts of Possible Tax Policy Changes Analysis of CP2C1 with Wealth Effect Dr. Tony Villamil Dr. Robert D. Cruz Taxation and Budget Reform Commission Tallahassee, Florida April 24-25, 2008

2. Additional Analysis of CP02 • Background • This new analysis of CP02 has been prepared adding a wealth effect from RLE elimination • In our opinion, the analysis of CP02 we submitted for the March 17th meeting of the TBRC (without the wealth effect of RLE elimination) is the most accurate assessment of the potential impacts from CP02 on Florida’s economy • However, we have conducted an additional simulation estimating how our March 17 results would change if the reduction in RLE were to lead to an $80 billion increase in property values as suggested by Dr. Hank Fishkind’s analysis of this proposal

3. In our research, we have not found empirical evidence at State level indicating that a reduction in property taxes leads, by itself to, an increase in property values. Many other variables affect property values

4. Additional Analysis of CP02 • New Simulation Parameters • This simulation assumes that property values within Florida will rise by $80 billion with elimination of $8 billion in RLE (as indicated in Dr. Fishkind’s presentation) • Approximately 73% of assessed taxable value is comprised of residential properties, and we estimate that 10% of those properties are owned by non-Florida residents • The above data implies that the household wealth of Florida residents would then rise by $52.6 billion under Dr. Fishkind’s increase in property value calculation

5. Additional Analysis of CP02 • Wealth Effects – The Evidence • Empirical studies estimating the impact on consumer spending from an increase in net worth (without regard to its source) cover a broad range • The most recent long term study covering 1953 to 1997, found a consumption impact of $4 per $100 increase in net worth, but the impacts ranged from a high of $10 (1976-1985) to a low of $2 (1987-1997) • Ludvigson and Steindel (1999). “How Important is the Stock Market Effect on Consumption,” Fed Bank of NY Policy Review, July

6. Additional Analysis of CP02 • Wealth Effects – The Evidence (concluded) • Two empirical studies estimating the impact on non-housing consumer spending from changes in housing prices suggest a weak correlation at best • Englehard (1996). “House Prices and Home Owner Savings Behavior,” Regional Science and Urban Economics, Vol. 26 • Skinner (1996). “Is Housing Wealth a Sideshow,” in D. Wise, Advances in the Economics of Aging. Univ. of Chicago Press • Based on the results of these studies, the simulation results shown below assume that each $100 increase in residential home value leads to an additional $3 of consumer spending

7. Simulation Results • All other estimates and assumptions used in our previous analysis of the economic impacts of CP02 – e.g., the funding sources to be used for replacing the RLE and the amount of RLE taxes to be replaced – were used in this simulation as well • Including the assumption that property values increase by $80B reduces the decline in economic growth from the baseline, but does not eliminate it • The results of the simulation with an increase in household wealth and the results of the prior simulation are summarized below

8. Economic Impacts of CP2CI on Key Macroeconomic Indicators:Assumes $80 Billion Increase Property Values from Elimination of RLE

9. Economic Impacts of CP2CI on Key Macroeconomic Indicators:Without Wealth Effects

10. Summary of Results for CP2C1 • Positive economic stimulus from elimination of RLE is smaller than the contractionary effects of increase in sales taxes and net reduction in state and local government spending when a “systems” or “general equilibrium” analytical framework is used (REMI model) • Florida’s economy grows more slowly than under the baseline simulation as reflected in lower job growth, lower population growth, lower GDP growth, and lower income growth in absolute and per capita terms

11. Summary of Results for CP2C1 (continued) • Even when assuming an unlikely $80 billion increase in property values, CP02 is likely to reduce slightly economic growth (from baseline trend) • The economic stimulus from the elimination of the RLE is not sufficient to overcome the anti-growth and competitive pressures of higher sales taxes and reductions in state budgets necessary to replace RLE revenues • The “tax swap” in CP02 will not likely increase population migration since, on an aggregate level CP02 reduces real, after tax, income per capita