An analysis of the economic impact of several fiscal alternatives

              "An Analysis of the Economic Impact*:: of Several Fiscal Alternatives"







Prepared for the Senate and House Joint Fiscal Reform ~ommittee by Alberta H. Charney, Ph.D. Gerald J. Swanson, Ph.D. Marshall Vest, M.S. Craig Horn, M.A. Dennis L. Hoffman, Ph.D. Michael B. Ormiston, Ph.D. Don E. Schlagenhauf, Ph.D. Lee R. McPheters, Ph.D. Timothy D. Hogan, Ph.D. Tracy L. Clark, M.S.







Typography by James Dodson







Preface



In February of 1990 the authors of this project were asked to analyze the economic impact of a series of fiscal initiativesthat are being considered during the 1990 Legislative session. The legislature encouraged legislative staff, Department of Revenue staff, and all affected agencies to cooperate by answering questions or making relevant data available to us. The fundamental assumptions concerning tax incidence as well as all ancillary analysis used in this report are based on established economic principles. The methodology was applied uniformly and consistently to all aspects of the alternative initiatives without bias toward any particular plan. Formal Plans were delivered to the authors on March 1, 1990 and the final report was delivered on April 9, 1990. The authors believe the study is an accurate analysis of the economic impact of these alternative tax and expenditure proposals. However, because of the magnitude of the task @2 and m yfive constraint, isolated ambiguities andlor typographical errors may remain. We are deeply indebtedto a number of individuals who supplied assistance to this project. The list includes but is not limited to Mr. Richard Beemiller, US-BEA; Mr. Michael Glenn, US-BEA; Ms. Georganna Meyer, DOR; Ms. Candy Cooley, DOR; Ms. Elaine Smith, DOR; Mr. Harry Cordova, DOR; Ms. Judy Richardson, DOE; Ms. Julie Vazquez, DOE; Mr. Arthur Black, DEQ; Mr. Kevin McCarthy, ATRA; Ms. Eileen Nader, APS; Mr. Herb Uphoff, ADOT; Mr. Lyle Morris, APS; and Ms. Sandy Palais, ASU. The typography talents of Mr. James Dodson were essential to this project. Neither Arizona State University, the University of Arizona, nor any agency of Arizona government is responsible for or necessarily endorses its conclusions. The analysis and conclusions of this report as well as all errors and omissions are the sole responsibility of the authors.







-The Authors



2; ; :







TABLE OF CONTENTS



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Chapter







Title Project Overview A Description of Several Fiscal Initiatives A Brief Description of the Project







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. ;qvllijr-qf;G S B S ~ ? The Economic Impact of Several Fiscal Initiatives: Outpdv Edh5fi@ ""lE



and Employment Effects -r-Q Dennis L. Hoffman, Ph.D.; Michael 6 Ormiston, Ph.D. ,' . Tracy L. Clark, M.S.



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r ;-,yfl%S23iu\ ; A Qualitative Analysis of Proposed Tax Packages Alberta H. Charney, Ph.D. and Gerald J. Swanson, Ph. D. ; 2';" s7 :kf15z



Distributional lmpact of the Proposed Fiscal Initiatives Alberta H. Charney, Ph.D.; Craig M. Horn, M.A. and Dennis L. Hoffman, Ph.D.



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An Analysis of the Responsiveness and Stability of Proposed Tax lnitiatives Don E. Schlagenhauf, Ph.D. The Impact of Proposed Tax Initiatives on Business Climate Lee R. McPheters, Ph.D. and Marshall Vest, MS. An Analysis of the Tax Exportation Associated with the Proposed Fiscal lnitiatives Timothy D. Hogan, Ph.D. House Select Fiscal Reform Committee Fiscal lnitiative - Package A House Select Fiscal Reform Committee Fiscal lnitiative - Package B Senate Select Fiscal Reform Committee Fiscal lnitiative - Package C Senate Select Fiscal Reform Committee Fiscal lnitiative - Package D







5







6







Appendix A Appendix B Appendix C Appendix D







PROJECT OVERVIEW







AN ANALYSIS OF THE ECONOMIC IMPACT OF SEVERAL FlSCAk INITIATIVES







The initiatives analyzed in this report include two separate tax/expenditure packages proposed by the House Select Fiscal Reform Committee and two separate taxlexpenditure initiatives proposed by the Senate Fiscal Reform Committee. Detailed background discussion for each of the four initiatives is contained in Appendices A and B supplied by the House and Appendices C and D supplied by the Senate. In addition to the four basic plans, the Senate Plan D provides for several tax initiatives that are designed to be phased in over several years. We will







@







analyze Plan D l (the FY91 effect of Plan D) and Plan D2 -the effect of tax changes as of FY95 proposed in Plan D. The Dz tax effects will be expressed in



FY91 dollars to facilitate a comparison with commensurate government







expenditures. A summary of the alternative fiscal programs appears in Tables



0.1 through 0.5. For background and more detail refer to the appendices







attached to the final report. The expenditure mix in fiscal packages A, B, C, and D l is essentially the



'







.







same. Each initiative will contain $55.8 million for an increase in State employee wages, $1 13.5 million in K-12 education expenditures, $27.1 million for universities, $1 1.7 million in increased community college expenditures, and



$24.5 million for the department of corrections. AHCCCS expenditures will be $23.3 million in Plan A and $20.1 million in Plans B, C, and $17.255 million in







Plan Dl. An additional $8 million will be spent by ADOT in Plan Dl. Plan Dl also implies an expenditure of $68.4 million in FY-91 at the local level. We







presume that the mix of local expenditures will be 13% on general government,



27% on public safety, 15% on the court systems, and 45% on health and







welfare. Plan D2 expenditures will include $271.7 million in General Fund Programs split as 22.3% on a wage package, 45.4% on K-12 education, 10.8% on Universities, 4.7% on Community Colleges, 9.8% on Corrections and 6.9% on AHCCCS. In addition, $8 million will be spent by HURF. The remaining $68.4 million will be spent at the local level as in Plan Dl. The following report contains a number of tasks. Task 1 examines the output, employment and earnings effects of the alternative fiscal (tax/expenditure) proposals. Task 2 examines the initiatives using a list of normative criteria for assessing the merits of various tax strategies. In Task 3 we examine the impact of the various fiscal initiatives on the distribution of income in the state of Arizona. Task 4 examines the stability and predictability of the various tax initiatives as sources of General Fund revenue. In Task 5 we examine whether any of the alternative fiscal initiatives have an adverse impact on the business climate of the state of Arizona. Task 6 identifies the degree to which the tax liabilities associated with the alternative initiatives are borne by out-of-state residents or firms.







THE ECONOMIC IMPACT OF SEVERAL FISCAL ALTERNATIVES: OUTPUT, EARNINGS, AND EMPLOYMENT EFFECTS







The output, earnings, and employment effects of the alternative fiscal alternatives may be measured by first identifying those segments of the economy that are directly affected by a tax or spending initiative. Next, we calculate the adjustments in "final demand" for goods and services that result from these direct effects. The economic impact of these final demand







adjustments is measured using multipliers taken from the Regional Input-Output model RIMS11 developed by the Bureau of Economic Analysis (BEA). These multipliers have been adjusted by BEA to account for Arizona's industry composition. The impact of the initiatives is first measured using our "benchmark" assumptions -that take the generally accepted view of a firm's ability to shift a tax burden. In addition we examine a complete shifting scenario designed to measure the most severe impact of each tax program on the State's economy. The analysis in Chapter 1 of the report identifies certain exported taxes. We account for all state taxes that are deductible against Federal tax liabilities. We also identify the out-of-state ownership of certain utility property taxes in Plans B,C, and D. Finally, we identify any final demands that apply exclusively to outof-state business endeavors. In Chapter 6 of this report we study the issue of exporting in more detail and explicitly tabulate the exporting identified in this report. The conclusions of our analysis are summarized below, for each of the alternative fiscal initiatives.







Plan A: Net Economic Impact



The net economic impact of the Plan A fiscal initiative appears in Table 0 1 . along with a summary of the consequences of each individual tax program. Under our benchmark assumption, the net effect of the Plan A initiative (option 1) is an increase in total output of $ 188.53m (a $98.03m increase in final demand plus a $90.50m increase in multiplier effects). Employment gains total 3719 jobs, household earnings increase $69.18m and the retained earnings of corporations will fall by $4.98m. Using the option 2 income tax initiative, net gains reduce to $156.87m in total output(combined final demand and multiplier effects), $58.91 in higher household earnings, and 3105 additional jobs.The net







effects of the Plan A initiative using the complete shifting assumption with the option 1 income tax initiative are an increase in total output of $ 178.77m (a $92.88m increase in final demand plus a $85.89m increase in multiplier effects). Employment gains total 3532 jobs, household earnings increase $65.90m and the retained earnings of corporations are unchanged. Using the option 2 income tax initiative, net gains reduce to $147.1 2m in total output(combined final demand and multiplier effects), $55.62 in higher household earnings, and 2918 additional jobs.







Plan B: Net Economic Impact



The net economic impact of the Plan B fiscal initiative appears in Table 0.2 along with a summary of the consequences of each individual tax program. Under our benchmark assumption, the net effect of the Plan B initiative is an increase in total output of $ 323.73m (a $164.15m increase in final demand plus a $159.58m increase in multiplier effects). Employment gains total 7184 jobs, household earnings increase 123.58m while the retained earnings of corporations will fall by $59.28. The net effects of the Plan B initiative using the complete shifting assumption are an increase in total output of $ 207.73m (a



$1 02.95m increase in final demand plus a $104.78m increase in multiplier







effects). Employment gains total 4944 jobs and household earnings increase $84.57 while the retained earnings of corporations are unchanged.







Plan C : Net Economic Impact



The net economic impact of the Plan C fiscal initiative appears in Table 0.3 along with a summary of the consequences of each individual tax program. Under our benchmark assumption, the net effect of the Plan C initiative is an increase in total output of $ 261.41 m (a $132.41 m increase in final demand plus







a $129.00m increase in multiplier effects). Employment gains total 6101 jobs, household earnings increase 103.58m while the retained earnings of corporations will fall by $36.88. The net effects of the Plan C initiative using the complete shifting assumption are an increase in total output of $ 189.25m (a $94.34m increase in final demand plus a $94.91 m increase in multiplier effects). Employment gains total 4707 jobs and household earnings increase $79.31 while the retained earnings of corporations are unchanged.







Plan D l : Net Economic lmpact



The net economic impact of the Plan D l fiscal initiative appears in Table 0.4 along with a summary of the consequences of each individual tax program. Under our benchmark assumption, the net effect of the Plan D l initiative is an increase in total output of $ 63.02m (a $32.37m increase in final demand plus a $30.65m increase in multiplier effects). Employment losses total 1514 jobs, household earnings fall 9.59m, while the retained earnings of corporations will increase by $21.21 m. The net effects of the Plan D l initiative using the complete shifting assumption are an increase in total output of $ 113.25m (a $58.87m increase in final demand plus a $54.38m increase in multiplier effects). Employment losses total 544 jobs and household earnings increase by $7.1 1m while the retained earnings of corporations are unchanged.







Plan D2: Net Economic Impact



The net economic impact of the Plan D2 fiscal initiative appears in Table 0.5 along with a summary of the consequences of each individual tax program. Under our benchmark assumption, the net effect of the Plan D2 initiative is an increase in total output of $1 14.69m (a $59.75m increase in final demand plus a $54.94m increase in multiplier effects). Employment gains total 806 jobs,







household earnings rise 21.61 m, while the retained earnings of corporations will increase by $27.12m. The net effects of the Plan D2 initiative using the complete shifting assumption are an increase in total output of $ 176.47m (a $92.34m increase in final demand plus a $84.13m increase in multiplier effects). Employment gains total 1999 jobs and household earnings increase by $42.39m, while the retained earnings of corporations are unchanged.







Overall Assessment of the Alternative Fiscal Initiatives



Table 0.6 contains a summary of the net effects of each fiscal initiative. All proposals lead to a net increase in demand and hence output of goods and services. Plans B and C appear to be the most stimulative and Plan D l is the least. Under our benchmark scenario Plans A, B, and C, all lead to reductions in the retained earnings of firms. Plans D l and D2 actually increase the retained earnings of firms due to the heavy reliance on property tax cuts associated with Plans D l and D2. All plans except D l lead to the creation of jobs. Plans B and C provide the greatest job creation. Total employment declines under Plan D l despite the modest increase in output that occurs. The service tax in Plan D l and D2 has a large negative impact on the highly employment intensive service sector of the Arizona economy. There is net job creation in Plan 02 due primarily to the stimulative effects of the decrease in commercial lease taxes. Earnings appreciate in virtually all cases with the greatest increase in household earnings coming from Plans B and C. Aggregate earnings are essentially unchanged by Plan D l .







QUALITATIVE ANALYSIS OF PROPOSED TAX PACKAGES







The four proposed alternative tax packages are very different in their approaches to raising approximately $250 million. This portion of the report provides a qualitative analysis of the proposals according to a number of criteria. The criteria are those outlined by the Fiscal 2000 staff: predictability, simplicity, horizontal equity, vertical equity, efficiency, neutrality, stability, responsiveness, and accountability. Because of the interrelationships in Arizona between state and local governments, the packages were also ranked according to interjurisdictional neutrality. Another criterion, competitiveness, is analyzed elsewhere in this report. This report carefully defines each of the criteria and provides examples that illustrate each of the criteria. Then similar features are compared across packages. For example, all property tax proposals are compared across packages, all individual income tax proposals are compared across packages, etc. By comparing similar proposals, the subtle differences between packages may be highlighted and the packages ranked for each type of tax. Finally, packages are ranked for each criteria. The ranking of packages is based on 1) the rankings of packages for each type of tax, 2) general characteristics of certain taxes, and 3) the level of revenue generated by each type of tax. The rankings in section Ill, combined with weights determined by the revenue generated by each tax within the packages determine the weights







.







used to rank the total package. The results of the ranking appear in Table 0.7. Plan A ranked best on three of the ten criteria while Plan B ranked best on one. Plan C ranked best on six of the criteria and Plan D ranked best on three of the criteria. Several plans tied for the "best" ranking on certain criteria. Alternatively, Plan A ranked worst on







a







only one of the criteria, Plan B ranked worst on two, Plan C ranked worst on only one, while Plan D ranked worst on six of the criteria.







DISTRIBUTIONAL IMPACT OF THE PROPOSED FISCAL INlTlATlVES



In analyzing the distributional impacts of the proposed tax packages, two separate effects are considered: the distribution of these taxes across consumer units with differing incomes and the distribution of earnings associated with the employment impacts resulting from these taxes. In addition, the distribution of benefits derived from the expenditures associated with these taxes are considered. The distribution of taxes across consumer units with differing incomes is computed using assumptions related to each tax package and detailed consumer expenditure data for eight different income classes. The results from this analysis are contained in Table 0.8. The distribution of earnings impacts associated with employment changes estimated in Task 1 are presented in the summary table 0.9. The earnings distribution of impacted jobs kom all the packages are similar; the impacted jobs are more heavily concentrated in the lower three earnings groups and in the highest income group. The distribution of expenditure benefits is based on the distribution of state and local expenditure benefits based on generally accepted theories in public finance. The results of our analysis of the individual expenditure proposals in each of the fiscal packages appears in Table 0.1 0. The net benefits are obtained by subtracting the expenditure benefits from tax burdens. The results appear in Table 0.1 1. Each plan delivers net benefits



to individuals in virtually every income bracket. However, individuals earning in







excess of $54,000 pay more in tax than they receive in benefits under the provisions of every fiscal initiative. Middle income households experience







some of the largest net benefits due to the relatively high education component associated with each,package. Of all the fiscal initiatives considered, Packages



B and C deliver the highest net benefits across all income levels.







AN ANALYSIS OF THE RESPONSIVENESS AND STABILITY OF PROPOSED REVENUE CHANGES







The purpose of this task is to create a quantitative measure of the changes proposed in each Revenue Package as they relate to the responsiveness and stability criterion. A revenue system is defined as responsive if this system adequately tracks the long-term growth in the state's demand for public goods.



A revenue system is stable if it does not produce wide swings in revenues in







response to economic cycles. The responsiveness measure is defined as the income elasticity of a







0







revenue source while the stability measure is the standard deviation of the annual rate of change in revenue for a particular source. Data needed to generate such measures are created by studying the implication of proposed changes in tax structure under the assumption that the changes were made in a previous fiscal year. By studying the revenue collections that would have occurred if the proposed changes were made in a previous fiscal year, predictability and responsiveness of each tax source may be observed through simulation.



-







Overall responsiveness and stability measures have been generated for each revenue package and are summarized in Tables 0.12 and 0.13. Entries for certain revenue initiatives differ from those described in Tables 0.1 through



0.5 because the responsiveness and stability analysis only applies to general







fund revenue sources. The major findings are as follows:







Package A



The responsiveness measure for this package is .8684while the stability measure is .0513. Other than Package D2, this package has the lowest stability measure. This is a result of the reliance on the personal income tax. The responsiveness measure places this package in the middle among a rank of the alternative initiatives.







Package B



This revenue package has a responsiveness coefficient of .6861 and a stability measure of ,0959. The overall income elasticity is the lowest of any package. The importance of increases in the minimum school tax is a primary factor for this responsiveness coefficient. A low responsiveness coefficient has two implications. First, in a growing economic environment, state revenue growth will not keep pace with the growth in state personal income. Second, over a business cycle, a low income elasticity means revenues will not fall as much as they would with an income elastic coefficient. Revenue Package B has the largest instability measure. The instabilities in this package are attributed to increased reliance on the corporate income tax and the mining severance tax.







Package C



This Revenue Package has a responsiveness coefficient of .8128and a stability coefficient of .0601. Both of these coefficients result in a ranking in the middle. The importance of the minimum school tax proposal keeps the elasticity from being nearer to one. The value of the stability coefficient is heavily influenced by the relative importance of the personal income tax and the minimum school tax in this proposal.







Package D







Because this tax package proposes changes over a five year period, two plans have been created. Plan D l evaluates the proposed changes that would occur in fiscal year 1990191. Plan D2 evaluates all the changes proposed over the five period assuming they all occur in fiscal year 1990191. The responsiveness coefficient for Plan D l is 1.8355 and Plan 02 is 1.6662. The stability measure for Plan D l and D2 is .0686 and .0471, respectively. The proposed changes in Revenue Package D result in the largest income elasticity measures. Ifthe state economy will continue in a growth mode, the responsiveness measure has favorable implications for the structural deficit. However, a large income elasticity also implies that revenue declines in business cycle downturns can be severe. The large income elasticity in the two plans is linked to the service sector tax and decline in reliance on the sales and use taxes. Both Plans D l and D2 score well from a stability standpoint. The service tax plays a prominent role with this measure.



THE IMPACT OF PROPOSED FISCAL PACKAGES ON BUSINESS CLIMATE







The business climate impact of fiscal changes is often as important as such other revenue characteristics as fairness, efficiency, and stability. Business climate considerations are particularly vital in Arizona, a state which has consistently ranked among the leaders in growth rates for income, population, and employment. This task measures changes in Arizona's competitive position that may result from alternative fiscal packages. The study analyzed the likely impact on three different types of indicators in order to determine:







how the revenue packages affected the tax burden rankings of Arizona vs. the 50 states, including rankings on total tax effort, per capita taxes, and taxes per $1000 of income how the revenue packages affected Arizona's performance on the closely followed Grant Thornton business climate ranking for the states of the West and the nation how each revenue package rated on its "competitiveness score", a measure of negative impact on business, constructed with weights and impacts tied to each tax change component. Tables 0.14 through 0.20 summarize the results of the analysis of business climate.







Plan A:







Business Climate Impacts







Plan A moves Arizona's total tax effort from 21st in the nation to 16, a change of five positions. Effects on personal income tax and corporate income tax burden rankings are moderate. On the Grant Thornton Business Climate Ranking, Plan A drops Arizona from 15th to 19th. The state's position relative to neighboring states does not change. The "Competitiveness Score" for Plan A is in the middle of the five plans. While the personal income tax increase and the sales tax increase in this plan should not be a major deterrent to business relocation, the plan lacks strong offsetting tax changes of the type found in other proposals. Capsule summary: moderate negative impact on tax burden and business climate rankings, but lacks components specifically attractive to relocating firms. Mid-range "competitiveness score."







Plan B: Business Climate lmpacts







Plan I3 moves Arizona's total tax effort from 21st in the nation to 16, a change of five positions, the same as Plan A. Effects on personal income tax and ranking are weaker than Plan A, but corporate income tax burden ranking changes are stronger. On the Grant Thornton Business Climate Ranking, Plan B drops Arizona from 15th to 19th. The "Competitiveness Score" for Plan B ranks fourth of five plans. One negative influence is the fuel tax, which affects transportation and distribution, two Arizona growth industries. The minimum school tax is also a large negative component of the package. Capsule summary: stronger negative impact on corporate tax burden rankings - fuel tax is strong negative offset by homeowner tax cut. Fourth ranked "competitiveness score."







0







Plan C:







Business Climate Impacts







Plan C moves Arizona's total tax effort from 21st in the nation to 18, a change of three positions, and a smaller change than in any other plan. Effects on personal income tax ranks are moderate but corporate income tax burden rankings change more than any other plan. On the Grant Thornton Business Climate Ranking, Plan C drops Arizona from 15th to 19th. The "Competitiveness Score" for Plan C nearly ties with D2 as the best of all plans. The personal income tax change is larger for C than for



A and B, and this is a closely watched indicator of tax activity. In addition, senior







executives often consider personal income taxes more important than sales taxes in relocation decisions. The corporate income tax change is also large in C. The interstate phone tax targets an Arizona growth industry, and this is a







strong negative. But this package contains a country tax relief provision which enters as a strong positive for commercial property owners. Capsule summary: Strong negative impact from telephone tax. Best feature is county tax relief, which leaps to second best business climate impact overall.







Plan D l :







Business Climate Impacts







Plan D l moves Arizona's total tax effort from 21st in the nation to 13th, a change of 8 positions, and a bigger change than A, B, or C. This plan has the largest change (with 02) on sales tax rankings, moving Arizona to 6th per capita. On the Grant Thornton Business Climate Ranking, Plan D l drops Arizona from 15th to 21st, but the state's position relative to neighboring states does not change. The "Competitiveness Score" for Plan D l is the worst of the five plans. The service tax exerts a massive negative weight in this plan, since



80 percent of its impact is on business and professional services, two key







growth sectors in the Arizona economy and the source of many start-up enterprises. The fuel tax has a negative impact on two other Arizona growth sectors, transportation and distribution. The plan contains two positive components related to property taxes, the county cuts and the statewide QTR provisions, which should be viewed as favorable to commercial properties. However, they do not completely offset the negative impacts of the service tax on potential business relocation. Capsule summary: Strong negative impact on sales tax and business climate rankings. Negative competitiveness considerations dominated by service tax, partially offset by property tax cuts. Ranks last on competitiveness score.







a







Plan D2: Business Climate Impacts







Plan D2 changes Arizona's total tax effort from 21st in the nation to 13th, a movement of 8 positions, the same as D l . Effects on personal income tax and corporate income tax burden rankings are moderate. The sales tax impact is large, moving Arizona to 6th from 9th. On the Grant Thornton Business Climate Ranking, Plan D2 drops Arizona from 15th to 21st. The "Competitiveness Score" for Plan D2 is the most favorable for attracting relocating businesses to Arizona. As with Plan D l , the service tax is the largest negative component, along with the fuel tax. However, the phase-out of the commercial lease tax, combined with other property tax cuts, gives this package components that are positive for business relocation. Capsule summary: Strong negative impact on sales tax rankings. But compared to other plans, phase-out of commercial lease tax helps competitiveness, although sales tax and fuel tax are major negatives. Has highest "Competitiveness Score" because of cuts favorable to business.







AN ANALYSIS OF TAX EXPORTATION







The extent to which state tax revenues are collected from non-residents reduces the negative impact of Arizona taxes upon the state's economy. This shifting of a tax burden across political borders is often referred to as "tax exporting." Such tax exporting usually occurs in one of three ways: imposition of a tax results in a higher product price and the purchaser is not a resident of Arizona; the tax causes the returns to labor or to the owner of the firm to fall and the worker or the owner is a non-resident; or the tax may reduce the federal income tax liability of Arizona residents or firms.







The tax export rates calculated as part of this project indicate that Arizona is able to shift a substantial portion of its tax burden to the residents of other states. This result holds even under the complete shifting assumption. The total amounts of tax exportation that would occur with of the five fiscal initiatives and similar figures for each individual tax program appear in Tables 0.21 (Benchmark Case) and 0.22 (Complete Shifting Case).







Plan A



Under the benchmark assumptions, Plan A (option 1) would export $60.9 million (or 24 percent of total revenues). This amount is somewhat higher than the $43.5 million (17.0 percent) shifted in Plan A (option 2). Using the complete shifting assumption, the total amount of taxes exported would fall to $57.9 (22.6 percent of total revenues) for Plan A (option 1) and $40.5 million (15.8 percent) for Plan A (option 2).







Plan B



Under the benchmark assumptions, Plan B would export $157.7 million (or



62.4 percent of total revenues). Using the complete shifting assumption, the







total amount of taxes exported would fall to $126.6 (50.0 percent of total revenues). More than one half of the entire amount exported would result from the minimum school tax.







Plan C



Under the benchmark assumptions, Plan C would export $140.4 million (or



56.2 percent of total revenues). Using the complete shifting assumption, the







total amount of taxes exported would fall to $108.4 (43.3 percent of total







revenues). More than one half of the entire amount exported would result from the minimum school tax.







Plan D l







Under the benchmark assumptions, Plan D l would export $9.1 million (or



2.8 percent of total revenues). Using the complete shifting assumption, the total







amount of taxes exported would rise to $49.9 (15.3 percent of total revenues).







Plan D2







Under the benchmark assumptions, Plan D2 would export $2.5 million (0.7 percent of total revenues). Using the complete shifting assumption, the total amount of taxes exported would rise to $51.4 (14.8 percent of total revenues).







Comparisons Among the Alternative Fiscal Initiatives







Of all of the proposed changes, an increase in the minimum school tax has the highest export rate. A high proportion of changes in the corporate income tax would also be shifted the non-residents. On the other hand, relatively small amounts of tax shifting occurs for the service tax or the general sales tax. The combination of taxes in Plans B and C produces a much larger degree of tax exporting than either A or D. Most of the difference in the magnitude of exported taxes between Plan A versus B and C is their inclusion of the increase in the minimum school tax. The mix of taxes in Plan D produces a low export rate due to its reliance on the service tax and the export of much of the benefits of its property tax cuts.







TABLE 0.1 PLAN A: ECONOMIC IMPACT* (in millions of dollars and number of jobs) Direct Effects Mululier After Tax Retained Earnings Output Effects Earnings







X INITIATIVES: PLAN A



Benchmark Assumptions individual Income, Option 1 ......... Individual income, Option 2 ......... Corporate Income...................... General Sales/Use .................... Clothing Exemption.................... Tobacco. .................................







Tax Revenues



134 134 15.1 86.6 -12 32.3 256 256







Flnal Demand



73.82 91.28 6.05 63.15 -8.48 5.55 140.08 157.55







Employment (Jobs)







4.98







Total, Option 1 ............................. Total,Option2 ............................. Complete Shifting Assumptions Individual Income, Option 1 ......... Individual Income, Option 2 ......... Corporate Income...................... General Sales/Use .................... Clothing Exemption.................... Tobacco.. ............................... Total, Option 1 ............................. Total, Option 2 .............................







4.98 4.98







125.64 139.83







5511 6125







93.68 103.96







134 134 15.1 86.6 -12 32.3







73.82 91.28 11.20 63.15 -8.48 5.55







Direct Fffects EXPENDITURES: PLAN A Expenditure Final Demand



238.1 1







Total .......................................... 255.9







NET ECONOMIC IMPACT: PLAN A** (Expenditure Effects Tax Effects)







-







After Tax Retained Earnings Final Demand After Tax Retained Earnings







M u l t i ~ l i e r Fffects Employment (Jobs)



9230







Output



216.14







Earnings



162.86







M u l t i ~ l i e r Effects Employment (Jobs) Earnings







Output







Benchmark Assumptions Option 1 ................................................... Option 2 ................................................... Complete Shifting Assumptions Option 1 ................................................... Option 2 ................................................... "Columns may not add to totals due to rounding. Negative numbers associated with tax initiatives indicate increases in demand, output, earnings andfor employment. **Tax effects measured negatively; expenditure effects measured positively.







TABLE 0.2 PLAN B: ECONOMIC IMPACT* (in millions of dollars and number o f jobs) Direct Effects Tax TAX INITIATIVES: PLAN B Revenues Benchmark Assumptions 69.3 Individual income ...................... Corporate Income...................... 39.3 Minimum School ........................ 118.9 Severance Tax ......................... 30.9 Gasoline Tax ............................ 41.6 Property Tax Credit.................... -47.2 Total Plan B................................. Complete Shifting Assumptions Individual Income ...................... Corporate Income...................... Minimum School. ....................... Severance Tax ......................... Gasoline Tax. ........................... Property Tax Credit.................... Total Plan B.................................



252.8







Multiolier After Tax Retained Earnings Output







Effects Earnings







Final Demand



38.18 15.74 36.05 12.94 -32.1 5 70.76







Employment (Jobs)







12.97 25.92 20.39







59.28







53.33







1915







36.38







69.3 39.3 118.9 30.9 41.6 -47.2 252.8







38.1 8 29.1 3 62.81 21.05 12.94 -32.1 5 131.96 108.1 3 4155 75.39







Direct Fffects EXPENDITURES: PLAN B Expendlture Total. ......................................... 252.8 Final Demand 234.91 After Tax Retained Earnings







Multiblier Output 212.91







Effects Earnings 159.96







Employment (Jobs) 9099







NET ECONOMIC IMPACT: PLAN B" (Expenditure Effects Tax Effects) Benchmark Assumptions Total.. ...................................................... Complete Shifting Assumptions Total ........................................................







-







Direct Effects After Tax Final Retained Demand E a r n i n g s



164.15 102.95 -59.28







Multiolier Output



159.58







Fffects Earnings



123.58 84.57







Employment (Jobs)



7184 4944







0







104.78







*Columns may not add to totals due to rounding. Negative numbers associated with tax initiatives indicate increases in demand, output, earnings and/or employment.



'*Tax effects measured negatively; expenditure effects measured positively.







TABLE 0.3 PLAN C: ECONOMIC IMPACT* (in millions of dollars and number of jobs) Direct Effects Tax TAX INITIATIVES: PLAN C Revenues Benchmark Assumptions 87 Individual Income ...................... Corporate Income...................... 45 Minimum School ........................ 119 Unorganized Districts................. 6 High Rate Tax Relief................... -50 General SalesIUse .................... 8 Telephone ................................ 20 Country Club Dues..................... 1 Superfund................................ 5 Insurance Premium .................... 9 Total Plan C................................. 250 Complete Shifting Assumptions Individual income ...................... Corporate income...................... Minimum School ........................ Unorganized Districts ................. High Rate Tax Relief................... General SalesIUse .................... Telephone ................................ Country Club Dues..................... Superfund................................ Insurance Premium.................... Total Plan C................................. Final Demand



47.93 18.03 36.05 3.48 .28.76 5.83 7.45 .82 2.65 9.00 102.50







M u l t l ~ l i e r Effects After Tax Retained Earnings Output Employment (Jobs) Earnings







14.85 25.92 .82 .7.35 2.64







36.88







Direct Effects EXPENDITURES: PLAN C Expenditure Total .......................................... 252.8 Final Demand 234.9 1 After Tax Retained Earnings







Multialier Output 212.91







Effects Earnings 159.96







Employment (Jobs) 9099







NET ECONOMIC IMPACT: PLAN C** Tax Effects) (Expenditure Effects Benchmark Assumptions Total ........................................................ Complete Shifting Assumptions Total ........................................................







.







Direct Effects After Tax Final Retained Demand E a r n i n g s



132.41 94.34 .36.88



0







M u l t i ~ i i e r Effects Output



129.00 94.91







Employment (Jobs)



6101 4707







Earnings



103.58 79.31







*Columns may not add to totals due to rounding. Negative numbers associated with tax initiatives indicate increases in demand. output. earnings and/or employment .







0







'*Tax effects measured negatively; expenditure effects measured positiiiely.







TABLE 0.4 PLAN Dl: ECONOMIC IMPACT* (in milllons of dollars and number of jobs) Direct Effects Tax Revenues TAX INITIATIVES: PLAN D l Benchmark Assumptions 323.9 Service Tax .............................. Gasoline Tax ............................ 103.8 Minimum School ........................ 32.7 Home Rebate ............................ 30.5 State Property Tax Cuts ............. -129.7 Local Property Tax Cuts ............. -106.9 Individual Income Tax ................ 43 Corporate Income Tax ................ 13 Tobacco Tax ............................ 16 Total Plan D l Final Demand



321.8 32.30 4.32 20.78 -73.26 .61.45 23.69 5.21 2.75 276.1 4







M u l t i ~ l l e r Effects After Tax Retained Earnings Output Employment (Jobs) Earnings







11.93 -21. 00 -16.43 4.29







...............................







326.3







.21.21







251.21







.







13,506







225.92







Complete Shifting Assumptions Service Tax .............................. Gasoline Tax ............................ Minimum School ........................ Home Rebate............................ State Property Tax Cuts ............. Local Property Tax Cuts ............. Individual Income Tax ................ Corporate Income Tax ................ Tobacco Tax ............................ Total Plan Dl ...............................



326.3 249.64 227.48 12536 209.02







Direct Effects EXPENDITURES: PLAN Dl Expenditure Total .......................................... 326.3 Final Demand 308.51 After Tax Retained Earnings







Multiblier Output 281.86







Fffects Earnings 216.33







Employment (Jobs) 11992







NET ECONOMIC IMPACT: PLAN Dlc* (Expenditure Effects Tax Effects) Benchmark Assumptions Total ........................................................ Complete Shifting Assumptions Total ........................................................







.







Direct Effects After Tax Final Retained Demand E a r n l n g s



32.37 58.87 21.21



0







Multiblier Output



30.65 54.38







Effects Earnings



.9.59 7.11







Employment (Jobs)



-1514



-544







*Columns may not add to totals due to rounding. Negative numbers associated with tax initiatives indicate increases in demand. output. earnings andlor employment. "Tax effects measured negatively; expenditure effects measured positively.







TABLE 0.5 PLAN D2: ECONOMIC IMPACT* (in millions of dollars and number of jobs) Direct Effects Tax ,X INITIATIVES: PLAN D2 Revenues Benchmark Assumptions Commercial Lease Tax ............... .85.8 Service Tax .............................. 323.9 Local Sales Tax ........................ 28.6 Gasoline Tax ............................ 103.8 MinimumSchool........................ 32.7 Home Rebate............................ 146.1 State Property Tax Cuts ............. -166.3 Local Property Tax Cuts ............. -106.9 Individual Income Tax ................ 43 Corporate Income Tax ................ 13 Tobacco Tax ............................ 16 Total Plan D2 ............................... 348.1



Complete Shifting Assumptions Commercial Lease Tax ............... Service Tax .............................. Local Sales Tax ........................ Gasoline Tax Minimum School ........................ Home Rebate............................ State Property Tax Cuts ............. Local Property Tax Cuts ............. Individual Income Tax ................ Corporate Income Tax ................ Tobacco Tax ............................ Total Plan D2 ...............................







MLIltiDlier After Tax Retalned Earnings Output







Effects Earnings







Final Demand



.85.8 321.8 20.63 32.30 4.32 99.52 .93.93 .61.45 23.69 5.21 2.75 269.05







Employment (Jobs)







11.93 .26.91 -16.43 4.29 .27.12







............................







Direct Effects Expenditure EXPENDITURES: PLAN D2 Total .......................................... 348.1 Final Demand 328.80 After Tax Retained Earnings







M u l t i ~ l i e r Effects Output 300.22 Employment (Jobs) 12777 Earnings 230.09







NET ECONOMIC IMPACT: PLAN D2** (Expenditure Effects Tax Effects) Benchmark Assumptions Total ........................................................ Complete Shifting Assumptions Total ........................................................







.







Direct Effects After Tax Final Retained Demand Earnings



59.75 92.34 27.1 2 0







M u l t i ~ l i e r Effects Output



54.94 84.13







Employment (Jobs)



806 1999







Earnings



21.61 42.39







*Columns may not add to totals due to rounding. Negative numbers associated with tax initiatives indicate increases in demand. output. earnings andlor employment. **Tax effects measured negatively; expenditure effects measured positively.







TABLE 0.6 NET ECONOMIC IMPACT: OUTPUT, EMPLOYMENT, AND EARNINGS EFFECTS* (in millions of dollars and number of jobs) After Tax Retained Earnings M u l t l ~ l i e r Effects Employment (Jobs) Earnings







NET IMPACT (Expenditure Effects Plan A Benchmark







-







Tax Effects)







Final Demand



98.03 80.56 -4.98 -4.98 92.88 75.42 0 0 164.1 5 102.95 -59.28 0 132.41 94.34 -36.88 0 32.37 58.87 21.21 0







Output







Option 1 ................................................... Option 2 ...................................................







90.50 76.31







3719 3105







69.18 58.90







Complete Shifting Option 1 ................................................... Option 2 ...................................................







85.89 71.70







3532 2918







65.90 55.62







Plan B Benchmark .................................................. Complete Shifting.......................................... Plan C Benchmark .................................................. Complete Shifting.......................................... Plan Dl Benchmark .................................................. Complete Shifting.......................................... Plan D2 Benchmark Assumptions.. .............................. Complete Shifting Assumptions........................







159.88 104.78







7184 4944







123.58 84.57







129.00 94.91







6101 4707







103.58 79.31







30.65 54.38







-1514 -544







-9.59 7.1 1







59.75 92.34







27.1 2 0







54.94 84.13







806 1999







21.61 42.39







*Negative numbers indicate the net economic costs of a particular fiscal initiative. Positive numbers indicate the net economic benefits of a particular fiscal initiative.







TABLE 0.7 QUALITATIVE ANALYSIS OF PROPOSED TAX PACKAGES EXECUTIVE SUMMARY Ranked Best A B



[B C A C C [A D D







. . . . Ranked Worst



C A D B A A



D D A D D D B B







Predictability ..................................... Simplicity ........................................... Horizontal Equity.............................. Vertical Equity................................... Efficiency ........................................... Neutrality ........................................... Stability .............................................. Responsiveness............................... . . ................................... Accountab~l~ty Interjurisdictional ..............................







CI



B C B B







C







C [A A B







Dl CI



B A







C



D







TABLE 0.8 DISTRIBUTIONAL IMPACT OF THE PROPOSED TAX PACKAGES SUMMARY TABLE TAX IMPACTS AS PERCENT OF INCOME







Less



than $5,450







$5,450 to $10,899







$1 0,900 to $16,349







$1 6,350 to $2 1,799







$21,800 to $32,699







$32,700 to $43,599



1







$43,600 to $54,499







$54,500 and Over







Package A



Taxes Paid ($) As % of Income 19.97 0.79% 22.1 1 0.28% -7.78 -0.06% -97.17 -0.52%







- Option



-140.47 -0.53%







-121.74 -0.32%







40.26 1,367.68 0.08% 1.63%







Package A



Taxes Paid ($) As % of Income 24.96 0.99% 27.1 0 0.34% 38.1 4 0.28% 20.62 0.11%







- Option 2



56.20 0.21% 122.68 0.33% 174.70 0.36% 692.45 0.83%







Package B



Taxes Paid ($) As O h of Income 16.21 0.64% 14.27 0.18% 18.87 0.14% 12.19 0.06% 1.05 0.00% 21.08 0.06% 28.84 0.06% 248.35 0.30%







e







Package C



Taxes Paid ($) As % of Income 16.73 0.66% 18.10 0.23% 22.1 9 0.17% -7.69 -0.04% -42.53 -0.1 6% -32.26 -0.09% -54.97 -0.1 1% 735.35 0.88%







Package D



Taxes Paid ($) As % of Income 32.49 1.28% 38.88 0.49% 83.41 0.62% 77.34 0.41%







- First Year



54.56 0.20% 48.65 0.13% 62.00 0.13% 509.94 0.61%







Package D



Taxes Paid ($) As % of Income 30.20 1.19% 45.43 0.57% 87.50 0.65% 84.07 0.45%







- Fifth Year



72.41 0.27% 85.8 1 0.23% 90.21 0.19% 591.77 0.71%







Table 0.9 EARNINGS DISTRIBUTION O JOB A D FTE IMPACTS F N







Percent o f Jobs f o r Each Income Category Employme---------------------------------------------------------------Change F r RIMS I 1 Model







$1



to







$3,320



to







$9,960



to







$16,600



to







$24,900



to







$33,200



to







$41,500



to







883,000



or More Total Percent







$3,319







$9,959







$16,599







$24,899







$33,199







$41,499







$82,999







Total Employment Impact







-







Benchmark







5,510 6,124 1,915 2,998 PackageD 13,506 Package D 11,971



Package A PackageA Package B PackageC







13.8 13.8 12.3 12.5 12.8 12.8







24.6 24.5 22.3 22.4 23.8 23.0







20.9 20.9 20.4 21.0 20.9 20.3







16.5 16.5 17.2 17.4 16.7 16.9







9.9 10.0 11.0 10.5 10.1 10.6







6.0 6.0 7.2 6.8 5.9 6.4







6.7 6.7 7.9 7.8 7.6 7.9







1.6 1.5 1.6 1.7 2.2 2.1







100.0 100.0 100.0 100.0 100.0 100.0







Total Employment lmpact Package Package Package Package Package Package A A B







- Complete S h i f t i n g



9.9 10.0 10.5 10.4 10.1 10.7 6.0 6.0 6.7 6.6 5.9 6.4 6.7 6.7 7.4 7.5 7.7 8.0 1.6 1.5 1.6 1.7 2.2 2.2 100.0 100.0 100.0 100.0 100.0 100.0







5,698 6,312 4,155 C 4,392 D 12,536 D 10,778







13.8 13.8 12.8 12.7 12.8 12.8







24.5 24.5 23.1 22.8 23.8 22.9







20.9 20.9 20.8 21.0 20.9 20.2







16.5 16.5 17.1 17.3 16.6 16.9







Full-Time Equivalent Employment







-







Benchmark







4,785 5,314 Package B 1,687 Package C 2,654 Package D 11,908 Package D 10,550



Package A Package A







Full-Time Equivalent Employment Package A Package Package Package Package Package



A B



C







-







Complete S h i f t i n g







D D







4,950 5,479 3,650 3,875 11,058 9,505







E x i s t i n g Employment D i s t r i b u t i o n







TABLE 0.10 DISTRIBUTIONAL IMPACT OF PROPOSED EXPENDITURE PACKAGES SUMMARY TABLE EXPENDITURE BENEFITS AS A PERCENT OF INCOME







Less than







$5,450



to







$10,900 $16,350 $2 1,800



to to $2 1, 799 to







$32,700 $43,600 $54,500



to to and Over







$5,450







$10,899 $ 1 6,349







$32,699 $43,599 $54,499







Plan A



Benefits Received As % of Income







.88%







.88%







.99%







.88%







.l/ 700







.48%







.O/ 300







.0/ 2�0







Plans B & C



Benefits Received As % of Income







.85%







.85%







.96%







.85%



Plan D l







.6g0/0







.48%







Benefits Received As % of Income







1.29%







1.29%







1.02%







.88%



Plan D2







.71%







.49%







Benefits Received As % of Income







1.45%







1.45%







1 .lo%







.95%







.60%







.55%







Entries are benefits as a percent of family income.







TABLE 0.11 DISTRIBUTIONAL IMPACT OF PROPOSED EXPENDITURE PACKAGES SUMMARY TABLE NET EXPENDITURE BENEFITS AS A PERCENT OF INCOME







Less than $5,450







$5,450 to $10,899







$10,900 to $16,349







$1 6,350 to $2 1, 799







$2 1,800 to $32,699







$32,700 to $43,599







$43,600 to $54,499







$54,500







and Over







Plan A, option 1



Benefits Received As % of Income



.09% .60% 1.05% 1.40% 1.24% .80% .22% -1.43%







Plan A, option 2



Benefits Received As % of Income



-.l1% .54% .71%







.77%







.SO%







.15%







-.06%







-.63%







@ Benefits Received



As O/O of Income



.21OO / .67% .82%







Plan B



.79% .69% .42%







Plan C



Benefits Received / As OO of Income



.19% .62% .79% .89% .85% -57%







Plan D l



Benefits Received As O h of Income



.01% .80% .40% .49% .51% .36%







Plan D2



Benefits Received / As OO of Income



.26% .88% .45% .50�h .33% .32%







Entries are benefits as a percent of family income.







TABLE 0.12 ANALYSIS OF REVENUE PACKAGES FOR GENERAL FUND REVENUE STABILITY'



Package A Package B Package C Package D l Package D2







Revenue Source Revenue Personal Income Tax ......................... 134.0 Corporate Income Tax ........................ 15.1 Tobacco Tax .................................... 32.3 Sales and Use Tax ............................. 74.6 Service Sector Tax ............................ Insurance Premium Tax ...................... Superfund Tax .................................. Treatment of HURF Monies .................. Property Taxes ................................. Minimum School Tax to Full QTR ........ Increased Homeowner Property Tax Relief...................... lncreased Rate on Unorganized Districts.................................... Relief for Counties with High Rates..... Cap on City Revenue Sharing............... Cap on Urban Revenue Sharing............ 256.0 Overall Measure................................







Measure .0174 .1872 .0446 .0877







Revenue 69.3 39.3







Measure .0174 1872







.







Revenue 87.0 45.0







Measure .0174 .1872







Revenue 43.0 13.0 16.0 -110.5 259.1







Measure .0174 1872 .0446 0880 .0655







. .







Revenue 43.0 13.0 16.0 -196.3 259.1







Measure .0174 .1872 .0446 .0900 .0655







.0513







*The measure for revenue stability is defined as the standard deviation of the rate of change of revenue collections.







TABLE 0.13 ANALYSIS OF REVENUE PACKAGES FOR GENERAL FUND REVENUE RESPONSIVENESS*



Package A Package B Package C Package D l Package D2







Revenue Source Revenue Personal Income Tax ......................... 134.0 Corporate Income Tax ........................ 15.1 Tobacco Tax .................................... 32.3 Sales and Use Tax ............................. 74.6 Service Sector Tax ............................ Insurance Premium Tax ...................... Superfund Tax .................................. Treatment of HURF Monies .................. Property Taxes ................................. Minimum School Tax to Full QTR ........ Increased Homeowner Property Tax Relief...................... lncreased Rate on Unorganized Districts .................................... Relief for Counties with High Rates..... Cap on City Revenue Sharing............... Cap on Urban Revenue Sharing ............ Overall Measure................................ 256.0







Measure 1.0340 .9317 .1705 .8606







Revenue 69.3 39.3







Measure 1.0340 .9317







Revenue 87.0 45.0







Measure 1.0340 .9317







Revenue 43.0 13.0 16.0 -110.5 259.1







Measure 1.0340 .9317 .1705 8344 1.4450







.







Revenue 43.0 13.0 16.0 -196.3 259.1







Measure 1.0340 -9317 .1705 .8181 1.4450







.8684







"The measure for revenue responsiveness is defined as the income elasticity which is defined as the rate of change of revenue divided by the rate of change of state personal income.







TABLE 0.14 REVENUE PACKAGE IMPACTS ON TAX BURDEN RANKINGS







vs.so STATES



Tax Burden Measure Total Tax Effort Rank.................. Plan A 21 to 16







Tax Burden Ranking Impact by Package Plan B Plan C Plan D l Plan 02 21 to 16 21 to18 21 to13 21 to 13







Total State & Local Govt. Taxes Per Capita Rank................... 23 to 18 Per 1000 Rank ..................... 14 to 9 Total State & Local Govt. Own Source Revenues ........ Per Capita Rank







23to 18 14 to 9







23 to 18 14 to 9







23 to 18 14 to 9







23 to 18 14 to 9







24 to 22







24 to 22







24 to 22







24 to 21







24 to 21







Total State & Local Govt Own Source Revenues ........ 17 to 14 Per $1000 Rank Personal Income Tax Tax Effort Rank .................... 35 to 33 Per Capita Rank................... 33 to 28 Per $1000 Rank ................... 33 to 30 Corporate Income Tax Tax Effort Rank .................... Per Capita Rank................... Per $1000 Rank ................... State & Local Govt. SalesIGross Receipts Tax Effort Rank .................... Per Capita Rank................... Per $1000 Rank ................... Property Tax Tax Effort Rank .................... Per Capita Rank................... Per $1000 Rank ................... Motor Fuels Tax Effort ................ Insurance Premium Tax Effort ....







.







17to 14







17 to 14







35 33 to 31 33 to 31







35 to 34 33 to 31 33 to 30







23 to 20 41 to 37 41 to 39







23 to 18 41 to 33 41 to 33







23 to 15 41 to 32 41 to 32







2 9 to 7 7







2 9 to 7 7







2 9 to 8 7







2 9 to 6 7 to 5







2 9 to 6 7 to 5







35 25 23 14 32







35 to 32 25 to 23 23 to 20 14 to 8 32







35 to 32 25 to 23 23 to 20 14 32 to 27







3 5 to 40 25 to 29 23 to 26 14 to 2 32







35 to 38 25 to 28 23 to 25 14 to 2 32







Public Utilities Tax Effort.............







17







17







17 to 14







17







17







TABLE 0.15 GRANT THORNTON BUSINESS CLIMATE RANKING State North Dakota ............................. Delaware ................................... Nebraska ................................... South Dakota ............................. New Hampshire ......................... Virginia ....................................... Nevada ...................................... Iowa ........................................... Kansas ....................................... North Carolina ........................... Missouri ..................................... Vermont ..................................... Minnesota .................................. New Mexico ............................... Arizona Maryland .................................... Mississippi ................................. New Jersey ................................ Wisconsin .................................. Florida ........................................ Hawaii ........................................ Massachusetts ........................... Idaho .......................................... Oregon ....................................... South Carolina ........................... Utah ........................................... Rhode Island ............................. Colorado .................................... Georgia ...................................... Tennessee ................................. Arkansas .................................... Washington ................................ Indiana ....................................... Alabama .................................... Connecticut ................................ California ................................... Kentucky .................................... New York ................................... West Virginia .............................. Maine ......................................... Illinois ......................................... Pennsylvania ............................. Wyoming .................................... Oklahoma .................................. Alaska ........................................ Ohio ........................................... Montana ..................................... Texas ......................................... Louisiana ................................... Michigan .................................... U.S. Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37



38 39 40 41 42 43 44 45 46 47 48 49 50







Regional Rank PLAN A A $256 million revenue increase would move Arizona down in the national ranki n g to number 19 from 15. ~



1







Arizona's ranking relative to six competing states would remain the same: third.







.....................................







2 3







PLAN B A $252.8 million revenue increase would move Arizona down in the national rankings to number 19 from 15.







Arizona's ranking relative to six competing states would remain the same: third.







e







4 5







PLAN C A $250 million revenue increase would move Arizona down in the national ranki n g to number 19 from 15. ~







Arizona's ranking relative to six competing states would remain the same: third.







6







PLAN Dl A $326.3 million revenue increase would move Arizona down in the national ranki n g to number 21 from 15. ~







Arizona's ranking relative to six competing states would remain the same: third.







PLAN D2 A $348.1 million revenue increase would move Arizona down in the national ranki n g to number 21 from 15. ~



7







Arizona's ranking relative to six competing states would remain the same: third.







TABLE 0.16 PLAN A: IMPACTS ON ARIZONA COMPETITIVENESS FOR BUSINESS RELOCATIONS Competitiveness Score



-.44 -.01 .04 -.07 -.01







lnitiative



PLAN A ............................. Personal Income................ Corporate ..........................



80120.. ..........................







Revenue



$256.0 134.0 15.1 4.0 (12.0) 20.0 3.1 74.6







Weight X Impact =



.44 .01 .04 .07 .01 .28 -1 -1



+1







Comments May impact senior executives Conforms Arizona to most states







Corp Dividends.............. Fed Tax Deduction ........ Foreign Tax Credit ......... Sales & Use Tax .................



. Rate Increase







-1







-1



-1 0 0







................







86.6



(12.0) 32.3







-.28



-1.05







Children's Clothing ........ Tobacco Tax ......................







.04



.ll







PLAN A COMPETITIVENESSSCORE = -.77 (Lower Negative Scores = Less Competitive For Relocations) PLAN B = -.84 PLAN C = -.67 PLAN D l = -.99 PLAN D2 = -66







DERIVING COMPETITIVENESS SCORES: The total absolute value of each package is computed as the sum of all changes (tax increases and tax cuts). The weight for each tax initiative is its share of the total absolute value (the weight of a $50 million change in a package with absolute value of $500 is .lo). The impact is a subjectively determined measure of probable harm or help to Arizona's competitiveness as determined by a consensus of economists, economic development specialists, budget analysts, statistical reports, and case studies . A negative impact ( -1, -2, -3) hurts competitiveness while a positive impact (1, 2, or 3) improves competitiveness.lmpacts of -3 are most harmful. Neutral initiatives have an impact of zero. The competitiveness score is the weight multiplied by the impact. Total package competitive score is the sum of the scores for each initiative. The more negative the score, the greater potential negative impact on Arizona economic growth.







TABLE 0.17 PLAN B: IMPACTS ON ARIZONA COMPETITIVENESS FOR BUSINESS RELOCATIONS







Initiative



Personal Income.................... Corporate Income







Revenue







WeiQhtX Impact =







Competitiveness Score







Comments







PLAN B ................................. $252.8







69.3



1 1.7







80120,Possessions ..........



Fed. Tax Deduction........... Foreign Tax Credit ............. Minimum School Tax.. ............ MiningSeverance.................. Fuel Tax.. .............................. Homeowner Tax Reduction....







.03 .07







-1 -1



-1 -1 -1



-2







-.03 -.07 -.01 -.34 -.09 -.24 .14







Conforms Arizona to most states Isolated geographic effects Industry specific Affects distribution & transportation Residential impact, but visible







24.5 3.1



1 18.9







30.9 41.6 (47.2)







.O1 .34 .09 .12 .14







1







PLAN B COMPETITIVENESS SCORE = -.84 (Lower Negative Scores = Less Competitive For Relocations)







l PLAN A = -.77 PLAN C = -.67 PLAN D = -.99 PLAN D2 = -.66



DERIVING COMPETITIVENESS SCORES: The total absolute value of each package is computed as the sum of all changes (tax increases and tax cuts). The weight for each tax initiative is its share of the total absolute value (the weight of a $50 million change in a package with absolute value of $500 is .lo).The impact is a subjectively determined measure of probable harm or help to Arizona's competitiveness as determined by a consensus of economists, economic development specialists, budget analysts, statistical reports, and case studies . A negative impact ( -1, -2, -3) hurts competitiveness while a positive impact (1,2, or 3) improves competitiveness.lmpacts of -3 are most harmful. Neutral initiatives have an impact of zero. The competitiveness score is the weight multiplied by the impact. Total package competitive score is the sum of the scores for each initiative. The more negative the score, the greater potential negative impact on Arizona economic growth.







TABLE 0.18 PLAN C: IMPACTS ON ARIZONA COMPETITIVENESS FOR BUSINESS RELOCATIONS







Initiative



PLAN C................................. Corporate Income. .................



80120, Possessions ..........







Revenue



$250.0 45.0 12.0 24.0 3.0 5.0 0 75.0 119.0 6.0 (50.0) 29.0 8.0 20.0 1.O 9.0 5.0







Competitiveness Weight X Impact = Score







Comments







.03 .07 .01 .01







-1 -1 -1







-.03 -.07 -.01 -.01







Conforms Arizona to most of U.S.







Fed. Tax Deduction........... Foreign Tax Credit ............. Reinsurance ..................... Bank Franchise ................. Property Tax .......................... Minimum School Tax .......... Unorganized Districts......... County Tax Relief .............. Sales & Use Tax ..................... Accounting Allowance ....... Interstate Phone ............... Country Clubs ................... Insurance Premium................ Superfund ............................







-1



-1 -1







.34 .02 .15 .02 .06 .03 .01







-.34 -.02 +.30 -.02 -.I8 -.03 -.01







Isolated geographic impact Primarily residential Commercial gets larger impact







2



-1 -3 0 -1







Affects growth industries







-1







May raise water rates







PLAN C COMP,ETlTlVENESS SCORE = -.67 (Lower Negative Scores = Less Competitive For Relocations) PLAN A = -.77 PLAN B = -.84 PLAN D l = -.99 PLAN D2 = -.66







DERIVING COMPETITIVENESS SCORES: The total absolute value of each package is computed as the sum of all changes (tax increases and tax cuts). The weight for each tax initiative is its share of the total absolute value (the weight of a $50 million change in a package with absolute value of $500 is .lo). The impact is a subjectively determined measure of probable harm or help to Arizona's competitiveness as determined by a consensus of economists, economic development specialists, budget analysts, statistical reports, and case studies . A negative impact ( -1, -2, -3) hurts competitiveness while a positive impact (1,2, or 3) improves competitiveness.lmpacts of -3 are most harmful. Neutral initiatives have an impact of zero. The competitiveness score is the weight multiplied by the impact. Total package competitive score is the sum of the scores for each initiative. The more negative the score, the greater potential negative impact on Arizona economic growth.







TABLE 0.19 PLAN D l : IMPACTS ON ARIZONA COMPETITIVENESS FOR BUSINESS RELOCATIONS



Competitiveness Score







Initiative







Revenue







We@htX Impact =







Comments







PLAN Dl ............................... Corporate Income.................. Service/County Tax ............... FuelTax ................................ Property Tax .......................... County Cuts...................... Statewide QTR .................. Minimum School Tax .......... Homeowners Rebate......... Consolidate Classes .......... Tobacco Tax ..........................







$326.3 13.0 323.9 103.8 (1 73.4) ( 06.9) 1 (111.2) 32.7 30.5 ( 8.5) 1 16.0 .13 .4 I .04 .04 +3 +2



-1



-1



. -1







.02 .41 .13







-1







-.02 -1.23 -.26 .39 .28 -.04 -.04 -.02







Bring AZ in line with states







-3 -2







80% business, professional



Affects distribution, transportation Helps commercial Isolated geographic impacts Commercial rate increases







.02



.02







0







PLAN D COMPETITIVENESS SCORE = -.99 l (Lower Negative Scores = Less Competitive For Relocations)







.7 PLAN A = - 7 PLAN B = -.a4







PLAN C = -.67







PLAN D2 = -66







DERIVING COMPETITIVENESS SCORES: The total absolute value of each package is computed as the sum of all changes (tax increases and tax cuts). The weight for each tax initiative is its share of the total absolute value (the weight of a $50 million change in a package with absolute value of $500 is .lo).The impact is a subjectively determined measure of probable harm or help to Arizona's competitiveness as determined by a consensus of economists, economic development specialists, budget analysts, statistical reports, and case studies . A negative impact ( -1, -2, hurts competitiveness while a positive impact (1,2, 3)improves -3) or competitiveness.lmpacts of -3 are most harmful. Neutral initiatives have an impact of zero. The competitiveness score is the weight multiplied by the impact. Total package competitive score is the sum of the ssores for each initiative. The more negative the score, the greater potential negative impact on Arizona economic growth.







TABLE 0.20 PLAN D2: IMPACTS ON ARIZONA COMPETITIVENESS FOR BUSINESS RELOCATIONS







Initiative



PLAN D2............................... Personal Income.................... Corporate Income .................. ServiceICountyTax ............... Local Sales Tax ...................... Commercial Lease ................. FuelTax ................................ Property Tax .......................... County Cuts...................... Statewide QTR .................. Minimum School Tax .......... Homeowners Rebate......... Consolidate Classes .......... Tobacco Tax.. ........................







Revenue



$348.1 43.0 13.0 323.9 28.6 (85.8) 103.8 (94.4) (106.9) (111.2) 32.7 146.1 (55.1) 16.0







Competitiveness Weight X Impact = Score



.04 .01 .30 .03 .08 .10 .10 .10 .03 .14 .05 .02 -1 -1 -3 -1 +3 -2 +3 +2 -1 -1 -1 0 -.04 -.01 -.90 -.03 .24 -.20 .30 .20 r.03 -.I4 -.05







Comments



May affect senior executives Affects growth industries Benefits commercial







Affects distribution & transportation Helps commercial Isolated geographic impacts







PLAN D2 COMPETITIVENESS SCORE = -.66 (Lower Negative Scores = Less Competitive For Relocations) PLAN A = -.77 PLAN B = -.84 PLAN C = -.67 PLAN D l = -.99







DERIVING COMPETITIVENESS SCORES: The total absolute value of each package is computed as the sum of all changes (tax increases and tax cuts). The weight for each tax initiative is its share of the total absolute value (the weight of a $50 million change in a package with absolute value of $500 is . I 0). The impact is a subjectively determined measure of probable harm or help to Arizona's competitiveness as determined by a consensus of economists, economic development specialists, budget analysts, statistical reports, and case studies . A negative impact ( -1, -2, -3) hurts competitiveness while a positive impact (1, 2, or 3) improves competitiveness.lmpacts of -3 are most harmful. Neutral initiatives have an impact of zero. The competitiveness score is the weight multiplied by the impact. Total package competitive score is the sum of the scores for each initiative. The more negative the score, the greater potential negative impact on Arizona economic growth.







TABLE 0.21 TAX EXPORTATION AND NON-ARIZONA PRODUCTION Benchmark Assumptions (in millions of dollars) Federal Total Revenue O f f s e t PLAN A lndividual Income. Option 1.......... lndividual Income. Option 2.......... Corporate Income ...................... General SalesNse ..................... Clothing Exemption .................... Tobacco Tax ............................. Total Option 1 ................................ Total Option 2 ................................ PLAN B lndividual Income....................... Corporate Income ...................... Minimum School......................... Severance Tax .......................... Motor Fuel Tax ........................... Property Tax Credit .................... Total ............................................ PLAN C Individual Income....................... Corporate Income ...................... Minimum School......................... Unorganized Districts ................. High Rate Tax Relief ................... General SalesNse ..................... Telephone ................................ County Club Dues ...................... Superfund ................................ Premium Tax ............................. Total ............................................ PLAN D l Service Tax .............................. Motor Fuel Tax ........................... Mlnimum School ........................ Homeowner Rebate .................... State Property Tax Cuts .............. Local Property Tax Cuts .............. lndividual Income....................... Corporate Income ...................... Tobacco Tax ............................. Total ............................................ PLAN D2 Service Tax .............................. Local Sales Tax ......................... Commercial Lease Tax ................ Motor Fuel Tax ........................... Minimum School Tax ................... Homeowner Rebate .................... State Property Tax Cuts .............. Local Property Tax Cuts .............. lndividual Income....................... Corporate Income ...................... Tobacco Tax ............................. ... Total ...................................... .... (a) Includes some additional secondary exporting due to the federal offset; additional indeterminate amounts of exporting for some taxes are not included. Out-of-State Utilities Other Total Value of Tax Taxes Non-Arizona Exportation E x p o r t e d P r o d u c t i o n







a







TABLE 0.22 TAX EXPORTATION AND NON-ARIZONA PRODUCTION Complete Shifting Assumptions (in millions of dollars) Total Federal Revenue O f f s e t PLAN A lndividual Income. Option 1.......... lndividual Income. Option 2.......... Corporate Income ...................... General SalesllJse..................... Clothing Exemption .................... Tobacco Tax ............................. Total Option 1................................ Total Option 2 ................................ PLAN B Individual Income....................... Corporate Income ...................... Minimum School......................... Severance Tax ......................... Motor Fuel Tax ........................... Property Tax Credit .................... Total ............................................ PLAN C Individual Income....................... Corporate Income ...................... Minimum School ......................... Unorganized Districts ................. High Rate Tax Relief ................... General SalesNse ..................... Telephone ................................ County Club Dues ...................... Superfund ................................ Premium Tax ............................. Total ............................................ PLAN D l Service Tax .............................. Motor Fuel Tax ........................... Mlnimum School ........................ Homeowner Rebate .................... State Property Tax Cuts .............. Local Property Tax Cuts .............. Individual Income ...................... Corporate Income ...................... Tobacco Tax ............................. Total ............................................ PLAN D2 Service Tax .............................. Local Sales Tax ......................... Commercial Lease Tax ................ Motor Fuel Tax ........................... Minimum School Tax ................... Homeowner Rebate .................... State Property Tax Cuts .............. Local Property Tax Cuts .............. lndividual Income....................... Corporate Income ...................... Tobacco Tax ............................. Total ............................................ (a) Includes some additional secondary exporting due to the federal offset; additional indeterminate amounts of exporting for some taxes are not included. Out-of-State Utilities Other Tax Exportation Total Taxes Exported Value o f Non-Arizona Production







e







i.







A DESCRIPTION OF SEVERAL FISCAL INITIATIVES







The initiatives analyzed in this report include two separate taxlexpenditure packages proposed by the House Select Fiscal Reform Committee and two separate taxlexpenditure initiatives proposed by the Senate Fiscal Reform Committee. Detailed background discussion for each of the four initiatives is contained in Appendices A and B supplied by the House and Appendices C and D supplied by the Senate. In addition to the four basic plans, the Senate Plan D provides for several tax initiatives that are designed to be phased in over several years. We will analyze Plan D l (the FY91 effect of Plan D) and Plan D2 - the effect of tax changes as of FY95 proposed in Plan D. The D2 tax effects will be expressed in FY91 dollars to facilitate a comparison with commensurate government







0







expenditures. A summary and brief discussion of the alternative fiscal programs appears below. For background and more detail refer to the attached appendices.







Plan A The Plan A tax initiative considered in this report is summarized in Table i.1. The Plan A individual income tax proposal is designed to raise $134 million. Two alternatives for generating the increase are offered in the plan. Both options use the simplified "no deduction" tax form proposed by Fiscal 2000. This form contains provisions for exceptions for 65fblindfdependent set at $3,000/$1,000/$3,000 respectively. Personal exceptions for joint filers are







*







$6,600 and $3,300 for single filers. One alternative rate structure exempts the first $9,000 of income for single filers and the first $18,000 of income for joint filers. Marginal tax rates range from 3.5% to 7.75%. A second option taxes all







income and divides filers into four tax brackets beginning with a 2% tax rate and a top rate of 5%. Results of a DOR simulation of these tax initiatives based on the 1987 simulation model appear on pages 4 and 5 of Appendix A. Plan A proposes a $15.1 million net increase in corporate income tax revenues. These include conforming the state's 80120 definition to the Federal concept of "property, payroll, and sales" rather than "gross revenues." The plan proposes a reduction in corporate rates while eliminating the deduction for Federal Corporate income taxes. In addition, Foreign Tax Credits are to be eliminated while extending corporate dividend deductions to firms with out-ofstate headquarters. Plan A proposes a 0.25% sales and use tax increase outside the present distribution formula parameters. All proceeds from this tax are earmarked for the general fund. In addition the plan proposes an exemption for children's clothing from allstate sales taxes. The net effect is expected to be a $74.6 million increase in SalesIUse assessments. The luxury tax increases proposed in Plan A are an additional 1 0 per pack ~ of cigarettes and a commensurate 67% increase in assessments on other tobacco products. See page 13 of Appendix A for a detailed list of the affected items.







Plan B







Table i.2 summarizes the tax initiatives proposed in Plan B proposed by the House. The plan seeks $69.3 million in additional individual income tax revenues. The increase is to be achieved by eliminating the "windfall" subtraction, capping the regular federal income tax deduction at $7,500 ($15,000 for joint filers), establishing a $400 minimum federal income tax







@







subtraction, and altering tax brackets as described on page 2 of Appendix B. The effect of these adjustments has been simulated on the DOR income tax model and is described on page 3 of Appendix B. Plan B proposes corporate income tax law provisions that will raise $39.3 million. These include conformity of the Arizona 80120 definitions for "80120" and "Possessions Corporations" to the Federal definition for such corporations. The provision will focus on property, payroll and sales in establishing the 80120 split rather than the narrow gross income concept employed in the current statute. A second corporate provision will reduce marginal corporate income tax rates while eliminating the federal corporate income tax deduction. The third corporate provision in Plan B is to eliminate the foreign tax credit subtraction. An increase in the qualifying tax rate (QTR) is designed to raise $118.9







e







million in Plan B. The proposal increases the minimum school tax from 1/4 of the QTR to the full QTR. The minimum school tax currently affects four school districts and establishing a minimum school tax at the full QTR will have implications for an additional nineteen districts. A description of the affected districts appears on page 7 of Appendix B. Plan B proposes an increase in the mining severance tax from 2.5% to 5.0%. The revenue impact of this proposal is $30.9 million. The provision provides for lower severance rates as market conditions deteriorate. However, current revenue estimates are based on the full 5% assessment. Revenue package B provides for additional General Fund revenues by redirecting vehicle license taxes from the HURF (eliminating the Usdane shift) and funding the DPS from HURF. These monies are replaced by a 2% increase in the fuel tax earmarked for the HURF. Taxpayers will realize an increase in gasoline taxes that sum to $41.6 million. However, the HURF will realize no







additional revenues. The General Fund will appreciate by $41.6 million due to the transfer of obligations. Plan B also provides for property tax relief that will reduce residential property taxes by some $47.2 million. The reduction reflects a 50% reduction in county primary tax rates for homeowners







- excluding the 50$ county education







rate. The implication of these rate reductions are listed for each county on page



14 of Appendix B.







Plan C



The tax initiatives proposed in Plan C, authored by the Senate, are summarized in Table i.3. The income tax provision in this initiative is based on a modified "one-page" tax form. The proposal is to simplify the individual income tax code by eliminating the deduction for federal income taxes and conforming to the federal amounts for exceptions, the standard deduction and itemized deductions. Taxpayers would enter on their form either the federal standard deduction amount or the total amount of their federal itemized deductions. The rate structure proposed under this initiative is described on page 2 of Appendix C. The changes in individual income tax liabilities induced by these tax code adjustments are described on page 3 of Appendix C. Plan C includes the same corporate income tax provisions that are described in Plan B, the "80120 and possessions" corporation conformity, elimination of the federal corporate income tax deduction and the foreign tax credit subtraction. In addition, the authors of Plan C propose the elimination of exemptions for corporate income taxes for reinsurers. Elimination of these exemptions would increase corporate income taxes by about $5 million. The final provision of tax Plan C is to institute a banking franchise tax in lieu of the present corporate income tax. Since the two taxes would be designed to







raise the same amount of total revenue there would be no net change in the general fund. Plan C provides for an increase in the minimum school tax from the current levy of 114 of the QTR to the full QTR. This provision mirrors the minimum school proposal in Plan B and the implications for individual school districts appears in Appendix C, page 10. In addition, the authors of Plan C propose a $6 million increase in the taxes on unorganized school districts. Insurance premium taxes are to be increased under the provisions of Plan C. The increase is obtained by the elimination of credits that may currently be claimed for Arizona Guaranty Fund assessments. This provision would force insurance companies to shoulder the burden of maintaining the Statesponsored insolvency fund. The sales and use tax provisions of Plan C call for the elimination of the $8 million accounting allowance currently afforded to businesses that collect sales tax for the State. A second provision is aimed at taxing interstate long distance telephone calls. The estimated impact of such a tax is $20 million. In addition, Plan C proposes an assessment on country club dues designed to raise $1 million. The final provision of Plan C is the institution of a Superfund tax designed to raise $5 million.







Plan D



Senate Plan D consists of two separate tax initiatives. Plan Dl, outlined in Table i.4, contains the "first year" revenues generated by the Senate "D" plan. Additional tax initiatives planned for subsequent years are referred to as Plan D2 in this report. The provisions of Plan D2 are described in Table i.5. These initiatives reflect tax code changes that are to be in place by 1995. The







revenues are expressed in 1991 dollars to facilitate comparison with an expenditure agenda and allow comparison with the alternative tax initiatives. The distinguishing feature of Plans D and D2 is that they provide for l substantial changes in the way monies are distributed from the General Fund to the cities and counties. Our economic impact analysis will include the effect of changes in the General Fund as well as the response at the city and county level to Plan Dl initiatives. Plan Dl provides for a decrease in the general sales tax rate from 5% to 4% while establishing a 1% general sales tax rate for each county. At the same time the sales tax base will be expanded to include services. The net effect of these changes is to raise $ 48.6 million for the State General Fund and $1 75.3 1 million for County General Funds. Plan Dl presumes that the counties are bound by expenditure limits that prevent them from spending any more than







$68.4 million of the additional $175.3 million in FY 1991. We presume that $68.4 million will be spent on a mix of County expenditures discussed in the



expenditure section below but $106.9 million will be used to offset general property tax revenues assessed at the county level. Plan Dl proposes that vehicle license tax revenue presently retained in HURF be directed to the General Fund and that an additional fuel tax of 5% be imposed with the proceeds earmarked for the HURF. This would raise $ 03.8 1 million in fuel tax revenue in 1991. Property tax assessments change under Plan Dl. In 1991 taxpayers would receive a $66.5 million decrease in total property taxes. The decrease is obtained by lowering the QTR from $4.72to $3.74- reducing tax liabilities an estimated $ 11.2 million. At the same time the minimum school tax would be 1 increased from $1 .I 8 to $2.36. This would generate $32.7million for the state qeneral fund. Plan Dl proposes a consolidation of the nine separate property







@







classifications to four. The 1991 effect of these reclassifications is to decrease revenues by $1 1.1 million. The Plan also proposes that the homeowner's rebate be phased out over several years. The 1991 effect is an increase in residential property taxes by $30.5 million. The cumulative effect of simultaneously changing the QTR, establishing a higher minimum school tax, and phasing out the homeowner's rebate and the property classifications is an additional decrease of $7.4 million in 1991. Accounting for the $106.9 million local property tax reduction assumed to result from the increased sales taxes, the total reduction is $173.4 million. For detail regarding the property tax code initiatives of Plan D l , refer to pages 5-7 in Appendix D. Plan D l proposes a simplification of the individual income tax code with greater progressivity. A simulated distribution of liabilities obtained by the provisions of the Plan D proposal appears on page 25 of Appendix D. Corporate tax revenues would increase due to the elimination of the deduction for Federal corporate taxes despite the institution of lower corporate rates. The individual income tax proposal would raise $43 million and the revisions to the corporate code would raise $13.0 million. on Plan D l contains an increase of 5@ each pack of cigarettes. The initiative is designed to raise $16 million for the General Fund. Plan D2 is a set of initiatives designed to be in place by 1995. We have expressed the impact of these programs in 1991 dollars and summarized the programs in Table i.5. Plan D2 includes all sales tax initiatives that are in Plan







D l plus the elimination of the Commercial Lease tax. This will reduce General



Fund collections by $85.8. In addition, some $12.3 million from proposed city distributions will be retained in the State General Fund. The net increase in General Fund sales collections will be $75.1 million under this proposal. The







CityICounty General Fund will







be affected since we assume the cities will







increase sales taxes by $12.3 million to recoup the lost distribution funds. The gasoline tax initiative in Plan D2 is exactly the same as in Plan Dl. Plan







D2 income tax initiatives match the D program plus $16.3 million of proposed l



city distributions are to be retained in the State General Fund. We assume that $16.3 million in additional sales tax revenue will be generated to maintain city spending levels. The property tax proposals in Plan D2 are the







D initiatives l







plus the "Homeowners rebate" is eliminated and the number of property tax classifications is reduced to four. The consolidation effect is a decrease of $26.5 million (down from $1 1.1 million in Dl). The rebate initiative will raise $146.1 million, up from $30.5 million in Dl,while the cumulative effect is a decrease of $28.6 million from a loss of $7.4 million in Plan Dl. The State General Fund will realize a net increase of $12.5 million as a result of the property tax provisions of Plan D2. CityICounty General Funds will decrease a







l l net $106.9 million in Plan D due to the Plan D sales initiatives discussed



above. Total General Fund net impact of Plan D2 is $271.7 million as a result of the initiatives in Plan D2 while CityICountylHURF spending will increase by $76.4 million.







Expenditure Programs



The expenditure mix in fiscal packages A, B, C, and D is essentially the l same. Each initiative will contain $55.8 million for an increase in State employee wages, $1 13.5 million in K-12 education expenditures, $27.1 million for universities, $1 1.7 million in increased community college expenditures, and $24.5 million for the department of corrections. AHCCCS expenditures will be $23.3 million in Plan A and $20.1 million in Plans B, C, and $17.255 million in







*







Plan D l . An additional $8 million will be spent by ADOT in Plan Dl. Plan D l also implies an expenditure of $68.4 million in FY-91 at the local level. We presume that the mix of local expenditures will be 13% on general government,



27% on public safety, 15% on the court systems, and 45% on health and







welfare. Plan D2 expenditures will include $271.7 million in General Fund Programs split as 22.3% on a wage package, 45.4% on K-12 education, 10.8% on Universities, 4.7% on Community Colleges, 9.8% on Corrections and 6.9% on AHCCCS. In addition, $8 million will be spent by HURF. The remaining $68.4 million will be spent at the local level as in Plan Dl.







TABLE i.1 HOUSE SELECT FISCAL REFORM COMMITTEE REVENUE PACKAGE A







Personal Income Tax







........................................................







$134.0 M







Simplify Tax and Adjust Rates







Corporate Income Tax







......................................................







15.1 M







Change 80/20 Definition ..................................................................... Controlled Corp Dividends ................................................................. Eliminate Fed Inc Tax Subtraction and Reduce Rates .................. Eliminate Foreign Income Tax Credit Subtraction..........................







4.0 M (12.0 M) $20.0 M 3.1 M







. Sales & Use Tax. .A







..........................................................







74.6 M



86.6 M (12.0 M)







Increase Rate 1/4% .............................................................................. Subtract Children's clothing (under 10 years) $75 ........................







Tobacco Tax







.....................................................................







32.3 M



31.8 M .5 M







Increase Cigarette Tax to 25$ per pack............................................







.







Increase All Other Tobacco Products by two-thirds........................







Total ............................................................................... $256.0 M







TABLE i.2 HOUSE SELECT FISCAL REFORM COMMITTEE REVENUE PACKAGE B Individual Income Tax Repeal Federal Tax Subtraction; Expand Tax Brackets







......................................................



......................................................







$ 69.3 M







Corporate Income Tax Conform to Federal lncome Definition for "80120" and "Possessions" Corporations ................................... Repeal Federal Tax Subtraction; Expand Tax Brackets; Lower Top Rate from 10.5% to 9.3 0 ........................................... /o Repeal Foreign Tax Credit Subtraction ............................................ Minimum School Tax Rate lncrease Rate from 114 QTR to Full QTR







39.3 M



11.7 M 24.5 M 3.1 M







................................................







118.9 M







a







Mining Severance Tax lncrease Rate to 5%; with Effective Rate Floating from 2.5% to 5% Depending upon Industry Profitability Repeal Usdane Shift







.....................................................







30.9 M







........................................................ .............................



......................







15.6 M 26.0 M







Fund DPS Highway Patrol from HURF Add 2 Cents to Fuel Tax and Place Proceeds, $41.6 M, in HURF Increased Homeowner Property Tax Relief Institute Program Whereby Homeowners' County Primary Tax Rates, Excluding 50$ County Education Rate, are Reduced 50% Total ................... :







(47.2 M)







.............................................................







$252.8 M







Other Assumptions: Assessment ratios remain at 1989 levels.







TABLE 1.3 SENATE FISCAL REFORM COMMITTEE REVENUE PACKAGE C Individual Income Tax Repeal Federal Tax Subtraction; Conform Exemptions Amounts to Federal; Conform Itemized Deductions to Federal; Lower Tax Rates







....................................................







$ 87 M







Corporate Income Tax Conform to Federal lncome Definition for "80120" and "Possessions" Corporations ................................... Repeal Federal Tax Subtraction; Expand Tax Brackets; Lower Top Rate from 10.5% to 9.3 0 ........................................ Repeal Foreign Tax Credit Subtraction ............................................ Require Reinsurers to Pay Corporate Income Taxes..................... Replace the Corporate lncome Tax on Banks with a Revenue-Neutral Franchise Tax .................................................. Property Tax Increase Rate from 114 QTR to Full QTR ........................................... Increase Rate on Unorganized Districts from $2.36 to $4.72 ....... Provide Property Tax Relief in Counties with High Rates ............. Sales and Use Tax Eliminate the Accounting Allowance................................................. Tax Interstate Telephone Calls .......................................................... Tax Country Club Dues ....................................................................... Insurance Premium Tax Repeal the lnsurance Premium Tax Credit for Guaranty Fund Assessments







......................................................







45 M







12 M 24 M 3M 5M







0M



75 M 119 M 6M (50M)



29 M 8M 20 M 1M







.....................................................................







...........................................................







....................................................







9M







Superfund Tax Establish a Separate Funding <Mechanism the Superfund for







..................................................................



$250 M







Total







.................................................................................







Other Assumptions: Assessment ratios remain at 1989 levels.







TABLE 1.4 FISCAL REFORM PLAN SUMMARY PACKAGE Dl Total Net General Fund Impact: $249.90 mllllon Total lmpact (Includes HURFICounties): $326.3 million Transaction Privilege ("Sales") Taxes: The state sales tax is lowered from 5% to 4%. Major Changes: The state sales tax base is expanded to include services. County sales taxes are established at a 1% rate. TOTAL FY 91 NET STATE GENERAL FUND IMPACT: $148.6 Million Revenue Impact: TOTAL FY 91 NET IMPACT ON COUNTY GENERAL FUNDS: $175.3 Million Gasoline Taxes: Major Changes:







Revenue Impact:







*







Redirect the Vehicle License Tax revenue that is presently going to HURF to the state general fund. Replace the lost revenue in HURF with the establishment of a 5% sales tax on fuel. TOTAL FY 91 NET GENERAL FUND IMPACT: $95.80 Million TOTAL FY 91 NET HIGHWAY USER REVENUE FUND IMPACT: $8.0 Million







Property Taxes: Major Changes:







Revenue Impact:







Decrease county property taxes to offset gains from 1% county sales tax proposal Lower the statewide QTR by $.98 from $4.72 to $3.74. Begin a three year program of consolidating the number of property tax classes from nine to four. Begin a four year program of eliminating the "Homeowners Rebate." Impact on the homeowner is countered by ratio change in FY 91. Increase the minimum QTR from $1.I8 to $2.36. TOTAL FY 91 NET GENERAL FUND IMPACT: ($66.5 Million) TO-TAL FY91 NET COUNTY GENERAL FUND IMPACT ($106.9 Million)







Income Taxes: Major Changes:







Revenue Impact:







Simplify personal income taxes and create greater progressivity while expanding reliance on this tax. Eliminate the deduction for federal taxes and establish one rate of 8.5% on all taxable corporate income. TOTAL FY 91 NET GENERAL FUND IMPACT: $56.0 Million







*







Luxury Taxes: Major Changes: Revenue Impact:







Increase the tax on cigarettes from $.I5 to $.20/pack. TOTAL FY 91 NET GENERAL FUND IMPACT: $16.0 Million







TABLE 1.5 FISCAL REFORM PLAN SUMMARY PACKAGE D2 (A 1995 Package Expressed In 1991 Dollars) Total Net General Fund Impact: $271.70 million Total Impact (Includes HURF/Citles/Counties): $348.1 million Transaction Privilege ("Sales") Taxes: The state sales tax is lowered from 5% to 4%. Major Changes: The state sales tax base is expanded to include services. County sales taxes are established at a 1% rate. Sales tax on commercial leases is eliminated. State revenue sharing for counties is discontinued. Eliminate commercial lease tax. Cap city revenue distributions. Raise city sales tax to offset decline in distributions. TOTAL FY 91 NET STATE GENERAL FUND IMPACT: $75.1 Million Revenue Impact: TOTAL FY 91 NET IMPACT ON CITYICOUNTY GENERAL FUNDS: $191.6 Million Gasoline Taxes: Redirect the Vehicle License Tax revenue that is presently going to Major Changes: HURF to the state general fund. Replace the lost revenue in HURF with the establishment of a 5% sales tax on fuel. TOTAL FY 91 NET GENERAL FUND IMPACT: $95.80 Million Revenue Impact: TOTAL FY 91 NET HIGHWAY USER REVENUE FUND IMPACT: $8.0 Million Property Taxes: Decrease county property taxes to offset gains from 1% county sales Major Changes: tax proposal Lower the statewide QTR by $98 from $4.72 to $3.74. Consolidate the number of property tax classes from nine to four. Eliminate the "Homeowners Rebate." lmpact on the homeowner is countered by ratio change in FY 91. lncrease the minimum QTR from $1. l 0 to $2.36. Revenue Impact: TOTAL FY 91 NET GENERAL FUND IMPACT: $12.5 Million TOTAL FY91 NET IMPACT ON CITYICOUNTY GENERAL FUNDS ($106.9 Million) income Taxes: Simplify personal income taxes and create greater progressivity while Major Changes: expanding reliance on this tax. Eliminate the deduction for federal taxes and establish one rate of 8.5% on all taxable corporate income. Cap city urban revenue sharing. Revenue Impact: TOTAL FY 91 NET GENERAL FUND IMPACT: $72.3 Million TOTAL FY91 NET IMPACT ON CITYICOUNTY GENERAL FUNDS ($16.3 Million) Luxury Taxes: Increase the tax on cigarettes from $.I5 to $.2Olpack. Major Changes: TOTAL FY 91 NET GENERAL FUND IMPACT: $16.0 Million Revenue Impact:







ii. A BRIEF DESCRIPTION OF THE PROJECT







The following report contains a number of tasks. Task 1 examines the output, employment and earnings effects of the alternative fiscal (taxlexpenditure) proposals. Task 2 examines the initiatives using a list of normative criteria for assessing the merits of various tax strategies. In Task 3 we examine the impact of the various fiscal initiatives on the distribution of income in the state of Arizona. Task 4 examines the stability and predictability of the various tax initiatives as sources of General Fund revenue. In Task 5 we examine whether any of the alternative fiscal initiatives have an adverse'impact on the business climate of the state of Arizona. Task 6 identifies the degree to which the tax liabilities associated with the alternative initiatives are borne by out-of-state residents or firms.







TASK 1







Economic Impact: Output, Earnings, and Employment Effects







Dennis L. Hoffman, Ph.D. Michael B. Ormiston, Ph.D. Tracy L. Clark, M.S.







1.







THE ECONOMIC IMPACT OF SEVERAL FISCAL ALTERNATIVES:







OUTPUT, EARNINGS, AND EMPLOYMENT EFFECTS







The output, earnings, and employment effects of the alternative fiscal alternatives may be measured by first identifying those segments of the economy that are directly affected by a tax or spending initiative. Next, we calculate the adjustments in "final demand" for goods and services that result from these direct effects. The economic impact of these final demand adjustments is measured using multipliers taken from the Regional Input-Output model RlMSll developed by the Bureau of Economic Analysis (BEA). These multipliers have been adjusted by BEA to account for Arizona's industry composition. The impact of the initiatives is first measured using our "benchmark" assumptions -that take the generally accepted view of a firm's ability to shift a tax burden. In addition we examine a complete shifting scenario designed to measure the most severe impact of each tax program on the State's economy. The analysis in Chapter 1 of the report identifies certain exported taxes. We account for all state taxes that are deductible against Federal tax liabilities. We also identify the out-of-state ownership of certain utility property taxes in Plans B,C, and D. Finally, we identify any final demands that apply exclusively to outof-state business endeavors. In Chapter 6 of this report we study the issue of exporting in more detail and explicitly tabulate the exporting identified in this report.







The Methodology for Evaluating Alternative Fiscal Policies



The economic impact of a particular fiscal policy consists of direct effects and multiplier effects. The direct effects are the effects of a particular policy







on disposable incomes of tax-paying consumers, retained earnings of taxpaying firms, and final demand for goods and services bought and sold in Arizona. The multiplier effects, on the other hand, measure how changes in final demand for goods and services impact on total output of all Arizona industries, earnings of Arizona workers, and employment in all Arizona industries. Together the direct and multiplier effects determine the economic impact of the proposed fiscal alternatives.







Tax Shifting



The degree to which a tax can be shifted from the point of legal impact to its final resting place on those who bear the economic costs is crucial for determining the burden, equity and ultimately the economic impact of a tax. Whether a tax is borne by consumers or producers makes a difference. Table 1.I gives the assumptions used for the various types of taxes analyzed in this report. These assumptions are generally the standards currently used by economists to evaluate fiscal policy changes. However, slight modifications were employed to more adequately reflect particular Arizona business activities. As can be seen from these tables, different cases will be considered in this report: the benchmark case and the complete forward shifting case. The benchmark case allows for partial shifting of taxes and provides the most reasonable basis for determining burden and equity. The complete forward shifting case assumes that the producers share of the tax burden is shifted forward 100 percent to workers and represents the worst case scenario as far as earnings and employment effects are concerned.







Multipliers Any systematic analysis of the impact of a policy change on output, earnings, and employment, as the policy change ripples through the State's economy, must take into account the interindustry relationships within the State. The Arizona input-output multipliers calculated by the BEA, U.S. Department of Commerce, account for these interindustry relationships and, thus, are useful tools for determining the total indirect effects of a policy change. The regional I-







0 multipliers are taken from the RlMS ll (Regional Input-Output Modeling



System). The BEA constructed RlMS II from two basic data sources: (1) BEA's national input-output table, which shows the input and output structure of more than 500 U.S. industries, and (2) BEA's four digit Standard Industrial Classification (SIC) county wage-and-salary data. The county data is used to adjust the national input-output model to reflect conditions in a regional economy. The BEA model may be used to examine the link between initial changes in final demand







- precipitated by any of several fiscal initiatives - and the







ultimate change in aggregate output, earnings and employment. Tables 1.2, 1.3, and 1.4 give examples of multipliers especially calibrated for Arizona by RlMS II. Table 1.2 gives several output multipliers. Each entry in Table 1.2 represents the dollar change in output that occurs in the row industry for each additional dollar change in final demand in the column industry. The sum of rows 1-38 in each column is the total output multiplier for the associated industry. For example, the entries in column one show that a one million dollar increase in final demand for construction output leads to $1 6,800 of output from firms in agriculture, an additional $800 of output from firms in forestry, and so on. Summing these entries gives the total output multiplier; that is, a one million dollar increase in final demand for construction output leads to an additional







$1,115,300.00 of output from all Arizona industries. The $2,115,300.00.







output impact is







Table 1.3 gives several earnings multipliers. Each entry in Table 1.3 represents the dollar change in earnings that occurs in the row industry for each additional dollar change in final demand in the column industry. The sum of each column is the total earnings multiplier for the associated industry (also listed as the row 39 entry in table 2.1). For example, the entries in the construction column show that a one million dollar increase in final demand for construction output leads to a $4,600 increase in earnings of workers employed in agriculture, a $1 00.00 increase in earnings of workers employed in forestry, and so on. Summing these entries gives the total earnings multiplier; that is, a one million dollar increase in final demand for construction output leads to an additional $707,500 of earnings for all Arizona industries. Table 1.4 gives several employment multipliers. Each entry in Table 1.4 represents the change in number of jobs that occurs in the row industry for each additional pne rnlll~on llar change in final demand in the column industry. do The sum of each column is the total employment multiplier for the associated industry. For example, the entries in the construction column show that a one million dollar increase in final demand for construction output generates .23 new jobs in agriculture, .006 new jobs in forestry, and so on. Summing these entries gives the total employment multiplier; that is, a one million dollar increase in final demand for construction output generates a total of 34.61 new jobs in all industries.







..







Price Elasticities Another tool that is needed to determine the economic impact of a change in fiscal policy is the price elasticity of demand of the commodities or groups







of commodities that are being taxed. The price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price. It measures the relative responsiveness of quantity demanded to changes in price. If the price elasticity of demand is greater than one, demand is said to be elastic, and a 10 percent increase in price will lead to a greater than 10 percent fall in quantity demanded. If the price elasticity of demand is less than one, demand is said to be inelastic, and a 10 percent increase in price will lead to a less than 10 percent fall in quantity demanded. Finally, if the price elasticity of demand is equal to one, demand is said to be unitary elastic, and a 10 percent increase in price will lead to a 10 percent reduction in quantity demanded. Price elasticities of demand have important implications for the economic effects of changes in fiscal policy. For example, a selective sales tax levied on a good or service which is price elastic will generate large reductions in final demand, earnings, and employment in the industry directly affected by the tax when compared to a comparable tax levied on a good or service that is price inelastic. Table 1.5 gives the price elasticity estimates used in this report. Because the focus of this study is the long-run economic impact of fiscal policies, we have chosen to use long-run price elasticities that account for all adjustments that occur in response to price changes.







4 b







Estimating Changes in Final Demand The economic impact of each fiscal initiative can be determined using multipliers illustrated in Tables 1.2-1.4 after we measure how each initiative changes the final demand for products that are purchased in Arizona. This is accomplished by first identifying any business activities that directly bear a







portion of any particular tax initiative. This typically occurs when selective excise taxes are imposed. Next, we examine how the disposable incomes of Arizona consumers change as a result of the initiative. The final demand impacts of disposable income changes are obtained by monitoring the expenditure patterns of a "typical* consumer. The expenditure patterns, summarized in Table 1.6, are taken from survey data compiled by the BEA. Final demand impacts of disposable income spent in the proportions described in Table 1.6 may be obtained by assigning goods and services to appropriate industry aggregations and accounting for the wholesale, retail and transportation margins embedded in the retail price of each good. The margins used in this analysis, presented in Table 1.7, are taken from the BEA's inputoutput model. For example, surveys reveal that a typical consumer spends $.95 of every $100.00 on tobacco products (see Table 1.6). But Table 1.7 reveals that 26.2% of this expenditure goes to wholesalers of tobacco products and 23.7% to retailers of tobacco products so only $47 of each $100.00 constitutes the final demand for tobacco product producers. The final demand impact of an additional $100.00 spent by an individual with preferences described in Table 1.6 appear in Table 1.8a. The entries for wholesale, retail and transportation contain the margins that accumulate in the purchase of all retail items. These proportions are used to represent final demand changes stemming from fiscal initiatives that influence aggregate disposable income - and ultimately aggregate expenditures in the state. We conduct the same exercise to determine the final demand for a consumer that earns $50,000 or more per annum. The final demand vector for this individual appears in Table 1.8b. Any final demand effects that occur in industries located outside the state of Arizona must be identified in the analysis a priori to insure accurate measurement of the economic impact. We identify any tax burden that is







directly exported to other states or to the Federal government prior to conducting the economic impact analysis below. We also identify out-of-state ownership of certain utility properties taxed in Plans B,C, and D. We also explicitly account for final demands that fall on out-of-state manufacturing firms. The out-of-state proportions are extracted in column two of Tables 1.8a and 1.8b using a procedure described in Chapter 6 of this report.







PLAN A : TAX INITIATIVES



Plan A consists of proposed taxes on individual income, corporate income, general saleshse taxes, an exemption for children's clothing, and a tobacco tax designed to raise $256m. The economic impact of these tax increases will be compared with $256m in state government expenditures to measure the net effect of the proposed fiscal initiative. A detailed discussion of the provisions of these tax and expenditure programs appears in the introduction.







Plan A: Income Tax



The economic impact of the individual income tax component of option 1 of the Plan A tax initiative may be calculated by noting that the plan will result in 134 million(l34m) dollars of increased income tax liability. The DOR simulation of this tax code revision indicates that the majority of the tax increase will be paid by individuals with incomes in excess of $50,000. Since state income taxes may be deducted from an individual's federal taxable income and the marginal tax rate of filers with incomes in excess of $50,000 is .33, the decrease in "after taxwor disposable income as a result of the income tax initiative proposed in tax plan A is $134m(l-.33) or $89.78m. (A more conservative estimate is .28. We supply the economic impact of this modification in marginal







tax rates at the end of this section.) The economic impact of this tax stems from the loss of $89.78m in final demand for goods and services that presumably are not purchased since taxpayer's disposable incomes are lower by $89.78m as a result of this tax. Not all of this $89.78m decrease in final demand falls on Arizona businesses. After accounting for exporting (see Table 6.2), we estimate that $73.82m represents reduced final demand for Arizona businesses. Using the multipliers described in Tables 1.2 - 1.4 we may estimate the lost economic activity that stems from the decrease in final demand identified above. The total output decrease attributable to option 1 of the income tax in plan A is 141.38m (a $73.82m direct loss in final demand and a $67.56m additional decline in demands due to multiplier effects), lost earnings total $47.92m and employment losses total 2728 jobs.The distribution of these losses across 39 industry aggregations appears in Table 1.9. If .28 is used as the marginal tax rate, output effects increase $10.58m, lost earnings increase $3.57m, and job losses increase by 203 jobs. The economic impact of the individual income tax component of option 2 of the Plan A tax initiative may be calculated by noting that the plan will result in $134m of increased income tax liability. The DOR simulation of this tax code revision indicates that the majority of the tax increase will be paid by individuals across all income levels. Since state income taxes may be deducted from an individual's federal taxable income and the marginal tax rate of filers with median (or average) incomes is .15, the decrease in "after tax" or disposable income as a result of the income tax initiative proposed in tax plan A is $134m(l -.15) or $113.90m. The economic impact of this tax stems from the loss







@







of $1 13.90m in final demand for goods and services that presumably are not purchased since taxpayer's disposable incomes are lower by $1 13.90m as a result of this tax.



.







Not all of this $1 13.90m decrease in final demand falls on Arizona businesses. After accounting for exporting (see Table 6.2), we estimate that $91.28m represents reduced final demand for Arizona businesses. Using the multipliers described in Tables 1.2 - 1.4 we may estimate the lost economic activity that stems from the decrease in final demand identified above. The total output decrease attributable to option 2 of the income tax in plan A is $173.03m (a 91.28m direct loss in final demand and a $81.74m additional decline in demands due to multiplier effects), lost earnings total $58.20m and employment losses total 3342 jobs.The distribution of these losses across 39 industry aggregations appears in Table 1.lo.







Plan A: Corporate Income Tax



The Corporate income tax in Plan A is designed to raise $15.1 m. Our benchmark assumption is that 50% of this tax burden is passed to consumers in the form of higher prices leading to a decline in disposable income of $7.55m. The remainder is reflected in lower after tax retained earnings of corporations. The after tax value is obtained by assuming that the marginal Federal Corporate Income tax rate paid by affected corporations is .34. Hence, after tax retained earnings fall by $7.55m (1-.34) = $4.983m. Not all of this $7.55m decrease in final demand falls on Arizona businesses. After accounting for exporting (see Table 6.2), we estimate that $6.05m represents reduced final demand for Arizona businesses. Using the multipliers described in Tables 1.2 - 1.4 we may estimate the lost economic activity that stems from the decrease in final demand identified above. The total output decrease attributable to the Corporate income tax initiative in Plan A is 11.47m (a $6.05m direct loss in final demand and a $5.42m additional decline in demands due to multiplier effects), lost earnings total $3.86m and







employment losses total 222 jobs.The distribution of these losses across 39 industry aggregations appears in Table 1.1 1. There will be an additional loss of $4.983m in the retained earnings of taxed firms. In an attempt to examine the most severe consequences of the Corporate income tax we assume that firms chose not to lose retained earnings but shift their share($7.55m) of the tax to their workers. Assuming these workers pay Federal taxes at marginal tax rates of .15, the resulting decrease in earnings is $7.55(1-.15) = $6.42m in additional disposable income. Assuming the affected workers have preferences consistent with Table 1.8a, the final demand impact is again on the representative bundle of goods and services. Using the multipliers described in Tables 1.2 - 1.4 we may estimate the lost economic activity that stems from the decrease in final demand using this complete shifting assumption.The total output decrease attributable to the Corporate income tax initiative in Plan A(combining effects that accrue from both the benchmark and shifting scenarios) is $21.22m(a $1 1.20m direct loss in final demand and a $10.02m additional decline in demands due to multiplier effects), lost earnings total $7.1 4m and employment losses total 41 0 jobs.The distribution of these losses across 39 industry aggregations appears in Table 1.12.







Plan A: Sales and Use Tax



The general sales tax initiative in Plan A is an excise tax that is estimated to raise $86.6m. The burden falls directly on consumers of taxed items.The economic impact of the tax stems from the adjustments that consumers make in their spending patterns as a result of the tax and from any disposable income effects that occur. Using the elasticities in Table 1.5, we estimate that a .25% price increase decreases the demand by .1875%. Hence, $64.95m of the







burden is reflected in reduced sales of taxed items and $21.65m is the reduced demand for all other goods. Taxed activities include essentially all activity in maintenance and repair construction, apparel, chemicals and refinery, lumber products, machinery, electrical products, motor vehicles and equipment, instruments and related products, miscellaneous manufacturing, wholesale trade, retail trade, hotels etc., and restaurantlbar. The remaining $21.65m raised by the retail sales tax comes from consumers who have $21.65m less to spend on all other goods and services. The final demand effects of this lost income are obtained by reducing the final demands of all endeavors not affected by the tax in the proportions they maintain vis-a-vis' all other goods and services in the representative bundle of goods described in Table 1.8a. The final demand effects generated by this tax reflect the combined market demand response due to the relative price change that the tax precipitates and the resulting lower expenditure on goods and services that are not directly effected by the retail sales tax. The final demand changes and the economic impact of the tax are summarized in Table 1.1 3. The total output decrease attributable to the retail sales tax in Plan A is $1 19.03m ($63.15m in direct final demand decreases and $55.88m in declines stemming from multiplier effects), lost earnings total $41.06m and employment losses total 2555 jobs.The distribution of these 3. losses across 39 industry aggregations appears in Table 1.I







Plan A: Children's Clothing Exemption



The sales tax initiative in Plan A is coupled with an exemption for children's clothing purchases. This exemption will reduce the tax burden of clothing purchasers by $12m. The elasticity of demand for clothing purchases is .33 so we estimate that $3.96m of the $12m reduction will directly stimulate sales of clothing while $8.04m will become available for the purchase of all other goods.







a







The $3.96m may be divided among economic agents responsible for the delivery of the product using the margins in Table 1.7. Retailers of apparel will realize an increase in demand of $1.22m, wholesalers of apparel will realize an increase in demand of $.I 04m, and the demand for the primary production of apparel products will increase by $2.64m. The final demand effects generated by this tax exemption reflect the combined market demand response due to the relative price change that the tax precipitates($3.96m) and the resulting higher spending($8.04m) on goods and services other that children's clothing. The final demand changes and the economic impact of the tax are summarized in Table 1.I 4. The total output increase attributable to the clothing exemption in Plan A is $15.84m (8.48m in direct final demand increases and $7.36m in increases stemming from multiplier effects), additional earnings total $5.44m and employment gains total







e







323 jobs.The distribution of this effect across 39 industry aggregations appears in Table 1.1 4.







Plan A: Tobacco Tax



The Tobacco tax initiative in Plan A is designed to raise $32.3m by adding a ten cent excise tax to each pack of cigarettes. This tax will add approximately 7.7% to the price of cigarettes. Using the tobacco elasticity in Table 1.5 we estimate that quantity sold will decrease by 14.54%. This reduction will represent 50.89m fewer packages sold or a decrease in the demand of $66.157m(assuming $1.30 per pack). This burden will be spilt by using the margins in Table 1.7.Wholesaler's of cigarettes will realize a decrease in demand totaling $17.35m, the loss to retailers is $15.62m, and $33.186rn will be borne by the primary producers of tobacco products. Since only $32.3m will be collected in tax revenue, $33.857m will be directed toward the purchase of







all other goods and services as consumers switch from cigarette consumption. Hence, there will be increased consumption of all other goods and services as a result of the tax on cigarettes. The final demand effects generated by the tobacco tax reflect the combined market demand response due to the relative price change that the tax precipitates($66,157m) and the effect of higher expenditure($33.857m) on goods and services other than tobacco. The final demand changes and the resulting economic impact of the tax are summarized in Table 1.I The total 5. output decrease attributable to the tobacco tax in Plan A is $9.69~1 ($5.55m in direct final demand decreases and $4.1 3m in declines stemming from multiplier effects), lost earnings total $6.29m dollars and employment losses total 329 jobs.The distribution of this effect across 39 industry aggregations appears in Table 1.15.







Plan A: Total Impact



The total output, earnings and employment impacts attributable to all Plan A initiatives are presented in Tables 1.16-1.19. Under our benchmark assumptions with the option 1 income tax initiative, the total output effect is $265.2m, with $93.68m in lower household earnings and 5500 fewer jobs. The benchmark results with the option 2 income tax initiative total $297.38m, with $103.96m in lower household earnings and 6124 fewer jobs. The impact of the option 1 and option 2 initiatives under our complete shifting assumptions are $275.48m and $307.12m output decreases respectively. Earnings losses total $96.96m and $107.23m respectively and job losses total 5698 and 6312 respectively.







PLAN B : TAX INITIATIVES Plan B consists of proposed taxes on individual income, corporate income, a minimum school tax, a severance tax, a gasoline tax, and a property tax credit designed to raise $253.1 m. The economic impact of these tax increases will be compared with $252.8m in state government expenditures to measure the net effect of the proposed fiscal initiative. A detailed discussion of the provisions of these tax and expenditure programs appears in the introduction.







-







Plan B: Individual Income Tax The economic impact of the individual income tax component of Plan B may be calculated by noting that the plan will result in $69.3m of increased income tax liability. The DOR simulation of this tax code revision indicates that the majority of the tax increase will be paid by individuals with incomes of from in







0







excess of $50,000. Since state income taxes may be deducted from an individual's federal taxable income and the marginal tax rate of filers with incomes in excess of $50,000 is .33, the decrease in "after tax" or disposable income as a result of the income tax initiative proposed in tax plan A is $69.3m(1-.33) = $46.43m. (A more conservative estimate is .28. We supply the economic impact of this modification in marginal tax rates at the end of this section.) The economic impact of this tax stems from the loss of $46.43m in final demand for goods and services that presumably are not purchased since taxpayer's disposable incomes are lower by $46.43m as a result of this tax. Not all of this $46.43m decrease in final demand falls on Arizona businesses. After accounting for exporting (see Table 6.2), we estimate that