THE SALES TAX ON FOOD OPTIONS FOR REDUCING THE TAX BURDEN
PREPARED BY:
THE STAFF OF THE JOINT SELECT COMMITTEE ON TAX REFORM AND SCHOOL FINANCE
AUGUST 1979
THE SALES TAX ON FOOD
OPTIONS FOR REDUCING THE TAX BURDEN
INTRODUCTION Many s t a t e s have attempted t o reduce the burden of the sales tax on individuals by eliminating the sales tax on food or providing an income tax c r e d i t f o r sales taxes paid. O forty-si0x s t a t e s that levy a f general sales tax, twenty-three s t a t e s exempt sales of food from the tax. The District of Columbia a1 so exempts food from i t s general sales tax. In addition, four s t a t e s provide an income tax c r e d i t f o r sales taxes paid on food items,and three s t a t e s provide an income tax c r e d i t f o r sales taxes paid i n general.1 (See Exhibit 1) The purpose of t h i s report is t o describe the potential aggregate impacts if similar provisions were implemented i n the State of Arizona. The analysis will be divided into the following sections:
1. a description of the current food sales tax 2. a description and analysis of six alternatives f o r reducing the sales tax burden 3. a summary and comparison of food sales tax exemptions and income tax credits f o r sales taxes paid
In order t o more clearly s t a t e the r e s u l t s of the analysis, detail of the methodology used t o estimate the impacts is omitted from the text. However, the reader interested in the procedures used t o t e s t these proposals i s referred t o the Appendix.
1
Sources : Significant Features of Fiscal Federal ism, 1976-77 Edition, Vol. I1 and Commerce Clearing House State Tax Reporters.
EXHIBIT 1
FOOD T X POLICIES IN OTHER STATES A
State A1 abama Alaska A i zona r Arkansas California Col orado Connecticut Delaware Florida Georgia Hawai i Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Mary1 and Massachusetts Michigan Minnesota Mississippi Missouri
Food Exempt
Income Tax Credit
State Nebraska Nevada Nw Jersey e New Mexico N York e w North Carol ina North Dakota Ohio 0 k l a homa Oregon Pennsylvania Rhode Island South Carol ina South Dakota Tennessee Texas Utah Vernon t Virginia Washington West Virginia Wisconsin Wyoming District of Columbia
Food Exempt
Income Tax Credit
x
I
x x
THE CURRENT FOOD SALES TAX
Under current Arizona law, sales of food and food products are taxable as follows:
1.
2.
Sales of food and drink by restaurants and similar establishments for consumption on the premises are subject t o the sales tax on restaurants and bars. All other food products sold t o consumers are taxable under the s t a t e ' s r e t a i l sales tax.
Sales in both categories are taxed by the s t a t e a t a cumulative rate of 4%. This includes a 2%transaction privilege tax and a 2% education excise tax. In addition, local sales taxes are often imposed on the sales of food and food products. Local sales taxes are usually levied a t a r a t e of 1-2% where appl icable
.
OPTIONS FOR REDUCING THE SALES TAX BURDEN : DESCRIPTION AND ANALYSIS
A mentioned before, there are two generally accepted approaches for reducing s the tax burden associated with the sales tax on food. The f i r s t approach i s t o eliminate the sales tax on food and prohibit the levy of new sales taxes on such products. The second approach i s t o return a l l o r a portion of the receipts collected from sales taxes on food t o taxpayers i n the form of an income tax credit. Several options are available f o r reducing the tax burden under each of these approaches.
In the sections t h a t follow, some of the options f o r reducing the tax burden under each approach will be described. The revenue and equity impacts of each option will also be discussed. These concepts are defined below:
1. Revenue Impacts
The revenue impacts of each option describe the total revenue loss t o a l l jurisdictions i f the option i s adopted and the distribution of the loss among jurisdictions. The estimated revenue loss f o r each option was based on the reduction in collections t h a t would have occurred i f the option had been in e f f e c t during calendar year 1978. Calendar year 1978 was selected because t h i s was the most recent time period f o r which revenue collections were available.
2.
Equity Impacts
The equity impacts of each option a r e discussed in terms of the change in the sales tax burden borne by families of different s i r e s and income levels. The sales tax burden i s defined a s the percent of each family's total incqme that i s used t o pay sales taxes. Total family income includes transfer payments and other sources of non-t.axable income i n addition to taxable income sources. 2 For each option, the analysis will include two graphswhich i l l u s t r a t e the change in the sales tax burdenwhich would have resulted i f the option had been in e f f e c t during calendar year 1977. The equity analysis i s based on 1977 because t h i s was the most recent time period f o r which family expenditure data could be estimated. I t should be noted t h a t , i f tax r e l i e f i s provided in the form of a tax c r e d i t , the degree of r e l i e f available t o each individual in 1977 will decrease somewhat in 1978 unless the c r e d i t s are indexed for inflation.
he following sources are included in total family income: wages and s a l a r i e s , sel f-empl oyment income, social security , r a i l road retirement, government retirement, veteran payments, unemployment compensation, estates, t r u s t s , dividends, interest, rental income, royal t i e s , income from roomers and boarders, welfare and public assistance, private pensions, regular contributions f o r support and other sources incl uding workmen ' s compensation.
I ELIMINATING THE SALES TAX O FOOD . N
O r d i n a r i l y , stateswhich exempt f o o d from t h e general sales t a x o n l y exempt those food products which a r e purchased f o r o f f -premi se consumption. Meals and o t h e r food products prepared f o r consumption on the premises remain taxable. Take-out food s o l d by r e s t a u r a n t s i s t a x a b l e i n some s t a t e s and exempt i n others. A s i m i l a r exemption c o u l d be i n s t i t u t e d i n t h e S t a t e o f Arizona simply by removing t h e tax on sales o f r e t a i l food items purchased f o r home consumption. Two o p t i o n s e x i s t f o r removing t h i s tax. and -local The f i r s t o p t i o n i s t o remove t h e The impacts o f each o f these s t a t e food sales t a x only. The second o p t i o n i s t o p r o h i b i t t h e l e v y o f s t a t e taxes on t h e s a l e o f f o o d products. options i s analyzed below. N OPTION 1: ELIMINATING THE STATE SALES TAX O FOOD A. Description
The intended e f f e c t o f t h i s o p t i o n i s t o e l i m i n a t e t h e s t a t e sales t a x l i a b i l i t y o f i n d i v i d u a l s on purchases o f food f o r home use. Under t h i s o p t i o n , t h e 4% Food products s o l d s t a t e t a x on sales o f r e t a i l food items would be removed. f o r on-premise consumption o r f o r off-premise consumption.
i n r e s t a u r a n t s and s i m i l a r establishments would remain t a x a b l e whether prepared
B.
Revenue Impacts
I n making t h i s a n a l y s i s , i t was estimated t h a t 26-30% o f A r i z o n a ' s r e t a i l sales t a x c o l l e c t i o n s a r e d e r i v e d from t h e sales t a x on food.3 During 1978, 26-30% t o $1 03,306,403. o f s t a t e r e t a i l sales t a x c o l l e c t i o n s represented $89,532,216 t a x on food had been removed beginning i n 1978.
This i s t h e p o t e n t i a l revenue l o s s t h a t would have r e s u l t e d i f the s t a t e sales
J
For an explanation of how t h i s estimate was derived, see t h e Appendix, o p t i o n 1.
C o l l e c t i o n s from t h e s t a t e ' s r e t a i l sales t a x are shared w i t h c o u n t i e s and c i t i e s . The t o t a l amount o f c o l l e c t i o n s i s d i s t r i b u t e d as f o l l o w s : State 70.7% Cities 12.5% Counties 16.8% t o $1 03,306,403 would be borne by
Thus, t h e revenue 1oss o f $89,532,216
each type o f j u r i s d i c t i o n as shown below: Loss t o State Loss t o Cities $11,191,527 12,913,300 Loss t o Counties $1 5,041,412 17,355,476 The
1ow
high
$63,299,277 73,037,627
A breakdown o f t h e estimated l o s s t o each c i t y i s shown i n Table 1. estimated l o s s t o each county i s shown i n Table 2.
C.
E q u i t y Impacts
The graphs i n e x h i b i t 2 i l l u s t r a t e t h e change i n t h e sales t a x burden t h a t would r e s u l t from removing t h e s t a t e sales t a x on food. The t o p graph shows t h e change i n t h e sales t a x burden borne by f a m i l i e s o f one (a s i n g l e i n d i v i d u a l ) and t h e bottom graph shows t h e change i n t h e sales t a x burden borne by farnil i e s o f four. As noted before, t h e s a l e s t a x burden i s d e f i n e d as t h e percent o f income
/
used by each f a m i l y t o pay sales taxes. The long-dashed l i n e ( t o p ) i n each o f t h e graphs shows t h e percent of income c u r r e n t l y used by f a m i l i e s a t d i f f e r e n t income l e v e l s t o pay s t a t e and l o c a l
As shown i n the graphs, low income f a m i l i e s devote a l a r g e r p o r t i o n of t h e i r t o t a l incomes t o sales taxes than f a m i l i e s o f t h e same s i z e w i t h h i g h e r l e v e l s o f income ( t h e sales t a x i s
sales taxes on a11 items (food and non-food). regressive). T h i s i s because f a m i l i e s w i t h lower incomes a r e more i n c l i n e d t o spend t h e i r e n t i r e income and w i l l t h e r e f o r e be s u b j e c t t o t h e sales t a x (5% i n t h i s example) on t h e e n t i r e amount. A t extremely low l e v e l s o f income, t h e
TABLE 1 BREAKDOWN OF c I n REVENUE LOSS UNDER OPTION 1 (Eliminating t h e S t a t e Food S a l e s Tax)
County Apache
City Eager Springerville S t . Johns Benson B i sbee Doug1 a s Huachuca City S i e r r a Vista Tombstone Willcox Fl a g s t a f f Fredon i a Page Millaims Globe Hayden Miami Payson Winkleman
P i ma Safford Thatcher
Low Estimate
High Estimate
Cochi s e
Coconi no
Gila
Graham
Greenlee Mari copa
Cl i f t o n Duncan Avon da 1e Buckeye Chandler El Mirage Gila Bend G i 1b e r t Gl endal e Goodyear Guadal upe
TABLE 1 ( c o n t ' d ) Low Estimate High Estimate
County Mari copa
City
Mesa Paradise Val 1ey Peoria Phoenix Scottsdal e S u r p r i se Tempe To1 1eson W i ckenburg ,Youngtown
Mohave Navajo Hol brook Show Low Snowfl ake Taylor Winslow Marana Oro Val l e y South Tucson Tucson Pinal Casa Grande Coo 1idge E l oy Florence Kearny Mammoth Superior Nogal es Patagoni a Chino V a l l e y C l arkdale Cottonwood Jerome Prescott Parker Somerton 9,882 7,924 41,856 2,057,987
Santa Cruz Yavapai
TABLE 1 ( c o n t ' d ) Low Estimate High Estimate
County
Y uma
City
We1 1t o n Y uma
$
6,502 202,399
$
7,503 233,537
Total
TABLE 2 BREAKDOWN OF REVENUE LOSS TO COUNTIES UNDER OPTION 1 ( E l i m i n a t i n g the S t a t e Food S a l e s Tax)
County Apache Cochise Coconi no
G i 1a
Low Estimate
High
Estimate
$
132,476 452,686 686,218 352,681 109,096 32 1,800 9,312,264 425,870 493,843 3,248,138 7 18,145 117,731 460,198 524,330
Graham Green l ee M a r i copa Mohave Navajo Pima P in a l Santa Cruz Yavapai
Y uma
EXHIBIT 2
COMPARISON OF SALES TAX BURDEN UNDER CURRENT LAW AND UNDER OPTION 1 ( E l i m i n a t i n g t h e S t a t e Food Sales Tax)
R C E N T
E
PP
=r
fi
N
I D4 I
(FAMILY SIZE. 1 ) TOTAL SALES TAX EURDEN TOTAL EXCEPT FOOD TOTAL WITH OPTION
----.
----------a.
OS3. L I ,E N 2C 0T
FA
flA
st-
i
0
7000
14000
21000
28000
FAMILY INCOME
35000
(1977 $ )
(FAMILY SIZE- 4 TOTAL SALES TAX BURDEN TOTAL EXCEPT FOOD TOTAL WITH OPTION
----..------.
0
,
7000
14000
21080
28000
FAMILY INCOME
35000
(1 977 $ )
percent of income used t o pay sales taxes may even exceed 5%, since f a m i l i e s i n lower income brackets f r e q u e n t l y spend i n excess o f t h e i r incomes from borrowed funds and savings withdrawals, and w i l l pay sales taxes on expendftures from these sources as we1 1
.
The short-dashed l i n e i n each o f t h e graphs i n e x h i b i t 2 i s i n c l u d e d t o show which p o r t i o n o f the sales t a x burden r e s u l t s from t h e t a x on food items and which p o r t i o n o f the sales tax burden r e s u l t s from t h e t a x on non-food items. The distance below t h i s l i n e represents the percent o f income used t o pay sales taxes on non-food purchases. t a x burden). The sol i d 1 i n e i n each o f the graphs shows the percent o f income t h a t would be used t o pay a l l sales taxes a f t e r removing the s t a t e sales t a x on food, re1 i e f The distance between t h i s l i n e and t h e long-dashed l i n e represents the percent o f income used f o r food sales taxes ( t h e food sales
The
distance between the long-dashed 1 i n e and t h e sol i d l i n e i s t h e amount o f t a x
t h a t would be received by i n d i v i d u a l s a t each income l e v e l i f t h e
s t a t e sales tax on food were removed.
I t i s obvious from the graphs t h a t i n d i v i d u a l s a t a l l l e v e l s of income
will
receive a s i g n i f i c a n t r e d u c t i o n i n sales t a x l i a b i l i t y i f t h e s t a t e t a x on food sales i s removed. B p r o h i b i t i n g c o l l e c t i o n o f t h e tax, t h i s o p t i o n assures y t h a t a l l i n d i v i d u a l s r e c e i v e t a x r e l i e f equal t o t h e i r a c t u a l s t a t e food sales t a x l i a b i l i t y (approximately 4/5 o f t h e t o t a l food sales t a x burden). Because the food sales tax burden i s g r e a t e r a t l o w l e v e l s o f income, l o w income f a m i l i e s
w i l l b e n e f i t most i f t h e t a x i s removed.
A1 though t h e l e v e l o f r e g r e s s i v i t y
i s reduced, the sales tax burden on low-income f a m i l i e s w i l l s t i l l be g r e a t e r than the sales t a x burden on h i g h e r income f a m i l i e s . OPTION 2: ELIMINATING STATE AND LOCAL SALES TAXES O FOOD N
A.
Description
Under t h i s option, s t a t e and l o c a l taxes on the s a l e
-
o f r e t a i l food items
would be removed. Again, food products sold i n restaurants and similar establ ishments would remain taxable whether prepared f o r on-premise consumption o r f o r off-premise consumption. The intended e f f e c t of t h i s option i s t o eliminate the s t a t e and local s a l e s tax l i a b i l i t y of individuals on purchases of food f o r home use.
B.
Revenue Impacts
Estimated collections from the local s a l e s tax on food were $15,089,533 t o $1 7,311,232 during 1 9 7 8 . ~ This i s the estimated revenue l o s s t h a t would have occurred i f local s a l e s taxes on food had been removed during t h a t period. When added t o the revenue l o s s from a s t a t e food s a l e s tax exemption, the t o t a l l o s s would range from $104,621,749 t o $1 20,617,635. The t o t a l l o s s t o each type of jurisdiction is shown below. Loss t o State S t a t e (low) (high) Tax Local low) Tax [high) $63,299,277 73,037,627 -0Loss t o Cities $11,191 ,527 12,913,300 $1 5,089,533 17,311,232 Loss t o Counties $1 5,041,412 17,355,476 -0-
Total (low) $63,299,277 $26,281,060 $1 5,041,412 (high) 73,037,627 30,224,532 17,355,476 Table 3 shows the estimated revenue l o s s t o selected c i t i e s under option 2. The estimated l o s s t o the s t a t e and t o each county would be the same under option 2 a s i t was under option 1.
C.
Equity Impacts
a
The graphs i n exhibit 3 i l l u s t r a t e t h e change i n t h e s a l e s tax burden t h a t J would r e s u l t i f s t a t e p local s a l e s taxes on food were eliminated. The 1ong-dashed 1 ine (indicating current tax burden) and the short-dashed 1 ine (indicating current tax burden without food) a r e the same a s the equivalent
or an explanation of how this estimate was derived, see the Appendix, option 2.
TABLE 3
BREAKDOWN O REVENUE LOSS TO CITIES UNDER OPTION 2 F ( E l i m i n a t i n g State J m Local Food Sales Tax) a
County APACHE
Cities Eager S p r i n q e r v i l 1e
Law Estimate
High Estimate
COCHISE
Benson B isbee Doug1as Hauchuca C i t . ~ Sierra Vista Tombstone Willcox -
1 1
$
77,973
I
I-
COCON IN0
Flagstaff Fredon ia Page Williams
G l obe
673,081 166,734
GILA
Hayden Miami Payson Winkleman GRAHAM Pima S a f fo r d Thatcher
C lifton Duncan
200,581
143,217
GREENLEE
1
TABLE 3 (cont 'd)
County
MAR ICOPA
Cities Phoenix Mesa Tempe Scottsdal e Avondal e Buckeye C hand1 e r El Mirage Gila Bend Gi 1bert G endal e l Good Year Guadal upe Paradise Val 1ey Peoria Surpri se To1 1eson Wickenburg Youngtown Kingman Hol brook Show L w o Snowf 1a ke Tayl or Wins1 o w Tucson Marana Oro Valley South Tucson Casa Grande Cool i dge E l oy Fl orence Kearney Mammoth Superior Nogales Pa tagon i a
L w Estimate o
High Estimate
MOHAVE
NVJ A AO
115,955
PI 4 M
I
2,057,987 196,815
PI A NL
S N A CRUZ AT
TABLE 3 (cont ' d)
County YAVAPAI
Cities Chino Valley C l arkdal e Cottonwood Jerome Prescott Parker Somerton We1 1t o n Y uma
Low Estimate -
Hiqh Estimate
$
261,821
$
302,103
f
7
585,067
TOTAL
EXHIBIT 3 COMPARISON OF SALES TAX BURDEN UNDER CURRENT LAW AND UNDER OPTION 2
( E l iminating S t a t e - Local Food Sales Tax) and
(FAMILY S I Z E - 1 ) TOTAL SALES TAX BURDEN TOTAL EXCEPT FOOD TOTAL WITH OPTION
,, .
-----------.
0
7000
14008
21000
28000
assso
(1977 $ )
FAMILY INCOME
NOTE:
In these graphs the short-dashed l i n e and the solid l i n e are-equal.
TOTAL SALES TAX CURDEN TOTAL EXCEPT FOOD TOTAL WITH OPTION
----. _-____-____.
0
7000
14000
21000
28008
35000
(1977
$1
FAMILY INCOME
1ines i n exhibit 2. In t h i s case, however, the sol id 1 ine (which represents the sales tax burden a f t e r removing s t a t e and local sales taxes on food) will be identical t o the short-dashed l i n e (the current tax burden without food). Under t h i s option, also, the sales tax burden will be reduced f o r individuals a t a l l levels of income. The amount of tax r e l i e f received by each family will be exactly equal t o i t s original food sales tax l i a b i l i t y ( s t a t e and local). The re1 ief received by each family i s represented in the graphs by the distance between the long-dashed l i n e and the solid l i n e . The remaining sales tax burden will equal the percent of income used t o pay sales taxes f o r nonfood purchases (represented by the sol id and short-dashed 1 ines). 11. I C M TAX CREDITS FOR SALES TAXES PAID NO E
The most common form of tax c r e d i t used t o compensate individuals f o r sales f taxes paid i s the fixed per capita c r e d i t . O the seven s t a t e s that provide an income tax c r e d i t f o r sales taxes paid, four s t a t e s (Idaho, Massachusetts, Nebraska, and Nw Mexico) use t h i s form of c r e d i t or a modified version. With e a c r e d i t of t h i s type, the same amount of reduction in income tax l i a b i l i t y i s granted f o r each individual in the s t a t e . The amount of the c r e d i t may be an arbitrary figure or may be based on an estimate of the average food sale$ tax l i a b i l i t y of individuals within the s t a t e . Tax c r e d i t s may also be designed t o duplicate the effects of an exemption by providing tax r e l i e f t o each household based on actual sales tax l i a b i l i t y . This may be accompl ished by allowing each household t o itemize food sales tax payments or a schedule of tax c r e d i t s may be developed based on an estimate of the food sales tax 1iabil i t y of families of different sizes and income levels.
A t h i r d form of tax c r e d i t used to compensate individuals f o r sales tax payments i s the "vanishing" tax credit. Vanishing tax credits concentrate tax re1 ief a t 1o levels of income and provide no re1 ief t o famil ies a t w high income levels. As the income of the claimant increases, the amount of
the tax credit decreases, until i t "vanishes" (declines t o zero) a t a specified income 1eve1
.
O the seven s t a t e s which provide an income tax c r e d i t f o r sales taxes paid, f three s t a t e s (Hawaii, Colorado, and Vermont) use a vanishing income tax credit. Colorado and Hawaii use a per capita tax c r e d i t which decl ines in value a s the level of income increases. In Hawaii , f o r example, the tax credit i s $40 f o r individuals w i t h an income level between $14,000 and $20,000. In Vermont, size tax credits are granted t o each household based on the income level of the family. For families of each size, the amount of the c r e d i t decreases a s the level of income increases. In the paragraphs t h a t follow, an analysis will be made of four additional options f o r reducing the sales tax burden. Each of these options will be i n the form of an income tax credit. OPTION 3 : FIXED PER CAPITA TAX CREDITS
A.
Description
Under this option, each individual i n the s t a t e would be e l i g i b l e t o receive an income tax c r e d i t a s compensation f o r sales taxes paid. The amount of the c r e d i t would be the same f o r each individual i n the s t a t e . The intended e f f e c t of t h i s option i s t o reduce the total tax 1i a b i l i t y of each individual i n the s t a t e by the same absolute amount.
B.
Revenue Impacts
The revenue loss from a f l a t r a t e per capita tax c r e d i t depends on the size of the c r e d i t which is granted. The estimated revenue loss t h a t would r e s u l t from several different levels of c r e d i t i s shown below f o r 1978:
Per Capita Tax Credit
Estimated Revenue Loss 5
The high estimate i s the revenue loss t h a t would have resulted i f a l l individuals e l i g i b l e f o r the c r e d i t i n 1978 had actually received i t . The low estimate is the revenue loss t h a t would have resulted i f the c r e d i t had been granted only t o individuals claimed as exemptions on 1978 tax returns. Net collections from the s t a t e income tax are divided between the s t a t e and i s equal t o 15%of the net proceeds collected the c i t i e s . The c i t i e s "hare from the income tax two years prior t a the current f i s c a l year. Thus, the c i t i e s would not receive a reduction in t h e i r share of income tax collections u n t i l two years a f t e r the income tax c r e d i t was f i r s t granted and the revenue loss associated w i t h the tax c r e d i t would be borne entirely by the s t a t e f o r the f i r s t two years that the c r e d i t was in effect.
C.
Equity Impacts
The graphs i n exhibit 4 i l l u s t r a t e the change i n the sales tax burden t h a t would resul t i f taxpayers received a $35 per capita income tax c r e d i t f o r sales taxes paid. Under t h i s option, the sales tax burden will be reduced f o r individuals a t a l l levels of income. Individuals a t lower levels of income will generally receive tax re1 ief which i s somewhat greater than their original s t a t e food sales tax burden, and i n the case of larger famil ies, will receive tax re1 ief which exceeds t h e i r combined s t a t e and local food sales tax 1i a b i l i t y . Individuals a t higher income levels w i l l , i n most cases, receive tax re1 ief which is equal t o or sl ightly l e s s than t h e i r actual food sales tax 1iabil ity. B comparing the lower graph of exhibit 4 w i t h the lower y graph of exhibit 2, i t can be shown t h a t the per capita tax c r e d i t will provide greater tax relief t o large families w i t h low incomes than a food sales tax exemption. In each of the graphs, the amount of tax re1 ief received by an explanation of how these estimates were derived, see the Appendix, Option 3.
or
EXHIBIT 4 COMPARISON OF SALES TAX BURDEN UNDER CURRENT LAW AND UNDER OPTION 3 ( F i x e d p e r C a p i t a Tax C r e d i t )
(FAMILY SIZE= 1 ) TOTAL SALES TAX BURDEN TOTAL EXCEPT FOOD TOTAL UITH OPTION
---
-. -----------.
0
7080
14000
'
21000
28000
35000
FAMILY INCOME
(FAMILY SIZE= 4 ) TOTAL SALES TAX BURDEN TOTAL EXCEPT FGOD TOTAL WITH OPTION
--- -. .,----------.
0
8
7600
14000
21000
28000
35000
(1 977
FAMILY INCOME
$1
individuals a t each income level i s represented by the distance between the long-dashed 1ine and the solid line. OPTION 4: I C M TAX CREDITS B S D ON ACTUAL FOOD SALES TAX LIABILITY NO E AE
A.
Description
T h i s option i s intended t o parallel the effects of the s t a t e food sales tax exemption. Under the option, each household would receive a tax c r e d i t based on an estimate of i t s s t a t e food sales tax l i a b i l i t y during 1977. The tax l i a b i l i t y estimated f o r each family i s determined based on the food expenditures of families by family s i z e and total family income. The schedule of tax credits available to families of different sizes and income levels under this option i s shown i n exhibit 5.6 A shown, the c r e d i t s are based on total family s income which includes transfer payments and other sources of income not taxed. B.
Revenue Impacts
The revenue loss i f t h i s type of c r e d i t had been in e f f e c t i n Arizona during s 1978 i s estimated a t $68,363,714.~ A w i t h other types of income tax c r e d i t s , t h i s revenue loss would be borne entirely by the s t a t e during the f i r s t year and the c i t i e s t h a t receive a share of the income tax would not experience a decl ine i n revenues until two years a f t e r the c r e d i t goes into effect.
or an explanation of how t h i s schedule was developed, see the Appendix, Option 4.
7 ~ noted previously, a c r e d i t based on actual food sales tax 1iabil i t y resembles s a food sales tax exemption w i t h respect t o tax re1 i e f . However, the estimated revenue loss from the c r e d i t will be significantly lower due t o the f a c t that the tax c r e d i t s granted t o each family under t h i s option were based on the estimated food sales tax 1i a b i l i t y of families during 1977 (see exhibit 5). If the tax credits available t o each family were adjusted t o approximate 1978 food sales tax l i a b i l i t y using the food inflation index, the estimated revenue loss would increase t o $75,014,187. This i s s t i l l lower than the loss from an exemption because non-residents and non-f i l e r s would not receive the credit.
EXHIBIT 5
TAX CREDIT SCHEDULE BASED ON A T A SALES T X LIABILITY CU L A
TOTAL FAMILY INCOME
$
FAMILY SIZE 1 $ 30
2 $ 50
3 $ 59 69 70 82 100 116
4 $ 75 81 90 104 120 135
5
$ 82
6 or more
$ 91
under 4,200 4,200 under 8,300 8,300 under 16,700 16,700 under 20,800 20,800 under 35,000 35,000 plus
33 37 39 43
63
65
101 105 111 135 153
114 131 147 164 191
72 76 91
52
NOTE:
This schedule was based on the estimated food purchases of families of each s i z e and income level during 1977. The income brackets a r e a1 so expressed i n terms of 1977 do1 1a r s .
C.
Equity Impacts
The two graphs i n exhibit 6 i l l u s t r a t e the change i n the sales tax burden that would occur if the State of Arizona used a schedule of tax c r e d i t s based on the actual s t a t e food sales tax l i a b i l i t y of households of different sizes and income levels. B comparing these graphs w i t h the graphs in y exhibit 2, i t can be shown t h a t the impact of a c r e d i t based on actual tax l i a b i l i t y will closely resemble the effects of a sales tax exemption.
A with the s t a t e food sales tax exemption, individuals a t a l l levels of s income will receive tax re1 ief which approaches their actual s t a t e food sales tax l i a b i l i t y (approximately 4/5 of the total food sales tax burden).
In the graphs, the total food sales tax burden i s represented by the distance between the long-dashed l i n e and the short-dashed line. Sales tax relief under option 4 i s represented by the distance between the longdashed l i n e and the solid line. OPTION 5: VANISHING TAX CREDITS
A.
-
THE HAWAII TAX CREDIT S H D L C E UE
Description
The intended effect of t h i s option is to reduce the tax burden on lower income families. The tax credit available t o each individual would be based on a schedule of tax credits equal in amount t o the ones used by the State of Hawaii. In Hawaii, income tax credits are 1imited t o individuals w i t h incomes of l e s s than $20,000. The entire schedu1.e of Hawaii tax credits i s shown i n exhibit 7. In the Hawaii tax c r e d i t schedule the term "income" refers to the adjusted gross income received by the claimant. Under t h i s option, however, the income on which the c r e d i t is based has been changed t o total family income.
EXHIBIT 6
a
COMPARISON OF SALES TAX BURDEN UNDER CURRENT LAW AND UNDER OPTION 4 (Tax C r e d i t s Based on Actual Sales Tax L i a b i l i t y )
(FAMILY SIZE.
1)
TOTAL SALES TF,X SURDEN TOTAL EXCEPT FOOD TOTAL WITH OPTION
----. -----------.
8
7009
14800
21000
28800
35000
FAMILY INCOME
TOTAL SALES TAX BURDEN TOTAL EXCEPT FOOD TOTAL WITH OPTION
--
,, ,.
-----------.
0
7000
14000
21008
28000
35000
FAMILY INCORE
EXHIBIT 7
TAX CREDIT SCHEDULE USED BY THE STATE OF HAWAII
INCOME
TAX CREDIT
$40 32 28 26 22 20 17 14 11 8
$
u n d e r 5,000
5,000 u n d e r 6,000 6,000 u n d e r 7,000 7,000 u n d e r 8,000 8,000 u n d e r 9,000 9,000 u n d e r 10,000
10,000 u n d e r 11,000 11,000 u n d e r 12,000 12,000 u n d e r 13,000 13,000 u n d e r 14,000 14,000 u n d e r 20,000
6
8. Revenue Impacts
I f a schedule o f tax c r e d i t s equal i n amount t o the ones used by Hawaii
had been i n e f f e c t i n the State o f Arizona during 1978, the estimated revenue 8 l o s s f o r t h a t period would have t o t a l e d $27,227,066. Because of the way income tax revenues are d i s t r i b u t e d i n the State o f Arizona, the revenue l o s s from a tax c r e d i t o f t h i s type would a l s o be borne e n t i r e l y by the s t a t e during the f i r s t years t h e c r e d i t was i n e f f e c t , and the c i t i e s would n o t experience a decline i n revenue u n t i l the t h i r d year.
C.
Equity Impacts
The two graphs i n e x h i b i t 8 i l l u s t r a t e the change i n the sales t a x burden t h a t would occur i f the State o f Arizona used a schedule o f t a x c r e d i t s s i m i l a r t o the one used by the State o f Hawaii. l e v e l s o f income under t h i s option. As shown i n the graphs, the reduction i n sales tax 1 i a b i l i t y i s r e s t r i c t e d t o f a m i l i e s a t lower However, the amount o f r e l i e f received As before, the amount by i n d i v i d u a l s a t lower income l e v e l s w i l l be s i g n i f i c a n t and w i l l i n f a c t exceed sales tax 1 i a b i l i t y f o r l a r g e r sized f a m i l i e s . between the long-dashed l i n e and the s o l i d l i n e . of tax r e l i e f a v a i l a b l e a t each income l e v e l i s represented by the distance
A t higher l e v e l s o f income there i s no distance between these two l i n e s , i n d i c a t i n g t h a t no tax r e l i e f i s received.
VANISHING TAX CREDITS
OPTION 6:
- THE VERMONT TAX
CREDIT SCHEDULE
A.
Description
Under option 6, t h e t a x c r e d i t a v a i l a b l e t o each i n d i v i d u a l would be based on a schedule o f tax c r e d i t s equal i n amount t o the ones used by the State of
a
u The estimate shown may be a low estimate, since the number o f i n d i v i d u a l s f i l i n g tax forms would probably increase i f a tax c r e d i t goes i n t o e f f e c t . For an explanation o f how t h i s estimate was derived, see the Appendix, Option 5.
EXHIBIT 8 COMPARISON OF SALES TAX BURDEN UNDER CURRENT L W AND UNDER OPTION 5 A (The Hawaii Tax C r e d i t Schedule)
(FAMILY SIZE= 1) P E R C P A I D4TOTAL SALES TAX BURDEN TOTAL EXCEPT FOOD TOTAL WITH OPTION
-- - - .
E
NI TN 0s3 FA L IE NS c 20T fl A EX E
-
st-
0
7000
14083 21000 FAMILY INCOME
2800b
35000
(FAMILY S I Z E * 4 ) TOTAL SALES TAX BURDEN TOTAL EXCEPT FOOD TOTAL WITH OPTION
-----------.
0
7080
14000 21000 FAMILY INCOflE
28080
35000 (1 977 $ )
Vermont.
This option i s a l s o intended t o reduce the t a x burden on low-income
f a m i l i e s . I n Vermont, income tax c r e d i t s a r e l i m i t e d t o f a m i l i e s w i t h incomes Famil i e s w i t h incomes below $9,000 receive a tax c r e d i t o f l e s s than $9,000. t h a t depends on income and f a m i l y size. Although the c r e d i t increases w i t h the s i z e o f the f a m i l y , the increase i s n o t d i r e c t l y p r o p o r t i o n a l t o the number o f i n d i v i d u a l s i n the family. The e n t i r e schedule o f Vermont t a x c r e d i t s i s shown i n e x h i b i t 9. The tax c r e d i t a v a i l a b l e t o each household i n the State o f Vermont i s based on "modified adjusted gross income" which included Social Security payments, pub1 i c assistance and other non-taxable sources o f income. This concept o f income c l o s e l y resembles f a m i l y income which was the basis f o r g r a n t i n g the tax c r e d i t i n t h i s analysis.
B.
Revenue Impacts
I f a schedule o f tax c r e d i t s equal i n amount t o t h e ones used by Vermont had been i n e f f e c t i n the State o f Arizona during 1978, the estimated revenue 9 Again, t h i s revenue l o s s f o r t h a t p e r i o d would have t o t a l e d $5,032,814. l o s s would be borne e n t i r e l y X y the s t a t e during the f i r s t year, and the c i t i e s t h a t receive a share o f the income t a x would n o t experience a decline i n revenues u n t i l two years a f t e r the c r e d i t goes i n t o e f f e c t .
C.
Equity Impacts
The two graphs i n e x h i b i t 10 i l l u s t r a t e the change i n the sales tax burden t h a t would occur ifthe State o f Arizona used a schedule o f t a x c r e d i t s s i m i l a r t o the one used by the State of Vermont. Under t h i s option, also, the reduction i n sales t a x l i a b i l i t y i s l i m i t e d t o f a m i l i e s a t lower l e v e l s of income. Even a t these low l e v e l s o f income, however, the amount o f t a x r e l i e f provided i s s i g n f i c a n t l y l e s s than the amount o f food sales tax liability. I n the graphs, food sales tax l i a b i l i t y i s represented by
he
estimate shown may be a low estimate, since the number o f i n d i v i d u a l s f i l i n g tax forms would probably increase i f a t a x c r e d i t goes i n t o effect. For an explanation o f how t h i s estimate was derived, see the Appendix, Option 6.
EXHIBIT 9
F TAX CREDIT SCHEDULE USED BY THE STATE O VERMONT
INCOME
$8 ,000-8,999
1
0 0 16 17 18
2
3 0 21 25 28 31
4 20 24 28 32 36
5 22 27 30 35 40
6 24 30 34 38 44
7 26 33 37 41 48
8 28 36 40 44 52
9
30 39 43 47 56
10 or more 32 42 46 50 60
0 0 20 23 25
7,000-7,999 6,000-6,999 5,000- 5,999 4,000-4,999
E X H I B I T 10 COMPARISON OF SALES TAX BURDEN UNDER CURRENT LAW AND UNDER OPTION 6 (The Vermont Tax C r e d i t Schedule)
(FARILY S I Z E * 1 ) TOTkL SALES TAX BUREEN TOTAL EXCEPT FOOD TOTAL WITH OPTION
\
----.
\
0
7000
14000 210Q0 FAMILY INCORE
23088
35000
(1 977
$1
(FAFlILY S I Z E * 4 ) TOTAL SALES TAX BURDEN TOTAL EXCEPT FOOD TOTAL WITH OPTION
,-,.
0
7800
14000 21000 FAMILY INCOME
28000
35000
the distance between the long-dashed line and the short-dashed 1 ine. Sales t a x relief under option 6 i s represented by the distance between the longdashed line and the solid line. A t higher levels of income there i s no distance between these two lines, indicating that no tax relief i s received.
COMPARISON OF REVENUE AND EQUITY IMPACTS:
EXEMPTIONS vs. CREDITS
I.
'
SUMMARY AND COMPARISON' OF REVENUE IMPACTS
When comparing the revenue impacts of the six options f o r reducing the s a l e s tax burden, the following questions should be considered. o 1) H w much revenue i s t o be returned t o the taxpayers? 2) Which j u r i s d i c t i o n s will bear the revenue l o s s ? In considering each of these questions, i t i s helpful t o look separately a t food sales tax exemptions and income tax c r e d i t s f o r s a l e s taxes paid. The d i s t i n c t c h a r a c t e r i s t i c s of each approach a r e considered below.
A.
TOTAL REVENUES RETURNED TO TAXPAYERS
1. Food Sales Tax Exemptions
W i t h a food sales t a x exemption, the t o t a l amount of revenue which is returned t o the taxpayers will be determined by the amount of revenues which would be collected by each jurisdiction i f the exemption were not i n e f f e c t . Option 1 , f o r example, involves removing the s t a t e tax on food. Therefore, the t o t a l amount of revenue retained by the taxpayers under this option would equal the t o t a l amount collected by the s t a t e from the s a l e s tax on food (estimated a t $89,532,216-$103,306,403). Similarly, Option 2 provides f o r a food s a l e s tax exemption a t the s t a t e and local level. Thus, the t o t a l tax l o s s under t h i s and option would equal the amount of taxes collected by s t a t e --- local j u r i s d i c t i o n s . ($89,532,216-$103,306,403 collected by t h e s t a t e plus $1 5,089,533-$17,311,232 collected by the c i t i e s . )
,
a
Because no tax revenues will be collected on food s a l e s i f an exemption i s i n e f f e c t , the a b i l i t y of the l e g i s l a t u r e t o control the t o t a l amount of the revenue l o s s will be somewhat limited under this approach. However, i t would
be possible t o exercise more control over the total revenue loss from this type of alternative by reducing the tax r a t e on food sales instead of eliminating the tax a1 together.
2.
I C M TAX CREDITS FOR SALES T X S PAID NO E AE
Income tax credits offer considerable f l e x i b i l i t y i n determining the amount of revenue t o be returned t o the taxpayers. With an income tax credit, the total amount returned will depend on the amount of the c r e d i t granted t o each individual or household. An income tax credit may be designed t o return a l l of the revenues collected from the food sales tax or only a portion of these revenues. For example, the total revenue loss resulting from each of the tax credits examined in t h i s report ranges from a high of $120,617,635 (option 2 ) t o a low Thus, the total amount of revenue t o be of $5,032,814. (Option 6.) returned t o the taxpayers will depend on the type of tax credit selected. In addition, the size of the revenue loss resulting from any of these options may be increased or decreased by altering the amount of the credit available t o each individual or household under that option.
B.
DISTRIBUTION OF REVENUE LOSS AMONG JURISDICTIONS
1. FOOD SALES TAX EXEMPTIONS
Exempting food from the sales tax would r e s u l t i n a reduction in total sales tax collections. Under current law, s t a t e sales tax collections are divided between the s t a t e , the c i t i e s and the counties. City sales tax collections are retained by the c i t i e s that levy a tax. Thus, the revenue loss from a s t a t e food sales tax exemption would be shared by the s t a t e , c i t i e s , and counties, while the revenue loss from a local food sales tax exemption would be borne entirely by the c i t i e s .
2.
I C M TAX CREDITS FOR SALES T X S PAID NO E AE
Providing an income tax c r e d i t f o r sales taxes paid would result i n a reduction
i n s t a t e income tax collections. Net collections from the s t a t e income tax are divided between the s t a t e and c i t i e s . The c i t i e s ' share is equal t o 15% of the net proceeds collected from the income tax two years prior t o the current fiscal year. Thus, the revenue loss resulting from an income tax c r e d i t would be borne entirely by the s t a t e during the f i r s t two years the credit i s in effect and the c i t i e s would not experience a reduction in t h e i r share of tax collections until the third year.
11. S M A Y AND C M A I O OF EQUITY IMPACTS U MR O P RS N Two questions must also be addressed when comparing the equity impacts of the six options f o r reducipg the sales tax burden. These questions are: 1) Will families a t a l l levels of income receive a reduction i n sales tax 1 iabil i ty? (What i s the scope of the tax re1 i e f ? ) o 2) Hw does the amount of reduction in taxes compare with the amount of taxes paid a t each leve3 of income? (What i s the degree of tax re1 ief?) Again, i t i s helpful t o look separately a t food sales tax exemptions and income tax credits f o r sales taxes paid in considering each of these questions.
A.
THE SCOPE OF TAX RELIEF
1. FOOD SALES TAX EXEMPTIONS Food sales tax exemptions are intended t o provide tax r e l i e f t o a l l individuals affected by the food sales tax. Because the food tax i s eliminated on a l l r e t a i l food items, any individual purchasing food a t r e t a i l w111 benefit regardless o f income level
2.
.
I C M TAX CREDITS FOR SALES TAXES PAID NO E
a
Income tax credits for sales taxes paid may be granted t o a l l individuals
regardless of income or may be granted only t o individuals a t specified income levels. For example, a f l a t r a t e per capita c r e d i t (option 3) will reduce the tax burden of individuals a t a1 1 income levels. A c r e d i t based on actual food sales tax l i a b i l i t y (option 4 ) will also benefit individuals a t a l l income levels. Vanishing tax credits, on the other hand, are designed t o provide tax relief only t o individuals a t lower levels of income. For example, the schedule of tax credits used by the States of Hawaii and Vermont (options 5 and 6) concentrate tax re1 ief a t the lower levels of income and do not provide tax re1 ief t o individuals in high income brackets.
B.
THE DEGREE OF TAX RELIEF
FOOD SALES TAX EXEMPTIONS
1.
B prohibiting collection of the tax, food sales tax exemptions assure t h a t a l l y individuals receive tax r e l i e f which is exactly equal t o t h e i r original food sales tax 1iabil ity. Because no tax is collected on food items when an exemption i s in e f f e c t , the food sales tax burden of individuals a t a l l levels of income i s reduced t o zero f o r each jurisdiction exempting food.
2.
I C M TAX CREDITS FOR SALES T X S PAID NO E AE
With an income tax c r e d i t , the degree of tax re1 ief available t o individuals
a t each level of income will depend on the type of tax credit selected, In general, the tax credits examined i n t h i s report represent three different patterns of tax re1 ief
.
The f i r s t pattern of tax re1 i e f , represented by option 4, duplicates the effects of a s t a t e sales tax exemption (option 1 ) . In this option, the tax c r e d i t available to each household i s based on an estimate of actual sales tax 1i a b i l i t y . Therefore, a l l families will receive tax r e l i e f which i s approximately equal t o t h e i r actual s t a t e food sales tax l i a b i l i t y .
�
The second pattern of tax r e l i e f i s represented by options 5 and 6. Under each of these options, individuals a t lower levels of income receive tax re1 ief which approaches t h e i r original food sales tax 1iabil i t y , while individuals a t high income levels receive no tax re1 ief. The third pattern of tax r e l i e f i s represented by option 3. Under t h i s optlon, individuals i n larger families and individuals w i t h lower levels of income may receive tax r e l i e f which exceeds their food sales tax l i a b i l i t y while individuals a t higher income levels and from smaller family sizes will receive tax re1 ief which, i n most cases, i s equal t o or slightly l e s s than their food sales tax l i a b i l i t y . I t should be noted t h a t the degree of tax r e l i e f available t o each individual from any income tax c r e d i t schedule will deteriorate from year t o year unless the c r e d i t schedule i s indexed f o r inflation.
APPENDIX METHODOLOGY: REVENUE IMPACTS
OPTION 1: ELIMINATING THE STATE SALES TAX ON FOOD As mentioned in the t e x t , food items sold in grocery stores are taxable under the r e t a i l category of the sales tax. Thus, collections from the tax on food are not separately identified, b u t are lumped together with a l l other collections from sales of r e t a i l items. In order t o determine what portion of the total collections from r e t a i l items i s derived from the sales tax on food, i t i s necessary t o detemine what portion of total r e t a i 1 expenditures i s represented by expenditures f o r food. To calculate t h i s amount, two different approaches were used.
In the f i r s t approach, i t was assumed t h a t the bulk of r e t a i l purchases are made by consumers, w i t h businesses purchasing only a small percentage of r e t a i l items. Thus, the percent of r e t a i l collections represented by collections from food could be estimated by determining what percent of the average consumer's expenditures f o r taxable r e t a i l items are equal to expenditures f o r food. To calculate t h i s percentage, expenditure data from the 1972-73 Consumer Expenditure Survey were used.' More specifically, the data used were taken from a breakdown of average consumption expenses based on a survey of families in the western area of the United States. For each category of expenditure, a separate determination was made a s t o whether expenses i n the category were subject to the Arizona r e t a i l sales tax. Retail categories composed of food i tems were a1 so identified. Expenditures i n each category subject t o the r e t a i l sales tax were updated to the 1977 level by increasing the figures t o r e f l e c t the increase in the consumer price index f o r that category between 1972-73 and 1 9 7 7 . ~ Total expenditures f o r r e t a i l items were then calculated by summing expenditures i n a l l categories (including food) t h a t were determined to be subject t o the Arizona r e t a i l sales tax. Total expenditures f o r r e t a i l food items were calculated by summing expenditures in r e t a i l categories t h a t were composed of food f o r
@
'consumer Expenditure Survey : Integrated Diary and Interview Survey Data 1972-73, U.S. Dept. of Labor, Bureau of Labor S t a t i s t i c s , pp. 121-124. L For each expenditure category, the component Consumer Price Index f o r the Phoenix Metropolitan area was provided by the Bureau of Business and Economic Research a t Arizona State University.
CI
home consumption. The percent of retai 1 expenditures which i s represented by food was then calculated by dividing expenditures f o r food items by expenditures f o r a l l r e t a i l items a s shown below:
CFE PC = CRE
where :
PC = the percent of r e t a i l sales tax collections derived from food sales CFE = consumer food expenditures CRE = consumer r e t a i l expenditures subject t o Arizona sales tax
In the second approach, the portion of r e t a i l sales tax collections derived from food sales was calculated by dividing estimated sales tax collections from food stores by total r e t a i l sales tax collections, during calendar year 1977. The following formula was used:
FTC PC = RTC
where :
PC = the percent of r e t a i l sales tax collections derived from food sales FTC = estimated s t a t e food sales tax collections during 1977 RTC = total s t a t e r e t a i l sales tax collections during 1977
Total s t a t e r e t a i l sales tax collections during 1977 (RTC) were available from the Arizona Department of Revenue. Tax collections from food sales during 1977 (FTC) were estimated using the following equation :
FTC = .04 (RFS)
where : FTC = estimated food s a l e s tax collections during 1977 RFS = t o t a 3 r e t a i l s a l e s made by grocery and other food s t o r e s during 1977 .04 i s the s a l e s tax r a t e Under the f i r s t approach, food s a l e s tax collections were estimated a t 30.8% of t o t a l r e t a i l s a l e s tax collections. This f i g u r e was be1 ieved t o be somewhat high because i t represents food s a l e s tax c o l l e c t i o n s a s a percent of s a l e s tax collections from consumer r e t a i l purchases instead of a s a percent of t o t a l r e t a i l s a l e s tax collections, which include taxes received from r e t a i l purchases by businesses. Under the second approach, food s a l e s tax c o l l e c t i o n s were estimated a t 25.7% of t o t a l r e t a i l s a l e s tax collections. Thus, a range of 26%-30%was selected a s the portion of r e t a i l s a l e s tax collections derived from food sales. To calculate the revenue l o s s associated w i t h the s a l e s tax exemption f o r 1978, t h i s range of r a t e s was applied t o t o t a l r e t a i l s a l e s tax c o l l e c t i o n s during 1978, as shown below:
RL = PC (RTC)
where :
(4)
RL = 1978 revenue l o s s PC = the percent of r e t a i l s a l e s tax c o l l e c t i o n s derived from food sales RTC = t o t a l s t a t e r e t a i l s a l e s tax c o l l e c t i o n s during 1978
'Total r e t a i l sales by food s t o r e s during 1977 were taken from the 1977 Economic Census of Retail Trade Advance Report, U.S. Dept. of Commerce.
-
OPTION 2:
ELIMINATING STATE AND LOCAL SALES TAXES ON FOOD
To determine the revenue loss from eliminating s t a t e and local sales taxes on food, the same percentages used in option 1 were applied t o t o t a l s t a t e and local collections from r e t a i l sales taxes during 1 9 7 8 . ~ Retail sales tax collections f o r a l l c i t i e s except Tempe, Scottsdale, Prescott, Phoenix, Peoria, Patagonia, Nogales, Mesa, Flagstaff, Chandler and Benson were derived from the Department of Revenue sales tax tapes.5 Collections f o r the c i t i e s l i s t e d were provided by the c i t i e s themselves. Retail sales tax collections in the City of Tucson were excluded from the local total because Tucson exempts food from i t s c i t y sales tax. OPTION 3: FIXED PER CAPITA TAX CREDITS
The revenue l o s s from a f l a t r a t e per capita tax c r e d i t will vary depending on the size of the c r e d i t that i s granted. Thus, the amount of revenue that will be l o s t can be altered by modifying the amount of the c r e d i t given t o each individual. I t was therefore possible t o s e l e c t the total amount of revenue which was t o be returned t o the taxpayers (the maximum revenue loss) and then determine the amount of the c r e d i t available t o each individual by dividing t h i s amount equally among the population. In other words, if the maximum revenue loss i s established, the amount of the c r e d i t can be determined a s follows:
RL PCC = SP
where :
4~he estimated revenue loss from removing the c i t y sales tax on food was determined i n a different manner f o r the City of Scottsdale. In t h i s c i t y , the estimate was based on sales tax collections from grocery stores which are recorded separately from other r e t a i l sales tax collections. 5~he Department of Revenue i s responsible f o r collecting the local sales tax f o r forty-nine c i t i e s and towns. Total r e t a i l sales tax collections from a l l c i t i e s participating in the s t a t e collection system were provided by county, from collections data in the Department of Revenue.
PCC = t h e amount o f the t a x c r e d i t a v a i l a b l e t o each i n d i v i d u a l
RL = t h e maximum revenue l o s s which would r e s u l t from a c r e d i t equal t o PCC S = the s t a t e population P Because o n l y a p o r t i o n o f t h e t o t a l p o p u l a t i o n w i l l f i l e an income t a x r e t u r n , however, t h e t a x c r e d i t w i l l n o t be claimed by t h e e n t i r e s t a t e p o p u l a t i o n and t h e a c t u a l revenue l o s s w i l l be somewhat smaller than i t would have been if a l l i n d i v i d u a l s claimed t h e c r e d i t . The minimum revenue l o s s from a c r e d i t o f t h i s type was determined as f o l l o w s : RL = PCC (ECF) where : RL = t h e minumum l o s s which would r e s u l t from a c r e d i t equal t o PCC
PCC = t h e amount o f t h e per c a p i t a t a x c r e d i t
(6
ECF = the t o t a l number c f exemptions claimed by f i l e r g ( t h e number o f i n d i v i d u a l s f o r which t h e c r e d i t i s granted) OPTION 4: INCOME TAX CREDITS BASED O ACTUAL FOOD SALES TAX LIABILITY N
The revenue l o s s from a t a x c r e d i t o f t h i s type was determined u s i n g the f o l l o w i n g formula:
where : RL = t h e t o t a l revenue l o s s r e s u l t i n g from t h e c r e d i t T = t h e t a x c r e d i t a v a i l a b l e t o each household C NH = the number o f households
i = t h e income l e v e l ( f a m i l y income) s = the family size
6 ~ h et o t a l number o f exemptions claimed on 1978 t a x forms was derived from information provided by t h e Department o f Revenue.
The size of the tax c r e d i t available t o each family (TCis) was based on an estimate of the actual food sales tax l i a b i l i t y of the household. To estimate the actual food sales tax l i a b i l i t y of households of a particular size and income level, expenditure data from the 1972-73 Consumer Expenditure Survey series were used.7 Specifically, expenditures f o r food products were determined from a breakdown of the consumption expenses of famil ies of each size and income level , based on a survey of households throughout the United States. All data from the survey, including income figures, were updated t o the 1977 level by increasing the figures t o r e f l e c t the change in the consumer price index f o r each category between 1972-73 and 1 9 7 7 . ~ The food sales tax 1 iabil i t y f o r families of each size and income level was determined by mu1 tiplying the family's estimated food expenditures by the four percent s t a t e sales tax. After calculating the food sales tax 1iabil i t y f o r each of seventy-two different family types (12 income levels x 6 family s i z e s ) , a schedule of tax c r e d i t was devel oped. In general, the tax c r e d i t established f o r families of a particular size and income was s e t equal t o the sales tax l i a b i l i t y computed f o r that family type. However, the number of income brackets i n the tax c r e d i t schedule was condensed from the original twelve to s i x by combining families i n different income brackets with similar food sales tax l i a b i l i t i e s . In these cases, the tax c r e d i t f o r each of the expanded income brackets was s e t equal t o the average of the tax l i a b i l i t i e s computed f o r each of the component income brackets. (See exhibit 5 of the text. ) The revenue loss from t h i s type of c r e d i t was then determined by multiplying the number of families of each size and income level by the c r e d i t available
Consumer Expenditure Survey Series : Interview Survey, 1972-73, U.S. Dept. of Labor, Bureau of Labor S t a t i s t i c s , pp. 81-200. 0 0 For each expenditure category, the component Consumer Price Index f o r the Phoenix Metropolitan area was provided by the Bureau of Business and Economic Research a t Arizona State University. The change in the general consumer price index f o r the Phoenix metropol itan area was used t o update income figures t o the 1977 1eve1
/
.
�
t o f a m i l i e s w i t h these c h a r a c t e r i s t i c s and summing t h e r e s u l t s . formula 7.)
(See
To determine t h e number o f f a m i l i e s o f each s i z e and income
l e v e l who would be e l i g i b l e t o r e c e i v e a c r e d i t f o r t h e 1978 t a x year, 1977 income t a x f i l e r s were s o r t e d by gross income and f a m i l y s i z e using Department o f Revenue income t a x tapes.' T h i s same d i s t r i b u t i o n was used t o estimate t h e breakdown o f 1978 f a m i l i e s by gross income and f a m i l y size. Because the c r e d i t a v a i l a b l e t o each i n d i v i d u a l was based on t o t a l f a m i l y income, i t was a l s o necessary t o expand gross income on each t a x form t o approximate t o t a l family income before determining the t a x c r e d i t a v a i l a b l e t o each family. process f o r expanding gross income i s described under o p t i o n 5. OPTION 5: VANISHING TAX CREDITS--THE HAWAII TAX CREDIT SCHEDULE The
Because t h e amount o f t h e c r e d i t a v a i l a b l e t o i n d i v i d u a l s a t each income l e v e l i s already s e t under t h i s option, t h e revenue l o s s from a c r e d i t o f t h i s type can be c a l c u l a t e d e a s i l y , i f t h e number o f i n d i v i d u a l s i n each income bracket i s known. The f o l l o w i n g formula was used:
where : RL = t o t a l revenue l o s s from t h e t a x c r e d i t T = t h e amount o f t h e t a x c r e d i t a v a i l a b l e f o r each i n d i v i d u a l C N = t h e number o f i n d i v i d u a l s f o r which t h e c r e d i t may be claimed
i denotes each o f t h e income brackets considered
To determine t h e number o f i n d i v i d u a l s i n each income group (Ni), using data tapes supplied by t h e Department of ~evenue.' individuals
claimed as exemptions on 1977 income t a x forms were s o r t e d by gross income The same d i s t r i b u t i o n
'A
s t a t i s t i c a l sample o f t a x forms, f i l e d by i n d i v i d u a l s f o r t h e 1977 income t a x year, was provided by t h e Dept. o f Revenue. Before r e l e a s i n g t h i s informat i o n , the Dept. of Revenue removed names, addresses and o t h e r i d e n t i f y i n g c h a r a c t e r i s t i c s from each form t o preserve t h e c o n f i d e n t i a l i t y o f these records.
was applied t o the number of individuals claimed as exemptions on 1978 tax returns t o estimate the number of individuals a t each level of gross income d u r i n g 1978. Because the c r e d i t available t o each individual i s based on total family income (including transfer payments and other sources of income not included in gross income f o r tax purposes) i t was also necessary t o expand gross income on each tax form t o approximate total family income before deteming the tax c r e d i t available t o each individual. To do this, income data from the 1972-73 Specifically, the data used were Consumer Expenditure Survey were used.'' taken from a breakdown of income received, by source, f o r families of each size and income level. For each income source a separate determination was made a s t o whether receipts from this source were included i n the Arizona definition of gross income. Receipts from sources included in gross income were then summed and divided into total family income t o develop an expansion factor f o r computing total family income from gross income. The expansion factors were calculated a s f o l l ows :11
where : IEF = income expansion factor TFI = total family income GRI = gross income (Arizona definition) i denotes the total family income bracket s denotes family size The 1978 gross income levels t o which each expansion factor appl ied were then calculated using the following formula :
loconsumer Expenditure Survey Series : Interview Survey, 1973-74, U.S. Dept. of Labor, Bureau of Labor S t a t i s t i c s , pp. 81-200. income expansion factor used f o r famil i e s i n the lowest income bracket was a1 tered in some cases when the factor calculated appeared t o be distorted because the families w i t h i n the bracket were not homogeneous i n character. In these cases, the income expansion factor calculated f o r families in the next income bracket was extended t o cover famil i e s in the lowest income bracket. A-8
he
where : GRI = the upper boundary of the gross income bracket in 1978 that i s subject t o the income expansion factor denoted by IEFiS TFI = the u p p y j boundary of the family income bracket denoted by i and s IEF = the income expansion factor i denotes the total family income bracket s denotes the family size The income expansion factor f o r families a t each level of gross income i s shown, by family size, in Table A-1 of the Appendix. After determining the income expansion factor f o r families of each size and level of gross income, the total family income of each f i l e r was computed as follows:
where : TFI GRI IEF i s
= total family income of 1978 f i l e r s = gross income of 1978 f i l e r s = income expansion factor
denotes the total family income bracket denotes the family size
a
he upper boundary of each family income bracket was f i r s t updated t o the 1978 level by increasing the figures t o r e f l e c t the change in the Consumer Price Index between 1972-73 and 1978. The general consumer price index f o r the Phoenix metropolitan area was used f o r t h i s purpose. T h i s index was provided by the Bureau of Business and Economic Research a t A.S.U.
TABLE A-1
FACTORS FOR EXPANDING GROSS INCOME T TOTAL FAMILY I C M O NO E
FAMILY SIZE = 1 Income Expansion Factor Income Expansion Factor
Gross Income $ 1,385 3,307 5,407 7,318 9,050 under $ 1,385 under 3,307 under 5,407 under 7,318 under 9,050 under 10,671
Gross Income $10,671 13,659 17,269 21,626 28,679 37,006 under $1 3,659 under 17,269 under 21,626 under 28,679 under 37,006 plus
Gross Income
$ 2,101 3,486 4,865 6,975 9,163
FAMILY SIZE = 2 Income Expansion Factor Gross Income $12,384 16,085 20,700 28,605 36,475 FAMILY SIZE = 3 Income Expansion Factor under $16,085 under 20,700 under 28,605 under 36,475 pl us
Income Expansion Factor
under $ 2,101 under 3,486 under 4,865 under 6,975 under 9,163 under 12,384
Gross Income $ 1 ,645 2,429 4,535 6,807 8,297 under $ 1,645 under 2,429 under 4,535 under 6,807 under 8,297 under 10,256
Gross Income $1 0,256 13,362 17,113 21,454 28,914 36,330 under $1 3,362 under 17,113 under 21,454 under 28,914 under 36,330 plus
Income Expansion Factor 1 .I490 1.0766 1.0734 1.0620 1.0565 1.051 5
TABLE A - l (cont ")
FAMILY SIZE = 4 Income Expansi on -Factor 2.2534 2.1768 1.6492 1.2599 1 .2083 1.1841 FAMILY SIZE = 5 Income Expansion Factor 3.0563 1,8647 1 .3640 1 .I664 1,0968 1 .I127 FAMILY SIZE = 6 Income Expansion Factor 2.0070 1.8637 1.5609 1.5161 1.3055 1 .I889 Income Expan s i 01: Factor Income Expansion Factor Income Expansion Factor -
Gross Income $ 2,044 under
Gross Income $1 0,372 14,208 1 7,077 21 ,524 29,340 36,783 under $1 4,208 under 17,077 under 21 ,524 under 29,340 under 36,783 pl us
2,821 4,654 7,311 8,893
under $ 2,044 2,821 under 4,654 under 7,311 under 8,893 under 10,372
Gross Income
$ 2,009 4,116 6,753 9,213 11,198
Gross Income $13,798 1 7,203 21 ,589 29,351 36,946 under $17,203 under 21 ,589 under 29,351 under 36,946 plus
under $2,009 under 4,116 under 6,753 under 9,213 tlndcla 71,'190 under 13,798
Gross Income
$ 3,059 4,118 5,901 7,088 9,408
Gross Income $12,914 16,783 21,422 28,779 36,924 under $16,783 under 21,422 under 28,779 under 36,924 plus
under $ 3,059 under 4,118 5,901 under under 7,088 under 9,408 under 12,914
OPTION 6 : VANISHING TAX CREDITS--THE VERMONT TAX CREDIT SCHEDULE Because the c r e d i t i s already s e t f o r families of each size and income level under this option, the revenue loss associated with t h i s schedule of credits can be easily calculated i f the number of families of each size and income level within the s t a t e i s known. Using a sample of 1977 income tax returns, the distribution of famil ies by size and gross income was calculated f o r a l l families f i l i n g 1977 tax returns. T h i s same distribution was used t o estimate the number of families of each size and gross income level during calendar year 1978. Because the c r e d i t available to each family was based on total family income, i t was also necessary t o expand gross income t o approximate total family income before determining the tax c r e d i t available t o each family. The process f o r expanding gross income i s the same a s described under option 5. After determining the tax c r e d i t available to each family during 1978, the revenue loss under this option was calculated a s follows:
where :
RL TC NF i s
= total revenue loss = tax c r e d i t = number of families
denotes income level denotes family s i z e
