Tuesday, March 31, 2009

[Group 2] Dime a Drink: How much more will you pay for a beer?

Currently, Minnesota’s alcoholic beverage tax has two forms, a special excise tax and a special gross receipts tax of 2.5%, which adds to the 6.5% state sales tax. The special excise tax is imposed on manufacturers and wholesalers of alcoholic beverages and is a specific dollar amount based on the amount per unit produced (in gallons) with different tax rates for each type of alcohol. The special gross receipts tax applies to retailers selling alcoholic beverages like restaurants, bars, and liquor stores. (Facing alcohol’s costs to society) According to the Minnesota Department of revenues, in fiscal year 2008, the excise tax generated revenues of about $73 million and the gross receipts tax generated about $65 million in revenue for a total of about $138 million.

House File 2125, as introduced on March 25, 2009, proposes to change the current law to increase the excise tax on alcohol. The increased revenue from this tax will fund a variety of alcohol-related services--primarily chemical dependency treatment, which is similar to some iniatives by other states. (Alcohol Tax Makes Policy Sense and Economic 'Cents') Therefore, “the costs of fighting alcohol abuse [will] be funded by those who abuse alcohol”.

As a sin tax, the alcohol tax is intended to change people’s behavior and reduce the negative social externality associated with drinking. This bill is nicknamed the dime a drink bill because, on average, the tax will increase the price of one twelve ounce glass of beer by ten cents. Officially, the excise tax increase is a $1.06 increase per gallon of regular beer, a $2.12 increase per gallon of wine, and a $12.87 increase per gallon of distilled spirits. According to a recent research (Washington Post, “Booze Taxes Lower Drinking Rates”), consumers are price sensitive in liquor consumption. But in general, the efficiency of the bill in changing unfavorable drinking behaviors is ambiguous, considering the complexity of human behaviors.

Adequacy is a major concern related to this tax. Alcohol in Minnesota is a highly taxed product. The excise tax on alcohol is among the highest for states with excise tax, and our 2.5% gross receipts tax is higher than that of neighboring states, most of which do not impose such a tax. Even though the tax rate is already high, it is not enough to support the proposed temperance program. In fiscal year 2002 Minnesota raised a combined $234 million in excise and sales taxes on alcohol, well below the estimated $4.5 billion in alcohol-related costs. (Also see an extensive discussion on Minnesota Public Radio, "Death by drinking")

On the bright side, the change in tax rate is simple to administer. According to the Taxation of Beverage Alcohol in Minnesota, “it would only require a tax rate change in the current excise tax system and…would be less likely to increase tax delinquencies than would a tax at retail.” If implemented, the tax is expected to bring in an additional $255,477,393 in revenue.

(Excise Tax compared to neighboring states)

Congestion Pricing: I-394 to Central London

This video provides an overview of the MnPASS system, an innovative congestion pricing system in place along I-394. MnPASS provides drivers with the choice to pay a toll in order to access the HOV (high occupancy vehicle) lanes that run along I-394 – those lanes commonly thought of as the ‘carpool lanes.’ The system is unique in that the toll is dynamic, and changes with regards to traffic levels in order to ensure the HOV lanes maintain an average speed of at least 50 mph.

In 2007, Humphrey Senior Fellow Lee Munnich participated in a forum on congestion pricing; video from a Q&A session after Munnich’s presentation on MnPASS suggests MnPASS may be among the cutting edge of congestion pricing systems worldwide.

Many of the questions contrasted the MnPASS system with other congestion pricing systems around the world. While MnPASS is currently limited to one highway that connects downtown to the western suburbs, many larger cities like London, Singapore, Stockholm and Rome have implemented congestion taxes on vehicles that enter the city core during peak hours. Munnich made several comments about London in particular, noting that the intention of the London fee is to force residents to reconsider their reliance on cars. This may be feasible in London, as it is home to a robust public transit system. Munnich noted that up to 80% of commuters destinations within London are available via public transit. Has the London fee begun to accomplish its goals?

The Central London Congestion Charge is an £8 toll on most vehicles entering downtown London at peak times, and is enforced by photographing license plates of cars using existing CCTV cameras. The fee-zone increased to include a larger portion of West London in 2007. Reaction to the fee, and the results of the fee indicate some success, with several issues.

A report by Transport for London, the agency that enforces the fee, indicates that up to 30% fewer cars are entering the fee-zone during enforcement times, and that bike, pedestrian, and transit appears to be replacing car traffic. Congestion initially decreased, though new road projects in London, with some aimed at making London more pedestrian friendly, appear to have increased congestion back to pre-2003 levels. Additionally, voters decided to abolish the expansion of the fee-zone to West London.

These mixed results have forced the Mayor of London, Boris Johnson, to reconsider the fee. One alternative he is considering is using dynamic pricing rather than fixed pricing, so like MnPASS, the fee will change depending on the time of day and traffic levels. Boris has cited Stockholm, Sweden as a model, where dynamic pricing has been in effect since 2006 and congestion has been reduced by about 25%.

The relative successes of MnPASS and Stockholm, and the re-evaluation of static pricing in London suggest that dynamic congestion pricing could be a viable tax in the future, both reducing congestion and providing an additional revenue stream for state and national governments.

Gas Tax - Group 4

The gas tax in Minnesota is a per-volume tax, with the rate paid dependent upon the quantity sold, not its value as in an ad valorem tax. Effective January 1, 2009, Minnesota’s gas tax rate (exclusive of the federal rate) is $.26/gallon. This puts Minnesota's rate below Wisconsin’s ($.329/gallon), but above the rates in Iowa and the Dakotas ($.22-.24/gallon). The state with the highest gas tax is New York, at $0.413 per gallon, and the state with the lowest is Alaska, at $0.08 per gallon. For more information on other state tax rates, please see:

As a basic good for consumers with few substitutes, gas is understood to be fairly inelastic in terms of demand. Taxing gasoline consumption is fairly economically efficient, as the increased price will not greatly affect consumer behavior. In terms of equity, however, the gas tax is somewhat a mixed bag. By the benefit-received principle, it is widely accepted in modern public finance theory as a sound tax policy that the quantity of fuel used by a consumer is directly linked to the extent that consumer makes use of the road system, both in terms of distance traveled and in terms of size of vehicle. On the other hand, the ability to pay principle demonstrates that the gas tax may be regressive. Indeed, as an excise tax, the gas tax consumes a larger percentage of a lower-income person's income than a higher-income person who purchases the same quantity. The argument is muddied when assumptions are made about personal driving habits (higher-income people driving more, higher-income people owning less fuel-efficient cars, etc.). Such arguments fit more discretely into horizontal equity situations.

The State's gas tax was raised in the 2008 legislative session, a process that included a bipartisan override of Governor Pawlenty's veto. For more information on the bill's details, please see the following:

As a revenue source earmarked for highway construction/maintenance work, declines in gas tax revenues are highly visible. There existed such political power to override the governor's veto because previously the tax had not been raised since 1988:

As a per volume (not ad valorem) tax, the state's gas tax does not provide consistent revenues and may not keep pace with inflation. Because of this, road improvements and other gas tax-funded activities have not kept pace with demand. In place of frequent, pitched political fights over raising the tax, some states have succeeded in indexing the tax to demand and inflation, providing consistent revenue generation:

Wisconsin had such an index in place until it was repealed in 2006. The repeal was the result over discomfort in automatically adjusting (raising and lowering) taxes:

These fights over indexing and raising the tax (as in Minnesota) demonstrate the low political feasibility of raising the tax. Even given this, the visibility of the tax is only high when politicians bring it to the forefront. Otherwise, changes in the tax are masked in the price volatility that consumers experience. See the following for a write-up on oil's price volatility:

Bjorn Arneson, Andy Hughes Laura Seifert, Margaret Van Heel, Haoping Wang

Got Corporate?

The words “corporate tax” can evoke strong responses from people, particularly in a post-AIG world. While business owners may see the tax as an undue burden to evade, taxpayers often view corporate tax as a significant source of state revenue with minimal costs to individuals. Policymakers must balance these two constituent groups when proposing the addition of, or changes to, corporate taxes.

During Minnesota Governor Tim Pawlenty’s recent State of the State address, he declared that “…if Minnesota were a country, we'd have the third highest business tax rates in the world.” His proposal to address this problem? Increasing Minnesota’s competitiveness by cutting the state’s corporate franchise tax in half over the next six years.

So what is corporate tax? And more importantly – what would a drastic corporate tax break mean for the rest of us?

In technical-speak, corporate tax is a net income type tax that applies to all “C” corporations, which are defined by US statue and are the most common form of incorporation. However, tax does not apply to “S” corporations or limited liability corporations, which may account for the rise of LLCs in recent years. The tax is applied to applicable corporations’ net income through a 3-factor apportionment formula, which weighs total income against the in-state property, payroll, and sales of a corporation at a predetermined ratio. All states use an apportionment formula and most use the 3-factor formula (including Minnesota).

States in the Upper Midwest depend on corporate taxes for a similar percentage of their total tax revenue, even though the total moneys collected may vary greatly between states. For instance, both Minnesota and South Dakota collect around 6% of their total revenues from corporations, but in Minnesota the total money collected equals $1 billion whereas in South Dakota it equals approximately $76 million.
Thus even though corporate taxes may generate significant total amounts of revenue, they generally provide a small percentage of Minnesota’s overall budget. This difference creates possibilities for both sides of the debate, as pro-tax advocates cite the total amounts of revenue to be gained, while anti-tax advocates cite the small percentage of revenue provided overall

Legitimately, any corporate tax cut would require an increase in other, potentially regressive revenue sources, such as sales taxes or user fees. While these adjustments would maintain tax neutrality, they also raise questions of tax equity between high and low incomes.

Gov. Pawlenty argues that his change will spur business development and lead to job growth, yet current public sentiment leans more towards corporate restraint than independence. With a significant deficit this year, a corporate tax break will likely translate to more spending cuts or increases in the sales, user fees, and/or personal income taxes. To tax (break) or not – that is the question for Minnesota. What would you do?

Expanding the Minnesota Sales Tax Base-Group One Project

The general sales tax in Minnesota was established in 1967. The current rate of 6.5% is higher than all neighboring states, but the base is narrower than most. The sales tax is levied on most goods with a few exceptions including clothing. Only four other states do not levy a tax on clothing. Further, Minnesota does not tax most services with a few exceptions. Although Minnesota has one of the highest rates in the nation, with only six other states having equal or higher general sales tax rates, many other states have local sales taxes which lead to a combined total of 6 to 11%. There are 119 exemptions from the sales tax base in Minnesota. By expanding the sales tax base to include clothing and many services currently excluded and lowering the sales tax rate, the sales tax would become a more stable revenue source.

The sales tax in Minnesota is fairly efficient-one reason being that it can be exported easily. According to the Tax Incidence Study conducted by the Minnesota Department of Revenue, 3.8% of the sales tax in Minnesota is paid by non-residents. Additionally, “sin” taxes, which can be imposed to incite or deter a particular behavior, are an efficient way of affecting change and altering behavior.

Sales taxes in general are regressive because they are not based on the ability to pay. While expanding the base would make it more regressive, there are ways to remedy this issue, such as lowering the rate and offering low-income clothing tax credits to individuals below a certain level of income. Additionally, since services generally have higher consumption levels for higher income levels, expanding the sales tax base to include more services would decrease the regressivity of the shift.

The sales tax base has been shrinking over time due to the shift from a goods-based economy to a service-based economy; increasing taxable services would help to stabilize the base. Additionally, internet sales have grown rapidly in recent years, and the inability to impose a sales tax uniformly across states on internet sales has contributed to the shrinking base. To address this issue, many states have joined the Streamlined Sales and Use Tax Agreement in an effort to make sales tax compliance and administration much easier. Moreover, ideas have been proposed this year that would expand the sales tax to downloaded music. The instability of this revenue stream makes for an unreliable revenue system. Expanding the base to include more inelastic goods such as clothing would improve the sustainability of the tax.

The sales tax in Minnesota is easy for individuals to comply with, and similarly, it is easy to collect. Because the system is already in place for collecting the sales tax, expanding the base would not make administrative feasibility any more difficult. Politically, however, expanding the base would be a difficult task. Lowering the rate and creating low-income credit options would make the political feasibility of expanding the base slightly easier.

Monday, March 30, 2009

Group Project: Are user fees an untapped or overused revenue source?

Since 1975, many states including Minnesota have relied on user fees and charges to finance a broader array of programs and services. Governments use user fees and charges to pay for all or part of the cost of providing specific services or privileges. We use the two terms interchangeably here.They generally reflect a direct relationship between taxes paid and services received and make consumers more efficient, since they must face the true costs of their consumption decisions (Fisher 2007).

User fees have several advantages. Governments are better able to use market forces to set an economically efficient level of services; they avoid subsidizing services where benefits accrue only to specific individuals; and governments can institute user fees to control consumption. Critics argue that they also have one primary disadvantage: they contribute to a more regressive tax structure. Additionally, related administration and compliance costs may offset any efficiency gains associated with the fee.

Recently, Minnesota has seen an increase in the use of fees and charges to finance government services. From 2003 to 2008, the revenue growth from user fees and charges increased at rates greater than both inflation and population growth [see Chart 2]. Despite this spike, Minnesota ranks 38th in its reliance on revenue from user fees and charges and 30th in per capita fees and charges in 2007 (U.S. Census, 2007). However, Minnesota relies more on user fees and charges to fund post-secondary education than the national average.

We evaluated user fees and charges using criteria including efficiency, equity, sustainability and feasibility. Because user fees create a link between costs and benefits, they will be efficient, as long as the fee is optimally priced. Since only those who pay the fee benefit from access to a good or service, such charges are considered equitable. User fees, however, can be regressive as they do not consider a consumer’s ability to pay. Fees' revenue potential is limited as the “fee-base” is too small to support large revenue increases, reducing its adequacy. Fees may be administratively feasible when exclusion is possible, but it is also costly because someone needs to be present to collect payment. The political feasibility of fees may vary depending on how visible they are to the public. While new fees and charges may be unpopular, user fees are more politically feasible than taxes, because the number of people paying the fee are small relative to the total population.

Minnesota’s low reliance on fees in comparison with other states indicates that we should consider their use for a broader range of services. However, we should be careful not to overly rely on fees and charges if we want to maintain a progressive tax structure. Minnesota’s disproportionate reliance on user fees related to post-secondary education may be particularly harmful, as those who pay the fees may be least able to afford them. Instead, we should consider the expansion of user fees and charges in areas that aren’t as clearly targeted at populations that can't afford those fees.

Friday, March 27, 2009

St. Paul: How to increase City property revenue 27% without (technically) raising taxes

For a few short years, the City of St. Paul turned its back on property tax increases, and instead raised revenue by blazing a different trail.  St. Paul shifted a core piece of its services - street plowing, cleaning, sidewalk repair, and lighting - off the property tax levy and onto a special fee.  St. Paul's experience has been mixed at best, but it provides an interesting window into a local government willing to experiment with a different approach to municipal finance.

The story begins as former St. Paul Mayor Randy Kelly narrowly beat his opponent in 2001 carrying the now-familiar "no new taxes" banner from his predecessor, Norm Coleman.   Kelly, like Norm Coleman before him, was elected as a strongly pro-business centrist.  But unlike Coleman, Kelly inherited a city in the midst of an economic slowdown.  Moreover, the local government aid (LGA) that sustained the City budget was fast being cut.  How Kelly tried to keep his "no new taxes" pledge while holding the City together became a defining part of his four years in office.

As LGA was cut early on in his tenure, Kelly had to put his best foot forward.  Kelly's solution to the City's economic challenges was to dramatically increase street maintenance fees.  During those three years from FY 2003-2005, street maintenance fees increased multiple times, totaling $9 million.  The costs of things like sidewalks, street cleaning, snow plowing and street lights were now funded largely by the right-of-way maintenance fee, instead of property taxes.  The fee is assessed based on how many linear feet of street frontage a property has.  Homeowners who lived on street corners have about twice as much street frontage, and therefore pay twice as much fee.  

To be sure, the net impact of the move toward fees has been the subject of much conversation in the City.  According to an excellent 2005 analysis by the St. Paul Pioneer Press, three years into Kelly's term, St. Paul property taxpayers were paying 22% more to the city in combined taxes and fees than they were when he came into office.  Except, technically speaking, there were "no new taxes".   Just fees.

The Pioneer Press analysis concluded that if the same amount of money had been collected through the established property tax system, 77 percent of homeowners would have had to pay more in property taxes than they did in fees.  However, it was the lower-value property owners who ended up paying considerably more in fees than they would have in taxes.  That's because unlike taxes, the right-of-way fees didn't take into account whether a 100 foot lot had a million dollar mansion on it, or a $50,000 fixer-upper - both would pay the same amount.  

But most everyone else has tended to be a loser in the deal.   If you owned a house on a street corner, you found yourself paying twice as much right-of-way fee as their next-door neighbor, because they had twice as much street frontage.   Only 28 percent of commercial-industrial property owners saved money under the fee plan; most of the rest paid more, and sometimes considerably more.  The analysis shared the example of a truck dealership that faced a $7,000 more in fees, instead of the $1,700 more they would have had to pay had the increase taken the form of property taxes.

Part of the sly brilliance of the plan was that it collected money from St. Paul's substantial list of non-taxable properties.  While non-profits like Hamline University or the Wilder Foundation don't pay property taxes, they too had to pay the right-of-way maintenance fee.  St. Paul Public Schools also ended up paying an additional $130,000 to the City.  

But perhaps the most telling part of the equation was who ended up as the biggest winner.  St. Paul's downtown business community had become particularly sensitive over the prior decade about losing downtown businesses to the suburbs.  Law book publisher Thompson-West left downtown St. Paul in the 1990s, along with a series of smaller firms.  The business community had spent great resources stemming any additional flow of business from downtown.

The fee scheme tread lightest the most densely-built properties. Dense properties packed in the maximum property value per foot of street frontage, which made them the biggest winners of all under the right-of-way maintenance fee.  And the very downtown businesses with which business leaders were most concerned about were not coincidentally the biggest beneficiaries of the new fee system.   In fact, the fee was designed by Joe Reid, an advisor to the St. Paul Chamber of Commerce. Unfortunately, this angle was entirely missed by the Pioneer Press analysis.  

As a matter of policy, the fee increases were obviously a regressive way to raise revenue.  It did expand the revenue base by raising money from non-profits that didn't contribute to city coffers.  It did diversify the tax base, though as some noted, it may have done as much to confuse taxpayers as make government more transparent.  Notably, it favored dense properties - something many urban planners would actually appreciate.  The fees, quietly, are still a part of St. Paul's revenue system.

But of course, the story of "no new taxes" didn't end gracefully for Randy Kelly.  In the end, Kelly was unable to keep his campaign promise, and he proposed a plain old tax increase during his final year in office.  After feeling great heat for his fee increases, and after famously endorsing President Bush in a heavily Democratic city, Kelly was defeated by the largest margin of any incumbent Mayor in City history.  And in a related note, local leaders haven't been so keen on those fees lately.

Thursday, March 26, 2009

The trade-off between tax and fee for parks

The city of Minneapolis has a unique, semi-autonomous administrative body—Minneapolis Park and Recreation Board (MPRB) for all the parks and green spaces. Its main source of general fund revenue has been property tax (constitutes about 70% of the total). This is legitimate, because a well-maintained urban environment has great influence on the value of houses and the living quality of residents.

However, along with the passing of the 3.9 Property Tax Cap (Minnesota Public Radio May 19, 2008) and the imminent decreasing in Local Government Aid (Politics in Minnesota January 28, 2009), the park board is left with limited revenue generators. When I interned at the park board, one phrase that I constantly heard was “revenue diversify”. One of the major budget initiatives taken by MPRB in 2008 was to diversify and grow revenue through establishing grants, increasing fees, permits and sales. (For detail, refer to Page 10 of 2008 Third Quarter Financial Status Report and Budget Strategy Initiatives Update of MPRB)

Although in class, we talk about fees and charges being regressive and it’s generally considered to be inefficient and less transparent, I have a different feeling towards the proposal by the park board. For one thing, the different fees, including Sailboat Buoys, Outdoor Wedding Rentals, and Canoe Racks are more of a luxury enjoyed by the wealthy than a burden on the poor. Thus it is related to the capacity to pay and is favorable in terms of equity. Besides, for the reason that different people put different value on enjoying the parks, and fees/permits are more directly related to the utility (or the costs) of having certain enjoyments than taxes, they are more efficient. And fees are usually more politically feasible. In this sense, raising user fees seems reasonable. The only concern is whether this source is adequate and can be depended upon for the long-term.

After reading State Auditor Rebecca Otto’s article, I started to form a holistic picture in my mind about the revenue system in Minnesota. Parks rely on property tax, but the “no new tax” pledge drives the property tax up, causing political pressure on lowering the tax, then for non-essential programs as parks, it would be compromised and forced to seek out alternative revenue sources, even though it’s a legitimate usage of property tax in the first place.

But there is still one question remained: what is the best revenue system for parks? There is no single revenue source that is perfect. A good revenue system, in my opinion, is the best combination of revenue sources that can offset each other's disadvantages but maximize the advantages. So, in regards to parks, should the property tax cap be removed? In response to Shawn’s posting below on “Minneapolis user fees”, should higher fees be collected? Or should we admit that we can not afford a high quality park system?

Saturday, March 21, 2009

Caught between a rock and a hard place

I recently saw this add for the Simpsons new movie, at the end Homer is swinging back and forth on a wrecking ball. On one side is a rock, on the other is an old bar called, A Hard Place; as the wrecking ball swings back and forth and he smacks into each object you get to hear his familiar, "DOH!". Until finally, the wrecking ball stops swinging and the once solidly attached wrecking ball breaks it's chain and lands on him, a classic Homer situation.

Right now, given the many faceted and hard to understand financial mess, there are many of us who feel like Homer, financially caught between a rock and a hard place. No doubt both state and local governments are feeling the same. Raise taxes, or not? Cut expenditures, or not? If raising taxes, how much and which taxes? If making cuts, to which programs and how much? In all likelihood this dialogue will continue into the foreseeable future as we work to find a way to balance our shaky state and local budgets.

For many of us not understanding how our state budget functions creates a challenge, people can be easily swayed by information and articles that are unable, in a short space, explain all of the details needed to understand why some decisions are made. Myself being a case in point, in the not too far distant past if someone had asked me, "What is a revenue system?", I am not sure I could have given a very coherent answer. Thankfully, The National Conference of State Legislatures has one of the better discussions on this topic that is easily understood even by a novice like myself. In this discussion they highlight nine principles of a high quality revenue system and all of them make sense to me but two ideas seem very relevant at this time, balance and transparency. Two sources of information have influenced how I feel about these topics, one is a recent article by Jay Kiedrowski in the Star Tribune, on February 13, 2009 in which he explains the structural imbalance in our state budget. The second is the actual line item budget proposed by the Governor.

It is in this line item budget and the described structural budget problems that our state faces that a person can see that we may be between a rock and a hard place for some time to come unless basic fiscal practices change. For example the using the remaining funds from some accounts to balance the budget removes flexibility and options in the future, the health care access fund being a prime example.

I just hope that when the wrecking ball stops swinging, the chain does not break, and we are not all standing under it, "DOH!"


Friday, March 20, 2009

Fee is spelled T.A.X.

With the recession worsening and economic turn around not in the foreseeable future, Governor Pawlenty, the state auditor and other legislative candidates signed a 'no new taxes pledge'. According to the 'Price of Government' report published by the Minnesota Department of Finance, the pledge is controversial because "it caters to a special interest group funded by wealthy conservatives rather than to the best interests of the citizens of Minnesota." An instance of this would be the shift of revenue in the form of other fees or taxes. An example here is the new fees pertaining to tuition costs and expenses. Families are now contributing 55% more to send their children to Minnesota public unviersities and colleges.

These fees or "taxes" are not just limited to tuition and education. According to Fisher, state lotteries and gambling "generate an average of 1.1 percent of state governments' total revenue and 1.2 percent of the states' general revenue." States levy higher tax rates on lotteries than cigarettes, alcohol, gasoline and other products. One possibility of this is that high tax rates create small efficient costs if demand is very price inelastic. The Census Data reports that on average about $.33 of every lottery-sale dollar results in revenue for the state government. Even if there are efficiency reasons, there are sometimes conflicting equity issues. Conversely, it may just be "simpler to collect lottery taxes, perhaps because consumers are not aware of the rates."

Minnesotans may not be aware of these rates since sales of lottery tickets has increased despite economic conditions. In an article by Martin Moylan of Minnesota Public Radio, for the second half of 2008 "Minnesota state lottery sales were up 12 percent and if the trend continues, sales for the current fiscal year will come close to $500 million." People may now be more willing to spend $1 or so on a lottery sales than spending a more substantial amount at casinos. The trade off of a $1 lottery ticket for millions in cash is worth it despite the recession. Even with most gambling and gaming down, state legislators see gambling as a way to bring in much needed revenue because of the fees or "taxes" involved that consumers are generally unaware of. According to Fisher, "the economic gain from providing lotteries is the same as the gaim from providing any service, consumers get happiness or economic welfare from consuming the service, in this case, either because of the potential for winning, because of the entertainment value, or both." With the potential to generate revenue, lotteries increase consumer welfare, but this is not the reason why governments must or should provide lotteries.

Thursday, March 19, 2009

Budget Cuts vs. Tax Increases

The grim economic outlook presents in front of state and local policy makers the formidable tasks to confront uncertainties and risks in the current recession. Minnesota is not an exception with the twin problems of a deficit and a recession: the state budget faces a 4.6 billion shortfall, while the unemployment rate hit seasonally adjusted 8.1 percent in February. The Minnesota Budget Project, an initiative of the Minnesota Council of Nonprofits, notes that a balanced solution to close the budget deficit, which provides for reasonable tax increases and spending cuts, is the most sensible course of action.

In last Wednesday discussion session, we talked about DFL's proposal of a broad array of tax changes, including imposing a fourth tier income tax rate on Minnesotans who earn more than $250,000 a year, and expanding the sales tax to clothing and legal and accounting services.

The revised budget plan, released by Gov. Tim Pawlenty on March 17th, however, still opposes raising state taxes. As what he has been doing in the past seven years as governor, Pawlenty prefers cuts, cuts, and more cuts. Now, he finds another backing--it is not what President Obama is doing. However, Minnesota cannot legally run a budget deficit and the federal government can.

Economists including Nobel Prize-winner Joseph Stiglitz and Office of Management and Budget director Peter Orszag have argued that spending cuts may be more harmful to a state’s economy during a recession than tax increases, especially when cuts are made to resources going to low-income families. By contrast, a well focused tax increase on high-income households is likely to have less impact on the state’s economy, since those households are likely to maintain their levels of consumption and simply save less. Besides, taking into account the fact that Minnesota’s tax system becomes significantly more regressive, indicated by the 2009 Minnesota Tax Incidence Study, certain change in income tax seems to be a possible attempt.

While Pawlenty continues to resist any tax increases, from 2002 to 2008, Minnesotans actually had a 21 percent increase in fees. Also in order to offset Pawlenty’s newly proposed cuts in aid, his Revenue Department assumes that local governments will raise property taxes, which will probably increase $626 million over the next three years. As commented by Sen. Tom Bakk, DFL-Cook, who chairs the Senate Tax Committee, “If it’s a property tax, if it’s a fee, if it’s a sales tax or an income tax, they’re all taxes and they come out of your pocket the same way.”

At his inauguration, President Obama said that the question people should ask “is not whether our government is too big or too small, but whether it works.” So, it makes little sense here in Minnesota the debate is about how best to shrink government. In such a gloomy economic downturn, the state leaders should be debating how the budget will restore economic security, opportunity and confidence for all Minnesota families, that is, it's for the leaders to figure out through whatever mix of revenue increases and program restructuring are best for the overall good. That is really what Minnesotans are asking for.

Friday, March 13, 2009

User Charges to Finance K-12 Education

I was surprised to read in Fisher that "among all state and local governments, local school districts rely on user charges least." This goes against what I have heard anecdotally from friends and family members that are parents and/or teachers. Most parents that I've talked to feel that school districts have steadily increased user charges for auxiliary or extracurricular services like meals, transportation, athletics or after-school programs and clubs. Part of this may be due to the high visibility of user charges in K-12 schools compared to user charges in other state and local governments.

Wassmer and Fisher (2000) argue that school districts should increase user charges to "either supplement revenue or permit a tax reduction" in part because "these types of services tend to provide substantial private benefits" and "may be consumed by only a fraction of students in a school." One of the reasons that public school districts in Minnesota haven't used school fees to a greater degree is because state law prohibits public school districts from charging fees for necessary goods and services. These include instructional materials and supplies, required library books, required school activities, graduation caps and gowns, lockers, and student transportation to and from school for students that live more than two miles from the school. The argument for imposing these limits on school fees is that the state has a constitutional obligation to provide free public education to all students and therefore cannot deny students an education based on students' ability to provide books or other educational supplies needed to complete their educational requirements.

Many public school districts would not be able to offer extracurricular activities without the revenue generated from user charges. However, these charges create inequity among students and potentially lower quality education for lower income students. The positive effects of extracurricular activities such as academic clubs, music, art or athletics on educational outcomes have been well-documented. If lower income students do not have access to these activities, their education and quality of life are negatively affected. Inequities between school districts can also happen when affluent school districts are able to charge fees and spend at above-average levels compared to less wealthy districts. Check out this 2008 Information Brief from the Minnesota House of Representatives Research Department for a summary of Minnesota state law governing authorized and prohibited public school fees, the education expenses allowed under the state’s education tax deduction and credit, and an outline of student user fees in other states.

Finally, what is your experience with school fees? Do you think the use of school fees should be increased? Are school fees more acceptable than general tax increases? Are people with a "liberal or left-leaning political bias" more concerned about equity than conservatives as Fisher suggests?

Transparency and User Fees continued

In my quest for finding out more about transparency and user fees, I found an interesting case study. It seems that in West Virginia this is a current issue, whose interest was sparked by local government fees in the city of Huntington.

Huntington currently charges a $2 weekly fee to anyone who works within the city limits, regardless of where they live. The mayor has proposed that this fee be increased by $1, and that the revenue generated by the increase be used to hire police, purchase new police cruisers, and repair and maintain streets. He estimates that the increase will generate $1.6 million. The interesting detail is that there does not seem to be a city ordinance tied to the increase that will earmark the new funds for these promised expenditures. Moreover, the stated use of the funds is only for the $1 increase. The existing $2/week charge has been used in the past for other types of expenditures, and it does not seem that the city is interested in redirecting that revenue stream for the purpose of police or street maintenance. Despite this fact the Huntington Chamber of Commerce does support the increase.

State Senator Evan Jenkins is about to propose legislation that, "would require cities with user fees to enact ordinances specifically stating how such funds will be used." Jenkins' legislation will require cities that enact new fees or increase existing fees develop dedicated funds for the revenue, so that the citizens can clearly track how the funds are used.

Three cities in West Virginia have weekly user fees, and currently all are set at $2/week. Huntington is the only of these three that does not already have a dedicated fund for its city user fee, and as a result its fee seems to be the most unpopular. Charleston directs its fee exclusively toward street paving and police and has even posted signs on newly paved roads indicating that the project was paid for with the user fee. Weirton uses their fee for police and fire service, and in 2002 the legality of this fee was upheld by the West Virginia Supreme Court.

Jenkins argues that this legislation will increase citizen confidence in local government and encourage them to invest in city services.

Thursday, March 12, 2009

When User Charges are Just Too Much

Since 1999, Washington State has witnessed a significant decline in ferry ridership. Much of the decline is due to annual increases in rider fares--up to 6 percent per year. The intention behind these increasing fares has been to offset rising operational and capital costs. Many ferries are more than 40 years old and require substantial maintenance

Washington State has long been aware of the need to attract more riders. In 2008, the Legislature froze passenger fares at 2007 levels. Now, a citizen-based proposal suggests raising excise taxes to prevent an additional increase in fares. The current proposal includes a raise in motor-vehicle excise tax, annual license fees, and/or the gas tax. 

Though most Washington residents view the excise tax as less-than-favorable, riders argue that it will raise revenue without increasing fares. More importantly, it will allow the ferry system to serve Puget Sound’s rapidly growing population. At present, no decisions have been made regarding the proposal.

Yet another option which would refrain from raising rider fares is Senate Bill 6005, which sets aside a portion of King County’s hotel-motel tax for “tourism promotion". Unfortunately, in its current economic state, King County is unwilling to relinquish such funds. The search for additional revenue (and better ridership) continues…

Minneapolis User Charge or Tax?

In class yesterday, we discussed user charges on a more general, macro level. The discussion left me wondering, what is Minneapolis’ approach to user charges? Within the City of Minneapolis FY 2009 Budget, the city outlines the Financial Policies concerning user fees. As a background information, in July 2002, the Mayor and City Council capped the total property tax levy collected by the City, at no more than 8 percent from the previous year’s amount effective in 2003. Because of this property tax policy,
The City shall implement user charges in lieu of general revenue sources for identified services where the costs are related to the level of service.
To that, the city has laid out some very specific policies around user charges, the highlights include:
  • The City shall establish user charges and fees at a level that reflects the service costs.
  • The City shall consider market rates charged by other organizations.
  • Non-Resident Charges will be used “whenever practical…to minimize the tax burden on City residents”
  • Charges for water, sewer, stormwater and solid waste collection shall be set at rates sufficient to finance all direct and indirect operating, capital and debt service costs.
What seems confusing to me is the next statement in this policy document, that
Except where required by law or generally accepted accounting principles (GAAP), no revenues shall be dedicated for specific purposes. All non-restricted revenues shall be deposited in the General Fund and appropriated through the annual budget process.
I see this policy document as an articulation of the City of Minneapolis' conscious decision to cap the increase in property tax rate and rely on user charges to make up the revenue differences. These revenue differences are then plopped into the general fund, unless otherwise mandated by law or GAAP. Given Fisher’s definition of how a user fee should behave, the City of Minneapolis’ version of user charges seems to me more like a local tax than anything else. What do you think?

Monday, March 9, 2009

transparency and user fees

In this week's reading "The Changing Picture of Minnesota Finance," Rebecca Otto states, "Regressive taxes and fees are also less efficient means of generating revenue - and much less transparent."

Is this really true? The Fisher text states, "user charges are most appropriate when ...the benefits of a government service go to identifiable direct consumers...." (p. 185). It seems that the point of a user fee is that consumers are aware of the service they are getting for the fee. Maybe that is not always the case, but to use one of the examples the book uses - it is obvious that you are paying to use a municipal golf course so that the service can be maintained. It seems pretty transparent to me. Are there other issues I'm not thinking of?

Friday, March 6, 2009

Income tax correction

My colleague just told me that for the first time ever he has an income tax liability. He owes $6,000.

This got me thinking about income tax reflecting a person’s true ability to pay. Not only what is claimed and deducted but the tax rate that is placed on varying income levels by the federal and state government.

A recent article from the New York Times exemplifies the same problem experience by my colleague being experienced by many high earners in New York. Many of these people relied on their year end bonuses or stock options to make up their taxes owed to the government. However, this year with the market performance being so poor and many bonuses being withheld, they do not have the ability to pay their tax liabilities. http://www.nytimes.com/2009/02/21/your-money/21wealth.html

As a result of these types of situations, and others, the IRS is making some allowances. They are not forgiving debts, but they are educating people on better ways to file and how best to use the payment schedule. They are helping people better represent who they are to the government. http://www.newsday.com/services/newspaper/printedition/friday/business/ny-bztax0612389172mar06,0,127356.story

The government is not taken more than we owe… they are instead making sure we represent ourselves correctly and pay accordingly.

As I believe the statement above holds true, I want the tax rate applied to upper incomes to accurately target the earners ability to pay. As we all know, President Obama is allowing the Bush tax cuts to sunset and the federal government income tax will once again be suitable. A higher income tax rate for higher income earners is a tax that best represents the person’s ability to pay as wealthier people have more expendable income. http://www.star-telegram.com/opinions/story/1242131.html

However, not everyone agrees with a progressive income tax on upper income earners. There is a bill in legislation in Oklahoma, right now, to lower their top rate income tax from 5.5% to 5.25%. http://www.forbes.com/feeds/ap/2009/03/04/ap6123904.html

Overall, the current income tax system is progressive and does well taxing people on their ability to pay. However, it is crucial that we realize that our filing status and declared deductions tell the government who we are and what ability we have to pay. When we make a change in status or forget to declare a deduction the government misreads our identity and we get hit with the bill, or refund, to correct it.