When new development is put in place, there is a new need for infrastructure that is traditionally provided by government. This infrastructure can range from schools to roads and police to parks. In an effort to recoup some of the costs of the new infrastructure, some counties and cities have implemented what are known as development impact fees. The idea is to put some of the financial burden on the developer.
From a benefit principle point of view, this fee seems to make better sense. While it is possible non-residents will use some of the infrastructure and some of the costs are not included in a development impact fee, this system is based on trying to get the people that benefit to pay.
Because of explosive population growth and the building that has accompanied it in the last 35 years, Florida counties have led the way in using impact fees. With strong growth and incentives to build, developers were more accepting of the impact fees. However as population slows and developers are coping with an economy that is not nearly as robust for building as it was even a few years ago, localities are seeing that any additional costs put on developers may be driving them away. This has led many Florida counties such as Lake County, Brevard County, and Collier County to reduce or suspend impact fees. These moves have been varied in success and difficult to quantify due to struggling real estate markets. It has become evident that municipalities that have relied on impact fees have a hard time coming up with funding if they reduce or eliminate them as was the case for Martin County which has decided to bring impact fees back.
What does this mean then for municipalities that are looking to impact fees as a potential source of funds?
-In the current economy, development impact fees may cut too heavily into a developer’s margins and leave them unable to pursue the project or make them look to other locations with no or lower impact fees.
-Depending on their structure, they may encourage more infill development. This can be accomplished by reducing or eliminating fees in areas that already have infrastructure in place.
-Zoning plays a big part in how development occurs, not just impact fees.
-Be sure not to become too dependent on impact fees, in case circumstances necessitate reducing them.
-Other opportunities for financing infrastructure projects could be done with other forms of value capture when property value increases.
Try this to see how much you would need to pay to develop something in Collier County.
Monday, March 29, 2010
Erasing the Minnesota Corporate Income Tax.
Governor Pawlenty is proposing to reduce the Minnesota corporate income tax by 20 percent. Pawlenty argues that reducing the corporate income tax will increase competitive advantage and create jobs for the state by increasing the number of corporations within the state, and retain existing corporations. [MPR story]
However, the impact that the revenue change will have on the mid-term and long-term state budget is not.
The average corporate state tax is 6.6 percent, and three states have no corporate tax. Iowa (12%) and Pennsylvania (9.99%) are the only two states that have a higher corporate income tax rate than Minnesota.
When considering revenue volatility, of the major sources of revenue for the state of Minnesota, the Corporate Franchise Tax (CFT) is the most volatile. However, since the CFT makes up only 7 percent of all general fund revenue, a 20 percent reduction in business taxation would only reduce the volatility of the tax base modestly.
Another question is whether corporate tax cuts really create new jobs, and how many jobs would be created if the Governor`s plan comes into effect. The Governor himself has stated that it would be impossible to quantify the amount of job creation his proposal will produce.
The efficiency of the corporate income tax cuts is low because it is unclear how tax cuts create new jobs and stimulate the economy.
Political Feasibility
The Governor’s proposed business tax cuts have received a cool reception from the leadership of the DFL controlled Minnesota House of Representative and Senate. For example, House Speaker Margaret Anderson-Kelliher criticized the Governor’s proposal, arguing that the Governor is cutting health care for the poor while giving a break to "out-of-state corporations[2]." Another DFLer, Representative Loren Holberg, who serves on the House Taxes Committee, said of the Governors proposal, “I think at a time of great financial stress it’s difficult to give tax big breaks to business when it’s questionable whether it would create jobs.”[3] It seems unlikely that the DFL controlled House or Senate will approve the most important components of the Governor’s proposed business tax cuts, in particular the 20 percent reduction of the CFT and 20 percent exemption of pass through income.
Equity
Pawlenty’s proposal to cut corporate income taxes but equalize the balance sheet by increasing revenues from homeowners and renters by reducing the “Renter's Property Tax Credit.” The Renter’s Property Tax Credit is a progressive tax credit given to renters based on the proportion of rent paid to income, as well as the "Residential Market Value Credit," a tax credit for homeowners.
Pawlenty’s proposal will essentially raise taxes on these populations by increasing their tax liability.
The largest reduction in the budget would be from the renter’s credit, with reductions for FY 12 = $52.7 million and FY13 = $53.1 million.
Renters tend to be the lowest income population and will be disproportionately affected by this budget change. The budget change for the “Residential Market Value Credit” will also be reduced, increasing property tax liability, by $24.6 million for FY11, 24.5 million for FY12, and $24.4 million for FY13. Although, homeowners tend to be higher income then renters the cut also raises the amount of property taxes paid for homeowners. The proposed change is also inequitable for businesses receiving the tax cut, as it is 20 percent cut across the board and the tax rate does not account for the amount of income earned by each business.
Group 6: Is the 4th Tier a Solution to Minnesota's Budget Woes?
Like nearly every state, Minnesota needs more revenue. The current recession has exacerbated systemic imbalances between ongoing revenue and long-term expenditures, resulting in a projected $4.4 billion deficit for the FY2012-13 biennium. One possible solution, popular among Democrats, is the creation of a 4th tier state personal income tax bracket (4th tier). Under current law, the Minnesota personal income tax is a graduated tax with three rates: 5.35%, 7.05%, and 7.85%. The rates are applied to income tiers that vary by filing status (married joint, single, or head of household). Click here for more information about Minnesota's personal income tax A 4th tier would cap the 3rd tier at a high level of personal income, allowing income above that level to be taxed at a rate greater than 7.85%.
Most of the political debate surrounding the 4th tier involves equity concerns. Between 2002 and 2006, Minnesota’s tax system became increasingly regressive largely due to rising inequality between high and middle income earners and the state’s growing reliance on local taxes, which are generally regressive. According to the Suits Index – a -1.0 to 1.0 scale that measures the degree to which a tax or tax system is regressive (-1.0), proportional (0), or progressive (1.0) – the regressivity of Minnesota's tax system increased from -.018 to -.053 over that four year time period (2009 Minnesota Tax Incidence Study). Since the income tax is the state’s only major progressive tax, its promotion is seen by many as the key to reversing this regressive trend. Click here to read a report on tax fairness put out by the Minnesota Budget Project (sponsored by the Minnesota Council of Non-Profits)
But is the 4th tier an adequate source of revenue for the state? The answer to this question hinges on the 4th tier’s composition, its tax rate, and efficiency effect. For the purposes of 4th tier revenue projection, a good source for 4th tier composition and tax rate is House File 885 (HF 885), which passed the Minnesota Legislature in 2009 but was vetoed by Governor Pawlenty. Under HF 885, a 9% tax rate would have been assessed to income above $250,000 for married joint filers and $141,250 for single filers. If HF 885’s tax rate and income brackets are used to define the 4th tier, then a preliminary estimate of the 4th tier’s revenue potential can be made using Minnesota Department of Revenue (DOR) wage data (available online). In 2007, roughly $33 billion in taxable income was generated above the proposed 4th tier floors. At the 3rd tier tax rate of 7.85%, this tax base produced slightly more than $2.59 billion in income tax revenue. Were HF 885’s 9% tax rate applied with an assumption of no effect on efficiency, then this same tax base would have generated nearly $2.97 billion, for an estimated revenue gain for the state of about $380 million.
Of course, the assumption that a 14.6% income tax increase (7.85 to 9) would have no efficiency effect is unrealistic. It is much more likely that the implementation of the 4th tier would have some negative effect on economic activity in the state. A literature review conducted by Marsha Blumenthal and Charles Quimby for the think tank Growth and Justice suggests that interregional tax elasticity estimates typically range between -.1 and -.6. In 2006, income taxes represented roughly 58% of the total tax burden for the state’s wealthiest 5% (about half of whom would be assessed a higher rate on some of their income under the proposed 4th tier.) For these high income earners, a 14.6% income tax increase would equate to an approximately 8% increase in total tax burden. Using this figure and the midpoint of the tax elasticity estimates (-.35), we can reasonably estimate that Minnesota would lose 2.8% of its 4th tier tax base given a 9% tax rate (.08 * -.35 = -.028). In absolute terms, a 2.8% decline in the 4th tier tax base would cost Minnesota slightly more than $83 million in tax revenue. However, this loss is more than made up for by the additional revenue generated by the higher tax rate. All told, we estimate that had HF 885’s version of the 4th tier been implemented in 2007, Minnesota’s income tax would have generated slightly less than $300 million in additional revenue in that year alone.
*Estimated from 2007 Individual Income Tax Statistics (Minnesota Department of Revenue). Tax base was calculated from aggregate wage data for singles making over $150,000 and married joint filers making over $250,000. The resulting sum was multiplied by .65 to provide an estimate of total taxable income after deductions.
**Estimated by Nick Petersen using a -.35 tax elasticity assumption.
Based on this analysis, the 4th tier’s efficiency effects do not appear to significantly impact its adequacy as a revenue source. This finding suggests that the 4th tier is a viable option in the state’s search for new revenue.
Most of the political debate surrounding the 4th tier involves equity concerns. Between 2002 and 2006, Minnesota’s tax system became increasingly regressive largely due to rising inequality between high and middle income earners and the state’s growing reliance on local taxes, which are generally regressive. According to the Suits Index – a -1.0 to 1.0 scale that measures the degree to which a tax or tax system is regressive (-1.0), proportional (0), or progressive (1.0) – the regressivity of Minnesota's tax system increased from -.018 to -.053 over that four year time period (2009 Minnesota Tax Incidence Study). Since the income tax is the state’s only major progressive tax, its promotion is seen by many as the key to reversing this regressive trend. Click here to read a report on tax fairness put out by the Minnesota Budget Project (sponsored by the Minnesota Council of Non-Profits)
But is the 4th tier an adequate source of revenue for the state? The answer to this question hinges on the 4th tier’s composition, its tax rate, and efficiency effect. For the purposes of 4th tier revenue projection, a good source for 4th tier composition and tax rate is House File 885 (HF 885), which passed the Minnesota Legislature in 2009 but was vetoed by Governor Pawlenty. Under HF 885, a 9% tax rate would have been assessed to income above $250,000 for married joint filers and $141,250 for single filers. If HF 885’s tax rate and income brackets are used to define the 4th tier, then a preliminary estimate of the 4th tier’s revenue potential can be made using Minnesota Department of Revenue (DOR) wage data (available online). In 2007, roughly $33 billion in taxable income was generated above the proposed 4th tier floors. At the 3rd tier tax rate of 7.85%, this tax base produced slightly more than $2.59 billion in income tax revenue. Were HF 885’s 9% tax rate applied with an assumption of no effect on efficiency, then this same tax base would have generated nearly $2.97 billion, for an estimated revenue gain for the state of about $380 million.
Of course, the assumption that a 14.6% income tax increase (7.85 to 9) would have no efficiency effect is unrealistic. It is much more likely that the implementation of the 4th tier would have some negative effect on economic activity in the state. A literature review conducted by Marsha Blumenthal and Charles Quimby for the think tank Growth and Justice suggests that interregional tax elasticity estimates typically range between -.1 and -.6. In 2006, income taxes represented roughly 58% of the total tax burden for the state’s wealthiest 5% (about half of whom would be assessed a higher rate on some of their income under the proposed 4th tier.) For these high income earners, a 14.6% income tax increase would equate to an approximately 8% increase in total tax burden. Using this figure and the midpoint of the tax elasticity estimates (-.35), we can reasonably estimate that Minnesota would lose 2.8% of its 4th tier tax base given a 9% tax rate (.08 * -.35 = -.028). In absolute terms, a 2.8% decline in the 4th tier tax base would cost Minnesota slightly more than $83 million in tax revenue. However, this loss is more than made up for by the additional revenue generated by the higher tax rate. All told, we estimate that had HF 885’s version of the 4th tier been implemented in 2007, Minnesota’s income tax would have generated slightly less than $300 million in additional revenue in that year alone.
Income Tax Revenue Generation from High Levels of Income
3-Tier and 4-Tier Income Tax Systems
(High Levels of Personal Income > $250,000 married joint filers, $212,500 heads of household, $141,250 singles)
| 3-Tier System (Observed Data) | 4-Tier System (Hypothetical Estimates) | |
| 2007 High Income Tax Base | $33 billion* | $33 billion |
| 2007 Tax Rate | 7.85% | 9.0 % |
| Efficiency Effect due to 4th tier | --- | -2.8%** |
| Modified Tax Base | $33 billion | $32.08 billion |
| Tax Revenue Generated off of High Levels of Income | $2.59 billion | $2.89 billion |
*Estimated from 2007 Individual Income Tax Statistics (Minnesota Department of Revenue). Tax base was calculated from aggregate wage data for singles making over $150,000 and married joint filers making over $250,000. The resulting sum was multiplied by .65 to provide an estimate of total taxable income after deductions.
**Estimated by Nick Petersen using a -.35 tax elasticity assumption.
Based on this analysis, the 4th tier’s efficiency effects do not appear to significantly impact its adequacy as a revenue source. This finding suggests that the 4th tier is a viable option in the state’s search for new revenue.
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