Tuesday, April 2, 2013

Group #5: How We Get There: Payroll and Sales Taxes for Metropolitan Transportation Projects in New York and the Twin Cities

Effective transportation systems that connect hubs of economic activity [1] in expanding metropolitan areas have long been on the agendas of many state and local governments.  Beyond increasing economic activity, there is an array of health, environmental, and equity benefits associated effective transportation systems, as well as challenges for policymakers in determining how to fund these high-cost projects.
Here, as part of our graduate work at the University of Minnesota, we take a look at two ways in which taxes are utilized to help fund public transportation: New York’s Metropolitan Transit Authority (MTA) payroll tax—known as the Metropolitan Commuter Transportation Mobility Tax (MCTMT) relative to the Twin Cities Commuter Tax, which serves as a case study example of how many cities have enacted sales taxes as a primary revenue source[2].  Beyond the brief overview of each, we also looked at the public finance implications of each tax through the criteria of efficiency, equity, feasibility, and sustainability. In short, although the MCTMT payroll tax paired with a modest sales tax as assessed in New York is imperfect, we found that it is unclear whether an increase in the sales tax as the sole source of revenue in lieu of the MCTMT would better meet the equity and feasibility tax criteria or revenue generation needs. But let’s dive a little deeper with some high points, video, charts, infographics, and more…

In brief, in the case of the MTA, revenues are largely driven by user fees in the form of fares and dedicated taxes, of which the MCTMT, a payroll tax, comprises 10-12% in a given year.

The revenues generated by MCTMT were assessed to address the MTA’s debt service and on-going maintenance/upgrades to the system. (You can watch this video, which will tell you a bit more about the MCTMT.) The funds are generated as a payroll tax and after numerous amendments to the original legislation which called for a flat tax on individuals with incomes exceeding $10k and organizations with payroll taxes exceeding $2500; the current rate chart (as similarly presented in the video, above) is as follows:

The new rates are much more progressive in nature and resulted in an annual revenue loss of $310 million per year, but are still projected to generate $1.2 billion in tax revenue annually, a sufficient amount for their purpose.  These changes were driven by some initial concerns that the payroll tax was inequitable.  However, despite these rate changes, challenges to the tax persist in the form of pending litigation around the assessment of the tax on businesses in counties surrounding the New York metro who do not feel they receive the same benefits relative to those who directly use or reside in the five boroughs of New York.

Is this claim of inequity accurate from a public finance perspective and are their other ways forward? No and yes.  But more on that later.

In the Twin Cities, not unlike many other metropolitan areas that rely on public transport, a sales tax is assessed in the counties that comprise the metropolitan area.  New York’s Metropolitan Commuter Transit District (MCTD)—which includes New York, Bronx, Kings, Queens, Richmond, Rockland, Nassau, Suffolk, Orange, Putnam, Dutchess, and Westchester counties—also assesses a sales tax, but its significantly smaller rate than the sales tax as currently proposed in the Twin Cities.

So, if, in fact an increase in the sales tax could be realized in New York, it may offset a potential loss in revenue if the MCTMT were found to be unconstitutional in the pending litigation.  Practically speaking, it could be a way to get there, but what about from a public finance perspective?

In looking at the tax criteria matrix below, we’re not sure that the sales tax is an entirely better option.

Both are pretty efficient forms of tax.  Both have moderate equity and feasibility challenges.  But the payroll tax when used as a tool to fund transportation is practically self-sustaining. The infographic below is helpful in explaining these ratings:

Let’s start with sustainability.  The logic here is pretty circular. Given that the MCTMT is a payroll tax and that having a robust public transportation provides numerous direct and indirect benefits to the individuals and businesses assessed by spurring their growth through all of the avenues depicted above, the tax base should only continue to grow with the transport system.

From an equity standpoint, whether you’re a business, individual or member of the community paying those taxes you’re also realizing these benefits, not to mention the downstream implications for entire state’s tax base and economic growth which is almost halfway driven by the MCTD. In short, by investing in transportation through payroll taxes, an individual or business is investing in their (1) community and their (2) business growth (not to mention the (3) environment and (4) health benefits). It’s a quadruple return on investment!

Feasibility without knowledge of these benefits is a bit trickier. If the MTA were to rely on a higher sales tax rate it is less visible and likely more technically and politically feasible to collect. Short of changes its revenue streams, the MTA or state could simply conduct more public outreach and education on the direct and indirect economic benefits of having a robust metropolitan transit system.  Examples of this could include conducting an economic impact analysis or creating a fun and interactive campaign like “Get There PGH” that makes the impact and benefits of the tax and transportation system easier to understand.  Given the continuing challenges and clear need to get there literally, and financially, no idea should be left untried.

[1] Chamber of Commerce Minneapolis and St. Paul, University of Minnesota’s Center for Transportation and Studies, Humphrey School’s State and Local Policy Program. “The Impacts of Regional Transit Investment: Research, Results, and Legislative Action.” Cowles Auditorium, Humphrey School. 2013.
[2] Ibid.

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