Tuesday, March 29, 2011
Examining New Hampshire's Statewide Property Tax
In 2009, New Hampshire’s combined state and local tax burden ranked 44th of the 50 states.[1] This is achieved, in part, by having no state general sales or use tax and no tax on income from wages. Instead, the state and local governments rely heavily on the property tax for revenues. As such, New Hampshire has one of the highest levels of property taxes in the nation.[2] The New Hampshire statewide property tax rate is determined by the amount of revenue that is needed, approximately $363 million (New Hampshire Department of Education, 2011). The 2010 rate was $2.190 per $1,000 equalized valuations (Transparent NH).
EFFICIENCY: The New Hampshire statewide property tax appears to be an efficient tax. Behavior changes seem minimal as a result of the tax. Both homeownership rates and home size are higher in New Hampshire than the national average.
EQUITY: The New Hampshire statewide property tax was instituted because of inequities in education funding. Now, the statewide property tax funds the public school system, a public education system that is better than at least 40 states in the nation[3]. In addition, the state instituted property tax relief for low to moderate-income homeowners[4]. To read more about the history of low and moderate-income homeowners property tax relief click here. [5] However, the traditional view of property tax is regressive, that is the lower tax brackets pay a higher share of their income than those in higher tax brackets.
ADEQUACY: The adequacy of the statewide property tax to generate revenue is about average. On one hand, the tax base is fairly large which allows the state to collect quite a bit of money. Property taxes are also more stable than sales or income taxes. However, property taxes are one of the most hated taxes and are often subject to property tax limits, constraining revenue generation for local governments. They also have a lower tax elasticity, or ability for tax revenues to keep up with changes in income, than sales or income taxes. Property taxes as revenue producers are increasingly falling short and often do not keep pace with the financial needs of local governments; leading many states to introduce additional taxes such as income or sales taxes.
FEASIBILITY: The use of a property tax to solve the education-funding crisis was relatively simple and highly administratively feasible for New Hampshire, it merely added onto an existing tax without increasing these drawbacks. The political feasibility of the property tax however was a bit more difficult. The New Hampshire Supreme Court required equalization in school funding, however, New Hampshire citizens have historically been resistant to tax increases. While any tax increase would inevitably be unpopular, among the choices, this was the least unpopular.
[1] http://www.taxfoundation.org/taxdata/show/468.html
[2] http://www.taxfoundation.org/taxdata/show/251.html
[3] http://www.pelhamweb.com/assessor/NOT%20AS%20HIGH%20AS%20YOU%20THINK.pdf
[4] http://www.nh.gov/revenue/faq/dra_1200.htm
[5] http://www.nh.gov/revenue/forms/documents/LM_history.pdf
Brilliance or Big Brother? The VMT Tax
To address this dilemma, many policymakers are taking a second look at the vehicle miles traveled (VMT) tax. Instead of taxing by the gallon, the VMT tax is based on the distance traveled– a direct user-fee for driving on roads. The tax utilizes GPS technology in the form of a small, on-vehicle-device (OVD) which collects miles traveled and transmits that information electronically when drivers fuel up at the pump. Despite its potential, many serious concerns arise when considering the efficiency, adequacy, equity and feasibility of the VMT tax:
- Efficiency: Compared to the fuel tax, the VMT tax has the potential to change driver behavior in a positive way by reducing average daily mileage (moving society to a more socially beneficial equilibrium in terms of congestion and pollution). Also, if the VMT was designed to charge more during peak periods, the transportation system would become more efficient by reducing congestion and distributing trips more evenly across multiple modes.
- Adequacy: As the VMT tax can be imposed on every vehicle for each mile driven regardless of fuel efficiency/type, it will have a more complete tax base and still relatively low tax rates, thus having a higher tax adequacy relative to fuel tax. Also, the sustainability is enhanced since fluctuating fuel prices, increasing fuel efficiency and alternative fuels would have a lesser impact on VMT tax revenue.
- Equity: Unlike the fuel tax, the VMT tax is not influenced by fuel efficiency or fuel type, improving equity in terms of benefits received and horizontal equity. However, considering vertical equity, a flat-rate VMT tax is still highly regressive, though to a lesser-extent compared to the fuel tax. A possible way to improve vertical equity is applying a higher tax rate to luxury sport cars than vehicles for ordinary uses.
- Feasibility: Due to incredibly high public visibility and low opportunity for tax exportation, the VMT tax faces major political feasibility issues. On the administrative side, costs needed to develop new accounting systems, technology, and infrastructure at each gas station (and on every vehicle) are daunting. Yet privacy concerns are paramount when considering the overall feasibility of the VMT tax, as many assert that the tracking device impinges on their freedom and hearkens back to “Big Brother” government:
Despite these concerns, as more and more people change their consumption habits away from gasoline, will the burgeoning holes in transportation budgets around the country change public opinion of the VMT tax from “Big Brother” to revenue brilliance?
The Minneapolis Downtown Improvement District
Have you noticed any change to our downtown district has become cleaner, safer, greener and better? Thanks for Andy‘s blog about special service district, which ignites our group to further explore Minneapolis Downtown Improvement District(DID). DID was formed in early 2009 after more than 5 years of formative planning and advocacy by the Minneapolis Downtown Council. As economic rational peeople, each of us may ask: why would we like to take more money from our skinny pockets for public services under difficult economic times? Why is the DID service different than from other government actions?
DID is one type of business improvement districts (BID). As we have learned some public services are more efficient when they are carried out by lower level government, they can understand and satisfy local residents’ unique characters and preference. BID is a new public-private partnership stemming from the idea that today’s entrepreneurial leaders know how to improve their business as while as improve their community. Therefore, “the basic approach for BID is one in which a majority of businesses defined by geographic location agree to provide an extra level of public service in their area by imposing an added tax or fee on all the properties or business in the area. The job of local government is to legally establish the district, collect the special tax assessments, and then transfer the funds over to a BID organization to use as it sees fit.”(Jerry Mitchell) Hundreds of BIDs have been operating in 42 states today. The successful examples are Washington DC Business Improvement District, Alliance for New York Downtown, etc.
In the Minneapolis Downtown Improvement District a non-profit entity is working with three committees: Operations& services budget, Greening design & infrastructure and DID communications. Currently DID is providing services which clean the streets, improve sidewalk experiences, provide safety services and plant greenery with DID ambassadors who are on the streets. Below is a video the DID created to promote their services.
DID is funded largely by charges to commercial properties that are included as special assessments on property tax invoices. It is interesting to see how DID separates downtown area into three types of district and provides different scale services to each district, please check their maps by block number and service level.. You can also find their annual report and operating plan on the DID website. Below is their working result in between July 2009 and June 2010:
Can DID make a difference? They claim DID is 100% business managed, utilizing sound business principles and the same quality and cost control by businesses when managing private properties. We can view DID like a “tiny government” charging tax to provide extra services for public values. We can also view DID like a business company charging fees to provide special services we want. DID, as a type of public-and-private partnership, may has advantages like bringing innovation, private expertise, competition and serving better public interest.
Blog by Peter Hamma, Lyssa Leitner, Rose Ryan, Paul Teicher, and Yizhuo (Serene) Zhao
A clothing sales tax? If the shoe fits...
Minnesota residents have benefitted from the exemption of clothing from the sales tax base since 1967. However, given Minnesota's $5 billion deficit, some Minnesota legislators are proposing a clothing sales tax (2:20 minute video) in an attempt to raise revenue, expand the tax base, and bypass having to make cuts.Clothing Tax Comparison
Indeed, of the states that do collect sales taxes, only Minnesota, New Jersey, Pennsylvania, and Rhode Island completely exempt clothing from taxation; Connecticut, Massachusetts, Vermont and New York offer partial exemptions. None of Minnesota’s neighbors exempt clothing from taxation.
Clothing Tax Stack-u
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Efficiency
Since all neighboring states impose a sales tax on clothing, it is unlikely that Minnesota residents would travel elsewhere to purchase clothing. The two likely places for distortion would be in internet sales and the potential negative impact on tourism- particularly in border cities and at the Mall of America.
Equity
A sales tax on clothing, especially with regards to smaller purchases, would be highly regressive as it would constitute a greater burden on lower-income households than on higher-income households. And while a $6.875 charge on a $100 purchase (given Minnesota’s 6.875% sales tax) might not seem very great, it represents a significant amount for families that might spend $300 on clothing . Ask anyone who’s had to buy shoes for growing children!
Feasibility
Implementing a clothing sales tax in Minnesota will be highly visible to the public, and grumbles would likely ensue. On the positive side, a clothing sales tax is highly exportable to non-residents. For instance, it is well known that people travel across the country to shop at the Mall of America, so the state will be able to collect revenue from tourist shoppers. The administrative feasibility of enforcing a clothing sales tax is fairly straight-forward. The state already has the administrative capacity to collect sales tax on a variety of products.
Adequacy
If simply looking at these measures to determine if expanding the Minnesota sales tax to clothing would provide to be adequate, then we would say yes. However, at the current rate, the sales tax on clothing is projected to provide $566 million in FY2012-2013. This amount is not adequate to cover the total projected budget deficit, but there isn't one solution that could. Another consideration is the stability of the tax as a revenue source. Generally, the goals of a good tax system are advanced by having broader tax bases and lower tax rates.
Important Considerations
The unique factor to the current legislative proposal on extending the sales tax to clothing, is where that additional revenue is to be directed. In the video below, Senate Tax Chair Tom Bakk, states that the additional monies are to be directed to the Minnesota school fund, in order to increase that pot of money.
Additionally, over the years 2011 – 2013, the tax rate on clothes is to be lowered. By lowering the rate over time, and maintaining the same payment to the school fund, any surplus in revenue will actually have a negative net impact on the General Fund. The state is raising additional revenue through the expansion of the sales tax to clothing, yet lowering its ability to raise revenue by eventually decreasing the tax rate, and therefore negating its ability to successfully be used to fund a specific program, and again creating a deficit.
What do you think? Should MN "fold" on the clothing tax proposal? Why or why not?
The European model for Internet sales taxation
Taxation should seek to be neutral and equitable between conventional and electronic forms of commerce. Business decisions should be motivated by economic rather than tax considerations. Taxpayers in similar situations carrying out similar transactions should be subject to similar levels of taxation.[1]
The news agency does not allow embedding of their content. Please click on the icon to view the video Tax Free Internet Shopping Could End Soon.
Local Option Sales Taxes in the Omnibus Tax Bills
The 2011 legislative session has been a nail biter for local governments in Minnesota. On Monday, the House passed the Tax Committee’s omnibus bill by a vote of 73-59. Rep. Davids, committee chair, said the aim of the bill is to create jobs and reduce the tax burden on Minnesotans. In contrast, House Minority Leader Paul Thissen called it, “handcuffs that chain us into awful choices.” Local option sales tax (LOST) restrictions have become points of contention in the House bill.
Tensions are running especially high in Rochester. House members removed a $58.5 million local option sales tax from the omnibus tax bill. One member of the Rochester Area Chamber of Commerce vehemently spoke out against the bill and told State Legislators to stop controlling local governments’ purse strings, “Rochester is fully capable of making intelligent decisions as to how we want to spend our money, and don't tread in that area is my recommendation to you because it is a hot subject in town.” Rochester has a history of fighting for local control of LOSTs. In 2008, the legislature imposed a moratorium on LOSTs that expired in May 2010. In 2010, Rochester worked hard to defeat an extension of the moratorium. Although the moratorium expired last May, the House bill re-imposes it by prohibiting local government spending to promote new local sales taxes until May 2012 (it does not affect LOST approved by May 24, 2011).
Hennepin County has also been keeping an ear tuned to the debates in St. Paul. Supporters and opponents of a LOST proposal to fund the Twins stadium packed a 600 seat auditorium to testify before the House Tax Committee. The proposal includes a .15 percent increase in sales tax, which amounts to about 3 cents per $20.
There is a glimmer of hope (or hurdle, depending on your point of view) for local governments like Rochester and Hennepin County. The House bill is now moving to the Senate, where it must be reconciled with the Senate Tax Committee omnibus bill. The Senate version does not renew the moratorium and authorizes a different set of LOST proposals.
LOST advocates have reason to be hopeful. Sen. Julianne Ortman, Chair of the Senate Tax Committee, has supported greater local control over LOSTs. She recently told MPR that allowing local governments more flexibility to raise their own revenue could be more efficient than forcing them to get permission from the legislature to impost local sales taxes. Although she introduced a bill to that effect, it is not included in the Senate omnibus tax bill.
Local governments around the state are anxiously (or eagerly) waiting to see what the final tax bill will look like and how it will impact their revenue options. John James, former Commissioner of Revenue and founder of Sensible Tax and Fiscal Systems, predicted that sales tax reform would be one result of this legislative session. Governments like Rochester and Hennepin County must be wondering if that includes new restrictions on local option sales taxes.