can cutting sales taxes increase spending? evidence from ohio ben passty jennifer pitzer auber oct....
TRANSCRIPT
![Page 1: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/1.jpg)
CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE
FROM OHIO
BEN PASSTYJENNIFER PITZER
AUBER OCT. 9, 2011
![Page 2: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/2.jpg)
Background and Motivation
State budget deficit How would increasing the state sales
and use tax 1 percentage point affect Ohio consumers?– State-Level analysis
Are consumers near state borders more likely to substitute out of state goods?
![Page 3: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/3.jpg)
Ohio’s Sales and Use Tax
Ohio’s state sales and use tax has changed twice in the last decade– Temporary increase to 6% in 2004– Decrease to 5.5% in 2006
Changes in total spending and resulting tax revenues were disappointing after 2006
![Page 4: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/4.jpg)
Data
Ohio Department of Taxation Data– Tax rates–Monthly tax revenues– By county– From 2000 through 2009
Data involve using tax rates and collections to calculate spending
![Page 5: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/5.jpg)
Average Monthly Tax Revenues
YearSales Tax Revenues
2000 $ 490,742,3302001 $ 495,933,4802002 $ 505,259,2602003 $ 526,814,210
Average for 5 Percent Rate $ 504,687,3202004 $ 674,072,2502005 $ 666,903,210
Average for 6 Percent Rate $ 670,487,7302006 $ 634,120,1602007 $ 646,201,0702008 $ 630,348,9602009 $ 588,015,410
Average for 5.5 Percent Rate $ 624,671,400
![Page 6: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/6.jpg)
![Page 7: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/7.jpg)
![Page 8: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/8.jpg)
Analyses
Aggregate monthly consumer spending– Account for changes over time– Seasonality– Changes to tax state level tax rate• 2 dummies for each increase
– 5 to 5.5%– 5.5% to 6%
![Page 9: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/9.jpg)
Empirical Framework
We infer spending changes when collections and tax rates fail to vary proportionally– Cessation of spending– Transfer of Spending out of the taxation
zone Sources of Identification– Variation over time at OH state level– Variation across Ohio counties as a
panel
![Page 10: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/10.jpg)
ResultsAR(3) models for Tax Revenue
($millions)
![Page 11: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/11.jpg)
Forecasting Results
The incremental changes from 5% to 5.5% are clearly different than those from 5.5% to 6%
Possible expectations– Nonlinear relationship between Taxes
and Revenue (confounded by spending behavior)
– Omitted variable bias
![Page 12: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/12.jpg)
ResultsImpact of the Recession (removing
2009; DV is tax revenue in $millions)
![Page 13: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/13.jpg)
Another Source of Identification
Counties also levy sales and use taxes
Factors that could drive changes in county tax rates– Size– Bordering other states– Responding to state policy
(endogeneity)
![Page 14: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/14.jpg)
Panel Results (Rev/Person)
![Page 15: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/15.jpg)
Results
County Taxes can affect revenue, which means they must also impact spending
These are much smaller levels (around 1%), but they often increase 0.5% or more at a time (same as Ohio)
Could these rates be affecting our state-level results?
![Page 16: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/16.jpg)
County Populations and Tax Rates
![Page 17: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/17.jpg)
Border versus Interior Counties
![Page 18: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/18.jpg)
Border versus Interior Counties
![Page 19: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/19.jpg)
![Page 20: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/20.jpg)
What about the Nine Largest Counties?
![Page 21: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/21.jpg)
Comparative Tax Progression
![Page 22: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/22.jpg)
Effective Tax Rates
![Page 23: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/23.jpg)
Counties Raise Sales Taxes When
They do not fear losing sales to a rival state (because there isn’t one nearby), and
Their rates are low to start with, and The state is lowering rates
![Page 24: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/24.jpg)
Conclusions
Local policy changes can obscure analysis done purely at the state level– One third of people in Ohio perceived
little change when the state cut its taxes in January 2006
– Interior counties were more likely to increase their tax rates
![Page 25: CAN CUTTING SALES TAXES INCREASE SPENDING? EVIDENCE FROM OHIO BEN PASSTY JENNIFER PITZER AUBER OCT. 9, 2011](https://reader036.vdocuments.us/reader036/viewer/2022081519/56649da05503460f94a8b39a/html5/thumbnails/25.jpg)
How to Increase Spending
Cutting sales taxes can increase spending…
If you find a way to prevent lower-level governments from engaging in a money grab by raising their own taxes