State and Local Public Finance

Paper Session

Friday, Jan. 6, 2017 10:15 AM – 12:15 PM

Sheraton Grand Chicago, Ohio
Hosted By: National Tax Association
  • Chair: Zhou Yang, Robert Morris University

Optimal Energy Taxation in Cities

Rainald Borck
,
University of Potsdam
Jan K. Brueckner
,
University of California-Irvine

Abstract

This paper presents the first investigation of the effects of optimal energy taxation in an urban spatial setting. Rather than exploring the effects of a carbon tax, our approach is to derive counterparts to existing taxes that are needed to support the social optimum. We then analyze the effects of these taxes on urban spatial structure. Emissions are generated by housing consumption and commute trips, and the optimal tax structure has a tax on commuting, housing floor space, and land. These taxes reduce the extent of commuting and the level of housing consumption while increasing building heights, generating a more-compact city with a lower level of emissions per capita.

Should We Be Taxed Out of Our Homes? The Optimal Taxation of Housing Consumption

David Albouy
,
University of Illinois-Urbana-Champaign
Sebastian Findeisen
,
University of Mannheim and CEPR

Abstract

Optimal tax theory suggests that it is more efficient to tax housing as a consumption good than other forms of consumption as it is a complement to leisure and is produced more intensively from land, an inelastic factor, than other goods. This tax rate appears to be at least 50 percent higher than other forms of consumption, justifying high rates of property taxation, particularly in areas with inelastic housing supply. It may be efficient to offer a lump sum transfer to households who choose to live close to high-paying jobs, justifying infra-marginal subsidies to housing units in some high-price areas. Proximity to amenities may also influence optimal tax rates depending on whether they are substitutes or complements to labor supply or housing consumption.

Job Creation Tax Credits, Fiscal Foresight, and Job Growth: Evidence from U.S. States

Robert S. Chirinko
,
University of Illinois-Chicago
Daniel J. Wilson
,
Federal Reserve Bank of San Francisco

Abstract

This paper studies the effects of job creation tax credits (JCTCs) enacted by U.S. states between 1990 and 2007 to gain insights about fiscal foresight (alterations of current behavior by forward-looking agents in anticipation of future policy changes). Nearly half of the states adopted JCTCs during this period, and their experiences provide a rich source of information for assessing the quantitative importance of fiscal foresight. We investigate whether JCTCs affect employment growth before, at, and after the time they go into effect. A theoretical model identifies three key conditions necessary for fiscal foresight, captures the effects of the rolling base feature of JCTCs, and generates several empirical predictions. We evaluate these predictions in a difference-in-difference regression framework applied to monthly panel data on employment, the JCTC effective and legislative dates, and various controls. Failing to account for the distorting effects of fiscal foresight can result in upwardly biased estimates of the impact of the JCTC fiscal policy by as much as 37%. We also find that the cumulative effect of the JCTCs is positive, but it takes several years for the full effect to be realized. The cost per job created is approximately $17,000, which is low relative to cost estimates of recent federal fiscal programs. This figure implies a fiscal multiplier on JCTC tax expenditures of about 1.9.

The Impact of State Taxes on Pass-Through Businesses: Evidence from the 2012 Kansas Income Tax Reform

Jason DeBacker
,
University of South Carolina
Bradley T. Heim
,
Indiana University
Shanthi Ramnath
,
U.S. Department of the Treasury
Justin M. Ross
,
Indiana University

Abstract

This paper examines the impact of a large-scale tax reform that took place in Kansas and, along with other changes, excluded certain forms of business income from individual taxation at the state level. In theory, lowering these firms’ marginal tax rates could stimulate investment thereby boosting the overall state economy. On the other hand, business owners could simply relabel other sources of income to receive favorable tax treatment, in which case, the exemption would fail to generate any additional real business activity. We test these competing theories using a difference-in-difference model where bordering states serve as a control group for Kansas. We find that the Kansas reform had a small, positive effect on the propensity to report income from self-employment, but failed to generate significant changes to the amount of reported income. Furthermore, we find that the reform had little impact on other forms of business income that were also subject to the exemption. Finally, we attempt to disentangle whether the reform led primarily to a recharacterization of existing income or whether the reform induced a real economic response. We find some evidence that the reform led to a recharacterization of wage income to contract labor.
Discussant(s)
John D. Wilson
,
Michigan State University
David F. Merriman
,
University of Illinois-Chicago
Eric Zwick
,
University of Chicago and NBER
Li Liu
,
International Monetary Fund
JEL Classifications
  • H2 - Taxation, Subsidies, and Revenue
  • H7 - State and Local Government; Intergovernmental Relations