State and Local Public Finance
Friday, Jan. 6, 2017 3:15 PM – 5:15 PM
- Chair: Zhou Yang, Robert Morris University
Should We Be Taxed Out of Our Homes? The Optimal Taxation of Housing Consumption
AbstractOptimal 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
AbstractThis 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
AbstractThis 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.
- H2 - Taxation, Subsidies, and Revenue
- H7 - State and Local Government; Intergovernmental Relations