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The Pros and Cons (and

Unintended Consequences) of
Different Revenue Sources
Tom Downes
Department of Economics
Tufts University

Prepared for the NCSL Education Finance Fellows Meeting


in Seattle, WA – March 2, 2019
Generating Revenues to Finance Education:
What Are the Pros and Cons of the Potential
Sources
 Sources of pressure to find new revenues:
 Health care costs (for school personnel, for state residents)
 Pension costs
 Special education

 Are there innovative ways to generate significant revenue beyond


the traditional taxes?
 Growing interest in gambling (sports betting, casinos), marijuana
taxes, sugary-beverage taxes, …
 Interest is not a signal of importance – revenues from these sources
are (and will continue to be) a small share of total revenues
 The three major broad-based taxes (income, sales, property) will
continue to be the primary sources of revenues
 Does not mean innovative variations on the big three aren’t possible
(and sensible) options
Trends in State Revenues
What Criteria Do Economists Use to
Evaluate Taxes?
 Economists evaluate taxes using the following criteria:
 Economic efficiency
 Fairness (equity) – both vertical and horizontal
 Ease of administration
 Revenue stability
 Link between the tax and the spending it is used to finance
 Tax visibility (salience)

 Unintended consequences tend to be covered by the


discussion of economic efficiency, though changes in
revenue stability can be an unintended consequence
 The Windows Tax example
Evaluating the Broad-Based Taxes – A
Few General Comments
 Economic efficiency is about how changing the tax
changes behavior. In the state and local context,
mobility of the base is a big part of this. But can also
be about changes in spending patterns, working, saving.
 Who pays vs. who bears the burden – easiest with the
income tax, harder with sales, property
 Low visibility taxes are taxes that are paid often, for
which each payment is a relatively small dollar amount,
and which are effectively embedded in the transaction
that leads to the tax. High visibility taxes are those
which are paid infrequently, are large amounts, and are
distinct from the transaction associated with the tax.
General Sales Tax
 Efficiency – Historically, focus had been on cross-locality
(cross-state) differences in rates. Increasingly,
conversation has turned to taxed v. un-taxed goods.
 Equity – Regressive (vertical)
 Ease of administration – At current rates (which don’t
encourage black markets), gets high marks.
 Stability – Cyclical, long-run trends in taxable sales.
 Link to spending – Weak
 Visibility - Low
Achilles Heel of the General Sales Tax –
The Growth in Services (courtesy Ronald
Fisher)
Individual Income Tax
 Efficiency – Historically, focus had been on cross-locality
(cross-state) differences in rates and on the impact on
work, savings. Evidence on work decisions
 Equity – Dependent on structure. Range from weakly
regressive to moderately progressive
 Ease of administration – Easy for wage income, much
harder for other sources of income
 Stability – As was apparent above, highly cyclical
(probably increasingly so)
 Link to spending – Weak
 Visibility - Moderate
Property Tax – An Unexplored Option
 In effect, more used than traditional numbers
indicate, since most states use foundation
financing and many mandate a minimum local tax
rate.

 Potential elements of a statewide tax


 Recapture
 Income- based circuit breaker (see discussion in
Kenyon piece)

 Example: Vermont
Property Tax on the Criteria
 Efficiency – Viewed as a tax on capital. Even more true if the
tax is uniform statewide.
 Equity – Proportional to progressive if an effective circuit
breaker is used. Horizontal – institutions matter.
 Ease of administration – Harder than the other taxes, mainly
because of the challenge of assessing the value of the base
 Stability – Most stable. Somewhat surprisingly, tax and
expenditure limits have actually increased stability.
 Link to spending – Stronger than other taxes, weaker for a
state than a local tax
 Visibility – High. Historically, the least popular tax.
Other Highly Publicized Options
 Sin Taxes (Lottery, Gambling, Sugary-Beverages,
Marijuana, …)
 Implications for equity, distortions of behavior
 Limited revenue possibilities
 Millionaires’ Tax
 How? (Increase top marginal rate, increasing rates on
capital gains and interest/dividends)
 Evidence on mobility
 Corporate Tax Rate options