Findings

Out of balance

Kevin Lewis

August 31, 2016

The Lifecycle of the 47%

Don Fullerton & Nirupama Rao

NBER Working Paper, August 2016

Abstract:
We assess the concentration and duration of zero tax liabilities and of transfer receipts, using data for households with ten to forty years of observations from the Panel Survey of Income Dynamics. We find that neither is strongly concentrated. Nearly 68% owe no federal tax in at least one year, approximately 78% receive some type of transfer in at least one year, and more than 58% receive transfers other than Social Security in at least one year. Of those who do not owe federal tax in any given year, 18% pay tax the following year, and 39% contribute within five years. Of those who receive transfers other than Social Security within a given year, nearly 44% stop receiving such transfers the next year, and more than 90% stop within ten years.

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The fiscal externality of multifamily housing and its impact on the property tax: Evidence from cities and schools, 1980–2010

Ryan Gallagher

Regional Science and Urban Economics, September 2016, Pages 249–259

Abstract:
Negative fiscal externalities produced by apartments and other small housing units are commonly cited as the justification for many local land-use restrictions, such as minimum lot requirements and limits on multifamily developments. Because these laws effectively limit the number of small dwellings that can be built within a community, proponents argue that restrictions of this type help to guarantee that new homes will “pay for themselves” by discouraging free-riding behavior within a system of local governments. Critics, however, have maintained that such policies constitute a veiled attempt by suburban communities at restricting entry for low-income families. Focusing on the clear distinction between housing units located in multifamily structures (i.e., apartments) and single-family homes, this paper finds strong evidence that residential per-capita values, measured as value per person and value per child, are actually higher for apartments, not single-family residences. Consequently, communities' effective property tax rates decline as apartments' share of the housing stock rises, holding all else equal. These findings are contrary to the set of assumptions that are often used to justify many of today's land-use restrictions and raise serious questions regarding the efficacy of modern fiscal zoning as a tool for promoting efficient fiscal federalism.

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Estimating Local Fiscal Multipliers

Juan Carlos Suárez Serrato & Philippe Wingender

NBER Working Paper, July 2016

Abstract:
We propose a new source of cross-sectional variation that may identify causal impacts of government spending on the economy. We use the fact that a large number of federal spending programs depend on local population levels. Every ten years, the Census provides a count of local populations. Since a different method is used to estimate non-Census year populations, this change in methodology leads to variation in the allocation of billions of dollars in federal spending. Our baseline results follow a treatment-effects framework where we estimate the effect of a Census Shock on federal spending, income, and employment growth by re-weighting the data based on an estimated propensity score that depends on lagged economic outcomes and observed economic shocks. Our estimates imply a local income multiplier of government spending between 1.7 and 2, and a cost per job of $30,000 per year. A complementary IV estimation strategy yields similar estimates. We also explore the potential for spillover effects across neighboring counties but we do not find evidence of sizable spillovers. Finally, we test for heterogeneous effects of government spending and find that federal spending has larger impacts in low-growth areas.

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State and Local Fiscal Policy and Growth at the Border

Sam Peltzman

Journal of Urban Economics, September 2016, Pages 1–15

Abstract:
The paper studies the connection between state and local fiscal policy, as measured by the share of government spending and revenues in personal income, and the economic activity of counties that share a state border. I construct a panel of pairs of US counties that share a state border from the 1970s to 2012. Economic activity is measured by county employment, wages and business establishments. The state and local government spending and revenue shares are aggregates for the states on the respective sides of the border. I estimate distributed lag regressions of changes in economic activity on changes in state and local government budgets in two ways. The first (double difference) utilizes change in the difference between border counties. This suggests a quite modest relocation of economic activity away from states with fiscal expansion. I then look at activity on each side of the border separately and find more substantial and consistently negative effects of fiscal expansion on both sides of the border. A border county shares the negative consequences for its neighbor of growth in the size of that neighbor's state and local governments. This negative fiscal externality is roughly half the size of the direct negative effects from similar own-state spending increases, and the sum of the two is substantial economically.

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Labour Costs and the Size of Government

François Facchini, Mickael Melki & Andrew Pickering

Oxford Bulletin of Economics and Statistics, forthcoming

Abstract:
Given inelastic demand for labour-intensive public services, the size of government depends positively on labour costs. OECD data exhibit a strong statistical association between government size and the business-sector labour share of income. When the labour share is instrumented with measures of technological change, institutional variation and predetermined data it continues to positively impact government size. In contrast, transfer spending is unaffected by the labour share. The evidence is consistent with the idea that the recent decline in the labour share has contributed to the slowdown in the growth of government witnessed in much of the post-war era.

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Attention Variation and Welfare: Theory and Evidence from a Tax Salience Experiment

Dmitry Taubinsky & Alex Rees-Jones

NBER Working Paper, August 2016

Abstract:
This paper shows that accounting for variation in mistakes can be crucial for welfare analysis. Focusing on consumer underreaction to not-fully-salient sales taxes, we show theoretically that the efficiency costs of taxation are amplified by 1) individual differences in underreaction and 2) the degree to which attention is increasing with the size of the tax rate. To empirically assess the importance of these issues, we implement an online shopping experiment in which 2,998 consumers -- matching the U.S. adult population on key demographics -- purchase common household products, facing tax rates that vary in size and salience. We find that: 1) there are significant individual differences in underreaction to taxes. Accounting for this heterogeneity increases the efficiency cost of taxation estimates by at least 200%, as compared to estimates generated from a representative agent model. 2) Tripling existing sales tax rates roughly doubles consumers' attention to taxes. Our results provide new insights into the mechanisms and determinants of boundedly rational processing of not-fully-salient incentives, and our general approach provides a framework for robust behavioral welfare analysis.

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Fiscal Stimulus and Consumer Debt

Yuliya Demyanyk, Elena Loutskina & Daniel Patrick Murphy

Federal Reserve Working Paper, August 2016

Abstract:
In the aftermath of the consumer debt–induced recession, policymakers have questioned whether fiscal stimulus is effective during the periods of high consumer indebtedness. This study empirically investigates this question. Using detailed data on Department of Defense spending for the 2006–2009 period, we document that the open-economy relative fiscal multiplier is higher in geographies with higher consumer indebtedness. The results suggest that fiscal policy can mitigate the adverse effect of consumer (over)leverage on real economic output during a recession. We then exploit detailed microdata to evaluate aggregate demand and aggregate supply-side economic mechanisms potentially underlying this result.

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The Impact of Tax and Expenditure Limits on Municipal Credit Ratings

Craig Maher et al.

American Review of Public Administration, September 2016, Pages 592-613

Abstract:
The research focuses on the impact of the restrictiveness of tax and expenditure limitations (TELs) on the credit ratings of 566 U.S. municipalities over the 2007-2010 time period. The credit ratings used are by Moody’s rating agency, and municipal fiscal data are drawn from the Government Financial Officers Association’s (GFOA) Certificate of Achievement for Excellence in Financial Reporting program. Results suggest that more restrictive TELs imposed on municipalities by the states have a weak negative impact on credit ratings which will likely force municipalities to face higher interest costs.

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The Determinants of the Severity of State Fiscal Crises

David Mitchell & Dean Stansel

Public Budgeting & Finance, forthcoming

Abstract:
During the most recent recession, many state governments faced substantial budget shortfalls. Those shortfalls are often blamed on external factors like the declining economy or reductions in federal aid. What politicians themselves do, especially during expansionary years — whether they enact spending increases, implement tax cuts, increase the size of their rainy day funds, or some combination thereof — is typically given less attention. We examine those factors and find that fiscal stress tends to be positively associated with spending growth, negatively associated with the size of rainy day funds, and not statistically significantly associated with the unemployment rate or federal aid.

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Can Paying Firms Quicker Affect Aggregate Employment?

Jean-Noel Barrot & Ramana Nanda

NBER Working Paper, July 2016

Abstract:
In 2011, the federal government accelerated payments to their small business contractors, spanning virtually every county and industry in the US. We study the impact of this reform on county-sector employment growth over the subsequent three years. Despite firms being paid just 15 days sooner, we find payroll increased 10 cents for each accelerated dollar, with two-thirds of the effect coming from an increase in new hires and the balance from an increase in earnings. Importantly, however, we document substantial crowding out of non-treated firms employment, particularly in counties with low rates of unemployment. Our results highlight an important channel through which financing constraints can be alleviated for small firms, but also emphasize the general-equilibrium effects of large-scale interventions, which can lead to a substantially lower net impact on aggregate outcomes.

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Jobless capital? The role of capital subsidies

Carlianne Patrick

Regional Science and Urban Economics, September 2016, Pages 169–179

Abstract:
Using tax abatements, financial incentives, and public investments to attract (or retain) firms is the primary economic development tool for many local governments. Often local job creation policies focus on increasing capital through grants, low-interest financing, and other economic development incentives. Theory predicts that capital subsidies induce firm behaviors that limit their job creation effects. This paper employs the Incentives Environment Index, constructed from state constitutional provisions that limit and structure the ability of state and local governmental entities to aid private enterprises, and county panels to test theoretical predictions on county capital expenditure and input mixes as well as industry establishment shares. The results indicate the act of increasing capital subsidy tools is associated with capital-labor substitution, decreased employment density, and changes in local industry mix. Results are robust to alternative empirical specifications and measures of capital subsidy availability.

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Public-sector Unions and Government Policy: Reexamining the Effects of Political Contributions and Collective Bargaining Rights

George Crowley & Scott Beaulier

Public Finance Review, forthcoming

Abstract:
Recent events, including the failed recall of Wisconsin Governor Scott Walker and the Chicago teachers strike, have shed light on the relationship between state fiscal policy and public-sector union power. While a literature has developed focusing on various aspects of the link between public-sector unions and government policy, scholars have yet to reach consensus. In most cases, public-sector unions have multiple tools they can use to influence policy. We find that union political contributions and collective bargaining are associated with higher incomes for state and local employees and with higher public employment, both across state and local governments overall as well as within the education sector. We also find relatively little evidence that union activity influences total spending.

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The Responsiveness of Casino Revenue to the Casino Tax Rate

Kathryn Combs et al.

Public Budgeting & Finance, forthcoming

Abstract:
This paper examines the tax base elasticity of the regulated casino industry in Illinois to help estimate state-level revenue impacts of casino tax rate changes. Illinois’ shift to a graduated rate schedule increased the highest marginal tax rate on casino adjusted gross receipts (AGR) from 20 percent to 70 percent before reverting to a 50 percent rate. We construct a state-level casino tax rate variable, which is a statewide average for each month of the marginal casino tax rate facing each casino. We find that a 1 percent increase in this state-level casino tax rate decreases overall Illinois casino AGR by around 1.1 percent.


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