Tag Archives: Tax rates

Taking a Shot at WA’s New Liquor Privatisation Proposition

Had the pleasure to find this in my reader today: (here)

State and local governments stand to lose hundreds of millions of dollars if voters pass either of two initiatives on the November ballot putting Washington state out of the liquor business, according to analyses by the state’s Office of Financial Management (OFM).

The reports, released on Wednesday, paint a far different picture from most of the scenarios analyzed in a state auditor’s report earlier this year, which predicted revenue boosts if the liquor business were privatized.

The OFM reports also conclude that consumption of hard liquor would go up.

Initiative 1100, which is backed by Costco Wholesale and other large retailers, would reduce state and local revenues by up to $277 million over the next five years, OFM said.

Initiative 1105, which is funded by large distributors, would decrease revenues by as much as $730 million — a bigger bite because that proposal also would eliminate the state’s liquor tax.

Backers of both initiatives say the state Legislature could raise taxes to make up for any deficit. Initiative 1105 recommends a new, simplified liquor tax that — along with other aspects of the measure — it says would increase revenue by $100 million beyond what the liquor board now projects.

The OFM reports conclude both measures would increase liquor sales in Washington by 5 percent, based on sales growth experienced in Alberta, after the Canadian province privatized its liquor stores.

Liquor sales would increase partly because the number of sales outlets would multiply as grocery and convenience stores that currently sell only beer and wine put liquor on their shelves. Both the state auditor and the new OFM reports estimate that 3,357 outlets would sell liquor, compared to 315 liquor stores now.

Given my research on this,  I feel I must comment.

  • Eliminating taxes would be a bad idea, as liquor taxes can be a boon to state coffers helping to fund many state programs and alleviate damages caused by drinking.  The benefits outweigh the costs on this one.
  • The demand for liquor is inelastic, meaning the state has more flexibility in keeping taxes and revenues high.  Moreover, the tax burden would be placed more on the consumer.  Any drastic drops in the tax rates for liquor won’t increase liquor demand by much (I calculated around .5% drop in consumption for ever 1% drop in the price relative to the tax rate) and the same in reverse, increasing taxes won’t do much to decrease the amount of liquor bought.
  • The OFM is underestimating the increase in revenues that will happen when the number of outlets selling liquor will increase by 965%. One thing I found with my research is that liquor licenses have a very strong positive correlation with liquor consumption.  So, the increased availability will increase sales.  By how much? While it is still an inelastic change, (b=+.187) a 965% change in liquor outlets will actually yield an increase in consumption of 1.8%.  Alcohol sales in 2008 was $825 million.  A 1.80% increase in consumption would translate into an increase in sales by $14 million.  Combined with anticipated sales growth from recent trends, liquor sales would increase by $85 million dollars for 2009.
  • While the change in consumption is underestimated, it isn’t a large share for revenue.  With a 965% increase in licenses  to sell liquor, WA should auction them off.  It provided West Virgina with realized revenues of 38.7% of net sales in the auction as evidenced in this paper.
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Senate passes jobs bill

So the Senate just voted on the jobs bill and it is now going to Obama.  I predict with a 99.87% certainty that Obama will pass it, only so that he can push it aside to get political points while getting to bigger business for the next session of congress.  Here is what the bill will offer: (bullet points added, from NYT)

  • …businesses that hire workers who have been jobless for at least 60 days will be exempt from paying the 6.2 percent payroll tax on those employees’ earnings until the end of the year. If those workers stay on for a full year, businesses will also get a $1,000 tax credit. (The employee’s pay would still be subject to the usual personal income taxes.) The business tax breaks would add up to about $15 billion in all.
  • It also provides an extra $20 billion for road and bridge construction and extends the federal highway program through year-end.

And that’s it. $30 billion in corporate tax breaks is soon to follow, which is probably being pushed by Dems in order to compliment the oddly restrictive, albeit mildly effective hiring incentive.

But where is the investment tax credit Obama said he would like to see when he gave his State of the Union address? This bill won’t do much for employment as much as we hope.  Construction spending is only expected to ease some of the pain for construction workers on federal contracts.  Of course I can’t quantify what this will do. (I will look out for it) I know that at this turning point in the economy, with productivity up and a lot of pent up need for hiring, an investment tax credit would definitely stimulate demand.  Weak demand is the reason that’s keeping employment from taking off.

Now that’s a complement!

Turns out cigarettes and gambling are complement goods: (here)

State video gambling tax receipts plummeted by nearly 18 percent in the last quarter of 2009, buffeted by the beginning of a statewide indoor smoking on bars and casinos and a recession that hit Montana hard.The gross video gambling-machine taxes will be about $12.5 million for the quarter that ran from October through December 2009, said Rick Ask, administrator of the Gambling Control Division in the state Justice Department. That’s about $2.7 million, or 17.8 percent, less than what the tax revenues were the previous three months, from July through September 2009.

The quarterly gambling-machine taxes are down by 16.8 percent, or $2.5 million, compared with the previous three-month period from September through December 2008, Ask said.

It certainly shows the unintended consequence of a policy that although is good at heart; can hurt the bank. So why would gambling and cigarettes be complements? Does nicotine help relieve the stress of losing money? Maybe smoking has a direct effect on one’s discount rate for gambling.

A Case for the Investment Tax Credit

Obama has recently sparked debate about a proposal to spark job creation.  He wants the proposal to include incentives for small businesses to hire more workers, spend more money for infrastructure projects and offer rebates for homeowners who update their homes with energy efficient durable goods and weatherization renovations — that has come to be known as “cash for caulkers.”  The debate around the blog world has included some interesting ideas, including the “cash for caulkers” idea itself and a cut in the minimum wage, which has spurred tremendous uproar in the blogging community for and against it.

One proposal that has caught my eye is the Investment Tax Credit. (ITC) Mankiw has made several good points about the ITC that is well worth looking at.  First, a temporary ITC could help act as a similar mechanism to create negative real interest rates, much like what inflation could do, even though quantitative easing is now out of the question given Bernanke’s recent remarks. Second, like cash-for-clunkers, it would help stimulate AD in the short-run and move AS rightward in the long-run, but broadly so as to not favor a specific industry. And lastly, tax credits usually are a good idea if you want more of something.  Considering how low investment growth is, it would only make sense to target tax credits on something like investment.  If businesses focus on investing, it will help stimulate demand for capital goods, increasing the need for more labor to supply it.

If opponents want to say that this may just stimulate demand for investment in foreign capital goods, I would say that most investment worthy capital goods would be created here in the U.S.  Less value added products that usually come from abroad, if do happen to be purchased, still doesn’t mean that the products wouldn’t go toward future productivity and lower unit costs.  For what its worth, the economics out rightly support the ITC.

To drive the point further, Obama should really listen to what small businesses actually want.  Yes, America wants jobs, but small businesses are not going to hire unless they get what they want first.  While the blogosphere argues over lowering labor costs with the minimum wage, small businesses are asking for something different.   From Peter Crabb:

The latest reading of the National Federation of Independent Business (NFIB) Index of Small Business Optimism was down, but business owners don’t see a lack of bank loans as a problem.Twenty-nine percent of all respondents to the NFIB survey reported they have met their borrowing needs. Nine percent reported problems obtaining financing, which is one point lower than the previous period.

Why are small businesses not desperately seeking more financing? Because they have little reason to invest in their companies. In the survey, only 16 percent said they are making capital-expenditure plans for the next few months. Only 8 percent said the current period is a good time to expand facilities, and only 3 percent think the economy will improve.

Small businesses are not concerned about getting loans for making investment into their companies. In fact, among their chief concerns are:

[From the NFIB report] …we find that when asked to identify the most important problem small-business owners face at this time, poor sales are cited most frequently, high taxes second and government requirements third.

It seems that their chief concern is with demand. Small-businesses don’t necessarily care about making investments right now as they need revenues to catch up first. However, whether or not small business are enticed by an ITC, larger businesses would be. I am sure many companies would be willing to take advantage of it. And the downside? No one takes advantage of it and the treasury account stays the same.

Some more cases for the ITC can be found here and here.

Average Marginal Tax Rate

From Mankiw:

From Barro and Redlick.

 

Russia raising taxes on beer

From Free Market Mogo on the Economist:

From the Economist:

The average Russian already drinks 30 litres of hard liquor a year, six times the amount in the EU, while imbibing a modest 77 litres of beer, a little less than a typical European. Pushing up beer prices is far more likely to encourage drinkers to swallow even more vodka or dodgy but cheap home-made spirits than to convince them to give up booze altogether. Then again, it will give Russia’s huge—and largely locally owned—vodka industry reason to raise a glass.

So I pose the question: Is this an intended or unintended consequence? If they seek to curb alcohol consumption, Russia could tax all alcohol, not strictly beer. If they seek to curb substitutes to vodka, which is largely Russian-owned, then they have applied the correct policy.

That’s interesting because during my research in alcohol demand, particular types of alcohol (beer, wine and liquor) are not considered substitutes.  Now, I am mostly familiar with the measured elasticities of beverage types in the U.S, but from what I have seen from the worldwide aggregate studies, (mostly Europe and U.K.) the same conclusions translate. Beer is the most inelastic of either of the three, so it makes sense that beer takes the hit in order to maximize revenue. (and maybe hopes of benefiting a Russian vodka industry) No doubt a cultural component is involved, but generally, I would put my money on not much of an increase in vodka sales other than seasonality and standard growth expectations.

Should we tax water?

If you ever read Henry George’s Progress and Poverty, you may already be familiar with his ideas on taxation.  If not, (I haven’t read it) he basically says this: just tax land.  Makes sense? Well, when trying to find money for a health care system, this article outlines it nicely:

Land, to George, was the resource for earning money, or just living: Only hoboes could get by without renting a slice of it. Land was not just natural but limited, so it belonged, in the truest sense, to the nation. Other taxes put an undue burden on human activity: Income tax weighed on productivity (wages and profits); a sales tax put a burden on trade; a “property tax,” which involves not just land but the structures on top of it, burdened development. To George, it was simple logic that a government should raise taxes from the value of land.

So, the benefits are obvious. The article then moves towards the idea of taxing water. And why not?

“The biggest thing is water,” Gaffney says. “In an arid state, water is worth more than land, or at least as much. But it’s totally exempt from taxation. It’s an enormous source of revenue that’s not being taxed at all. In fact, it wouldn’t even have to be a tax because, legally speaking, the state [of California] owns all the water. … So the state should simply charge a rental for the use of its water. But not only does it not charge for people taking water out — it subsidizes them by paying for the works that are necessary to store and distribute the water.”

I think the relevant term is “ass-backwards.” Meanwhile, Americans argue about their income tax and whether some of it should help complete strangers cover their medical costs.

So, tax land AND water, and the emotional component of state spending is unequivocally taken out of the equation.

I like this. I like this so much that we should go even further. Not only should we completely banish all sales and income taxes – minus sin and other special excise taxes – we should add to the list taxes for environmental hazard, degradation and other externality costs. (within reason of course) Therefore, society nets a triple benefit – increased incomes, internalized externality costs (both from private or public land value AND the true cost against third parties) and public revenue from a true progressive tax structure. One could only dream…

HT: MR