An Economic Analysis of the Proposed Special Purpose Local Option Sales Tax (SPLOST) for Bibb County

Transcription

1 Center for Economic Analysis Macon State College School of Business An Economic Analysis of the Proposed Special Purpose Local Option Sales Tax (SPLOST) for Bibb County Conducted by: Dr. Greg George, Director Center for Economic Analysis School of Business Macon State College October 20, 2011 Disclaimer: The purpose of this report is to present an independent and unbiased assessment of the economic impacts, both the costs and benefits, of the proposed Bibb County SPLOST. The findings in this report were generated using current and widely accepted econometric methods and software designed specifically to conduct economic impact studies. Information regarding final tax receipts and the allocation of funds are based on information provided by the City of Macon, Department of Finance and have been double checked for accuracy. Unanticipated changes in the local economy (as well as other unidentified factors) could cause the results to vary slightly, resulting in either larger or smaller impacts than those reported. As a result, the findings in this report should be viewed as a baseline estimate to allow interested parties to assess the merits of the proposal based on the best information available. This report does not necessarily reflect the opinion of the School of Business, Macon State College, nor the University System of Georgia. Any errors or omissions are the strict responsibility of the author. Additionally, any errors or questions should be addressed to greg.george@maconstate.edu.

2 Summary of Findings The proposed SPLOST will generate approximately $306,509,791 in Gross Economic Benefits over the course of the program. The Cost to the local economy of implementing the proposed SPLOST totals approximately $164,231,600 over the course of the program. Total Net Benefits of the proposed SPLOST if implemented will have a positive impact on the local economy of approximately $142,278,191. Bibb County consumers and businesses will pay a total of $103,550,000 over the six year period, which means they will bear 54.5% of the tax. Bibb County consumers will pay 19.5% of the $190,000,000, or $37,050,000. The remainder will fall on local businesses ($66,500,000 or 35%) and out of county residents ($86,450,000 or 45.5%). The findings in this report are based on established economic impact study techniques using the best information available at the present time. As with any forecast, certain variables are unknown and either need to be estimated or derived through a process of research under a valid set of assumptions. For the purposes of this report, when estimating key variables under uncertainty, a conservative approach was employed, which we feel is in the best interest of those who will be most impacted by the SPLOST. The narrative of this report details where assumptions were made and how we came to our conclusions. Our approach limits the possibility that we overstate the benefits, or underestimate the costs of the proposed SPLOST. In the event that new information becomes available, we will update our estimates to reflect any changes in the outcomes

3 I. Overview The Center for Economic Analysis (the Center) was approached by the City of Macon to conduct an independent and unbiased economic assessment of the 2011 proposed Special Purpose Local Option Sales Tax (SPLOST). The purpose of the present report is to provide Bibb County residents and other interested parties with accurate, timely and thorough information regarding the costs and benefits of the SPLOST, if passed by voters on November 8, In pursuit of this task, the Center has conducted extensive research, consulted with key personnel, and created a customized and theoretically sound methodology to properly analyze the complete economic impacts of the proposal as presented to Bibb County residents. In 1985, the State of Georgia enacted the SPLOST law, which enables counties to initiate a referendum to impose a one percent county sales tax. Funds raised by a SPLOST are used to fund capital outlay projects proposed by the county and municipal governments within the county. The tax is collected on all items subject to the state sales and use tax within the county, as well as the sale of motor fuels, and the sale of food and beverages, which are not subject to the state sales tax. On November 8, 2011, Bibb County voters will be asked to decide whether to impose the one percent SPLOST to fund various projects, including equipment purchases, road improvements, construction projects, and debt reduction. In order for voters to make an informed decision regarding passage of the SPLOST, an understanding of the benefits to local businesses and residents must be weighed against and costs to tax payers within the County limits. While there may be differing and equally valid opinions regarding the proper allocation of funds and the distribution of costs and benefits among individual residents, it is beyond the scope of this report to accurately identify and assess the merits of such claims. Instead, this report presents the net economic benefits to the county residents and businesses as a whole and the net costs to tax payers within the local economy. Where appropriate, we will break down the impacts across consumers and firms, as this is necessary to reach valid estimates. The methodology utilized in this report was customized to accurately assess the net benefits to Bibb County residents of the proposed SPLOST, given the complexity of the proposal. The following section outlines the current proposal as presented by city and county officials. Section III describes the methodological considerations and underlying assumptions used to generate our assessment. Section IV contains the detailed results of our study and offers some concluding remarks. The Center for Economic Analysis is housed in the School of Business at Macon State College. The mission of the Center is to provide Middle Georgia with a variety of analytical services to local businesses, non-profits, and governmental agencies. The Center strives to be a center of excellence and is the leading provider of economic, market and business research in the Middle Georgia region. We are pleased to present the current study to interested parties and feel it will be a valuable tool in allowing voters to make more informed decisions

4 II. The Proposed SPLOST If passed by voters, the proposed SPLOST will go into effect on January 1, 2012 and will generate an estimated $190,000,000 in revenue over six years. In order to properly plan for expenditures, the city and county officials need accurate assessments of how much revenue will be generated. Of course, multiple factors influence the actual amount to be collected over the six years, which requires basic assumption regarding the pace of economic activity and changes in money flows as a result of the SPLOST itself. In order to confirm the initial estimates, the Center conducted an independent assessment of the amount of revenue likely to be generated by implementation of the SPLOST. Our assessment confirms that the SPLOST will generate the estimated $190 million 1. Furthermore, in the event that the local and state economy experiences a reasonable and moderate growth rate over the next six years (2-3%), the SPLOST may generate additional funds above the estimated $190 million. Demographic changes could also impact tax receipts; however, Middle Georgia as a whole would have to experience a considerable decline in population to significantly impact the collection of sales tax receipts. Finally, changes in State laws could impact the distribution of sales tax revenue, but such changes are unanticipated and outside the scope of this report. Therefore, for the purposes of this report, we will assume the $190 million in revenues will be met and not consider the impacts of additional revenue that may or may not be generated. In that sense, our results can be viewed as a baseline estimate that may ultimately need to be adjusted upwards or downwards as events dictate. In an agreement reached by city and county officials, the revenue generated by the SPLOST will be allocated to multiple projects over the next six years. The broad categories for proposed expenditures include: -Public Safety -Infrastructure Improvements -Capital Outlays -Economic Development -Debt Retirement -Recreation and Cultural Arts It is important to note that some of the proposed projects are considered mandatory expenditures* that will have to be met, with or without passage of the SPLOST. For instance, the city and county are currently and will continue to make debt payments over the next six years whether the SPLOST is passed by voters or not. The SPLOST simply offers an alternative method for meeting these obligations. While this may seem to be merely an accounting or logistical issue, it is a necessary and vitally important part of conducting a valid economic impact study since the mechanism for payment will have significant impacts on local tax payers/voters. A breakdown of the proposed projects can be found in Table 1 below. 1 Based on numerous estimates under various conservative assumptions, we consistently produced revenue estimates between $185,863,686 (flat to slightly negative growth) and $195,408,436 (2% annual growth). Furthermore, actual collection rates from a particularly bad year (2010) were used as a baseline for our estimates

5 Table 1: Proposed SPLOST Projects Project Cost ($) Mandatory* Classification Upgrade Emergency Communications 8,000,000 Public Safety (C) New Animal Control Center 3,000,000 Public Safety (C) Courthouse and Other Building Improvements 5,000,000 Public Safety (C) Police/Sheriff Cars and Equipment 5,000,000 Y Public Safety (P) Juvenile Justice Center 7,000,000 Public Safety (C) Three Fire Stations 12,000,000 Public Safety (C) Storm Drainage 14,000,000 Y Infrastructure (C) Street/Road Repair 10,000,000 Y Infrastructure (C) GMA Lease Pool Purchases 7,325,170 Y Capital Outlay (P) Other Facilities and Equipment (Public Safety) 6,000,000 Y Capital Outlay (P) Acquisition of Property (BRAC Encroachment) 6,000,000 Y Economic Development (P) Downtown Corridor Development 8,000,000 Economic Development (C) Centreplex Upgrades 5,000,000 Economic Development (C) Land Acquisition for Economic Development 5,900,000 Economic Development (C) Retire County Debt 30,674,830 Y Debt Retirement (D) Retire City Debt 14,000,000 Y Debt Retirement (D) Recreation Phase 1 (New Construction) 22,747,000 Recreation (C) Recreation Phase 1 (Renovation) 13,550,000 Recreation (C) Purchase of Land 2,000,000 Recreation (P) Purchase of Equipment 653,000 Y Recreation (P) Tubman Museum 2,500,000 Cultural Arts (C) Ft. Hawkins 750,000 Cultural Arts (C) Rose Hill Cemetery 300,000 Cultural Arts (C) Bowden Golf Course 600,000 Recreation (C) Total: $190,000,000 $93,653,000 * In order to properly assess the economic impact, it is necessary to identify expenditures that would have necessarily been funded from other sources in the event the SPLOST is not passed by voters. As is the case with all of our assumptions we attempt to make reasonable and accurate choices; however, when uncertain, we err on the side of being conservative. This prevents us from accidentally overestimating benefits and/or underestimating costs. Although there is no theoretical justification for using conservative assumptions, we feel conservative assumptions are appropriate in studies such as these. In essence, we err on the side of limiting the number of Type II errors committed by the electorate (i.e. voting yes for a proposal that the voter would otherwise not favor). III. Methodology In order to make an informed decision, it is important to properly account for all of the cost and benefits linked to that particular decision. While this may sound like a fairly - 4 -

6 simple task, when it comes to analyzing the real costs and benefits associated with a taxfunded venture, the calculus becomes complex and confusing to those unfamiliar with the techniques. Our methodology for calculating the economic impacts of the proposed SPLOST pays particular attention to the details of not only the total benefit that will accrue from the estimated $190,000,000 worth of city and county, expenditures but also to the manner in which the moneys are spent and from where they are collected. By breaking apart and carefully itemizing all of the costs and benefits, we can develop an accurate and defensible estimation of the net impact to the local economy, and ultimately, to the residents of Bibb County. It is important to note that we are only estimating the direct and indirect/induced economic benefits to the local economy, without actually estimating the total social benefit of the expenditures. For example, we will estimate the economic impact of constructing a new recreation center as the value of the building plus the additional impacts created by an appropriate multiplier effect. i.e. Any new investment generates economy activity and jobs, which produce additional economic activity and jobs in other sectors of the economy. These estimates are generated based on actual data from Bibb County and have proven to be an extremely accurate method for calculating the economic impact of activities such as those planned in the SPLOST. What we cannot capture due to the limited scope of this project is the social benefit (in dollar terms) that accrues to the residents of the community that find their standard of living has improved as a result of the investment. By excluding such benefits, we are underestimating the total benefits of the SPLOST. Without a considerably more involved study, these estimates are difficult to estimate accurately, and will therefore be excluded from the present study. The first problem in calculating the net benefits of any program is to properly estimate the costs. The costs associated with a sales tax has been well researched in the field of economics and includes an important concept referred to as tax incidence, in laymen s terms, who bears the brunt of the tax? Two important considerations arise when considering the collection of the proposed SPLOST and one has generated some degree of controversy. The basic idea of tax incidence states that any sales tax will be paid jointly by consumers and firms based on relative elasticities of supply and demand. While the mechanics of this are somewhat convoluted, the results are quite simple. For a typical sales tax increase such as the proposed SPLOST, consumers will pay approximately 65% of the tax, while firms will pay the remaining 35%. This is a well established fact and non-controversial (The state of Minnesota publishes estimates of tax incidence every other year and is the source for our estimate). Where there has been some degree of uncertainty revolves around what percentage of the proposed SPLOST will be paid by Bibb County residents versus out of county (OOC) residents. Since some portion of total sales are made by OOC residents, a corresponding portion of the tax revenue will not fall on Bibb County residents and businesses. The question is not if, but how much will be paid by OOC residents. Estimates range from 75% to 50% and have sparked a heated debate, since this will obviously impact the level of net benefits to Bibb County residents. The most accurate estimate in our opinion was generated in a traffic study performed by the Georgia Institute of Technology, which estimated that 71.4% of total sales are OOC sales. This means that Bibb County will only encounter 28.6% of the total tax. We can neither confirm nor reject the findings and - 5 -

7 in the absence of better data, we will use a slightly more conservative 70/30 split 2 as a starting point for our analysis. It is important to note that this is not the end of the discussion, but only the beginning. Recall that tax incidence will ultimately have an impact on what percentage of the tax is carried by consumers and which portion falls on firms. Our methodology accounts for this subtle, but important concept when estimating the total cost of the proposed SPLOST. A final consideration regarding the cost of the SPLOST concerns how much impact the sales tax will have on local firms. While Bibb County consumers will have their tax burden offset by OOC residents, local firms will be impacted by the entire tax. However, local firms will benefit from the fact that they typically only pay 35% of a sales tax due to the previously stated notion of tax incidence. The benefits of the proposed SPLOST are fairly well defined. Proposed expenditures fall into one of three basic categories; construction/renovation, purchases, and debt retirement. The first two generate easily calculated direct and indirect/induced benefits. Debt retirement generates obvious benefits in that the County tax payers avoid interest payments and the municipalities can maintain higher credit ratings. An added benefit is the savings that accrue to Bibb County residents as a result of paying for necessary expenditures using OOC tax receipts. It is important to note that for comparison purposes, it would be erroneous to assume that necessary expenditures would have to be funded 100% by Bibb residents if the SPLOST is not enacted. In the event that general revenues would be used to fund the necessary purchases, existing sales tax revenues would be used to some degree to pay for the items. Using our methodology, we are able to calculate the actual difference between using the SPLOST to pay for any given item and using general funds. While not all of the proposed expenditures are mandatory, a portion of the expenditures will ultimately have to be incurred whether the SPLOST is passed or not. We employ a conservative approach to establishing whether an expenditure is mandatory or not. IV. Results Costs As indicated in the Methodology Section above, the total cost of the SPLOST to Bibb County residents is complicated by the notion of tax incidence. First, we calculate the total cost to Bibb County consumers, followed by an assessment of the total cost to local businesses. Our estimates indicate the total cost to all consumers and businesses, and do not capture any variation among individual consumers and businesses. 2 Using a 70/30 split is within the margin of error of the Bibb County Export Analysis and allows for a more clear presentation of the data. There is evidence to suggest that the OOC split for the SPLOST revenue will be lower than the original estimates since gasoline sales are included in the SPLOST and draw a considerable amount of OOC sales from interstate traffic. In any event, we have elected to use a conservative estimate due to disagreement on this split

8 Using the OOC estimate, only 30% of the $190,000,000 will be initially applied to the consumer estimate. Therefore, we start with $57,000,000 on the consumption side. Recall that the tax will be shared by consumers and businesses due to tax incidence estimates of 65% to 35%, respectively. We estimate that Bibb County consumers will pay $37,050,000 over the six years of the tax. The remaining $19,950,000 of the Bibb County portion will be applied to local businesses below. OOC residents will contribute a total of $133,000,000 out of the $190,000,000 in total receipts based on the Georgia Tech study. Due to tax incidence, local businesses will be impacted by 35% of this, or $46,550,000. Additionally, local businesses will be responsible for $19,950,000 from local purchases creating a total impact of $66,500,000 on local businesses (exactly 35% of the entire tax as expected). Bibb County consumers and firms will pay a combined $103,550,000 of the tax over the six years. By these estimates, OOC residents will pay $86,450,000, which is 45.5% of the tax. In order to estimate the total economic costs of the SPLOST, which includes induced and indirect effects, an IMPLAN model was constructed based on Bibb County data. IMPLAN takes the reduction is household expenditures due to the sales tax and spreads the effect across the local economy, based on historic spending patterns. The end result is a decrease in overall economic activity of $164,231,600 over the six years. This should be viewed as the real cost of enacting the SPLOST. In other words, what would have otherwise been done with the money, had it not been applied to the SPLOST? The answer is simple; consumers would have spent the money similar to how they have historically spent money, which would have created positive induced and indirect effects. This is precisely what IMPLAN is estimating as the cost to the Bibb County economy. The final estimate simply takes the Net Present Value of the stream of payments over time. Since only 1/6 th of the SPLOST is collected each year, a simple discount rate calculation gives us a cost in Net Present Value of $138,931,505. This assumes a discount rate of 5%, which is standard practice 3 for discounting consumption activity. It is worth noting that the same discount rate will be applied to both the cost and benefit estimates. Assuming a lower (higher) discount rate will increase (decrease) the estimated costs and benefits proportionally. Although the choice of discount rate is important to the precision of the estimates, whether we use a slightly higher or lower discount rate does not substantively change our results. 3 Some studies indicate higher discount rates than 5% for future consumption expenditures (see Hartmann, 2006). For some litigation purposes, the State of Georgia requires the use of a 5% discount rate. Considering the current historically low interest rates in the US bond market, it is also reasonable to use lower discount rates in current estimates. While there is no consensus on which rate is the most appropriate, for the purposes of this report, the choice is fairly arbitrary, since the same rate will be applied to both the costs and benefits. Note, however, that using a higher rate will lower the Net Benefit in terms of NPV, although the difference will remain positive under any choice of discount rate

9 Benefits The benefits to the Bibb County economy of the proposed SPLOST fall into a number of distinct categories (construction/renovation expenditures, debt retirement, and purchases). With government expenditures, such as building a recreation center, or a new bridge, there are both direct and indirect effects that benefit the economy. While standard multipliers exist for particular types of spending projects, IMPLAN provides multipliers generated using actual data from Bibb County. This allows for much more precise estimates of how money will flow through the local economy. Based on the proposed list of projects, it is a straight forward calculation to estimate the total benefits from new construction and renovation projects. Table 2 contains the total expenditures and the corresponding multipliers. Table 2: Construction/Renovation Projects Project Amount Multiplier Total Economic Activity Construction Project totals $53,300, $86,838,972 Storm Drainage $14,000, $22,127,280 CentrePlex $5,000, $8,062,310 Cultural Arts (Tubman and Ft. Hawkins) $3,250, $5,129,209 Sports and Recreation $36,897, $63,323,960 Totals $112,447, * $185,481,731 * Weighted average of all multipliers. Purchases of various items must be analyzed separately due to relatively small multiplier effects. Direct purchases of automobiles, equipment, real estate, and other property account for $29,978,170 of the total project list. It is estimated that these purchases will generate a total of $33,832,965 worth of value to the Bibb County economy. This includes the value of the purchases along with the addition of a small multiplier effect. No multipliers were used for the real estate purchases. Debt retirement must be handled separately since it generates benefits in the form of savings. By retiring debt early, the city and county save on interest payments that would accrue over the next 10 to 20 years. By paying the debt off early, Bibb County and Macon will both save tax payer money and potentially increase their credit ratings. For the purposes of this report, we will only consider the reduction in overall debt and the interest savings as benefits from the SPLOST. Based on the interest rates and the duration of the loans, we find that Bibb County and Macon will save a total of $13,689,189 in interest payments by using a portion of the SPLOST revenue to pay for debt retirement. Furthermore, the reduction of debt by $44,674,830 is also a direct benefit to the local economy which brings the debt retirement benefit to $58,364,

10 The final benefit that will come from the SPLOST is the discount that Bibb County residents will receive on mandatory purchases by using sales tax (high OOC contribution) as opposed to regular funding mechanisms. A careful analysis of annual tax receipts reveals that the effective savings rate between using the SPLOST to pay for mandatory expenditures versus regular mechanisms amounts to 30.8%. While the calculations used to derive this estimate are complicated, the underlying logic is quite simple. There is also an OOC contribution using regular funding mechanisms, since regular sales taxes account for approximately 27% of regular revenues. The difference between the OOC contributions of the SPLOST and regular revenues 4 amounts to 30.8%. Therefore, a real savings to Bibb County tax payers can be calculated and equals $28,831,076. Table 3 summarizes the total economic benefits of the SPLOST. Table 3: Total Economic Benefits of the Proposed SPLOST (Gross) Benefit Total Benefit Construction/Renovation Projects $185,481,731 Purchases $33,832,965 Debt Retirement $58,364,019 OOC Savings $28,831,076 Grand Total: $306,509,791 As we did with the total costs above, we must discount the benefits to estimate the Net Present Value. For consistency, we will use the same 5% discount rate; however, whereas the costs are spread over six years, the final construction projects will not begin until the end of the sixth year. We must therefore discount over seven years to allow for the lag with the final projects which brings the NPV of the SPLOST benefits to $253,368,586. A final comparison of the total costs and benefits is illustrated in Table 4 below. Table 4: Comparison of Costs and Benefits of the Proposed SPLOST Gross Discounted Economic Benefits $306,509,791 $253,368,586 Economic Costs $164,231,600 $138,931,505 Net Benefit: $142,278,191 $114,437,081 4 We estimate that under normal funding conditions, there is an inflow of sales tax receipts from OOC residents of approximately 14.7% into the local economy. Therefore, the difference between funding the mandatory purchases with SPLOST revenues is the difference between paying either 85.3 cents on the dollar, or paying 54.5 cents on the dollar; a difference of 30.8%

11 In order to avoid confusion, it should be pointed out that the gross numbers are our best estimate regarding the actual dollar amount of economic costs and benefits that will be realized over the duration of the SPLOST. The discounted figures offer an alternative way to think about the proposed SPLOST. A prospective voter is making a decision today regarding a future stream of expenditures and benefits. In order to make an informed decision, the voter must not only judge the merits of the proposed policy, but the voter must also understand the real values of the costs and benefits at the time the decision is made. The discounted figures are appropriate for such a decision

12 References: Minnesota Tax Incidence Study Analysis of Minnesota s Household and Business Taxes. Minnesota Revenue Tax Research Division. March 15, City of Macon, 2012 Annual Budget. Office of the Mayor. 3. Garvey, Blair. Bibb County Export Analysis. Enterprise Innovation Institute (EI2). Georgia Institute of Technology. September 22nd, Hartmann, Wesley R Intertemporal effects of consumption and their implications for demand elasticity estimates. Quantitative Marketing and Economics 4(4) IMPLAN Economic Impact Software. Bibb County Data Package by Zipcode data. 6. Martin, Deborah R. and Iuliucci, Christy W. Bibb County, Georgia Annual Budget for the Fiscal Year Ending June 30,