DOR Administrative Costs/Savings Department of Revenue Analysis of H.F (Drazkowski) As Proposed to be Amended (H2716A1 & H2716A2)

Transcription

1 Fair Tax to Replace Income, Sales, and Excise Taxes March 14, 2018 DOR Administrative Costs/Savings Department of Revenue Yes X No Fund Impact F.Y F.Y F.Y F.Y (000 s) Individual Income Tax $0 $0 ($6,142,200)($13,398,800) Corporate Franchise Tax (Including AMT) $0 $0 ($330,000) ($1,119,800) Repeal Minimum Fees (Corporations & Partnerships) $0 $0 ($11,300) ($93,000) Insurance Premiums Taxes $0 $0 ($208,800) ($433,500) Sales and Use Tax $0 $0 ($2,447,200) ($6,101,100) Cigarette and Tobacco Taxes $0 $0 ($259,100) ($619,600) Alcohol Taxes $0 $0 ($39,900) ($98,300) Solid Waste Management Tax $0 $0 ($11,000) ($27,400) Monthly Tax Rebates $0 $0 * * Fair Tax $0 $0 * * General Fund $0 $0 $97,500 $247,900 Sales and Use Tax $0 $0 ($145,100) ($361,100) Fair Tax $0 $0 $145,100 $361,100 Natural Resources and Arts Funds $0 $0 $0 $0 Rental Car Tax $0 $0 ($12,300) ($30,900) Rental Car Fee $0 $0 ($600) ($1,500) Highway User Tax Distribution Fund $0 $0 ($12,900) ($32,400) Solid Waste Management Tax $0 $0 ($25,600) ($63,900) Environmental Fund $0 $0 ($25,600) ($63,900) Game and Fish Fund Sales and Use Tax $0 $0 ($5,800) ($13,900) Natural Resources Fund Sales and Use Tax $0 $0 ($5,800) ($13,900) Special Revenue Fund Cigarette Tax $0 $0 $0 ($26,200) Insurance Premiums Tax $0 $0 ($47,400) ($97,600) Health Care Access Fund $0 $0 ($47,400) ($97,600) Total All Funds $0 $0 $0 $0 *Relative size of rebates and Fair Tax revenue both depend on the revenue-neutral tax rate. Sales and excise taxes effective for sales and purchases made after January 1, Income and corporate taxes effective for tax years beginning after December 31, 2019.

2 Page 2 EXPLANATION OF THE BILL The bill creates a broad-based consumption tax called the Fair Tax. It repeals several existing taxes and sets the new consumption tax rate high enough to replace the lost revenue and (it is assumed) to pay monthly rebate checks to all families. The rebate checks would equal the tax rate times the poverty guidelines (which vary by household size). Repealed taxes include the individual income tax, corporate franchise tax, alcohol and tobacco excise taxes, insurance premiums taxes, and the solid waste management tax. The new Fair Tax also replaces the current sales and use tax. Foregone revenue totals $22.5 billion in fiscal year The Tax Base: The Fair Tax taxes almost all consumer purchases of goods and services. It includes a broad business exemption that exempts purchases of any goods or services used for business purposes. Consumer goods exempt from the current sales tax would become taxable, including groceries, clothing, and prescription drugs. Consumer services such as medical care, legal and accounting services, auto repairs, and childcare would be subject to tax, as would insurance premiums. Building materials purchased by home construction businesses would be exempt, but the full purchase price of newly constructed homes and home improvements would be taxable. Sales of existing homes (and used goods in general) would be exempt, but realtor fees would be taxable. Rent paid for an apartment or home is a form of consumption and would be taxable. Banking services such as brokerage, loan origination, and mutual fund management fees would be taxable. The Fair Tax would also tax implicit financial intermediation services on mortgage and consumer loans, measured as interest paid in excess of interest rates on federal bonds. Tuition for primary, secondary, and postsecondary education is considered investment spending and would be exempt, but room and board would be subject to tax. Motor vehicle purchases and motor fuels would be exempt from the new tax, remaining subject to the existing motor vehicle sales tax and motor fuels tax. Purchases by, and goods and services provided by, certain nonprofit organizations would be exempt, but fund-raising sales would be taxable. Government services (other than education) are considered to be consumption. Government franchises that sell their products or services are treated like businesses, with an exemption for inputs and a tax on all sales to consumers. Because most government services are not sold to customers, those government services would be taxed indirectly by taxing all inputs, including wages and salaries, though the wages and salaries of those providing educational services will be exempt. Purchases by the federal government and any state or local government purchases made with federal funds are exempt to the extent required under federal law. Sales to out-of-state customers and purchases for use out-of-state would be exempt from tax. Sales by out-of-state sellers would be taxable if they have nexus in Minnesota. Businesses without nexus that voluntarily register and remit tax will be compensated for the cost of collecting and remitting the tax.

3 Page 3 EXPLANATION OF THE BILL (cont.) Fair Tax Rate: Unlike the existing sales tax, the Fair Tax would not be shown on customer receipts. Businesses would remit a fixed percentage of total taxable sales. Although sales tax rates are usually defined as a percent of the pre-tax price (the tax-exclusive sales tax rate), the Fair Tax rate is defined as a percent of the total payment, including the tax (the tax-inclusive sales tax rate). 1 The dedicated 0.375% tax rate would be reduced to offset the revenue increase that would otherwise occur with the much broader tax base. This will maintain revenue in the Natural Resources and Arts Funds at current-law levels. Monthly Sales Tax Rebates: On or before the first day of each month, every qualified taxpayer will receive a payment equal to the tax-inclusive tax rate times 1/12 of the annual poverty guidelines issued by the U.S. Department of Health and Human Services. The guideline is adjusted upward somewhat for married couples to eliminate any marriage penalty. The monthly payment varies with household size and marital status, but it does not vary with income. Advisory Task Force: The bill establishes a Fair Tax Advisory Task Force to provide advice to the Commissioner of Revenue, who must submit legislation to the legislature by February 1, 2019 to implement the provisions of the bill. This includes setting the revenue neutral tax rate, determining a method for distributing the monthly sales tax rebates, creating a vendor allowance provision to compensate all sellers for the costs of collection, and adjusting local sales tax rates and durations for the very large increase in the tax base. The legislation will specify dedication percentages to hold all special funds harmless. REVENUE ANALYSIS DETAIL Repealed Taxes Based on the House Income Tax Simulation (HITS 6.6) Model, repeal will reduce individual income tax revenues in the February 2018 forecast by 48 percent in fiscal year 2020 and 100 percent in fiscal year The revenue loss from repeal of the corporate tax was estimated based on the February 2018 forecast and information about the share of forecast receipts that come from delayed returns and audits. The estimates include the impact of repealing the minimum fees on C-corporations, S-corporations, and partnerships. The revenue loss from repeal of insurance premiums taxes is based on the February 2018 forecast and the assumption that fiscal year 2020 will include a half year impact. The revenue loss from replacing the current-law sales tax and repealing the excise taxes is based on the February 2018 forecast and the assumption that fiscal year 2020 will include only five months of impact. The transfer of $26.2 million in cigarette tax revenue in fiscal year 2020 is assumed to have occurred prior to January 1, 2019, so the impact on that fund is delayed until fiscal year For example, if the pre-tax price is $100 and the tax is $25, this would be a 25% tax-exclusive rate ($25/$100) or a 20% tax-inclusive rate ($25/$125). The Fair Tax rate in this case would be defined as 20%.

4 Page 4 REVENUE ANALYSIS DETAIL (cont.) Repealed Taxes (cont.) The proposal would have an unknown impact on the dedication of sales tax revenue to several other funds. For example: o Current law dedicates the 6.5 percent sales tax on short-term vehicle rentals to the Highway User Tax Distribution Fund. The statutory section cited to define rental vehicles is repealed. If the dedication still applies to the Fair Tax, it would increase due to the higher tax rate, but fall because business rentals would be exempt. The current law amount is forecast at $21.9 million in fiscal year o Current law dedicates the 6.5 percent sales tax on long-term vehicle leases to four different transportation funds. The statutory section cited to define leased vehicles is repealed. If the dedication still applies to the Fair Tax, it would rise due to the higher tax rate, but fall because business rentals would be exempt. The current law total is forecast at $100.3 million in fiscal year o Current law dedicates half of the 6.5 percent sales tax on fireworks to two special revenue funds. The dedicated amounts would rise with a higher tax rate. The current law total is forecast to be less than $1 million in fiscal year Monthly Tax Rebates The dollars to which the rebate rate would be applied are estimated from the Tax Incidence Study database. The poverty guideline (adjusted to remove the marriage penalty) is calculated for each household in the 2019 database and summed for the population. That total is assumed to grow with population (1% per year) and with inflation (because the poverty guidelines are indexed for inflation). In fiscal year 2021, the sum of the adjusted poverty guideline amounts for all 2.82 million eligible filing units is $58.3 billion. The rebate cost would equal $58.3 billion times the tax-inclusive rate. Fair Tax Base and Tax Rate The breadth of the tax base has been estimated in several studies. Their results are adjusted to remove purchases and sales by the federal government, motor vehicles, and motor fuels from the base. The remaining tax base including the tax on state and local government services is estimated in those studies at between 94% and 100% of total consumer expenditures. In contrast, the current general sales tax base (including currently taxable purchases by business) is only roughly 32.3% as large as total consumer expenditures, so the proposed tax base is between 2.76 and 2.94 times as large as the existing sales tax base. The revenue lost from the repealed taxes in the fiscal year biennium is roughly 3.55 times the revenue that would have been raised from the current sales tax at a 6.875% tax rate. To raise 3.55 times the revenue on a base that is 2.76 or 2.94 times as large, the (tax-exclusive) tax rate would need to rise from 6.875% to between 8.30% and 8.83%. It is assumed that the Fair Tax revenue is also intended to cover the cost of the monthly sales tax rebates. If the tax rate is set high enough to be revenue neutral for the biennium, then the (tax-exclusive) tax rate would be between 10.4% and 11.3%.

5 Page 5 REVENUE ANALYSIS DETAIL (cont.) Fair Tax Base and Tax Rate (cont.) The analysis, to this point, assumes a compliance rate of 100% for the new tax. Given the high tax rate and challenges of enforcement, lower compliance rates are likely. If compliance is at 85% rather than 100%, the necessary (tax-exclusive) tax rate would rise to between 12.3% and 13.2%. The tax rate for the Fair Tax is defined as tax divided by the total price (including the tax) rather than tax divided by the pre-tax price (as is familiar from the existing sales tax). The tax rates stated in the previous bullets are all tax exclusive rates (similar to the current sales tax rates). The tax inclusive rate (assuming 85% compliance) would be lower, at between 11.1% and 11.9%. The table assumes that rates will be revenue-neutral each year which will require a higher rate in the first year. The analysis does not include the cost of vendor allowances for those remitting the tax. Covering those costs would increase the revenue-neutral tax rate. Although the proposal will be revenue neutral, it is not budget neutral. The indirect tax on government services (in the form of a tax on most wages and salaries as well as purchased inputs) will raise costs for both state and local governments. hf2716(sf2428)_1 / trc, paw Source: Minnesota Department of Revenue Tax Research Division Revenue-Analyses.aspx