March 20, 2015 Research Report The Economic Impact of Interchange Fees on Minnesota Sales Tax For Weber Johnson Public Affairs and Client
Research Team UMD Monica Haynes, Director Gina Chiodi Grensing, Editor/Writer Michelle Scott, Undergraduate Research Assistant Karen Haedtke, Executive Administrative Specialist 11 East Superior Street, Suite 210 Duluth, MN 55812 (218) 726-7895 www.d.umn.edu/lsbe/bber.php Project Contact Lance Klatt Executive Director Minnesota Service Station Association 2886 Middle Street Little Canada, MN 55117 (o) 651-487-1983 (c) 612-916-9917 lance@mnssa.com ii
Table of Contents Research Team... ii Table of Contents... iii Table of Figures... iii Table of Tables... iv Executive Summary... v I. Project Description... 1 Deliverables... 3 Study Area... 4 Definitions Used in This Report... 4 II. Impact Procedures and Input Assumptions... 5 Input/Output Analysis... 5 IMPLAN Data and Assumptions... 5 Inputs provided for modeling the impact... 6 III. Findings... 9 Sales Taxes... 9 Excise Taxes... 13 Sales and Excise Taxes... 17 Modeling Issues... 19 V. Conclusions... 19 Bibliography... 20 Appendix... 21 Interchange Fee Sales Tax Impact Results... 21 Interchange Fee Excise Tax Impact Results... 23 Interchange Fee Sales and Excise Tax Impact Results... 25 Table of Figures Figure 1: Transfer of Fees in Credit Card Transaction... 2 iii
Table of Tables Table 1. Interchange Fee Levied on Sales Tax... 2 Table 2. Sales Tax and Interchange Fee Impacts by Industry, 2012... 8 Table 3. Scenario I Impacts by Industry, Sales Tax Only... 10 Table 4. Scenario I Detailed Impacts for Five Selected Industries, Sales Tax Only... 11 Table 5. Scenario I Detailed Net Impacts for Selected Industries and Banks, Sales Tax Only... 11 Table 6. Scenario II Impacts By Industry, Sales Tax Only... 12 Table 7. Scenario II Net Impacts Selected Industries and Banks, Sales Tax Only... 12 Table 8. Scenario III Impacts by Industry, Sales Tax Only... 13 Table 9. Scenario III Net Impacts on Selected Industries and Banks, Sales Tax Only... 13 Table 10. Scenario I Impacts By Industry, Excise Taxes Only... 14 Table 11. Detailed Impacts for Five Selected Industries, Excise Taxes Only... 14 Table 12. Scenario I Detailed Net Impacts Selected Industries and Banks, Excise Taxes Only... 15 Table 13. Scenario II Impacts by Industry, Excise Taxes Only... 15 Table 14. Scenario II Detailed Net Impacts Selected Industries and Banks, Excise Taxes Only.. 15 Table 15. Scenario III Impacts by Industry, Excise Taxes Only... 16 Table 16. Scenario III Detailed Net Impacts for Selected Industries and Banks, Excise Taxes Only... 16 Table 17. Scenario I Impacts by Industry, Sales and Excise Taxes Combined... 17 Table 18. Scenario I Detailed Impacts For Five Selected Industries, Sales and Excise Taxes Combined... 17 Table 19. Scenario I Detailed Net Impacts for Selected Industries and Banks, Sales and Excise Taxes Combined... 17 Table 20. Scenario II Impacts by Industry, Sales and Excise Taxes Combined... 18 Table 21. Scenario II Detailed Net Impacts for Selected Industries and Banks, Sales and Excise Taxes Combined... 18 Table 22. Scenario III Impacts by Industry, Sales and Excise Taxes Combined... 18 Table 23. Scenario III Detailed Net Impacts for Selected Industries and Banks, Sales and Excise Taxes Combined... 18 iv
Executive Summary ABOUT THE PROJECT Merchants pay credit card processors an interchange fee, commonly known as a swipe fee, for the process of accepting credit cards as a payment option. The rate varies depending on the type of transaction, but it averages about 2% of the purchase amount. While this fee is levied for the service/product purchased, it also is levied on the taxes collected in the transaction. In recent years, some states (e.g. Kentucky and New York) have passed legislation to eliminate interchange fees on state sales tax. Weber Johnson Public Affairs on behalf of its clients requested the s Labovitz School (BBER) to assess the economic impact of the interchange fee charged on Minnesota state taxes (i.e. sales and excise taxes) on the state economy. The goal of this study is to estimate the amount that various industries are paying in interchange fees on state taxes and to model the economic impact on the state if those fees were reduced or removed from being levied on the state sales and excise tax portion of any credit card sale. The study focuses on the following industries: Grocery Stores Hospitality (including Restaurants and Hotels) Gasoline / Convenience Stores Retailers / Merchants Liquor Stores The study areas for the impact was designated as the State of Minnesota. The economic modeling data and software used was IMPLAN 3.1 1 The study used IMPLAN s economic multiplier analysis and input/output modeling. Data was IMPLAN state data for the year 2012. Results of modeling, reflecting 2015 dollars, are presented here as a written report. Three scenarios were modeled for both sales and excise taxes and for the combined tax amount. These scenarios estimate the impacts to the five industries, as well as banks and consumers as a result of removing the interchange fee from the state tax portion of any credit card sale. FIVE INDUSTRIES The first scenario showed the largest positive effects on the specific industries with a combined total output of $87.1 million annually, as shown in the table below. Output is the value of all local production required to sustain activities. Additionally, approximately 968 jobs would be created throughout the 1 IMPLAN is used by state government and federal government agencies, among others. IMPLAN Group LLC, 16740 Birkdale Commons Pkwy, Suite 212, Huntersville, NC 28078. www.implan.com v
state as a result of the increased revenue in these industries. Detailed Impacts for Five Selected Industries, Sales and Excise Taxes Combined Direct Effect 684 $18,554,899 $26,544,666 $44,589,004 Indirect Effect 121 $6,665,278 $11,750,427 $20,316,465 Induced Effect 164 $7,498,550 $12,558,327 $22,178,439 Total Effect 968 $32,718,727 $50,853,419 $87,083,908 INDUSTRY BREAKOUT While it is of great benefit to the five industries in this report that interchange fees be removed from Minnesota sales tax, the negative economic impact to local banks would be dramatic. The table below shows the extent to which each industry, including the banking industry, would impact the state s economy as a result of removing the interchange fees from sales tax transactions. If interchange fees were removed from sales tax transactions, the losses to the banking industry would, in turn, contribute to a loss of 495 jobs, a decrease in labor income of -$30.8 million, and a decline in total output of -$77.6 million throughout the state of Minnesota. Impacts by Industry, Sales and Excise Taxes Combined Liquor Stores 46 $1,535,595 $2,399,509 $3,985,530 Grocery 77 $2,559,440 $3,999,363 $6,642,853 Hospitality 185 $5,533,475 $8,493,636 $15,528,287 Gasoline/Convenience 263 $8,546,422 $13,378,789 $23,165,500 Retail/Merchants 398 $14,543,796 $22,582,124 $37,761,738 Industries Subtotal 968 $32,718,728 $50,853,421 $87,083,908 Banks -495 ($30,854,653) ($41,242,332) ($77,643,752) Total Effect 475 $2,001,697 $9,832,776 $9,841,848 FIVE INDUSTRIES and BANKING Lastly, when combining the impacts to the five specified industries as well as the banking industry, there is a net positive economic impact of $9.6 million as combined total output. In addition, it is estimated 473 new jobs would be created as a result of the change. Detailed Net Impacts Selected Industries and Banks, Sales and Excise Taxes Combined Direct Effect 494 $3,465,291 $7,400,852 $8,913,212 Indirect Effect -30 ($2,041,726) $1,474,563 ($773,123) Induced Effect 10 $440,509 $735,672 $1,300,065 Total Effect 473 $1,864,074 $9,611,088 $9,440,155 vi
The Economic Impact of Interchange Fees on Minnesota Sales Tax I. Project Description Merchants pay credit card processors an interchange fee, commonly known as a swipe fee, for the process of accepting credit cards as a payment option. According to the American Bankers Association, when a consumer purchases goods using a credit or debit card, the transaction is entered at the merchant s location (store or Internet), at which time the transaction is transmitted to the merchant s bank (acquiring bank) for verification. The acquiring bank presents the data to the card-issuing network, e.g., Visa or MasterCard, which contacts the consumer s bank that issued the card (issuing bank) to assess the consumer s account or credit line. The issuing bank informs Visa or MasterCard to satisfy or decline payment, which is relayed to the merchant bank and subsequently to the merchant. This all takes place within seconds. If the transaction is authorized, funds will be credited to the merchant s account and the consumer exits the store with his goods. The customer is required to satisfy payment pursuant to his normal billing contract, or in the case of a debit transaction, the funds are withdrawn from his account. 2 There are a variety of purported reasons for the existence of interchange fees. It is a common assumption that the fees exist to cover processing costs and associated risks (e.g., fraud, transactional costs, overhead). Additionally, interchange fees are said to exist to fund reward programs of the credit/debit cards. Still, it has been reported the fees exist for credit card networks (e.g, Visa, MasterCard) as a way to balance numerous issues between merchants and consumers in the face of the honor all cards rule. 3 There are numerous well-founded reasons to the existence of interchange fees, but no one definitive explanation for their current existence. Figure 1 on the next page illustrates an example for a cardholder making a $100 purchase. For the transaction, the merchant is charged $2.00. This amount is divided between the issuing bank, which receives $1.60, the card-issuing network, which receives $0.10, and the acquiring bank, which receives $0.30 for processing the transaction. 4 2 American Bankers Association, Interchange: How It Works, October 2010. 3 Adam J. Levitin, Priceless? The Economic Costs of Credit Card Merchant Restraints, UCLA Law Review 4 U.S. Government Accountability Office Report to Congressional Requesters, Credit and Debit Cards: Federal Entities are Taking Actions to Limit Their Interchange Fees, but Additional Revenue Collection Cost Savings May Exist, May 2008. 1
Figure 1: Transfer of Fees in Credit Card Transaction Source: Based on information collected from Levitin s 2008 study Priceless? The Economic Costs of Credit Card Merchant Restraints The interchange rate varies depending on the type of transaction, but it averages about 2% of the purchase amount. While this fee is levied for the service/product purchased, it also is levied on taxes collected in the transaction. Table 1 shows the transfer of fees in a credit card transaction and includes the Minnesota state sales tax (6.875%) to highlight how merchants are additionally impacted by interchange fees levied on state taxes. The first column, Cost of Item, shows the same values from Figure 1: the Issuing Bank receives $1.60, the Card-Issuing Network receives $0.10, the Acquiring Bank receives $0.30, and the Merchant receives $98.00. The second column, however, shows that the merchant pays an additional $0.14 to the banks and card-issuing networks as a result of the interchange fee. Table 1. Interchange Fee Levied on Sales Tax COST OF ITEM SALES TAX TOTAL (6.875%) Issuing Bank Receives $1.60 $0.11 $1.71 Card-Issuing Network (e.g. Visa) Receives $0.10 $0.01 $0.11 Acquiring Bank Receives $0.30 $0.02 $0.32 Merchant Receives $98.00 -$0.14 $97.86 TOTAL $100.00 2
In recent years, some states (e.g. Kentucky and New York) have passed legislation to eliminate interchange fees on state sales tax. Weber Johnson Public Affairs and clients has asked the University of Minnesota Duluth s Labovitz School (BBER) to assess the economic impact of the interchange fee charged on Minnesota state taxes (e.g. sales tax, excise taxes) on the state economy. The study focuses on the following industries: Gasoline and Convenience Stores Liquor Stores Grocery Stores Hospitality Retailers / Merchants The economic modeling data and software used for the analysis was IMPLAN 3.1 5 The study used IMPLAN s economic multiplier analysis and input/output modeling. Data was IMPLAN state data, for the year 2012. Results of modeling, reflecting 2015 dollars, are presented here as a written report. The research objectives of this study included the following: To estimate the amount that various industries are paying in interchange fees on state taxes To model the economic impact on the state if those fees were removed from being levied on the state tax portion of any credit card sale To draft the findings of this analysis into a report Deliverables 1. The BBER will report the direct, indirect, and induced economic impacts for the State of Minnesota resulting from the elimination of the interchange rate on the state tax portion of a credit card sale. 2. The BBER will report economic impacts for each industry and highlight which industries would be most impacted by eliminating the interchange rate. 3. The BBER will draft, publish, and provide a final digital report in Microsoft Word and Acrobat PDF formats to Weber Johnson PA and clients. 5 IMPLAN is used by state government and federal government agencies, among others. IMPLAN Group LLC, 16740 Birkdale Commons Pkwy, Suite 212, Huntersville, NC 28078. www.implan.com 3
Study Area The geographic scope for this economic impact analysis is the State of Minnesota. Source: Wikipedia Definitions Used in This Report Direct Effect: Initial new spending in the study area resulting from the project. Employment: Estimates (from U.S. Department of Commerce secondary data) are in terms of jobs, not in terms of full-time equivalent employees. Therefore, these jobs may be temporary, part-time, or short-term jobs. Excise Tax: Taxes paid when purchases are made on a specific good, such as gasoline. Excise taxes are often included in the price of the product. In Minnesota, excise taxes are levied on cigarette and tobacco products, motor fuel, and alcohol. Gross Output: The value of local production required to sustain activities. Households: Residents of the study area. Final users of nondurable goods & services. One of several institutions in IMPLAN. Indirect Effect: The additional inter-industry spending from the direct impact. 4
Induced Effect: The impact of additional household expenditures resulting from the direct and indirect impact. Interchange Fee: A fee paid between banks for the acceptance of credit card/debit card based transactions. Usually it is a fee that a merchant's bank (the "acquiring bank") pays a customer's bank (the "issuing bank"). Labor Income: All forms of employment income, including employee compensation (wages and benefits) and proprietor income. Leakages: Any payments made to imports or value added sectors that do not in turn re-spend the dollars within the region. Tax on Production and Imports: Sales and excise taxes, customs duties, property taxes, motor vehicle licenses, severance taxes, other taxes, and special assessments. It excludes most nontax payments and nets out subsidies (BEA). Value Added: A measure of the impacting industry s contribution to the local community; it includes wages, rents, interest, and profits. II. Impact Procedures and Input Assumptions Input/Output Analysis Input/Output analysis is a type of applied economic analysis that tracks the interdependence among various producing and consuming sectors of an economy 6. Specifically, it depicts inter-industry relations and shows how each industry is dependent on all the others in the economy, both as a consumer of outputs and as a supplier of inputs. Input/Output analysis has been used to study regional economies within a nation and as a tool for national and regional economic planning. It predicts the effect of changes in one industry on the others and on consumers, government, and suppliers. It is this technique that is enacted in this study. This study uses the IMPLAN Group s input/output modeling data and software (IMPLAN version 3.1). The IMPLAN database contains county, state, zip code, and federal economic statistics, which are specialized by region, not estimated from national averages. Using classic input/output analysis in combination with regional-specific Social Accounting Matrices and Multiplier Models, IMPLAN provides a highly accurate and adaptable model for its users. IMPLAN Data and Assumptions IMPLAN data files use the following federal government data sources. US Bureau of Economic Analysis Benchmark I/O Accounts of the US US Bureau of Economic Analysis Output Estimates US Bureau of Economic Analysis Regional Economic Information Systems (REIS) Program US Bureau of Labor Statistics Covered Employment and Wages (CEW) Program US Bureau of Labor Statistics Consumer Expenditure Survey US Census Bureau County Business Patterns 6 Source: Bureau of Economic Analysis 5
US Census Bureau Decennial Census and Population Surveys US Census Bureau Economic Censuses and Surveys US Department of Agriculture Census IMPLAN data files consist of the following components: employment, industry output, value added, institutional demands, national structural matrices, and inter-institutional transfers. The data used IMPLAN state data for the year 2012. All results are reported in 2015 dollars. Economic impacts are made up of direct, indirect, and induced impacts. The following are suggested assumptions for accepting the impact model: IMPLAN input/output is a production-based model, and employment numbers (from U.S. Department of Commerce secondary data) treat both full- and parttime individuals as being employed. Regional data for the impact models for Value Added, Employment, and Output are supplied by IMPLAN for this impact. Employment assumptions were provided to the model to enable construction of the impact model. From these data, Social Accounts, Production, Absorption, and Byproducts information was generated from the national level data and was incorporated into the model. All region study definitions and impact model assumptions were agreed on before work with the models began. Inputs provided for modeling the impact The BBER worked closely with Weber Johnson PA and clients (the Minnesota Service Station Association and other relevant business trade associations) in determining key assumptions in the development of the IMPLAN models. Inputs required for these models include the various interchange fees and credit/debit transactions, which vary among products and services in the study industries, as well as sales and excise tax collections by industry, statewide. Additional data was accumulated through literature searches and publicly available data on interchange fees nationwide. Data were gathered for five main categories: gasoline/convenience store, grocery, hospitality (including bars and restaurants), retailers (such as Target, Best Buy), licensed beverage locations (i.e. liquor stores). Interchange Fees: Interchange fees vary widely dependent upon numerous criteria including the transaction amount, whether the transaction occurred with a credit or debit card, and even the type of purchasing card used. For example, according to a MasterCard rate sheet for 2014-15, purchases with a personal non-rewards credit card incur an interchange fee of 1.51% + $0.10. However, the same transaction using a debit card would be 0.05% + $0.21. Similarly, if the customer used an airline rewards card for the same transaction, the rate would be 2.30% + $0.10. 7 Thus, our assumptions are based on averages and utilize data provided by the various business trade associations to assure similarly compared rates and figures. In general, we are assuming the fees to be roughly 1 to 3% of each purchase for an average rate of 2%. Credit/Debit Transactions: In order to estimate the total dollar amount collected as a result of interchange fees levied on state sales and excise taxes, it is important to estimate the percentage of sales made with a debit or credit card for each of the industries selected for this study. Two of the participating industries provided us with national averages for credit and debit card transactions for their industry (52% for gasoline/convenience and 56% for retail). For the remaining industries, we used 7 Merchant Warehouse, Understanding Interchange Rates, Shannon Andrade, July 10, 2013. 6
a conservative estimate of 60%, based on national reports 8. Sales and Excise Tax Collections: Table 2, below, shows the total sales and excise taxes collected statewide by each industry and estimates the total dollar amount collected as a result of interchange fees levied on the taxes. Industries are broken out by IMPLAN sector for more detail. These sectors were used for modeling, along with the Monetary Authorities and Depository Credit Intermediation sector (i.e. Banks) and the Household sectors. The column labeled Sales Tax Collections (2012) indicates the amount of state sales tax paid by each industry 9. The column labeled Excise Tax Collections (2012) estimates the amount of excise taxes collected by each industry. Excise Taxes are collected at the wholesale level, so they are not reported by the Minnesota Department of Revenue for each industry, as sales tax collections are. However, according to industry representatives, the taxes are passed from wholesalers to retailers and are included in the point of sale to consumers. Therefore, it was important to include them in the analysis. IMPLAN data includes a value for Taxes on Production and Imports (TOPI) by industry, which includes sales and excise taxes. However, while the total amounts paid to government are industry- and institution- specific, the detailed distribution of those payments amongst the various types of payments (e.g. sales tax, property tax, excise tax) is the same for all industries and institutions. Thus, while liquor or tobacco sales would be heavily weighted towards excise taxes, these differences are not captured in IMPLAN s tax reports. Therefore, for the purpose of this analysis, excise taxes were estimated using data from the Minnesota Department of Revenue, which reports total excise taxes collected at the state level, in combination with the 2002 Economic Census Retail Trade Subject Series, which reports the percentage of sales for various products (including alcohol, tobacco, cigarettes, and motor fuels) by type of industry. For example, the Department of Revenue reports that $371 million was collected in cigarette excise taxes in 2012, and the Economic Census reports that 43.6% of cigarette sales were accounted for by gasoline stations. Using these values we can assume that approximately $162 million in cigarette excise taxes were collected by gasoline stations during that particular year. The last two columns, labeled Interchange Fee on Sales Tax and Interchange Fee on Excise Tax, calculate the actual dollar amount collected in interchange fees on respective taxes by multiplying the tax collections by the interchange fee (2%) and the credit/debit transaction rate (52%-60% depending on the industry). 8 http://www.nytimes.com/imagepages/2010/01/04/business/20100105_visa2_graphic.html; http://www.huffingtonpost.com/2012/06/07/credit-card-payments-growth_n_1575417.html 9 Source: Minnesota Department of Revenue Sales and Use Tax, 2012 Statistics. In the case of liquor stores (Retail Food and Beverage Stores), the sales tax amount shown also includes the state Use Tax of $548,158, the additional 2.5% collected on liquor sales. 7
DESCRIPTION Table 2. Sales Tax and Interchange Fee Impacts by Industry, 2012 SALES TAX EXCISE TAX COLLECTIONS COLLECTIONS INTERCHANGE FEES ON SALES TAX INTERCHANGE FEES ON EXCISE TAX RETAIL/MERCHANTS Retail - Motor vehicle and parts dealers $150,085,268 $1,700,420 $1,682,178 $19,059 Retail - Furniture and home furnishings stores $92,959,079 $0 $1,041,899 $0 Retail - Electronics and appliance stores $110,238,064 $0 $1,235,564 $0 Retail - Building material and garden equipment and supplies stores $335,601,247 $2,550,630 $3,761,468 $28,588 Retail - Health and personal care stores $45,762,425 $14,976,610 $512,912 $167,860 Retail - Clothing and clothing accessories stores $67,927,307 $0 $761,339 $0 Retail - Sporting goods, hobby, musical instrument and book stores $90,691,979 $848,930 $1,016,489 $9,515 Retail - General merchandise stores $389,677,866 $64,920,820 $4,367,566 $727,642 Retail - Miscellaneous store retailers $118,420,806 $49,559,600 $1,327,278 $555,471 Retail - Nonstore retailers $118,353,110 $19,946,345 $1,326,519 $223,562 $1,519,717,151 $154,503,355 $17,033,211 $1,731,696 HOSPITALITY Hotels and motels, including casino hotels $121,420,390 $0 $1,458,104 $0 Other accommodations $2,576,963 $0 $28,883 $0 Full-service restaurants $299,127,073 $0 $3,352,660 $0 Limited-service restaurants $172,195,087 $0 $1,929,988 $0 All other food and drinking places $79,364,752 $0 $889,532 $0 $674,684,265 $0 $7,659,166 $0 GROCERY Retail - Food and beverage stores $142,335,471 $137,883,135 $1,709,268 $1,655,801 $142,335,471 $137,883,135 $1,709,268 $1,655,801 GASOLINE/CONVENIENCE Retail - Gasoline stores $71,324,864 $1,015,272,555 $742,318 $10,566,514 $71,324,864 $1,015,272,555 $742,318 $10,566,514 LIQUOR STORES Retail - Food and beverage stores $121,012,598 $47,110,955 $1,453,207 $565,743 $121,012,598 $47,110,955 $1,453,207 $565,743 TOTAL $2,529,074,349 $1,354,770,000 $28,597,170 $14,519,753 Source: Minnesota Department of Revenue, 2002 Economic Census 8
In total, it is estimated that $28.5 million is charged to the Minnesota retail and hospitality industries as a result of interchange fees collected on state sales tax, and $14.5 million is charged to the industries as a result of the interchange fees collected on state excise taxes. These estimates provide the inputs necessary to estimate the economic impacts of the transaction fees collected on Minnesota sales tax for the selected industries. In each scenario, we estimate that the banking industry would see a decrease in revenue equal to approximately 95% 10 of the value collected as a result of removing interchange fees on state taxes. This would equal approximately $27.1 million in lost revenue as a result of the sales tax collections, and $13.7 million on excise tax collections 11. The credit card network (typically Visa or MasterCard) receives the remaining 5%, but this industry has little to no presence in the state of Minnesota 12, so the remaining amount was considered to be a leakage. In some scenarios, we measure the impacts on households. In those scenarios, the amount credited to each household income level was based on estimates from the 2015 Minnesota Tax Incidence Study. Slight adjustments were made to align with IMPLAN household income level categories. III. Findings Impacts of removing transaction fees from state sales and excise taxes were modeled using three scenarios: Scenario I Merchants Put Savings Back into Businesses: This scenario assumes that all the savings that the five industries gain from removing the transaction fee from state sales/excise taxes are put back into their businesses by hiring additional employees, adding more inventory, or expanding production. Scenario II Half of Savings Passed on to Households 13 : In this scenario, we assume that retailers pass 50% of the savings they earn by removing transaction fees from state sales/excise taxes on to consumers and households in the form of lower prices. Scenario III All Savings Passed on to Households: Scenario III assumes that all of the savings earned by removing transaction fees from state sales/excise taxes are passed on to consumers and households through lower prices. The impacts of the three scenarios were modeled for sales taxes first, then excise taxes, then both combined. Sales Taxes These results use the direct expenditures collected by the State of Minnesota Department of Revenue as the original input for the model. Each industry was credited with additional revenue equal to the amount they are estimated to pay in interchange fees on state sales tax, using the values in Table 2 (Interchange Fee on Sales Tax column). In each scenario, banks were negatively impacted, in proportion to the amount they receive as a result of the interchange fees. 10 See Figure 1, page 2 11 IMPLAN s local purchase percentage (LPP) for the banking industry in Minnesota is 82%, meaning that an additional 18% of spending in the banking industry leaves the state, and is considered to be a leakage. 12 According to Minnesota DEED s Quarterly Census of Employment and Wages (https://apps.deed.state.mn.us/lmi/qcew/areasel.aspx), the Credit Card Issuing industry (NAICS code 522210) employed 7 individuals in 2012. 13 See definition on page 4. 9
Table 3. Scenario I Impacts by Industry, Sales Tax Only Gasoline/Convenience 17 $560,992 $878,191 $1,520,596 Liquor Stores 33 $1,105,296 $1,727,127 $2,868,719 Grocery 39 $1,300,053 $2,031,454 $3,374,200 Hospitality 185 $5,533,475 $8,493,636 $15,528,287 Retail/Merchants 355 $13,183,032 $20,491,747 $34,252,320 Industries Subtotal 629 $21,682,848 $33,622,155 $57,544,122 Households 0 $0 $0 $0 Banks -328 ($20,464,256) ($27,353,853) ($51,496,986) Total Effect 302 $1,356,214 $6,489,989 $6,448,829 Table 3 summarizes the economic impacts by industry for Scenario I, where the additional revenue from the removal of the interchange fee on sales tax is put back into Minnesota businesses. The positive impacts on the selected retail and hospitality industries (Gasoline/Convenience, Liquor, Grocery, Hospitality/Restaurants, and Retailers/Merchants) were modeled along with the negative impacts on the banking industry. In this scenario, Households were not impacted. The column labeled Employment estimates the number of jobs that would be created in each industry were the interchange fee removed from the state sales tax. The industry of Retailers and Merchants would see the largest growth in employment numbers, followed by the Hospitality / Restaurant industry, Grocery Stores, Liquor Stores, and, finally, Gasoline and Convenience Stores. Banks would experience a large negative impact, as 95% of the savings that the hospitality and retail industries see are subtracted from banks total sales. The column labeled Labor Income is an estimate of all employee compensation, including wages, benefits, and proprietor income. These results suggest that, were the interchange fee not collected on state sales tax, the five selected industries would add more than $21.7 million in employee wages and benefits to the state s economy, while the banking industry and the industries impacted by it would see a similar decline in labor income. Overall the combined effect on labor income is positive, leading to about $1.4 million in additional employee wages and benefits throughout the state. The column labeled Value Added shows the economic impacts of the expenditures put specifically towards wages, rents, interest, and profits. Value Added includes Labor Income and represents the contribution to GDP made by an individual producer, industry, or sector. If the interchange fee were removed from state sales tax, the five selected industries would contribute to an increase in total value added impact of nearly $33.6 million for the state of Minnesota, with Retailers and Merchants contributing the greatest amount and Gasoline/Convenience Stores contributing the smallest amount. Again, the decline in revenues to the banking industry has a negative impact on the Value Added total, but the combined effect is a positive one for the state s economy. The last column, Output, is the value of all local production required to sustain activities. It includes both Labor Income and Value Added. If the transaction fees currently collected on state sales tax were returned to the selected industries (approximately $28.5 million annually in 2012), it is estimated that the industries would see a combined total output impact of nearly $58 million dollars annually. The banking industry s negative effects are slightly less than the positive effects on the selected industries, so the combined effects on the state s economy are positive, contributing to an additional $6.5 million in output throughout the state. 10
Table 4. Scenario I Detailed Impacts for Five Selected Industries, Sales Tax Only Direct Effect 443 $12,384,752 $17,776,052 $29,692,463 Indirect Effect 78 $4,331,528 $7,527,825 $13,161,469 Induced Effect 109 $4,966,568 $8,318,277 $14,690,190 Total Effect 629 $21,682,848 $33,622,154 $57,544,122 Table 4 shows the detailed impacts of that additional revenue on the five selected industries. These results do not show the impacts to the banks. In this table, the direct financial impact of removing the transaction fees from state sales tax is listed in the row labeled Direct Effect. These estimates represent the positive impacts to the five industries. Indirect Effect shows the measurement of increased spending between commercial, government, and service industries as a result of the increase in revenue for the selected hospitality and retail industries. Induced Effect measures the amount of increased spending by residential households as a result of the increase in revenue. Total Effect is the sum of Direct, Indirect, and Induced Effects. Table 5. Scenario I Detailed Net Impacts for Selected Industries and Banks, Sales Tax Only Direct Effect 317 $2,376,614 $5,078,975 $6,030,601 Indirect Effect -23 ($1,443,366) $712,389 ($826,137) Induced Effect 6 $285,343 $476,937 $842,671 Total Effect 301 $1,218,591 $6,268,301 $6,047,136 Further details of the net economic impacts on the state of Minnesota are shown in Table 5. In this table, the direct financial impact of removing the transaction fees from state sales tax is listed in the row labeled Direct Effect. These results combine both the positive impacts on the selected industries as well as the corresponding decline in revenue for the banking industry. The results show that the direct effects on the economy are positive. While the banking industry does see a loss of -126 jobs as a result of the decline in revenue (see Appendix, page 21, Economic Effect of Interchange Fee Levied on Sales Tax for Banks Only), the selected retail and hospitality industries create 443 jobs as a result of their increase in revenue (see Table 4), leading to a net increase of 317 jobs throughout the state. Similarly, Labor Income, Value Added, and Output are all positive. The Indirect Effects (increased spending between industries) are mostly negative, as a result of the reduced inter-industry spending by the banks. The Induced Effects (household spending) is positive, likely as a result of the additional jobs created by the selected industries. 11
Table 6. Scenario II Impacts By Industry, Sales Tax Only Gasoline/Convenience 9 $280,496 $439,096 $760,298 Liquor Stores 17 $552,648 $863,564 $1,434,360 Grocery 19 $650,027 $1,015,727 $1,687,100 Hospitality 93 $2,766,738 $4,246,818 $7,764,144 Retail/Merchants 177 $6,591,516 $10,245,874 $17,126,160 Industries Subtotal 314 $10,841,424 $16,811,078 $28,772,061 Consumers 130 $5,963,955 $10,062,576 $17,707,615 Banks -328 ($20,464,256) ($27,353,853) ($51,496,986) Total Effect 116 ($3,658,878) ($480,200) ($5,017,311) Table 6 shows the results of Scenario II, where half of the savings gained by the selected retail and hospitality industries are passed on to households in the form of lower prices. These results are more mixed. The results show that all of the five industries create fewer jobs and contribute less to Labor Income, Value Added, and Output throughout the economy in this scenario. The impact on the banks is the same. The impact to consumers is positive, but because consumers spend a smaller portion of their savings than the selected industries, the total effect on the economy is mixed. There is still a total net increase in new jobs, but the total net effects on Labor Income, Value Added, and Output are negative. Table 7. Scenario II Net Impacts Selected Industries and Banks, Sales Tax Only Direct Effect 95 ($3,815,762) ($3,809,051) ($8,815,630) Indirect Effect -61 ($3,609,130) ($3,051,523) ($7,406,871) Induced Effect 82 $3,766,013 $6,380,374 $11,205,191 Total Effect 116 ($3,658,878) ($480,200) ($5,017,311) Table 7 shows the net economic impacts for Scenario II on the state of Minnesota. The results indicate that all of the positive benefits to the state s economy come from Induced Effects (spending by households). This is the result of the additional savings passed on to consumers in the form of lower prices at the selected retail and hospitality industries. There is still a positive direct effect on the state s employment, but the rest of the effects on the state s economy are negative. 12
Table 8. Scenario III Impacts by Industry, Sales Tax Only Gasoline/Convenience 0 $0 $0 $0 Liquor Stores 0 $0 $0 $0 Grocery 0 $0 $0 $0 Hospitality 0 $0 $0 $0 Retail/Merchants 0 $0 $0 $0 Industries Subtotal 0 $0 $0 $0 Households 260 $11,927,909 $20,125,152 $35,415,230 Banks -328 ($20,464,256) ($27,353,853) ($51,496,986) Total Effect -68 ($8,536,348) ($7,228,701) ($16,081,757) Table 9. Scenario III Net Impacts on Selected Industries and Banks, Sales Tax Only Direct Effect -126 ($10,008,138) ($12,697,077) ($23,661,862) Indirect Effect -100 ($5,774,894) ($6,815,436) ($13,987,606) Induced Effect 158 $7,246,684 $12,283,812 $21,567,711 Total Effect -68 ($8,536,348) ($7,228,701) ($16,081,757) Tables 8 and 9 show the results for Scenario III. Here, the selected industries pass on all their savings to households, so they aren t positively impacted by the change in policy. The impact on the banks is the same. Households see the greatest positive impacts, but their spending doesn t have the same ripple effect throughout the economy, and as a result, the total net effects on the state are mostly negative. Excise Taxes The second portion of this analysis examines the economic impacts of removing the credit and debit interchange fees from state excise taxes. These results use a combination of the excise tax collection totals reported by the State of Minnesota Department of Revenue along with U.S. Economic Census data 14 on the percent of sales accounted for by type of business as the original inputs for the model. The same three scenarios were modeled for this portion of the analysis. Each industry was credited with additional revenue equal to the amount they are estimated to pay in interchange fees on state excise taxes, using the values in Table 2 (Interchange Fee on Excise Tax column). In each scenario, banks were negatively impacted, in proportion to the amount they receive as a result of the interchange fees. 14 Product Lines: 2002, Kinds of Business by Broad Product Line for the United States: 2002 13
Table 10. Scenario I Impacts By Industry, Excise Taxes Only Hospitality 0 $0 $0 $0 Liquor Stores 13 $430,299 $672,382 $1,116,811 Grocery 38 $1,259,387 $1,967,909 $3,268,653 Retail/Merchants 43 $1,360,764 $2,090,377 $3,509,418 Gasoline/Convenience 246 $7,985,430 $12,500,598 $21,644,904 Industries Subtotal 339 $11,035,879 $17,231,265 $29,539,786 Consumers 0 $0 $0 $0 Banks -167 ($10,390,397) ($13,888,479) ($26,146,766) Net Effect 173 $645,483 $3,342,787 $3,393,019 Table 10 shows the total results for Scenario I by type of industry. The positive impacts on the selected retail and hospitality industries (Gasoline/Convenience, Liquor, Grocery, Hospitality/Restaurants, and Retailers/Merchants) were modeled along with the negative impacts on the banking industry. In this scenario, households were not impacted. The most striking difference between these results as compared with the results for the sales tax collections is how much more the Gasoline and Convenience industry contributes to the state s economy as a result of removing the transaction fee from excise taxes. While this industry contributes a relatively small amount in sales tax revenue, it is heavily impacted by excise taxes. Considering that over $850 million was collected in motor fuels excise taxes in 2012, and 96% of all motor fuels sales occur at gasoline stations, 15 it is not surprising that this industry would be so impacted by excise taxes. In addition to motor fuel sales, gasoline and convenience stores also sell a substantial share of cigarettes, tobacco, and alcohol, all of which are subject to excise taxes in the state of Minnesota. Overall, removing the interchange fee from state excise taxes and returning the savings to the merchants has a positive net impact on the economy of the state of Minnesota. Gasoline and Convenience Stores contribute the most to the positive impacts. The decrease in revenue to the banking industry has a negative impact to the state s economy, but the total net impact is positive. Table 11. Detailed Impacts for Five Selected Industries, Excise Taxes Only Direct Effect 241 $6,170,147 $8,768,614 $14,896,541 Indirect Effect 43 $2,333,750 $4,222,602 $7,154,996 Induced Effect 55 $2,531,982 $4,240,050 $7,488,249 Total Effect 339 $11,035,879 $17,231,265 $29,539,786 Table 11 shows the detailed impacts of that additional revenue on the five selected industries. These results do not show the impacts to the banks. In this table, the direct financial impact of removing the transaction fees from state excise taxes is listed in the row labeled Direct Effect. These estimates represent the positive impacts to the five industries. 15 2002 Economic Census Retail Trade Subject Series 14
Table 12. Scenario I Detailed Net Impacts Selected Industries and Banks, Excise Taxes Only Direct Effect 177 $1,088,677 $2,321,877 $2,882,611 Indirect Effect -8 ($598,360) $762,174 $53,014 Induced Effect 3 $155,166 $258,735 $457,394 Total Effect 173 $645,483 $3,342,787 $3,393,019 Table 12 shows the total net impacts for Scenario I. In this table, the direct financial impact of removing the transaction fees from state excise taxes is listed in the row labeled Direct Effect. The direct effect includes the positive impacts to the selected industries as well as the negative impacts to banks. The row labeled Indirect Effect shows the measurement of increased inter-industry spending as a result of the increase in revenue for the selected hospitality and retail industries (and corresponding decline in revenue for the banking industry). Induced Effect measures the amount of increased spending by residential households as a result of the net increase in revenue. Total Effect is the sum of Direct, Indirect, and Induced Effects. The results of Scenario I for the state excise taxes are very similar to the results of Scenario I for the state sales taxes. The primary difference between the two models is how the different industries are impacted and the magnitude of the results. While the Gasoline and Convenience industry is impacted more by excise taxes, most other industries are impacted less, and the overall net effect on the economy is smaller. Table 13. Scenario II Impacts by Industry, Excise Taxes Only Hospitality 0 $0 $0 $0 Liquor Stores 6 $215,150 $336,191 $558,406 Grocery 19 $629,694 $983,955 $1,634,327 Retail/Merchants 22 $680,382 $1,045,189 $1,754,709 Gasoline/Convenience 123 $3,992,715 $6,250,299 $10,822,452 Industries Subtotal 170 $5,517,940 $8,615,633 $14,769,893 Households 68 $3,122,656 $5,277,801 $9,280,734 Banks -167 ($10,390,397) ($13,888,479) ($26,146,766) Total Effect 71 ($1,749,802) $4,955 ($2,096,141) Table 14. Scenario II Detailed Net Impacts Selected Industries and Banks, Excise Taxes Only Direct Effect 56 ($1,996,397) ($2,062,430) ($4,565,659) Indirect Effect -29 ($1,765,235) ($1,349,127) ($3,524,484) Induced Effect 44 $2,011,830 $3,416,511 $5,994,003 Total Effect 71 ($1,749,802) $4,955 ($2,096,141) 15
Tables 13 and 14 show the impacts of Scenario II in which the credit and debit card interchange fees are not charged on state excise taxes and half of the resulting savings are passed on to consumers in the form of lower prices. Like the previous results (Scenario II, Sales Taxes), these have mixed results on the state s economy. The results show that all of the five industries create fewer jobs and contribute less to Labor Income, Value Added, and Output throughout the economy than in Scenario I. The impact on the banks is the same. The impact to consumers is positive, but because consumers spend a smaller portion of their savings than the selected industries, the total effect on the economy is mixed. There is a total net increase in new jobs and a small net increase in Value Added, but the total net effects on Labor Income and Output are negative. Table 15 and 16 show the impacts of Scenario III in which all of the savings as a result of removing the interchange fee from state excise taxes are passed on to consumers. The impact on the banks is the same. Households see the greatest positive impacts, but their spending doesn t have the same ripple effect throughout the economy, and as a result, the total net effects on the state are mostly negative. Table 15. Scenario III Impacts by Industry, Excise Taxes Only Hospitality 0 $0 $0 $0 Liquor Stores 0 $0 $0 $0 Grocery 0 $0 $0 $0 Retail/Merchants 0 $0 $0 $0 Gasoline/Convenience 0 $0 $0 $0 Industries Subtotal 0 $0 $0 $0 Households 136 $6,245,312 $10,555,602 $18,561,468 Banks -167 ($10,390,397) ($13,888,479) ($26,146,766) Total Effect -31 ($4,145,085) ($3,332,876) ($7,585,299) Table 16. Scenario III Detailed Net Impacts for Selected Industries and Banks, Excise Taxes Only Direct Effect -64 ($5,081,471) ($6,446,737) ($12,013,930) Indirect Effect -51 ($2,932,109) ($3,460,428) ($7,101,982) Induced Effect 84 $3,868,495 $6,574,288 $11,530,613 Total Effect -31 ($4,145,085) ($3,332,876) ($7,585,299) 16
Sales and Excise Taxes Tables 17-23 show the results of modeling for Scenarios I-III as a result of removing interchange fees from both state sales and excise taxes. Table 17. Scenario I Impacts by Industry, Sales and Excise Taxes Combined Liquor Stores 46 $1,535,595 $2,399,509 $3,985,530 Grocery 77 $2,559,440 $3,999,363 $6,642,853 Hospitality 185 $5,533,475 $8,493,636 $15,528,287 Gasoline/Convenience 263 $8,546,422 $13,378,789 $23,165,500 Retail/Merchants 398 $14,543,796 $22,582,124 $37,761,738 Industries Subtotal 968 $32,718,728 $50,853,421 $87,083,908 Households 0 $0 $0 $0 Banks -495 ($30,854,653) ($41,242,332) ($77,643,752) Total Effect 475 $2,001,697 $9,832,776 $9,841,848 Table 18. Scenario I Detailed Impacts For Five Selected Industries, Sales and Excise Taxes Combined Direct Effect 684 $18,554,899 $26,544,666 $44,589,004 Indirect Effect 121 $6,665,278 $11,750,427 $20,316,465 Induced Effect 164 $7,498,550 $12,558,327 $22,178,439 Total Effect 968 $32,718,727 $50,853,419 $87,083,908 Table 19. Scenario I Detailed Net Impacts for Selected Industries and Banks, Sales and Excise Taxes Combined Direct Effect 494 $3,465,291 $7,400,852 $8,913,212 Indirect Effect -30 ($2,041,726) $1,474,563 ($773,123) Induced Effect 10 $440,509 $735,672 $1,300,065 Total Effect 473 $1,864,074 $9,611,088 $9,440,155 17
Table 20. Scenario II Impacts by Industry, Sales and Excise Taxes Combined Liquor Stores 23 $767,798 $1,199,755 $1,992,765 Grocery 38 $1,279,720 $1,999,682 $3,321,427 Hospitality 93 $2,766,738 $4,246,818 $7,764,144 Gasoline/Convenience 131 $4,273,211 $6,689,395 $11,582,750 Retail/Merchants 199 $7,271,898 $11,291,062 $18,880,869 Industries Subtotal 484 $16,359,364 $25,426,711 $43,541,954 Consumers 198 $9,086,611 $15,340,377 $26,988,349 Banks -495 ($30,854,653) ($41,242,332) ($77,643,752) Total Effect 187 ($5,408,680) ($475,245) ($7,113,452) Table 21. Scenario II Detailed Net Impacts for Selected Industries and Banks, Sales and Excise Taxes Combined Direct Effect 152 ($5,812,159) ($5,871,481) ($13,381,289) Indirect Effect -91 ($5,374,365) ($4,400,650) ($10,931,355) Induced Effect 126 $5,777,843 $9,796,885 $17,199,194 Total Effect 187 ($5,408,680) ($475,245) ($7,113,452) Table 22. Scenario III Impacts by Industry, Sales and Excise Taxes Combined Liquor Stores 0 $0 $0 $0 Grocery 0 $0 $0 $0 Hospitality 0 $0 $0 $0 Gasoline/Convenience 0 $0 $0 $0 Retail/Merchants 0 $0 $0 $0 Industries Subtotal 0 $0 $0 $0 Consumers 396 $18,173,221 $30,680,754 $53,976,698 Banks -495 ($30,854,653) ($41,242,332) ($77,643,752) Total Effect -99 ($12,681,433) ($10,561,577) ($23,667,056) Table 23. Scenario III Detailed Net Impacts for Selected Industries and Banks, Sales and Excise Taxes Combined Direct Effect -190 ($15,089,609) ($19,143,814) ($35,675,792) Indirect Effect -151 ($8,707,003) ($10,275,864) ($21,089,588) Induced Effect 242 $11,115,179 $18,858,100 $33,098,324 Total Effect -99 ($12,681,433) ($10,561,577) ($23,667,056) 18
Modeling Issues IMPLAN modeling issues associated with small study areas like that in this report of county-level impacts, as noted in the IMPLAN User s Guide, 16 include the following: A small area can have a high level of leakage. Leakages are any payments made to imports or value added sectors which do not in turn re-spend the dollars within the region. A study area that is actually part of a larger functional economic region will likely miss important backward linkages. For example, linkages with the labor force may be missing. Workers who live and spend outside the study area may actually hold local jobs. IMPLAN study areas are typically a collection of counties. A county is the smallest standard area for IMPLAN data sets. Also, it can be expected that input/output multipliers are larger when more economic activity is incorporated into the local transactions matrix. The more imports are internalized, the larger the calculated multipliers become. At the state level all counties are incorporated, and for the state, the greatest level of internalized economic activity is attained. Theoretically, therefore, the state IMPLAN multipliers will always be greater than multipliers for any individual or subset of counties. Special considerations for interpreting these impact numbers: Regional indirect and induced effects are driven by assumptions in the model. With some models, one problem is that the assumptions can mask the true multiplier. This is especially true of the assumption of constant returns to scale: This assumption most affects induced effects and says that, for example, if I drink coffee, and my income increases, I will drink proportionally more coffee than before. The amount of weight placed on the induced effects (the percentage of the total induced effect you would want to use) can be further analyzed with an in-depth impact study, involving much more specific data collection and more detailed analysis. V. Conclusions Three scenarios were modeled for both sales and excise taxes and for the combined tax amount. These scenarios estimate the impacts to the five industries, as well as banks and households as a result of removing the interchange fee from the state tax portion of any credit card sale. Overall, removing the interchange fees from state and excise taxes is estimated to have a net positive impact on the state of Minnesota. The five selected industries (gasoline/convenience, grocery, liquor stores, hospitality, and retail) would all see large positive impacts from the change. In total, it is estimated that 968 new jobs would be created throughout the state and an additional $87.5 million in total output would enter the state s economy as a result of the increased revenue in these industries. While it is of great benefit to the five industries in this report that interchange fees be removed from Minnesota sales tax, the negative economic impact to local banks would be dramatic. If interchange fees were removed from sales tax transactions, the losses to the banking industry would, in turn, contribute to a loss of 495 jobs, a decrease in labor income of -$30.8 million, and a decline in total output of -$77.6 million throughout the state of Minnesota. When combining the impacts to the five industries as well as the banking industry, there is a net positive 19