State and Local Government Finance
State and Local Government Finance PPA 735
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MEMORANDUTVI TO PROFESSOR YINGER FROM M SALMAN RAVALA SUBJECT FLORIDA LOTTERY EXPANSION PROPOSAL DATE MAY 5 2008572008 I recommend that you support Governor Charlie Crist s proposal to expand the Florida Lottery The proposal is sound because 1 the product lifecycle theory calls for an introduction of new more innovative Florida lottery products 2 the proposed expansion will lead to an increase in the Educational Enhancement Trust Fund hereinafter EETF 3 a larger lottery program will support small business development and enhance job creation and 4 Florida demographics present a special case where expansion increases consumer utility outweighing social costs I A BACKGROUND THE PEOPLE S LOTTERY Creation In 1986 the citizens of Florida authorized a lottery through a constitutional amendment enacted by a twotoone margin which would use its proceeds to enhance public education in the state Tickets to the Florida Lottery went on sale in January 1988 and the lottery was expected to become a billiondollar business in its initial year of operation1 During the 20052006 scal year alone more than 1 billion was transferred by the Florida Lottery to the EETF Overall more than 17 billion dollars have been transferred to the fund via lottery revenues since inception2 Today both citizens of Florida and tourists continue to show their support for the Florida Lottery by purchasing in excess of 4 billion of its products per year3 Operation The Florida Lottery is headquartered in Tallahassee It has nine district offices and approximately 450 employees4 The Florida Lottery sells a variety of online and scratchoff instant win games through a network of over 13000 retailers including gas stations convenience stores and grocery stores5 Florida Lottery games include the Florida Lotto Fantasy 5 Mega Money Play 4 Cash 3 and approximately 50 Scratch Offs Florida is the only US state that does not participate in any multistate games such as Powerball or Mega Millions Revenue Generation Article X Section 15 of the Florida Constitution requires net proceeds derived from the lotteries to be deposited to a state trust fund to be designated The State Education Lotteries Trust Fund 6 However it must be remembered that revenue received from the sale of lotteries should first be used to pay 1 lottery winners and 2 administrative FLORIDA LOTTERY EXPANSION z costs associated with running lottery Only what is left over is transferred to the EETF In Florida transfer to the education fund has been in excess of 17 billion dollars to date Issue at Hand Florida Governor Charlie Crist has proposed expanding the Florida lottery to counterattack the poor economy and generate additional revenues Specifically the Governor has proposed to expand the Cash 3 and Play 4 games and add more locations and new instant vending machines7 The issue is not whether lotteries are good or bad However by the very nature of the topic issues such as social costs and benefits will be discussed albeit brie y In addition the issue is also not whether the Florida Lottery should be privatized or be operated by a public corporation The issue is simply whether the Florida Lottery should be expanded or operated at its current contained level There are various arguments both opposing and favoring expansion of lotteries Opponents of the expansion generally argue that l lotteries prey on minorities and poor and 2 spending on lotteries leads to a displacement of consumption and saving Proponents of the expansion generally argue that 1 expansion of lotteries lead to higher revenues given that other revenue sources are experiencing a downturn in the face of a poor economy 2 people from all demographics instead of just the poor play the lotterys 3 expanded lotteries fulfill people s demands by introducing new products 4 lotteries serve as an alternative to gambling products and 5 lotteries are voluntary purchases of entertainment goods9 Relevant arguments are discussed in detail below THE FLORIDA LOTTERY MUST BE EXPANDED The Product Life Cycle The Florida Lottery has had no significant expansion of its products in the last twenty years In addition Florida Lottery is one of the very few lotteries in the country that does not hold midday drawings As stated above Florida Lottery is also the only lottery in the nation that does not participate in multistate games The lottery just like any other business or product seeks to grow future cash ows and after a significant time on the market without innovation needs certain product enhancements Governor Crist s expansion proposal addresses the need of development by adding one and two dollars to the Cash 3 and Play 4 games and by holding midday drawings something that is attractive to both citizens and tourists of Florida The product lifecycle argument strictly discusses the management and business side of the issue It only address the fact that innovation can lead to increases in sales and an expansion of the Florida Lottery by either introducing new products or enhancing old FLORIDA LOTTERY EXPANSION ones can prove to be a good business decision for the Florida Lottery This argument ignores both social costs and bene ts Figure 1 shows atypical product lifecycle Although it is dif cult to tell where lottery sales would have been if changes were not made Figure 2 shows that the phasedout expansion led to an increase ofweekly sales from 13477393 in March 2007 to 18461570 in March 2008 EE TF Citizens of Florida took the initiative and voted for the Florida Lottery in 1986 As Florida marks its lottery s 20Lh anniversary one must not forget to realize that the program has contributed signi cantly over the years to education The Florida Lottery supplies for 5 of the state s total education budget and as Figure 3 shows contributions from the lottery go towards K12 programs bonds for school construction amp maintenance state universities and the Bright Futures Scholarship An expanded lottery will contribute more to the EETF The Evans amp Zhang study nds that a dollar increase in earmarked revenues contributes an additional 60 7 80 cents in K 12 education expenditure In addition the Novarro study nds that earmarking of lottery revenue to education does in fact lead to a substantial increase in spending on education Figure 4 shows that the expansion of the Florida Lottery led to an increased transfer of money to the EETF from 944970424 in March 2007 to 959384363 in March 2008 Some scholars argue that contributions from the Florida lottery only account for a meager 5 of the statewide education budget In addition they argue that the above numbers are not net increases and they are substitutes for other forms of education funding Lastly they argue that the additional money spent on the expanded lottery could have been spent elsewhere if the lottery was not expanded Although some of the arguments are wellstated they are not plausible in the case of Florida Although the Florida Lottery contributes only 5 it is 5 of a typically large billons of dollars education budget that the Florida Department of Education eagerly desires every year In addition if it was not for the lottery transfers to the EETF Florida would neither have the Florida Bright Futures Scholarship a scholarship meant to encourage recipients to stay in Florida colleges and universities and seek jobs in Florida nor anything equivalent to the Lottery Revenue Bond Program for building and renovating schools in Florida Lastly although money spent on lotteries could be spent elsewhere it should be recognized that the money could have been spent outside the state With the expansion even if money is displaced towards lotteries at least the money goes to the Florida Lottery eventually ending up with Florida schools Economic Development and Job Creation The Lottery also supports Florida s economy by doing over 29 million worth of business with Floridabased vendors11 For example recent payatpump technology at gas stations has decreased the number of customers actually going inside the gas station FLORIDA LOTTERY EXPANSION 4 store to buy additional products Research has shown that Florida Lottery products are among the few items that will bring a customer into a store even if they use the patat pump technology 12 The Florida Lottery s retailerpopulation ratio is 1 1300 whereas the nationwide average retailerpopulation ratio for lotteries is 11200 This indicates that an additional 1000 retailers of the Florida Lottery can be added thereby increasing jobs and giving boost to the economy generally Some opponents argue that money spent on lotteries would have been spent somewhere else However even if lottery spending is a shift in discretionary spending portion of it could be a shift away from buying goods and services outside the state In addition it must be recognized that the Florida demographics are different than any other state Florida has 1000 new residents every day and 5 7 10 of the Florida Lottery business comes from visitors tourists and seasonal residents Evidence shows that tourists purchase products that Governor Crist s proposal creates To the extent that Florida can capture visitor and tourist discretionary spending that helps Florida Consumer Welfare anal Social Costs Part of the expansion proposal expands instant games which studies show are regressive 7 and addictive in nature In addition the Bureau of Labor Statistics CEX data shows that there is an average decline of 46 per month in household nongambling expenditures Many people attain entertainment value from playing the lottery However some scholars argue that lotteries and gambling also generate social costs in the form of addiction There appears to be a broad consensus in the same scholarship circle that the benefits of lottery outweigh their costs Expansion should therefore help increase consumer surplus ceteris paribus In addition the 2004 study by Oster as pointed out in Melissa Keamey s 2005 paper titled Economic Winners anal Losers of Legalized Gambling shows that for rational and informed consumers who derive entertainment value from lotteries consumer utility actually increases The same study also shows that consumers on average appear to be making sound and informed decisions 13 Although some of the above arguments opposing Govemor s Crist s proposal may be true they are weak For example even where there are social costs associated with an expanded lottery the benefits in the form of consumer surplus outweigh the harm In addition some of the benefits are translated into jobs and a boost to the economy In addition given the current state of the economy and the weak budget of the state an expansion is one of the most reliable solutions to the problem FLORIDA LOTTERY EXPAINISION 5 III CONCLUSION Lotteries are here to stay 14 This is true for many reasons but especially true in the case of Florida which has many seasonal residents and tourists States like Florida cannot remove lotteries because if they remove them lottery revenues will be lost to neighboring states Florida also has a large number of Seminole grounds with casinos and therefore a high rate of gambling As a clarification the issue is not whether to continue state lotteries and gambling but whether to expand the lottery It has already been established that lotteries in Florida are here to stay Expansion of the lottery is necessary as long as it is done in an effective manner containing social costs as proposed by Governor Crist What truly is another viable option Removing it completely FIGURE 1 7 The Product LifeCycle FIGURE 2 7 Expansion Increases Sales by 3698 Product Sales Introduction Grcwlern Maturin Decline Sales FIGURE 3 7 Contributions to Education FIGURE 4 7 Expansion Increases Transfer to cummunwcuuem EETF by 153 5115490500100 Sula Humquotnuns us1n1uom7 Omersuu smaem Schnu Financial Aid Canaan 144705400 Bonds 7 25319551 9 Bright Fumns x Schalnrshlps 534654250630 Funlm scuuuls g suasomunuan w mummy WM apiiuilmmwema EETF Wan FLORIDA LOTTERY EXPANSION c 1 Florida Lottery Set Jan 15 The New York Times June 5 1987 available at httpquer nvtime 1 html lre RDP DR1 53CF936A35755COA961948260 last visited Mar 25 2008 2 Betlott International Lottery Syndicate available at htgpWwwbetlottcoukFloridaStateLotteg htm last visited Mar 25 2008 3 Florida Lottery Our History available at httpWWW flalotterv 39 39 Maindo last visited Mar 26 2008 4 Department of Lottery available at httpWWWoppagastateflusprofi1es2090 last visited Mar 26 2008 5 Department of Lottery available at httpWwwoppagastatefiusprofi1es2090 last visited Mar 26 2008 6 Art X Sec 15 Florida Constitution 7 Central Florida News 13 Crist Considers Expanding Lottery to Boost Economy available at httDZWWW fm W 13 M quot cal 0 17crist considers expanding lottery to boost emnnmv html last visited Mar 25 2008 8 Kearney Melissa State Lotteries and Consumer Behavior Journal of Public Economics December 2003 p 7 9 Kearney Melissa State Lotteries and Consumer Behavior Journal of Public Economics December 2003 p 33 10 See generally The Florida Lottery Long Range Program Plan FY 20082009 through 20122013 available at httpwuu 1 39 1 1 39 1 1 1 nrlflast visited Mar 25 2008 Lottery funds contribute to K12 programs bonds for school and 39 te quothi er Me and community colleges including workforce education programs the Bright Futures Scholarship Program and other state student financial ai 11 See generally The Florida Lottery Long Range Program Plan FY 20082009 through 20122013 available 1 1 1 1 at httpwwwflaridalatte 39 pdf last visited Mar 25 2008 12 See generally The Florida Lottery Long Range Program Plan FY 20082009 through 20122013 available at httpwwwflaridalatte 39 1 1 1 pdf last visited Mar 25 2008 Lottery funds contribute to K12 programs bonds for school 39 and 39 state quothi er Me and community colleges including workforce education programs the Bright Futures Scholarship Program and other state student financial aid 13 Kearney Melissa Economic Winners and Losers of Legalized Gambling Brookings Institution February 2005 p 19 14 John M Yinger Lecture 10 Government Monopoly State amp Local Public Finance Spring 2008 available at 1 mmm all 1 39 39 la 9 PPA 3 MainPagePPA735 08htm last visited Mar 26 2008 PPA 735 STATE AND LOCAL GOVERNMENT FINANCE TO PROFESSOR YINGER FROM KEVIN JOHNSON SUBJECT GAMBLING PROPOSALS IN KENTUCKY DATE 582006 The Kentucky General Assembly is considering a constitutional amendment to permit casino gambling at horse racing tracks Legislators cite the expansion of gambling in neighboring states and the need for additional government revenue as primary reasons for their support of the measure While legislative estimates are likely too optimistic introducing casino gaming into the commonwealth can increase both taX revenue and racetrack income This effect will be small however especially compared to the proposal s social and economic costs On balance casinos will not produce a windfall for the state and should be avoided for their negative consequences BACKGROUND Once exceptional for its legalized betting on horse races Kentucky now nds itself a holdout among several adjacent states where casinos have recently opened Residents currently have two gambling options the state lottery and parimutuel wagering on horse racing Of course many Kentuckians travel the short distance to casinos in neighboring jurisdictions Table 1 describes the presence of lotteries and casinos in the region Resistance to casinos in Kentucky has often come from those who oppose gambling on moral grounds By placing the casinos at racetracks state officials have reduced opposition from the horse industry which fears competition The legislature estimates that casinos would generate 825 million in fiscal year 2009 The proposed taX rate on gaming revenue is 35 percent so the government would collect 289 Johnson 2 million Yaeger and Boardman Local governments would receive 225 percent of this gure or about 65 million in 2009 The state currently spends around 9 billion annually the increased gaming revenue represents roughly three percent of this total The official estimates do not include other effects on revenue which may follow the introduction of casinos ANALYSIS The economic consequences of casino gambling will likely be mixed Research indicates that other taX sources may be displaced as consumers shift spending to the new gaming opportunities Sales taX revenues particularly will be affected As individuals substitute additional gambling for other products sales taX income on those goods will be lost Landers The magnitude of this loss depends in part on the size of the casino levy All things equal a larger taX on casino wagering will reduce the displacement of sales taxes by making the price of the new games higher Legislators are particularly sensitive to effects casinos may have on the racing industry As a result the proposed casino taX is higher than the rate on parimutuel bets Lottery revenue is also likely to fall if the proposed amendment becomes law Research using data from several states shows that with a 20 percent taX on casinos each new dollar of taX revenue from casinos leads to a 138 loss in lottery revenue Elliott and Navin Assuming Kentucky places a 35 percent taX on casinos the state would receive 175 from every 5 spent on gaming and lose 138 in lottery income The total effect is thus a small net gain Holding other factors constant the annual increase in state revenue would be much smaller than three percent Since lottery receipts are earmarked for education the introduction of casinos may negatively impact the state s school funds To rectify this the legislature will have to adjust the manner in Johnson 3 which taxes are allocated to specific parts of the budget A portion of casino levies might be distributed to education for instance Altemately the legislature could opt to eliminate speci c allocations for gaming taxes and simply fund schools out of the larger pot of state money Current gambling restrictions reduce consumer surplus by prohibiting a form of entertainment many wish to purchase Allowing casinos will increase the choices available to individuals increasing the satisfaction of those who choose to patronize gaming establishmentsiat least in terms of their ability to purchase services they desire this says nothing about their satisfaction with the results of their wagering For residents who presently visit outofstate venues to gamble local casinos will reduce the travel costs of obtaining desired services Casinos present a number of problems that are less acute in other revenue sources Included in these is the instability of gambling taxes across the business cycle Studies also indicate that gaming taxes are highly regressive in many cases Lowincome gamblers pay a larger share of their income in such taxes on average than highincome individuals The state may hope to export some problems to visitors from other states but inevitably casinos will be patronized by many instate customers See Figure l for proposed casino locations A 2002 report commissioned by the General Assembly states that 95 percent of customers at riverboat facilities in Indiana and Illinois travel less than 120 miles to the casinos Wolfe The proposed race track casinos in Kentucky will not draw tourists in the same way as large resorts in Las Vegas The introduction of gaming parlors would affect other businesses as patrons shift spending to the new outlet The authors of the 2002 report for the General Assembly conclude that the economic effect is primarily to transfer local spending from other local businesses to the casinos Wolfe Although the state and race tracks stand to gain retail and entertainment venues in the Johnson 4 surrounding areas will likely experience reduced sales Retailers selling lottery tickets will probably earn less as customers purchase fewer tickets On its own casino gambling would certainly detract from parimutuel wagering The same substitution effect that threatens the state lottery and local businesses also applies to horse racing Thalheimer The horse industry is ingrained into the economic and social fabric of the commonwealth making free standing casinos very unlikely By proposing gaming facilities at race courses lawmakers have actually turned track owners into proponents of the program Both sides now see casinos as a sort of economic development initiative for the industry RECOMMENDATIONS If the legislature approves the constitutional amendment permitting casinos the issue will be placed on the next statewide ballot This will place the final decision directly in the public s hands In recent years Kentuckians have vocally opposed new taxes on products such as gasoline and motor vehicles At the same time education and public health have required additional funding By allowing a referendum on casinos the legislature will force the issue of how to finance government onto voters The public will not be well served by the casino proposal however especially if voters hear only the most optimistic assessments of the plan If lawmakers wish to increase revenue without hurting the racing industry they have other options I recommend an expansion of the taxes on tobacco and gasoline categories in which the state s levies are still below national averages Casino revenues are not free in the sense that they affect other businesses and create social costs like gambling addiction The downside of casino gambling should be considered along with the advantages Johnson 5 The horse industry is important to many in Kentucky and officials also have other options for supporting its growth I A tax 39 to rquot 39 this goal By lowering the levy on wagers called the takeout rate the state could foster racing without adding casinos Tracks could increase purses for horse owners and payouts for bettors making the races a more attractive proposition for both groups Casinos offer a mixed bag of revenue and problems for the state not a panacea The new form of gaming will not exist in a vacuum Instead retail and lottery sales will suffer and new social ills will arise As lawmakers and citizens consider the proposed amendment they should keep these facts in mind before rushing to embrace expanded gambling Johnson 6 TABLE 1 Avalabxhty uf Legeuzea cembhng by State State Lung Casmus gas uf zuuzg mama Yes 9 Illmms Yes 9 Kantucky Yes Missuun Yes m Ohm Yes Tennessee Yes ergm 2 Yes n WesL wng Yes 4 Sal12 Kearney quotThe grammx wxmer amzaseys aflegalxzed gamblmg H FIGURE 1 Lucanun efpmpesea casmus ow fr g39t39ica 39 39 awma lint st Six12 Yaeger and Bumdmm Local Wudate meat Impact Emmatefm HB 501 Johnson 7 References Elliott Donald S and John C Navin 2002 Has riverboat gambling reduced state lottery revenue Public Finance Review 303 235 Kearney Melissa Schettini 2005 The economic winners and losers of legalized gambling National Tax Journal 582 281 Landers James R 2005 The effect of casino gambling on sales taX revenues in states legalizing casinos in the 1990s State Tax Notes 38 1073 Madhusudhan Ranjana G 1996 Betting on casino revenues lessons from state experiences National Tax Journal 493 401 Thalheimer Richard 1998 Parimutuel wagering and video gaming a racetrack portfolio AppliedEconomics 304 531 Wolfe Charles Study Outofstate casinos luring Kentucky money away Cincinnati Enquirer January 17 2002 Yaeger Mary and Barry Boardman 2005 Local Mandate Fiscal Impact Estimate for HB 601 Kentucky Legislative Research Commission ltwwwlrckygovrecord06RSHB601LMdocgt From Catherine Nolan To Professor Yinger RE Commuter Taxes in New York City Spring 2008 It is widely accepted that large cities like New York City are the economic engines of the regions in which they are located Bene ciaries of the metropolitan area are far greater in number than the individuals who simply reside within the city limits An updated version of the New York City commuter tax should be implemented to better account for the costs of this bene t First I will explain the current scal condition of New York City and how although commuters provide some scal bene ts to the city these are insuf cient Then I will address how multiple commonlyapplied economics principles support the commuter tax 7 these include the horizontal and vertical equity principles and the bene ts principle Over time wealthy city dwellers have relocated to the suburbs leaving inner cities nancially stressed and unstable Haughwout explains Today s city populations are signi cantly less able to provide revenue for long run infrastructure investments than populations of the past and suburban populations 1997 The New York City tristate commuter area has a population estimated at approximately 22 million Many of these suburbanites continue to work in New York City and demand the city s goods and services Over the past several years a greater proportion of earned income in New York City has been earned by commuters individuals who reside outside of the city limits Scholars estimate The share of New York City earned income going to commuters has been increasing over time going from 34 percent in 1990 to 37 percent in 1996 and that at least onequarter 25 percent of privatesector jobs were held by commuters in 1996 Chemick amp Tkacheva 2002 Commuters create an increased demand for public services including police re transit and waste disposal among others Public services are paid for mainly through property tax levies The effect of this increased demand then is even higher taxes for city residents While businesses and commuters contribute to the economy through increasing the real property tax base and the sales tax base these contributions are not suf cient For example If a commuter earns a salary of 80000 and he spends as much as one quarter of his after tax income assuming a 35 income tax bracket of approximately 52000 in the city he is contributing only 1040 in tax dollars assuming an 8 sales tax to supporting provision of the public goods he demands Meanwhile Chemick and Tkacheva estimate the additional New York City expenditures associated with the jobs held by nonresidents are equal to between 22 and 38 percent of total spending by the city of New York or 12 billion to 19 billion in 1997 in 2000 dollars Police expenditures and re expenditures are about 185 million higher due to the jobs held by commuters Chernick amp Tkacheva 2002 Clearly the commuter does not contribute enough to the local economy and the current situation violates the principle of horizontal equity Horizontal equity theory holds that individuals with the same ability to pay should pay the amount meaning that individuals with the same salary should experience the same tax burden One scholar Inman reports that in the city of Philadelphia the individual tax burden is 144 compared to 95 for the suburbanite Inman 2003 I suspect that the ratios are similar for individuals in the New York City area if not even more disparate This situation is inequitable and would be made more equitable through a commuter tax which would increase the commuters tax burden Similarly the commuter situation violates the principle of vertical equity which holds that individuals with more ability to pay should pay more meaning those with greater incomes should pay more taxes This would represent a progressive tax or at least a proportional tax Instead the taxes are highly regressive Generally suburbanites have higher incomes and pay less taxes than city dwellers In the New York City case commuters enter the city from some of the wealthiest counties in the United States see map pg 4 including Fairfield CT rank 5 Somerset NJ 7 Morris NJ 10 and Westchester NY 12 A commuter tax would improve the vertical equity of the tax structure As an aside city infrastructure investments have been found to spillover from central cities to their surrounding area increasing the value of homes in suburbs at the cost of the city dweller A commuter tax would internalize this extemality and force suburbanites to share in the cost of city infrastructure expansion As I have explained commuters benefit from the public goods and services provided by the city while maintaining a low tax burden Finally the benefits principle holds that individuals who benefit from a public good or service should pay more of the taxes associated with that good or service Therefore the commuters should pay Again scholars report The additional New York City expenditures associated with the jobs held by nonresidents are equal to between 22 and 38 percent of total spending by the city of New York Chernick amp Tkacheva 2002 The commuters should be held responsible for paying their fair share of the tax burden and that share is as explained by Chernick and Tkacheva 24 percent of the total spending A commuter tax would help to correct for the inequities in the current system in place in New York Cities and cities alike The commuter tax should be reinstated as a payroll tax at a percentage rate that would cover their fair share of public services States of Amenca Source kajpedAa Works Cited Cherknick Author s rst name initialH amp Tkacheva O 2002 The Commuter Tax and the Fiscal Cost of Commuters to New York City State Tax Notes 25 Haughwout A l997Central city infrastructure investment and suburban house values Regional Science and Urban Economics 27 199214 Inman RP 2003Should Philadelphia s suburbs help their central city Business Review Q2 2436 New York metropolitan area 2008 In Wikipedia ECN635 Lan MEMORANDUM To George Valverde Director of the Department of Motor Vehicles DMV California From MinFang Rae Lan Subject Fix Califomia s Fuel Tax Crisis with a Percentage Tax Date 26 Mar 2007 Summary To raise sufficient tax to maintain transportation facilities and to give correct incentive to solve energy and environmental problems I recommend that the Department of Motor Vehicles adopts a percentage fuel tax instead of a pergallon fuel tax INTRODUCTION Fuel excise tax is a common tax across the US collected by both federal and state governments for highway construction and maintenance Currently the state motor fuel tax rate is 18 cents per gallon for any kind of fuels in California while the median state s rate is 21 cents per gallon The fuel tax revenue per capita in California is ranked the 46Lh in the US which is far lower than the average Appendix Fig1 and T able 1 In addition the amount of fuel tax paid is decided by how many gallons of gasoline purchased fuelefficientcar owners travel the same distance but pay less As more Californians switch to hybrid cars the state government is losing fuel tax revenue to support its transportation facilities Obviously this issue has been of concern to the DMV since November 2004 and an alternative way to collect enough tax revenue which have been most discussed is the permile transportation tax also called a mileage taxl In the fall of 2005 Oregon State has started the permile transportation tax experiment on 20 private owned cars Each of these cars is equipped with an electronic odometer and Global Positioning Systems GPS With electronic devices gas pumps can read the odometer and computers can calculate the tax should be paid Meanwhile the GPS can trace the mileage traveled outside Oregon outsidestate mileage will be subtracted from the total Oregon planned to expand this experiment to 280 drivers in 2006 Moreover UK and Dutch government have launched similar research preparing to charge drivers kilometerbased fees So the technology to charge a mileage fee is already there but this is not the only choice In fact many states are losing fuel tax revenue as well Some of them are considering a oat fuel tax rate system to collect a fix amount of tax some of them are thinking charging drivers a percentage rate on each dollar they spend on oil a percentage tax and others simply increase their fuel tax rate These methods to collect fuel tax are all feasible and have their own advantages and disadvantages To x our fuel tax problem in California instead of a mileage tax we have a better choice the percentage tax ECN635 Lan ANALYSIS MILEAGE TAX A mileage tax is an alternative form of fuel tax that has been discussed frequently by other states and other countries As introduced before the mileage tax is collected according to how many miles traveled Regardless of the efficiency of cars and how much energy consumed people who travel the same distance must pay the same amount of fuel tax Setting a tax rate on mileage our tax revenue can maintain even though the fuel efficiency of auto vehicles increases Per gallon tax Gallons purchased tG Mileage tax Miles driven tM If we substitute the mileage tax for the pergallon tax however three key merits of the present fuel tax system will lose low collection costs the user fee concept and the fuelefficiency incentive 1 Implementation costs of a mileage fuel tax are huge First a mileage tax system requires electronic odometer GPS and more complicated computer systems to be equipped in cars and in pumps The GPS solely costs around 100 dollars per vehicle For 21546544 passenger vehicles registered in California about 2 billions dollars will be spent on GPS besides the costs for other electronic devices In Netherlands researchers found that although with the GPS in cars government can charge drivers a heavier mileage tax rate at congested places or trafficbusy times to lessen traffic congestion from 30 to 40 it is not efficient when compared to other feasible solutions due to its high implementation costsamp 2 A mileage tax does not comply with the user fee concept Since the most part of the fuel tax is aimed for highway maintenance people who damage highways should pay for it39 however people who travel farther may not be those who damage highways most Pressure is the weight of a car shared by the contact areas between the car and road Therefore trucks press the roads more than SUVs and SUVs press the road more than sedans Apergallon fuel tax which charges truckdrivers more than SUVdrivers and than sedandrivers realizes the user fee concept but a atrate mileage tax will not Nonetheless the user fee concept can still be realized if different classes of vehicles are charged different mileage tax rates according to the pressure it gives roads 3 A mileage fuel tax discourages fuel ef ciency Since drivers are taxed by the distance traveled regardless of how much gasoline consumed the fuel tax itself is not profuel efficiency However this problem can be easily fixed if we set different mileage tax rates on cars according to their fuel efficiencyi ECN635 Lan Besides three missing merits of current fuel tax there are another two issues First drivers will be doubletaxed even though they have GPS After people drive to another state they may buy gasoline there and be charged a pergallon fuel tax On the way home GPS will record the mileage traveled in the other state but not the mileage traveled in California with the gasoline purchased out of home In this distance in California drivers pay twice the fuel tax a pergallon fuel tax to the other state and a mileage fuel tax to California Secondly privacy matters The GPS will record your location so anyone can call your travel history This is the most concerned issue of the mileage fuel tax system right now Advocators of the mileage tax claim that people will drive less if they are charged by the distance they drive Nonetheless a mileage tax or a pergallon tax makes no difference from this point of view To go farther drivers need to consume more gasoline and pay more fuel tax in the pergallon tax system as well Mileage tax will not change drivers behavior ANALYSIS PERCENTAGE TAX A percentage tax similar to a sale tax is collected as a percentage of fuel price As people buy more oil they pay more and pay more fuel tax Percentage tax gallon Gallons purchased t There are two leading advantages of the percentage fuel tax 1 A percentage tax holds the three merits of per gallon fuel tax First it is easily imposed since the way we collect the percentage tax is like the way we collect the pergallon fuel tax now no huge spending is for the change and people who are paying less fuel tax now will still be those who pay less in the future Second the percentage tax conforms to the user fee concept Trucks give stronger pressure to roads and consume more oil so truck drivers pay more fuel tax sedan drivers pay less Additionally the percentage fuel tax gives a right incentive to save energy people will switch to fuelefficient cars that consume less fuel so they can pay less fuel tax 2 A percentage tax can maintain a healthy oil market While many scholars note that oil prices and fuel tax rates are too low to re ect its scarcity a percentage fuel tax helps to fix this problem When the demand is low or supply is sufficient oil price is stable comparatively low and less fuel tax will be charged at this moment When demand for gasoline increases or supply suddenly decreases the oil price will go high and combines more fuel tax charged By the percentage tax drivers are charged more fuel tax as a punishment for consuming oil when it runs short and this punishment will deter people from consuming oil right now With these two striking advantages we might still wonder Are we going to lose fuel ECN635 Lan tax revenue again as fuelefficient vehicles are getting popular Examining the historical data of sales and resale prices of motor gasoline in California I found that the answer is no The increasing oil prices caused by the high demand and limited oil reserve will go faster than the decline of gasoline sales so the percentage tax will have a positive growth rate in the longrun Appendix Table 2 and 3 Fig2 If we had shifted to the percentage fuel tax system we would have gained a 6982 percent increase of fuel tax revenue from 2000 to 2005 but actually we only have a 145 increase under current tax system while the vehicle miles of travel VMT increases 1120 Appendix Table4 and EqJ 2 3 Using the same data to estimate motor gasoline sales and resale price at 2010 both of shortrun trend and longrun trend imply that gasoline price will keep going up to about 230 to 240 in 2010 Consequently we would have an increase in percentage tax revenue close to 128 to 569 from 2005 to 2010 ifwe have imposed a percentage fuel tax AppendixFig3 4 T able5 and Eq 5 6 As the growth of VMT longrun trend indicates that VMT will reach 190 billion miles in 2010 but shortrun trend shows a faster decline of VMT growth and a decrease to 181 billion miles Estimations of growth of VMT diverge If VMT keeps going up the growth of VMT is estimated to be around 447 if VMT growth slows down as the shortrun trend then VMT will have a negative growth rate 048 See Appendix Fig5 Table 6 anqu 7 8 Growth of Fuel Tax Volume Tax Percentage Tax Mileage Tax 20002005 145 6982 1120 20052010 Shortrun trend 20 16 569 048 20052010 Longrun trend 2016 128 447 Finally these estimations disclose that the percentage tax revenue is expected to increase both in shortrun estimation and in longrun estimation especially in the shortrun when oil price is unstable RECOMMENDATION The growth of mileage tax revenue is always equal to the growth of VMT but this is not saying the mileage tax is always sustainable preople buy more SUVs highways will depreciate sooner even though VMT and the growth of mileage tax are xed and state government will still have a problem to maintain its transportation facilities Compared to current pergallon fuel tax however a mileage tax and a percentage tax are more sustainable This table below shows the vantages of three possible forms of motor fuel tax 4 ECN635 Volume Tax Percentage Tax Mileage Tax Low collection costs M E El Userfee concept M E El Fuele iciency incentive M E El Tax Sustainability El M M Political easiness E El Evan be xedby choosing a combination of rates Apercentage tax being sustainable and saving all the merits of current fuel tax system is in a better position while a mileage tax requires high implementation costs and a pergallon tax is not sustainable Furthermore a higher pergallon tax rate or a mileage tax is against voters favor the percentage fuel tax is easier to be implemented practically and politicallyZ Overall the percentage tax should be rst considered when we try to modify Califomia s fuel tax system CONCLUSION Since 2000 the hybridcar market has grown by at least 20 per year and Los Angeles San Francisco and San Diego combined share over 20 ofUS hybrid volume in 2006 Meanwhile the fuel tax revenue collected by California government has increased in a decreasing rate during this period In 2004 to 2005 the fuel tax revenue even has a negative growth and caused the state a 5milliondollar loss AppendixTable 7 andFig6 Although the growth of VMT has slowed down it still has a 04 growth in 2006 California now has the fuel tax crisis for we cannot rely on decreasing sources of fuel tax to offer a growing demand in transportation Under these circumstances in order to provide adequate local roads or state highway services I strongly recommend that the DMV of California should adopt a right away feasible solution the percentage tax to fix California s fuel tax crisis l O cials in carclogged California are so worried they may be considering a replacementfor the gas tax altogether replacing it with something called quottax by the mile CBS Evening News 14th Feb 2005lt http39 1 om tori s 700 021 39 39 4120shtmlgt Z ad valorem or percentage tax system Fisher Ronald C State amp LocalPublic FinanceThomson Southwestern 2006 3 21546 544passenger vehicles registered in California 2005 Source EstimatedFeePaid Vehicle Registrations by County Report 2005 ECN635 Lan 95mmmy M m I no Pa n Groof P Leboutlle CPB Netherlami Bureau for Economic Polmy Rexearcn June 2005 ltnttp39wwwnewmlesorgenvtromer dmnkrnlmxntrnb 5 taxman cw whim mamger oftne Oregon Department of Transportation dtvtxton Martin Wacky A Dozen Reaxon or Ramng Gaxoltne Twces Instttwfe of Transportation Smiley Rexearcn Report March 1 2003 195 TVmrionABC 30 lt nfthwwwjn omecoWaniclexbbm drnv twc rntlentrngt rm In Anwe n n nr rv n s n D1ego5131Share of le US hjbmiMmketLoArgele122Sun anctxco 81 San Diego 20 Some R L Polk amp Co APPENDIX Fig1 State Gasoline Excise Tax Rates e v mm sraxe gasollne exnsr m mm AUUS mm W Wm n7 ltGrmgmy mmmm Ham 5 mm s 1 mm W NW 7 L man m M Wmn m x 4 f 3 61 r w Mammy n 3 I Hi quotlquot 3 mm g nnunwm 39u i i V F um nzml39 quot I iNewlmvaS 10 y 391 39 r x L 7 M r Gwyn m mm A 1 Huh u mqu m luauan Hslmrsli mmmn gamma I 7 7 mm m n Table 1 Motor Fuel Tax Collections by State FY2005 5 mm Tax qundatmnCensus Bureau ECN635 Motor Fuel Motor Fuel Taxes axes As a quotn of Collected Motor Fuel Taxes Per Capita Total State State Thousands Per Ca ita Rank axes All States 34570 28 16 85 e 3 978 S 32 7 2 Alaska 39565 59 59 49 2 1 Anzona 705623 115 81 35 6 4 Arkansas 437097 1 W29 8 6 7 Callfumva 3366141 9316 46 3 4 588869 12623 30 7 7 Covmedlcut 477108 135 93 20 4 l l 113663 13467 21 4 2 Flonda 2093900 1 1770 36 6 2 Georgia 926 102 12 44 5 9 Hawan 86426 67 79 47 l 9 102 1 0 11 7 5 lllmols 1419BB3 11125 40 5 4 8 128 65 25 3 n u a 438322 147 76 15 7 6 Kansas 426261 155 29 9 76 Kemucky 496340 11 a 5 5 Louls ana 02975 133 28 24 7 0 Malne 228395 172 76 F 7 4 l 752509 13443 22 5 6 Massachusetts 585524 107 13 41 3 8 MI I 1076183 106 33 42 4 4 Minnesota 1472 126 92 29 4 l MlSSKSstpI 435530 149 10 13 8 0 Missuun 742053 127 94 27 7 8 Montana 191912 205 03 1 107 Nebraska 305055 5 I73 43 4 B 0 Nevada 307672 512740 28 61 New Hampshire 132137 8100 E7 45 6 5 New Jars 25 27 22 43 23 New Mexlca 223395 51 IS 87 35 5 0 ew York 532687 52766 50 11 NonhCamlllIa 51338403 S54 14 1O 72 Norm Dakota 121574 191 01 2 H 7 hi 167195 514584 16 70 Oklahoma 13 116 37 G 0 regon 3732 5 I02 53 43 5 7 ylva a 1907573 515347 12 7 0 Rhode lsland 32 7 123 36 31 5 0 1 84931 511 98 39 6 6 Scum Dakota 124974 S161 05 7 l 1 3 Ta 442 514153 13 8 4 2 935 649 S 28 42 26 E 0 351097 514214 17 7 5 Verrnc 585980 3138 01 151 1 8 rgini 2934 1 55 33 ashmgmn 930975 5 4B 06 14 6 3 West ngnla 319571 175 93 3 7 4 W5 on 957055 5 72 BB 5 7 We 67864 1 23 3 9 Source Tax Foundauon Census Blueau Table2 Motor Gasoline Sales for Resale Prices California Source EneIgy Information Administration 393 39 nrnia Tmal Gasnllnn WholesaleResale Price by All R316 Cents per Gallnn v ear Ve e e v 98039s 1373 24 9 352 620 62 2 630 199 39s 208 653 742 710 66 391 690 305 63 5 807 200039s 1033 102 8 93 6 1200 150 2 1813 Updated on 4102007 We U SEnirgv1nmrmatmn Admlmstranon Table3 Motor Gasoline Sales to end User Total Califoria Source Eneigy Information Administration ECN63 5 Lan Calitnmia Tnlal Gasoline Relall D v n v v v s by All MG Thousand Gallons per Day v v v v 9 55397 59352 7l369 77295 2mm 23444 2272 mm 27123 24929 mun 2392 upualeuunmmznm Suuvce US EnEmvWuvmatmnAdmwmstvatmn Fig2 Motor Gasoline Sales and Prices US and California DataSource Energy lnforrnatlon Administration mm m 9mm m i some mm m mums In my 751033 w 514m cams mm m Gdlms m in mm Amid mum mm m Sublime WWW Amgrvsmm per 311m NW3 w mtmm PnceCACeMs pa u m Table4 Motor Gasoline Sales Resale Price and total VMT California 20002005 lxanpxaln MuturGasulme Sales c4 MuturGasUhne Sales furResale Tutal V39MT c4 mun Gallons per Day Cm G 3mm Billmns 2000 82723 1083 16355 2005 8392 1813 18187 2010ShortRun Trend 6700 240 181 2010LongRun Bread 6700 230 190 Eq1 Growth ofPer gallon Fuel Tax Revenue 20002005 8 ECN635 Lan Data Source Energy Information Administration TRG 7T G 8392782723 ATR 002005 2 5RG R2000 8272 3 145 2000 39 Eq2 Growth of Percentage Fuel Tax Revenue 20002005 Data Source Energy Information Administration S 7TR3 71813x839271083x82723 T R ATR200072005 2033 3 2000 108 3 2000 x 82723 6982 Eq3 Growth of Mileage Tax Revenue or Growth of VMT 20002005 Data Source California Department of Transportation 7 mg 7 Diego0 18187b 716355b ATR 002005 7 T W 1120 2000 Fig3 Motor Gasoline Sales and Estimation California Data Source Energy Information Administration Average Sales of Motor Fuel CA 1000 Gallons per Day 1990 1995 2000 2005 2010 2015 Fig4 Motor Gasoline Sales for Resale Prices and Estimation California Data Source Energy Information Administration ECN635 Lan Pnce of Motor Gaselme CA WW4 1980 1985 1990 1995 2000 2005 2010 2015 Table5 Motor Gasoline Sales and Resale Price California 20052010 Estimation Source Energy Information Administration California Department of Transportation Motor Gasoline Sales CA Mm GaSOIine sales for Resale Total VMT CA Price CA 1000 Gallons per Day Cents per Gallon Billions 2005 8392 1813 18187 201 0ShortRun Trend 6700 240 18 l 201 0LongRun Trend 6700 230 190 Eq4 Estimated Growth of Pergallon Fuel Tax Revenue 20052010 Data Source Energy Information Administration 7 TRZCSIO iTRZCSOS 7 67007 8392 7 ATRG 7 8392 200572010 G TRZOOS 72016 Eq5 Estimated Growth of Percentage Fuel Tax Revenue 20052010 Using Data from 2000 to 2005 Data Source Energy Information Administration ATR T122110 41223005 240 x 6700 7 1813 x 8392 569 200572010 TRZSOOS 1813 X 8392 u Eq6 Estimated Growth of Percentage Fuel Tax Revenue 20052010 Using Data from 1983 to 2005 Data Source Energy Information Administration 10 ECN635 s 7 s 7 ATR200572010 TRZOEQSTRZOOS 230x6700 1813x8392 128 2005 1813x 8392 Fig5 Vehicle Miles of Travel California Data Source California Department of Transportation Total Veh1c1e M1165 of Trave1VMT CA 210 00 200 00 190 00 180 00 170 00 38 88 138 88 120 00 110 00 70 00 60 00 50 00 40 00 30 00 20 00 888 1975 1980 1985 1990 1995 2000 2005 2010 2015 Table6 Total VMT California 20052010 Estimation Source California Department of Transportation T0181 VMT CA Billions 2005 l 8 l 87 2010ShortRur1 Trend 181 201 0Lor1gRur1 Trend 190 Eq7 Estimated Growth of Mileage Tax Revenue 20052010 or Growth of VMT Using Data from 2000 to 2005 Data Source California Department of Transportation MRM 7 TR 10 41221305 181b718187b 7 70480 200572010 TR gos 18187b 0 Eq8 Estimated Growth of Mileage Tax Revenue 20052010 or Growth of VMT Using 11 ECN ZS Data n m 1963 tn mus D Sumu Clhmmu DayArman a Tnnspumcnn TR 7 TR 7 muggingquot w w 4 47 T m 181 875 percentage change 2004 2005 000189 mum Fig Percentage change in Mntnx Fuel Tax Revenue and VMT
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