Tax Reduction Economic Impact Study

Hello Spencer, CGE models use assumptions about households' and businesses' propensities to spend on various goods as their incomes change. These assumptions are a flexibility that IMPLAN does not provide. You will need to make assumptions about what proportion of those savings would be spent (and on what) and then model those expenditures in IMPLAN. We highly recommend that you find a source for such assumptions. With those assumptions in hand, you could utilize the Household Spending Pattern Activity Type. This would allow you to customize the Household spending in order to remove rent, mortgage, utilities and the like. The Activity Level for the Household Spending Pattern would need to be something less than the full amount of the tax savings to account for household savings. The assumptions about business spending are more tenuous than household spending because there are more options (capital investments, profits, higher wages for employees) and because businesses tend to have plans in place that are not immediately affected by having a little extra cash (production is not necessarily immediately increased). If these are permeant cuts, it may be that the greater impact is increased attraction of new businesses and households to the region. Finally, there needs to be some acknowledgement (if not analysis) on the impact this could have on the local government (will they reduce spending?). Regards, IMPLAN Staff

Thanks for the reply. In light of what you've mentioned below, I believe the following steps would be necessary to handle the income tax (only for Employee Compensation and Proprietor Income, not business income taxes) analysis. Do you agree with this approach? 1. Export the Aggregate SAM in the IxC Social Accounting Matrix to Excel 2. Within Excel, calculate the total of Emp Comp and PI for each of the nine Households categories 3. Within Excel, individually calculate the Emp Comp and PI total for all nine Households categories 4. Within Excel, calculate share of each Households category's of the total in step 3 above 5. Factor the $100 million income tax reduction by each Households category's respective share of total from step 4 above 6. Using your guidance in previous response, utilize the Household Spending Pattern Activity Type to allow for customizing the Household spending in order to remove rent, mortgage, utilities, etc., as well as reducing the Activity Level for the Household Spending Pattern to account for household savings (source for savings rate obtained from BEA). 7. Run scenario to include each of the nine Households categories. 8. Summarize/report results

Hello Spencer, We agree with your approach. Regards, IMPLAN Staff

Great - thanks for the confirmation. Now that I have the income tax piece figured out, I'm moving onto the property tax component. What we're trying to understand is if property taxes were to be reduced by a similar amount ($100M) what would the economic impact be? The question is being asked by the agriculture community so they are naturally interested in looking at it from an agricultural standpoint. I see two scenarios: 1) what if the property tax reduction was aimed solely at agriculture and 2) what if the property tax reduction were aimed at the various property class (industrial, commercial, ag, etc.) according to their respective share of the total state/local property tax "bill". From what I've seen within the software, read on the forum and the "Principles of Impact Analysis and IMPLAN Applications" book by Frances Day, I've gathered that the only place to really affect property taxes is within each industry using the "Customize Study Area Data" screen. This would be handled through a reduction in TOPI which I understand is the bucket for state/local property taxes. So, in theory, I could follow the following steps to do the "Ag Only" scenario: 1. Create an activity with an event for each agriculture industry present within the study area. Activity level would be something consistent across all ag industries ($100?). 2. Run the above scenario to generate the overall impact 3. Adjust the TOPI downward $100M for the ag sectors (prorated by share of TOPI sourced by each of the ag sectors to the total), but then distribute this reduction to the other VA categories (EC, PI, and OPTI) to keep the total VA amount the same between scenarios since cost of inputs wouldn't be expected to change in the short run. 4. Create an activity with an event for each agriculture industry present within the study area. Activity level would be the same as in step 1 for consistency. 5. Run the scenario in step 4 to generate the overall impact 6. Subtract Scenario 1 from Scenario 2 to calculate the difference in impact To handle the "various property class" (industrial, commercial, ag, etc.) scenario, I'd think we'd handle it the same way, but it would involve many more industries (the rest of those present in the study area). Does this sound like a reasonable approach? If not, what do you suggest?

Hello Spencer, Adjusting TOPI reduces overall TOPI, not just specifically State and Local. There will be a reduction in Federal tax impact that would not actually occur. In addition, adjusting TOPI also affects non-property tax components of TOPI, e.g. sales tax, though property tax does make up the biggest share of TOPI for non-retail sectors. Also, TOPI in IMPLAN is net of subsidies, which can often leave TOPI negative for agricultural sectors since they tend to be heavily subsidized. A reduction in TOPI taxes, all else equal, would make negative TOPI more negative. While TOPI is specific to industries and places, the composition of TOPI is specific only to places. Therefore, a given amount of TOPI will be allocated among property tax, sales tax, etc., the same for any sector within a study area. How the TOPI is reapportioned is the crux of this issue, and IMPLAN does not have the ability to predict firms’ and proprietors’ behavioral responses to lower property taxes. The proposal to evenly distribute a reduction of TOPI among the remaining three value added components is one option among many. For example, perhaps all of the savings would go to profits (thus, to OPI), without any change in labor income. IMPLAN’s default configuration treats OPI as a leakage, so there would not be any impact from this. There might, however, be higher corporate income taxes from higher profits and potentially new capital investment spending. It is also part of IMPLAN’s default configuration to treat government receipts as a leakage, but this may not be reasonable. A change in tax revenue might imply lower government spending, which would have a negative economic impact in IMPLAN. Again, IMPLAN isn’t well-suited to address these questions. Regards, IMPLAN Staff

Thanks for the response. I do know that a person can see what’s estimated to be paid in the form of property taxes within IMPLAN (IXC Social Accounting Matrix, Detailed SAM, Type Code 12001, Transfer Type 15021, which is $2.455 billion for Nebraska) - is there no way to change that in a way that captures the impact throughout the rest of the economy? Similarly, is it possible to change property taxes paid by households (IXC Social Accounting Matrix, Detailed SAM, Type Code 12001, Transfer Type 15031, which is $51.3 million for all Nebraska households)? Are you aware of another way to re-frame the question to answer it in a different way?

Spencer, Those values cannot be edited within the software. Property tax payments made by households (IxC SAM columns 10001-10009) are for personal property, e.g., cars and boats. Property tax paid on real property owned by households is included in TOPI paid by sector 441, owner-occupied dwellings. Real and equipment property tax paid by other industries are included in those industries’ payments to TOPI. There is the option to manually reallocate TOPI results, though. You could customize overall TOPI, and maybe other components of VA or IE, and then reorganize results within TOPI so that other TOPI components are at the same effective rate, which is to say, the same share of output. That way, it’s as if only the property tax component of TOPI were customized. This solution would work only for industry-paid TOPI. Household payments of personal property tax couldn’t be treated this way, since household spending levels can’t be customized within the model. Alternatively, you could export the IxI SAM, reconstruct and rebalance it as desired (making assumptions along the way about how value added, output, intermediate expenditures, etc., change), and then manually (e.g., in a spreadsheet) calculate new multipliers and apply impacts in the spreadsheet model. We will support this methodology only through a project consultation. Regards, IMPLAN Staff

Thanks for the reply. You mention exporting the IXI SAM and recalculating the multipliers through a project consultation. What is the process/cost for going down that path?

Thanks for your time this afternoon. Is there a reason why when I import the activity for Ag Production (including structures) and when I import Ag Production (excluding structures) that one is a commodity change (including structures) and the other is an industry change (excluding structures)? 

Hello Spencer, Both activities should import as a Commodity Change Activity (see image). We would be interested in seeing your utility file. Could you send us a copy of your database file (typically found in Documents > MIG > Implan > Utilities)? You will need to compress the file before emailing to support@implan.com. In the meantime, you can download new utility files at the links below. Note that these are compressed and will need to be extracted prior to use. Please let us know if this does not resolve the issue. Regards, IMPLAN Staff