Category Archives: State & Local Finance

Quarterly Survey of Public Pensions: First Quarter 2016

Source: United States Census Bureau, G16-QSPP1, June 30, 2016

For the 100 largest public-employee pension systems in the country, assets (cash and investments) totaled $3,252.2 billion in the first quarter of 2016, increasing by 0.1 percent from the 2015 fourth-quarter level of $3,249.4 billion. Compared to the same quarter in 2015, assets for these major public pension systems decreased 4.0 percent from $3,388.5 billion….

Slowing Growth in State Tax Revenues: Weak Stock Market, Shaky Oil Prices, and Brexit Aftermath Leave the States With Much Uncertainty

Source: Lucy Dadayan and Donald J. Boyd, Nelson A. Rockefeller Institute of Government, State Revenue Report, no. 103, June 30, 2016

State tax revenue growth slowed significantly in the second half of 2015 and, according to preliminary data, early in 2016, this according to the latest State Revenue Report. Adding to this picture of slow growth and declines, the report put a spotlight on the potential impact of this recent slowing of state revenue performance, combined with a volatile stock market and turmoil related to Brexit.

How you buy affects what you get: Technology acquisition by state governments

Source: Kawika Pierson, Fred Thompson, Government Information Quarterly, In Press – Corrected Proof, Available online June 24, 2016
(subscription required)

From the abstract:
Research suggests that governments should rely on standardized information technology solutions rather than custom built ones. We find that, for many categories of taxes, states that have contracted out the development of their tax-processing systems to providers offering standardized solutions see statistically and economically significant increases in collections relative to states that have not. We find no evidence that financial administration expenditures increase for these states. At the same time, there are several categories of taxes where we do not find a positive impact. We reconcile these findings by developing a qualitative argument that standardized solutions in tax administration may be most effective for the types of taxes that are the most difficult to enforce.

Highlights
• Leverages a natural experiment to test government IT acquisition strategies.
• Uses tax collection as an objective outcome measure.
• Compares governments that adopt more standardized solutions with those that do not.
• Governments with standardized solutions show significantly higher tax collections.
• Collection improvements seem more likely in taxes that are harder to enforce.

Tax Benefits of Government-Owned Marijuana Stores

Source: Benjamin M. Leff, American University Washington College of Law, WCL Research Paper No. 2016-22, May 20, 2016

From the abstract:     
Over a year ago (March 7, 2015), a little store called the Cannabis Corner opened up in the small town of North Bonneville, Washington, about an hour by car from Portland, Oregon. The Cannabis Corner is the first marijuana store to be operated by a “public development authority,” an independent entity created by a state or local government. Public development authorities are generally exempt from federal income taxes under section 115 of the Internal Revenue Code. For a marijuana business, this exemption is especially valuable because section 280E of the Code currently prevents marijuana businesses from deducting many of the ordinary expenses other businesses regularly deduct, resulting in extremely high federal income taxes.

This Article is the first to address whether independent governmental affiliates that sell marijuana are exempt from federal income tax under section 115 of the Internal Revenue Code. It argues that such entities should easily pass the IRS’s current interpretation of the three requirements for tax-exemption under section 115: (i) that exempt income be derived from “the exercise of any essential governmental function;” (ii) that such income “accru[e] to a State or any political subdivision thereof;” and (iii) that the income “not serve private interests[.]” In addition, this Article argues that the fact that selling marijuana is illegal under federal law is not a bar to exemption under section 115 of the Code the way it is under section 501(c)(3).

Tax exemption for public development authorities that sell marijuana is important because of the non-tax benefits of a marijuana market dominated by government sellers. Some of these benefits exist when governments are participants in a marijuana market that is open to private sellers as well, such as is the case in North Bonneville, Washington. This Article also explores the benefits that might accrue if a state chose to create a regulatory regime for legalizing marijuana in which all marijuana selling took place in government-owned stores. Many states have experimented for years with state control of liquor sales, but there are reasons to believe that marijuana may be significantly more suited to a state-controlled market than alcohol, at least for a transitional period. The question of whether an independent governmental affiliate is exempt from federal income tax, including section 280E, is especially important to governments contemplating the contours of their legal marijuana markets.

Marijuana Legalization and Taxes: Lessons for Other States from Colorado and Washington

Source: Joseph Henchman, Morgan Scarboro, Tax Foundation, Special Report No. 321, May 12, 2016

Key Findings:
– Marijuana tax collections in Colorado and Washington have exceeded initial estimates, and a nationwide legalization-and-tax regime could see states raise billions of dollars per year in marijuana tax revenue.
– Colorado, Washington, and Oregon have all taken steps to reduce their marijuana tax rates, with Alaska considering it, after initial rates of 30 percent or more did not reduce the black market sufficiently. More recent ballot initiative proposals across the country propose rates between 10 and 25 percent.
– Tax rates on final retail sales have proven the most workable form of taxation. Other forms of taxation that have been proposed, such as taxing marijuana flowers at a certain dollar amount, taxing at the processor or producer level rather than the retail level, or taxing products by their level of THC, have faced practical implementation difficulties.
– Medical marijuana is usually more loosely regulated and less taxed than recreational marijuana. In Washington, moving non-medical sales to the retail market has proven difficult given the enormous differentials in tax rates and regulatory structure, and officials there wish the two systems had been tackled simultaneously.
– While the revenue can be in the tens or even hundreds of millions of dollars, it takes a lead time to develop. Revenues started out slowly in Colorado and Washington, as consumers became familiar with the new system and after state and local authorities spent time and money setting up new frameworks and regulatory infrastructure.
– Significant attention must be given to health, agricultural, zoning, local enforcement, and criminal penalty issues. These important issues have generally been unaddressed in ballot initiatives and left for resolution in the implementation process.
Related:
Marijuana Legalization and Taxes: Federal Revenue Impact
Source: Gavin Ekins, Joseph Henchman, Tax Foundation, Fiscal Fact No. 509, May 12, 2016

Key Findings:
– Marijuana tax collections in Colorado and Washington have exceeded initial estimates.
– A mature marijuana industry could generate up to $28 billion in tax revenues for federal, state, and local governments, including $7 billion in federal revenue: $5.5 billion from business taxes and $1.5 billion from income and payroll taxes.
– A federal tax of $23 per pound of product, similar to the federal tax on tobacco, could generate $500 million per year. Alternatively, a 10 percent sales surtax could generate $5.3 billion per year, with higher tax rates collecting proportionately more.
– The reduction of societal risk in being engaged in the marijuana trade, as well as the inclusion of taxes, will combine to reduce profits (and tax collections) somewhat from an initial level after national legalization.
– Society pays all the costs regardless of legality but tax revenues help offset those costs.

Mileage-Based Road User Charges

Source: Robert S. Kirk, Marc Levinson, Congressional Research Service, CRS Report, R44540, June 22, 2016

A mileage-based road user charge would involve assessing owners of individual vehicles on a per-mile basis for the distance the vehicle is driven. Currently, federal highway and public transportation programs are funded mainly by motor fuel tax receipts that flow into the Highway Trust Fund (HTF). The tax rates, set on a per-gallon basis, have not been raised since 1993, and receipts have been insufficient to support the transportation programs authorized by Congress since FY2008. The long-term viability of motor fuels taxes is also questionable because of increasing vehicle fuel efficiency and the wider use of electric vehicles. Economists have favored the use of mileage-based user charges as an alternative to motor fuels taxes to support highway funding. Congress, in Section 6020 of the Fixing America’s Surface Transportation Act (FAST Act; P.L. 114-94), provided $95 million to fund large-scale pilot studies by states or groups of states to demonstrate “user-based revenue systems” to maintain the solvency of the HTF……

The Political Economy of Underfunded Municipal Pension Plans

Source: Jeffrey Brinkman, Daniele Coen-Pirani, Holger Sieg, NBER Working Paper No. w22321, June 2016
(subscription required)

From the abstract:
This paper analyzes the determinants of underfunding of local government’s pension funds using a politico-economic overlapping generations model. We show that a binding downpayment constraint in the housing market dampens capitalization of future taxes into current land prices. Thus, a local government’s pension funding policy matters for land prices and the utility of young households. Underfunding arises in equilibrium if the pension funding policy is set by the old generation. Young households instead favor a policy of full funding. Empirical results based on cross-city comparisons in the magnitude of unfunded liabilities are consistent with the predictions of the model.