Tax

Do Tax Credits Stimulate R&D Spending? The Effect of the R&D Tax Credit in its First Decade

Do Tax Credits Stimulate R&D Spending? The Effect of the R&D Tax Credit in its First Decade

Rao, Nirupama S.
03/08/2014

This paper examines the impact of the R&D tax credit between 1981-1991 using confidential IRS data from corporate tax returns. The key advances on previous work are an instrumental variables strategy based on tax law changes that addresses the simultaneity between R&D spending and its user cost and the use of new confidential data. Estimates imply that a ten percent reduction in the user cost of R&D leads the average firm to increase its research intensity—the ratio of R&D spending to sales—by 11 percent in the short-run. Long-run estimates imply that firms do face adjustment costs and further increase spending over the longer-run. Analysis of the components of qualified research shows that wages and supplies account for the bulk of the increase in research spending. Comparisons of the elasticity across firms of different sizes, industries, tax status, multi-national status and credit history are also made. Neither small nor young firms appear more responsive in the static analysis but the dynamic model reveals stronger short-run responses, suggesting that they may face lower adjustment costs or liquidity constraints in financing R&D. Long-run and retiming analyses show no evidence that firms allocate their qualified research spending over time to maximize their R&D tax credits. Elasticities of qualified and total research intensities from a smaller sample suggest firms respond to user cost changes largely by increasing their qualified spending, meaning that what R&D the federal credit deems qualified research is an important margin on which the credit affects firm behavior.

The Price of Liquor is Too Damn High: State Facilitated Collusion and the Implications for Taxes

The Price of Liquor is Too Damn High: State Facilitated Collusion and the Implications for Taxes

Rao, Nirupama S. (with Chris Conlon)
12/02/2013

Alcohol markets are subject to both heavy regulation as well as excise taxes at the federal and state level. We examine the impact of particular state regulations on the structure of the alcohol market. We show that post and hold and meet but not beat pricing regulations at the wholesale level eliminate competitive incentives among whole-sellers and minimum retail markup rules at the retailer level e ectively allow whole-sellers to set retail price floors. Our model suggests that without any competitive incentives at the wholesale level, firms will set prices as if they were a single monopolist. Wholesalers will tend to mark up premium brands relative to call or well products. Regression results indicate that states featuring post and hold regulations consume 4% to 10% less alcohol than other states, suggesting that the regulations may over-restrict quantity. Tabulations suggest that premium products comprise a smaller share of consumption in post and hold states. This output gap due to collusive pricing leads any taxes levied on the liquor market to entail greater deadweight loss relative to a competitive wholesale market. We conduct an empirical analysis, where instead of providing wholesalers with market power, the state increases taxes to keep the overall level of alcohol consumption fixed. We also compute the deadweight loss of increasing taxation under both the existing scheme, and one with a competitive wholesale market. We find that the state of Connecticut could substantially increase taxes and tax revenues without affecting aggregate quantities if it repealed post and hold. Back of the envelope estimates suggest that Connecticut is forgoing over $300M in potential revenue from alcohol taxes in a competitive wholesale market.

Financing Medicaid: Federalism and the Growth of America's Health Care Safety Net

Financing Medicaid: Federalism and the Growth of America's Health Care Safety Net
University of Michigan Press

Shanna Rose
08/29/2013

Medicaid has evolved over the past five decades from a tiny “welfare medicine” program into the single largest health insurance program in the United States. Contrary to the conventional wisdom that programs for the poor are vulnerable to instability and retrenchment because they lack a powerful constituency, This book finds that, as a result of its unique institutional structure, Medicaid does, in fact, have an organized, influential interest group: the nation’s governors. Although governors routinely criticize Medicaid for its mounting cost to the states, they have found it difficult to resist the powerful expansionary incentives created by the program’s open-ended federal matching grants. Throughout the program’s history, state leaders have used a variety of methods ranging from lobbying and negotiation to creative financing mechanisms and waivers to maximize federal aid, thereby fueling Medicaid’s growth. And, perceiving federal retrenchment efforts as a threat to their states’ financial interests, the governors have repeatedly worked together in bipartisan fashion to defend the program against cutbacks. Indeed, Rose argues, Medicaid has been a driving force behind the mobilization of the intergovernmental lobby, and specifically the National Governors Association—one of the most powerful interest groups in Washington. Financing Medicaid intertwines theory, historical narrative, and case studies, drawing on a variety of sources including archival materials from gubernatorial and presidential libraries and the National Governors Association.

Partisan Priorities: How Issue Ownership Drives and Distorts American Politics

Partisan Priorities: How Issue Ownership Drives and Distorts American Politics
Cambridge University Press.

Egan, Patrick J.
07/22/2013

Americans consistently name Republicans as the party better at handling issues like national security and crime, while they trust Democrats on issues like education and the environment – a phenomenon called “issue ownership.” Partisan Priorities investigates the origins of issue ownership, showing that in fact the parties deliver neither superior performance nor popular policies on the issues they “own.” Rather, Patrick J. Egan finds that Republicans and Democrats simply prioritize their owned issues with lawmaking and government spending when they are in power. Since the parties tend to be particularly ideologically rigid on the issues they own, politicians actually tend to ignore citizens' preferences when crafting policy on these issues. Thus, issue ownership distorts the relationship between citizens' preferences and public policies.

Shifting the Burden: Examining the Undertaxation of Some of the Most Valuable Properties in New York City

Shifting the Burden: Examining the Undertaxation of Some of the Most Valuable Properties in New York City
Furman Center Policy Brief; July 2013

The Furman Center for Real Estate and Urban Policy
07/02/2013

Some of New York City’s most valuable properties in its highest-cost neighborhoods are significantly and persistently undervalued, according to Shifting the Burden. The report identifies 50 individual co-ops in 46 buildings that were sold in 2012 for more than the New York City Department of Finance’s estimate of the market value of the entire building. This undervaluation has significant consequences for the distribution of tax burdens in New York City.

Taxes and the Extraction of Exhaustible Resources: Evidence from California Oil Production

Taxes and the Extraction of Exhaustible Resources: Evidence from California Oil Production
NYU Wagner Research Paper No. 2211681. Jan 2013

Rao, Nirupama.
01/01/2013

Rapid oil price increases frequently bring calls for special oil industry taxes. This paper uses new well-level production data and price variation induced by federal oil taxes and price controls to estimate how taxes affect production. Theory suggests temporary taxes create strong incentives for retiming productioneven well shutting. Empirical estimates suggest little shut-in in response to taxes, but substantial production retiming with an estimated elasticity between 0.208 and 0.261. The estimates are used to calibrate a simple model of the efficiency cost of tax-induced distortions, implying that a 15% tax reduces social efficiency by between 3% and 25% of the revenue raised.

Budget Slack, Institutions, and Transparency

Budget Slack, Institutions, and Transparency
Public Administration Review 72(2): 187-95

Rose, Shanna, and Daniel L. Smith.
03/01/2012

Economic theory suggests that it is optimal for governments to use precautionary saving as a countercyclical tool. However, the availability of surplus funds often triggers political pressure for tax cuts and spending increases. Mechanisms for alleviating that pressure include limiting the transparency of slack resources and limiting politicians' discretion to use slack resources for purposes other than stabilization. This article investigates the extent to which these two mechanisms are substitutes. In particular, the authors examine whether the widespread adoption of budget stabilization funds (BSFs) in the U.S. states over the past several decades has been accompanied by a decline in conservative revenue forecast bias. Using panel data from 47 states over a 22-year period, they find that the adoption of a BSF reduces revenue underestimation by approximately two-thirds; however, the size of the effect depends in part on how much a state saves in the BSF and the rules governing BSF deposits and withdrawals. The results suggest that BSFs have the unintended effect of increasing fiscal transparency.

The 2013 Federal Budget's Impact on Communities of Color and Low-Income Families

The 2013 Federal Budget's Impact on Communities of Color and Low-Income Families

Women of Color Policy Network
02/23/2012

The Obama administration's budget proposal for fiscal year 2013 (FY 2013) strengthens the national economy by investing in schools, communities and safety net programs. The FY 2013 budget also includes a number of important investments in infrastructure that will spur much needed job growth in a time of economic uncertainty for many working and low-income families. It is critical that such investments take into account the persistently high unemployment in communities of color, and target spending to increase the economic security of the communities most impacted by the "Great Recession." Additionally, the budget includes important changes to the tax code that will lay the foundation for a fairer and more equitable economy.

Nonprofit Exemptions and Homeowner Property Tax Burden

Nonprofit Exemptions and Homeowner Property Tax Burden
Public Finance and Management 12(1): 21-50.

Calabrese, Thad, and Deborah A. Carroll
01/01/2012

This paper examines the question of whether there is any correlation between the prevalence of nonprofit organizations with property, plant, and equipment exempt from property taxation and the property tax burden for homeowners. Data from the Tax Foundation and Internal Revenue Service was used to analyze general-purpose local governments within larger counties (populations greater than 65,000) in the United States for years 2005 and 2006. Several econometric specifications were used to estimate homeowner property tax burden as a function of the value of nonprofit fixed assets, government tax structure characteristics, and a series of control variables. Our estimates suggest that county geographies with greater presence of nonprofits tend to have higher homeowner tax burdens on average. Specifically, the value of nonprofit tax-exempt fixed assets within a county geography that is 10% above the mean of $15.4 million is generally associated with a median property tax paid by homeowners as a % of household income that is between 0.0009% and 0.0154% above the mean or between $2 and $24 higher on average. The median property tax paid as a % of homeowner’s home value would be between 0.0006% and 0.0069% above the mean or between $3 and $12 higher on average. Overall, we find a strong, positive correlation between nonprofit fixed assets and property tax burden for homeowners at the local level.

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