TAX REVENUE VOLATILITY & LABOR MOBILITY

Volatility of Tax Revenues

Why should we care about the volatility of our state tax revenues?

Our livelihood as a state depends on having revenues to fund state activities Investment/Planning Competition Solvency

Data Analysis

Want to see what factors contribute to volatility in tax revenues and then see how Louisiana fits into the big picture

We analyzed data on per capita state tax revenue collections from 1993-2007 Data is from the US Census Bureau Tax collections are adjusted for inflation

Volatility in State Tax Revenues

State Volatility Ranking

State Rank

Alaska 1

Vermont 2

Wyoming 3

California 4

New Jersey 5

New Hampshire 6

Louisiana 7

Connecticut 8

… …

Arizona 49

Texas 50

Determinants of Volatility

Why does Louisiana have such volatile state tax revenues? What determines a state’s volatility?

Tax Structure Dependence on specific types of taxes may

contribute to volatility Severance Taxes, Property Taxes Sales Taxes, Income Taxes, Corporate

Income Taxes

Determinants of Volatility Cont’d Income

States with higher incomes will likely have higher volatility

Income Distribution States with more unequal distributions of

income will likely have more volatility

Size Larger states will likely have lower volatility

Louisiana’s Tax Structure

Property Tax

Severance Tax

General Sales

Tax

Individual

Income Tax

Corporate

Income Tax

LA .5% 7.3% 32.6% 25.4% 4.8%

LA Rank 23 7 22 38 32

TX 0% 5.5% 50.3% 0% 0%

AR 6.5% .3% 37.8% 30.3% 4.8%

MS .4% .9% 48.7% 20.7% 5.2%

National Average

2.6% 3.4% 31.2% 30.6% 6.0%

Tax Structure & Volatility

Using data on state tax collections for all 50 states we estimated the relationship between volatility and the dependence of each state’s revenues on particular taxes

Elasticity = by what percentage does volatility increase/decrease when the dependence on a particular type of tax increases by 1%

Elasticity Illustration

Suppose that we estimated the income tax elasticity to be .75. This would mean that a 1% increase in a

state’s dependence on income tax revenue would increase volatility by .75%

Or, a 10% increase in a state’s dependence on income tax revenue would increase volatility by 7.5%

A negative income tax elasticity would indicate that increasing a state’s dependence on income tax revenue lowers volatility

Tax Structure Elasticities

Other Elasticities

We also estimated elasticities with regard to other factors that may affect volatility

Income Use data on Median Income in each state,

from the 2000 American Community Survey Size

Use population data from the 2000 Census Income Inequality

This one is a bit more complex

The Gini Coefficient

There is no perfect way to measure income inequality

The Gini Coefficient measures income inequality on a scale from 0 to 1 Closer to zero means income distribution is

more equal Closer to one means that income

distribution is more unequal

Generating the Gini Coefficient

Cumulative % of Households

Cumulative % of Income

20% 40% 60% 80% 100%

20%

40%

60%

80%

100% Line of Equality

Lorenz Curve

EqualityofLineBelowArea

CurvesBetweenAreaGini

Income, Size and Inequality in Louisiana

Median Income

Population

Gini Coefficien

t

LA $37,303 4,468,976 .483

LA Rank 49 22 2

TX $47,437 20,851,820 .470

AR $39,959 2,673,400 .458

MS $39,406 2,844,658 .478

National Average $49,353 5,616,997 .446

Other Elasticity Estimates

Louisiana & Volatility

Positive Factors Very low dependence on property taxes

Negative Factors Very high dependence on severance taxes Very high income inequality

Even Worse Factors Volatility in Louisiana is far greater than it

is estimated to be given its characteristics

Plot of Volatility and Median Income

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Median Income

Skills and Migration

One vital requirement for growth at the state level is the skill composition and quality of the work force

We will take a look at the skill composition of the Louisiana workforce and examine the skill and quality composition of those migrating in and out of the state

Skill Composition of Labor Force

Net Migration of Working Age Persons

In-Migration

Out-Migration

Net Out-Migration National Rank

Louisiana

560,199 665,915

105,716 2

Texas

3,239,739

2,051,737

(1,188,002) 50

Arkansas

519,070 344,950

(174,120) 36

Mississippi

405,226 395,102

(10,124) 8

Net Migration of Core Labor Force

In-Migration

Out-Migration

Net Out-Migration National Rank

Louisiana

256,856 306,613

50,027 2

Texas

1,481,116

1,020,340 (460,776) 50

Arkansas

242,043 152,024

(90,019) 36

Mississippi

183,688 183,373

(315) 7

Net Out-Migration of Working Age Persons by Skill Group

Bach Degree

or Higher Some

College HS Diploma Less Than HS

Louisiana 32,759 29,595 27,162 16,200

LA Rank 2 5 3 1

Texas (336,259) (247,499) (236,014) (368,230)

Arkansas (24,895) (44,217) (61,615) (43,393)

Mississippi 4,470 6,496 (9,094) (11,996)

Skill Distribution of LA Net Out-Migration of Working Age

Persons

Net Out-Migration of Core Labor Force

by Skill Group

Bach Degree

or Higher Some

College HS Diploma Less Than HS

Louisiana 23,306 14,028 11,143 1,550

LA Rank 4 6 5 7

Texas (160,611) (121,487) (92,215) (86,463)

Arkansas (18,112) (20,443) (31,002) (20,462)

Mississippi 1,472 4,392 (4,043) (2,136)

Skill Distribution of LA Net Out-Migration of Core Labor Force

Worker Quality

While education is a good indicator of the skill level of an individual, it is not the only factor that determines the quality of a worker

Some workers have better aptitudes than others which in turn makes them more successful in their line of work

We want to see whether the workers that are coming in and going out of Louisiana are high or low quality workers given their skill characteristics

Quality of Louisiana Working Age Migrants Relative to National Average

Quality of Louisiana Core Labor Force Migrants Relative to National Average

Louisiana and Migration

Louisiana’s population has been shrinking over the past 8 years Some of that due to Katrina

The decline in population is more heavily skewed toward individuals with higher levels of education

Across all skill groups the average worker we import is of higher quality than the average worker we export

Questions?

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