To prepare for the next fiscal crisis, state revenue departments should consider how technological and digital advancements could disrupt future tax revenues and plan accordingly, according to a municipal finance expert.
In a June 20 interview with Tax Notes, Jim Spiotto, managing director of Chapman Strategic Advisors LLC, discussed his recently published presentation on evolving changes caused by automation and the sharing and digital economies, and the importance of diversifying tax revenues before the next economic downturn.
For example, Spiotto asked, what’s the future of hotel tax revenue in light of Airbnb, gas tax revenues in the face of Tesla, or parking and registration fees in light of Uber and Lyft? Does betting on steady revenue from income and sales taxes make sense when the large manufacturer in your municipality is rapidly automating its labor?
A widely shared pair of photos of 5th Avenue in New York in 1900 and in 1913 illustrate Spiotto’s point: In the first photo, there is one automobile in a sea of buggies in the Easter morning parade; but in the second, the road has been overtaken by only automobiles.
“They never thought the automobile was a great idea, but where are the buggy whip companies of today?” Spiotto told Tax Notes. “The future will come quicker than we realize and that’s why its important that if you are making plans and you are financing with 5-, 10-, 15-, or 20-year bonds, you want to make sure your policy is sound.”
Spiotto, who also sits on the board of the Civic Federation, originally presented his working research paper at the “Ready Or Not? Post-Fiscal Crisis/Next Fiscal Crisis” Conference at the Federal Reserve Bank of Chicago in May, but began publishing the research on MuniNet Guide in June.
In the third part of his article series, Spiotto looked at the evolution of tax policy and the search for diverse and sustainable sources of tax revenues in light of technology that can change a tax base faster than a bond can amortize.
The paper cited as example the Chicago metropolitan statistical area (MSA), which is the second largest manufacturing area in the country. Between 2000 and 2016, Illinois and Chicago MSA each lost 35 percent of their manufacturing jobs, while the country as a whole lost 29 percent, the paper said. Lagging personal income increases and job losses slowed gross domestic product growth at a time when public spending on pensions skyrocketed.
North Dakota depends on fossil fuel severance taxes, and South Dakota on sales taxes. Spiotto said Minnesota has a large banking industry and often leads the way in tax policies, but that Michigan’s reliance on manufacturing combustion engines for cars will make it “a forerunner of what the future will bring.” He said Wisconsin relies on manufacturing, but with developments like Foxconn Technology's projects in the state, he wants to “see how that goes.”
The goal is to get more governments to start thinking of where their revenue sources will be in 2029 or 2039, particularly when they issue debt that will be paid off over that timeline, Spiotto said. The research looked at where Midwestern states draw tax revenues from and whether rebalancing needs to occur as economies attempt to adjust to changes occurring faster than the pace of government.
“We need to really sit down at a policy level and think of what the future is going to be,” Spiotto told Tax Notes. “I think it’s just starting to occur. If you are trying to sell 20-year parking garage revenue bonds, you will get some people asking questions.”
Spiotto pointed to the Great Depression, when 60 percent to 70 percent of state and local government revenues came from property taxes, compared with the Great Recession, when that number was down to 16.7 percent, with sales and income taxes and miscellaneous and federal aid filling the gap.
“The reason the real estate bubble was the Great Recession and not [a] depression was the diversity of taxation, and we need to learn from that and realize that diversity also means future planning and addressing,” Spiotto said. “We will need to address what will happen in the future now, so we will be able to pay for it and won’t have the dislocation, [and] exasperation when everything was based on a single revenue.”
Spiotto said he thinks the revenue sources that fund transportation will undergo a sea change soon: There will be a significant increase in the use of electric vehicles, which will affect not only gas tax revenues, but also income and sales tax revenues in areas whose revenues rely on combustion car engine manufacturing.
Car owners will start to rethink investing in a vehicle that they would use for only 4 percent of their day and may look to the shared vehicle economy, further affecting not only manufacturing but also parking lot revenues and congestion taxes, Spiotto said, adding that revenue departments may need to rethink formerly solid revenue sources when automated vehicles affect parking and congestion revenues, personal income taxes from drivers, highway tolls, and registration and licensing fees.
Services that rent out snowblowers or drills would reduce sales taxes at the start, but would also reduce manufacturing in the long run, Spiotto said.
Automation won’t just affect automobiles; worker displacement caused by automation may need to be rethought. Though there are sales taxes on manufacturing equipment that replaces workers, the one-time revenue doesn’t compare to the revenue from a living worker who purchases goods and services, pays those taxes, and stimulates the economy, the paper said.
“A machine doesn’t do that. Whether it’s a personal property tax, annual automation tax or employee replacement tax or an annual assessment, people will say that’s an added burden on business. Not if you consider that, to the degree you are adding efficiencies, we are sharing some of the efficiencies with the community at large,” Spiotto said.
Spiotto said economic development policies are the key to success for any government, arguing that jobs induce other jobs.