Sales Tax Exemption Impact

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    IMPLAN Support
    Hello, You will need to estimate the increase in sales due to the tax exemption and then run that loss through IMPLAN. The other side of the coin is the loss of state government revenue. This could be estimated by running that loss through the State and Local government non-education institutional spending pattern (Setup Activities > Activity Options > Import > Institutional Spending Patterns. Results of the two scenarios would then need to be compared to determine the net impact. Please don't hesitate to ask further questions.
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    Mei
    I wonder if I can estimate the potential increase of farm equipment sales based on IMPLAN data. If the sales tax is exempted, it is likely that farmers will buy equipment locally rather than go to neighboring states where there is no sales tax for farm equipments. So I summed up the gross inputs and regional inputs of sector 203 (farm machinery and equipment manufacturing) for 19 agricultural sectors. The total gross inputs is $14.6 million and total regional inputs is $11.5 million. The difference (farms spend in neighboring states for farm equipment) is $3.1 million. But these numbers seem too low to be the sales of farm equipment in this state. The output of sector 203 is $550 million and total exports and imports of sector 3203 are $150 million and $110 million, respectively. This suggests that sales of farm equipments in this state is over $500 million. Could you please let me know how I am wrong and whether there is a way to estimate the increased sales as an effect of sales tax exemption from IMPLAN data? Thank you so much!
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    sstauner
    Hi Mei, The agricultural sectors are not the only purchases of commodity 3203. If you go to Explore > Social Accounts > Balance Sheets tab, Industry Demand tab and select Commodity 3203 from the drop-down menu, you will see that State/Local Government, Scientific Research, Waste Management, Repair and Maintenance Construction, and others also purchase this commodity. If you then flip over to the Institutional Demand tab, you will see that the administrative government sectors also purchase it and a large sum is purchased as capital investment (as opposed to intermediate expenditure). Thanks!
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    IMPLAN Support
    Hi Mei, The agricultural sectors are not the only purchases of commodity 3203. If you go to Explore > Social Accounts > Balance Sheets tab, Industry Demand tab and select Commodity 3203 from the drop-down menu, you will see that State/Local Government, Scientific Research, Waste Management, Repair and Maintenance Construction, and others also purchase this commodity. If you then flip over to the Institutional Demand tab, you will see that the administrative government sectors also purchase it and a large sum is purchased as capital investment (as opposed to intermediate expenditure). Thanks!
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    Mei
    Thank you for your reply! The institutional demand is over 20 times greater than Industry Demand. Could you please explain more about institutional demand, especially captial investment? It is the largest element in the Institutional Demand tab. What will be the likely effect if the sales tax is exempted? Farmers will not benefit the most from the tax exemption? Thank you so much!
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    ljvoves
    There are two types of demand: intermediate and final. Within final demand there are two sub-types: endogenous and exogenous. Intermediate demand is that of industries for each others output to produce their outputs. Final demand is that made by consumers (C), investors (I), government (G) and exports (X) or net exports (X-M). Investors turn savings into new capital stock in the economy. The price of capital includes the effects of taxes. As taxes change so does the cost of capital and the quantity of final demand for investments. Because investments are typically exogenously determined, a reduction in investment taxes will result in an increase in investments. Let us know if you have any further questions.
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    IMPLAN Support
    There are two types of demand: intermediate and final. Within final demand there are two sub-types: endogenous and exogenous. Intermediate demand is that of industries for each others output to produce their outputs. Final demand is that made by consumers (C), investors (I), government (G) and exports (X) or net exports (X-M). Investors turn savings into new capital stock in the economy. The price of capital includes the effects of taxes. As taxes change so does the cost of capital and the quantity of final demand for investments. Because investments are typically exogenously determined, a reduction in investment taxes will result in an increase in investments. Let us know if you have any further questions.
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    Mei
    So the industry demand lists the intermediate demand of each industry for the commodity 3203 to produce their products including farm machine, crops, etc? And the institutional demand are final demand by consumers (including farmers), investors (including tractor dealers, and others?), governments, and exports? In the institutional demand tab, I see that demand of households (farmers etc) is zero. There are demands from federal and state governments and foreign and domestic exports. Capital demand means that investors (tractor dealers) bought the commodity 3203? How do I know how much farmers paid to tractor dealers for farm equipment in the state? Do you have suggestions on how to examine the sales tax exemption impact using IMPLAN? I am grateful for all your assistance!
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    IMPLAN Support
    Hi Mei, Industry demand does list intermediate demand of each industry for commodity 3203, as you wrote, but intermediate demand does not include capital investment. Note that in institutional demand, the Capital row likely demands the most of Commodity 3203 (I am not sure which study area data you are using, but Capital purchases should be high, since farm machinery is primarily a capital good, not an intermediate input; domestic and foreign exports likely also make up a large share). That capital row represents capital investments in equipment used in a production process, so farmers' purchases of farm machinery would be in that capital row. IMPLAN does not have data to break out which industries make capital purchases of particular commodities; it only includes data on total capital purchases for each commodity. So, IMPLAN doesn't include an estimate of how much farmers, specifically, paid to tractor dealers for farm equipment in the state. Also, note that intermediate demand by farmers (for any commodity) wouldn't be captured in households; it would be captured by the appropriate agriculture sector. The capital purchases of farm equipment would include purchases of equipment by farmers and others as an investment (consumption). The intermediate purchases of farm equipment by industry reflects purchases of parts to maintain existing capital equipment (farm machinery in this case) -- ie, operational costs rather than the purchase of new equipment. For a definition of intermediate inputs, see implan.com/index.php?option=com_glossary&letter=I&id=62&Itemid=1481 Regarding the sales tax analysis, take note of what we wrote earlier regarding estimating both sides of the coin - the effect of an increase in sales and the effect of a loss in state government revenue. We don't have a recommendation about how to estimate the size of those effects. Note also that you should pay attention to which purchasers of farm equipment would have paid sales tax on farm equipment - likely end users (capital buyers), possibly not some of those buying for intermediate inputs if those goods are resold (but likely those buying farm equipment for replacement parts), likely not government. Thanks!
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    Mei
    I would like to estimate the effect of increasing 3203 sales by $100MM due to the tax exemption. I got the industry margins file from IMPLAN support forum: http://www.implan.com/index.php?option=com_kunena&view=topic&catid=80&id=17985&Itemid=1679 , so I create industry change activity and create 4 events for sector 203, 319, 332, and 335. The industry sales are in the table below. Sector Margin Sector Margin value Industry sales 203 203 0.766693 76669297 203 319 0.206283 20628267 203 332 0.001233 123286.3 203 335 0.025791 2579150 I wonder if this is a correct way to estimate the impact. If so, I wonder how accurate the estimate is because 319 include the wholesale trade of everything not just farm equipment. Do you suggest modifying the data for 319? If so, what data should I collect from tractor dealers? Or should I create a new sector for tractor dealers? Thank you so much! Looking forward to your reply.
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    IMPLAN Support
    Good Morning Mei, I apologize for the delay of my response. As long as you are just margin a purchase of 302 your can margin it through the software; as shown in this article: http://implan.com/index.php?option=com_content&view=article&id=160&Itemid=1702. The same principles apply to Margining commodity purchases, with the exception of the fact that the commodity purchases will get split by market share, so the process will yield impacts to significantly more Sectors and depending on the region there may be some of the total cost lost to inventory (which is production attributed to another year's economic activity and thus will have not impact in the current year's purchasing and labor requirements, so it is leaked). You can view the market share mix for your region if you want to do it on a commodity basis in the Explore> Social Accounts> Balance Sheet (Tab), and select View By: Commodity Balance Sheet and the Industry-Institutional Demand tab. Thanks!
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    Mei
    Dear Moderator, Thank you for your response and the article. It is helpful for my future study. But for this study, I need to margin the purchase of 3203 farm equipment, not 302. When I tried to edit event properties to margin the sales, a message appeared saying “There are no margins for sector 3203”. Then I tried to use industry change and margin 203 farm equipment manufacturing, the same message appeared “There are no margins for sector 203”. So I searched IMPLAN support forum and got the industry margins file from: http://www.implan.com/index.php?option=com_kunena&view=topic&catid=80&id=17985&Itemid=1679. I created industry change activity and create 4 events for sector 203, 319, 332, and 335. The industry sales are in the table above. I hope this is a correct way to estimate the impact. If so, I wonder how accurate the estimate is because 319 include the wholesale trade of everything not just farm equipment. And if you suggest modifying the data for 319, what data should I collect from tractor dealers? Or should I create a new sector for tractor dealers? Also, tractor dealers mention that if they will sell more farm equipment due to the tax exemption, their repair and maintenance service will also increase, which is in sector 417. In this case, should I modify both 319 and 417 to reflect the business of tractor dealers, one for their increased sales of farm equipment and one for their increased services. I probably need to create two activities. Sorry for so many questions. Thank you so much!
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    IMPLAN Support
    Hello Mei, Do you know that all of the new sales of farm equipment in your area will come from farm equipment manufactured in your area? The way you are trying to model it below implies that all of the new sales will be from new manufacturing in your study area. If you don't know whether any will come from your study area, simply use sector 319, which includes the wholesale of farm equipment, and select the Gross Retail Sales option, which will apply only the impact of the wholesale operations to your area. Alternatively, using the margins spreadsheet that you downloaded, take MarginSector 203's share of Sector 203, approx. 76.7%, multiply it by your estimated new sales ($100 million), and add it as an event in sector 203. Unless you know that 100% of these new sales will be manufactured locally, I recommend setting the Local Purchase Percentage to SAM Model Value. You can do this, with the appropriate event selected, by going to Event Options>Edit Event Properties>Local Purchase Percentage>Set to SAM Model Value. Do this same procedure for MarginSectors 332 and 335. Then, since you're assuming 100% of the sales will be made locally (i.e. 100% from local farm equipment dealers), follow the same procedure for MarginSector 319 except leave the Local Purchase Percentage at 100% for this one.
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    Mei
    Dear Moderator, As you suggested, I set the LPC of 203, 332, and 335 to SAM model. I compared the LPC of trade flow model and Econometric RPC for the three sectors. The LPC of 332 and 335 are similar, but the LPC of 203 of trade flow model is 14.67%, much lower than the LPC of Econometric RPC model 78.58% (please see the attached file). It is discussed that the trade model is a better estimate (http://www.implan.com/index.php?option=com_kunena&view=topic&catid=84&id=13497&Itemid=1679#13498 ). This means that only 14.67% of farm equipment demand is locally supplied. Does it mean that tractor dealers buy 85.33% of farm equipment from other states, not from farm equipment manufacturing industry in the state? Or farmers and government buy 85.33% of farm equipment from out of state, not from tractor dealers in the state? Since neighboring states don’t have sales tax for farm equipment, we know some farmers buy equipment from tractor dealers in other states. In this case, which model should I use? Why? What if tractor dealers say they don't buy that high percentage of farm equipment from other states? Thank you so much! [attachment=549]EconometricRPCvsTrademodel.pdf[/attachment]
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    IMPLAN Support
    Hi Mi. I apologize for the long delay of our response. LPP means that only 14% of supply is normally met by local production by local demand of farm equipment production, of course that value doesn't necessarily apply to any given dealer's purchases. One dealer may only sell local production, another may not sell any local production. The result being that the gravity model says that only 14% is met by local supply. This of course can be edited to match what you know for any given firm. Likewise supply/demand pool ratio can be higher than 14% as this method of calculating looks at different variables and doesn't include factors such as cross hauling. You are correct in that these numbers indicate that 85.33% of farm machine production is bought from producers outside of the region (whether domestic or foreign). But this value is only the manufacturer's producer value, and farmers are unlikely to purchase directly from the manufacturing floor. Instead, farmers will buy from a local dealer, and the RPC for the wholesalers (319) you will likely see is much closer to 100%. One way to view what portions of the final sale to farmers goes to wholesale vs. manufacturing is to use Margining. This link will walk you through that process.http://implan.com/administrator/index.php?option=com_content&task=article.edit&id=160 Thanks!
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