Finance

The Week in Public Finance: The Netflix Tax, Another Atlantic City Rescue and More

A roundup of money (and other) news governments can use.
by | August 5, 2016

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Taxing Netflix

Pennsylvania this week became one of a few states that taxes online streaming video services like Netflix and and Hulu, a development that has consumers complaining but other governments watching closely.

The expansion of the state’s 6 percent sales tax was part of a revenue package passed earlier this year to fill a $1.3 billion hole in the state’s new $31.5 billion budget. Pennsylvania also extended the sales tax to digital downloads like music and ebooks. Sixteen other states already do that, but it has proven difficult to tax streaming services.

Last year, Alabama lawmakers tabled a study that would have expanded its 4 percent digital downloads tax to streaming services. Vermont looked at the issue but then the technology was more akin to a service than a tangible good. Massachusetts passed a wide-ranging technology tax in 2013 that was quickly repealed after the tech industry complained of the difficulties of complying to it. (For the record, Florida does apply a small communications tax to streaming services.)

Chicago is the only other major jurisdiction to implement what’s dubbed the "Netflix tax." Last fall, it extended its 9 percent amusement tax to a host of other services. The move was highly controversial because, like in Pennsylvania, it was seen as a ploy to fill a budget gap.

The Takeaway: Ploy or not, states and localities are steadily losing out on their sales tax collections. As we have moved from a goods to services economy, the sales tax base has shrunk dramatically. Between 1970 and 2010, the mean state sales tax base narrowed from 55 percent of personal income to 37 percent.

Digital goods are a considerable part of that. Sales and rentals of DVD and Blu-ray discs have fallen by half in less than a decade while CD and video game sales have also declined sharply. The Wall Street Journal estimates states may have collectively lost as much as $1 billion dollars a year in tax revenue from those three items alone.

States have been trying for decades to expand the sales tax to services with generally little success. But as revenue growth continues to be historically slow and fixed costs like health care and pensions rise, attempts to tax technology services will continue. Pennsylvania will likely provide the best case study yet for other states eyeing the streaming issue.

Atlantic City Avoids Default, Again

For the second time in four months, financially strapped Atlantic City, N.J., avoided defaulting on a closely watched debt payment. On Monday, the city made a $3.4 million payment after the state came to the rescue with a $74 million bridge loan.

Back in May, Atlantic City was expected to default on another debt payment but, once again, was saved when the state approved rescue legislation for the troubled gambling hub.

Under the new bridge loan, city leaders have agreed to start reporting weekly to the state and will dismiss a lawsuit it brought against it. The city will also by Sept. 15 dissolve its water utility, which has been valued at as much as $100 million. The bridge loan will help Atlantic City make upcoming debt payments and devise a plan by early November for its financial recovery, which is required by the rescue package.

The Takeaway: New Jersey has not had a municipal default since the Great Depression, a fact that distinguishes the state in the credit market. If Atlantic City does impair its creditors in any way, it will be viewed as not just a mark against the struggling gambling town, but other distressed cities and even New Jersey itself. As such, New Jersey isn’t expected to approve any plan that hurts bondholders -- which generally leaves it to citizens and city services to make the sacrafice.

‘The Toast of Kalamazoo’ (Zoo-Zoo-Zoo-Zoo-Zoo)

Turns out Detroit’s Grand Bargain wasn’t a one-time thing in Michigan.

The city of Kalamazoo has announced that it will accept $70 million in private donations over three years to create what it will call the Foundation for Excellence. The seed money is no small chunk of change -- equal to 35 percent of the city’s general fund budget -- and was donated by area philanthropists William Johnston, William Parfet and others.

The city also plans to secure additional contributions for future years: The idea is the foundation’s earnings would provide a new revenue stream for city operations.

Kalamazoo plans to use the money to eliminate a structural budget deficit, roll back local property taxes and help fund economic development and community improvements. Mayor Bobby Hopewell called the donation “a game-changing opportunity.”

The Takeaway: This could potentially set an example for other cities also suffering from a declining tax base and high fixed costs. Over the past several years, Kalamazoo has made significant spending cuts, but has been limited in its ability to raise revenues thanks to state limits on increasing property taxes.

Moody’s, which has twice downgraded the city for these reasons, called the public-private funding model a “credit positive for Kalamazoo because it will provide the city with significant additional resources” and is a way to leverage non-raditional revenues. In other words, this deal is a real pipperoo ( -- just one last Glen Miller reference, I promise.) The move represents a creative way to turn a one-time fix like a donation into a recurring revenue stream.

The idea of investment funds to help budgets has been gaining steam in recent years as states and localities look to eke out more revenue in a very slow growth era. Alaska’s governor wants to overhaul the state’s finances to create such a fund to help its budget. And other states have implemented rainy day funds to help with making their annual pension payments.

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*This story has been updated 

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