Topic:
INDUSTRY (GENERAL); ECONOMIC CONDITIONS; TRAINING PROGRAMS; EMPLOYMENT (GENERAL); PROPERTY TAX; TAXATION (GENERAL);
Location:
ECONOMY ; TAXATION;

OLR Research Report


October 13, 2004

 

2004-R-0764

IMPACT OF MANUFACTURING JOB LOSSES ON THE STATE ECONOMY AND TAX BASE

By: John Moran, Associate Analyst

You asked for a description of the economic impact of manufacturing job losses in Connecticut and how such losses affect state tax revenues and local property taxes.

SUMMARY

Connecticut has lost thousands of manufacturing jobs in recent years resulting in significant economic impact on the state's economy. But there are no existing precise measurements of the impact. Recently CERC, an economic development corporation, estimated that the more than 46,000 manufacturing jobs lost in Connecticut since the beginning of 1998 has taken $2.2 billion in lost wages out of the state economy. Many workers who lose manufacturing work eventually find other jobs, although they may not earn as much in them, therefore not all the $2.2 billion is taken out of the economy.

The loss of these manufacturing jobs also has a ripple effect on other parts of the economy. One recent report estimated that 1.9 jobs rely either directly or indirectly on each manufacturing job. This “multiplier effect” takes into account the decrease in jobs related to goods, services, and raw materials needed for manufacturing as well as the decrease in purchasing by former manufacturing employees.

State and local governments also lose tax revenue due to the loss of manufacturing jobs. Job losses in a fairly high paying sector, like manufacturing, probably result in less income and sales taxes generated from the individuals who lose those jobs who are likely to be unemployed for a time, take lower paying jobs, or both. Using assumptions based on 2000 data, a manufacturing worker earning $60,000 a year pays an estimated $4,200 a year in combined income and sales taxes. Losing a thousand such jobs in one year means a potential loss of around $4.2 million in state revenue. But this revenue loss is tempered when those employees losing manufacturing jobs find another job. The exact amount of the tax loss depends upon the wage level of the new jobs.

Job loss only indirectly affects property taxes. It does not change the tax liability for a property owner who loses his job, but it may affect whether he pays the tax or leads him to sell his home. Extensive manufacturing job losses in a town could affect the town's overall property tax base and eventually lead to decreasing property values there.

MANUFACTURING JOBS LOSSES IMPACT ON THE ECONOMY

CERC (formerly known as the Connecticut Economic Resource Center) estimates that $2.2 billion in manufacturing wages have been lost in Connecticut since 1998, assuming the approximately 46,000 jobs lost paid an average of $48,000 a year. (CERC uses the more conservative $48,000 figure from federal data; for reasons detailed below, we also cite a 2000 state average annual wage for manufacturing of $60,000.)

This lost household income for former manufacturing workers leads to reduced consumer spending (retail purchases, home purchases, services, etc.) that in turn results in losses in other, consumer-related industries. In addition, another set of losses occurs as manufacturers reduce their purchases of raw materials, semi-finished products, and other goods and services they need to operate. This “multiplier effect” describes the jobs in other industries and companies affected by the loss of manufacturing jobs.

Using a nationally calculated multiplier of 1.0 to 1.5 for every dollar spent in manufacturing, CERC estimates the total economic impact of losing $2.2 billion in manufacturing wages to be $4.4 to $5.5 billion in the overall state economy.

The Manufacturing Alliance of Connecticut (MAC), CERC, and the Connecticut Center for Economic Analysis (CCEA) calculated that in Connecticut for every one manufacturing job there are 1.99 other Connecticut jobs that depend upon the manufacturing job. The MAC Index 2003, which the three organizations jointly produce, shows manufacturing has the highest employment multiplier of any other industry sector. (MAC Index 2003 can be found at http://www.mact.org/macindexindex.htm.)

But a significant amount of the decrease in manufacturing wages is replaced by growth in other sectors as many former manufacturing employees obtain jobs in the retail or service sectors. But both of these sectors pay less than manufacturing, so there is still an overall loss in wages that translates into a decrease in consumer spending. No data available measures the exact decrease in wages in Connecticut.

The loss in purchasing by manufacturers is generally not replaced by other sectors expanding as they do not purchase the same type of goods and services, especially the raw materials and semi-finished products needed in manufacturing.

STATE TAX REVENUE IMPACT

The state loses tax revenue when manufacturing jobs are lost. Job losses result in less income taxes and less sales taxes generated from the individuals who lose their jobs as they are likely to be unemployed for a time, take a lower paying job, or both. The tax losses are greater when the job loss comes from a higher-paying sector, such as manufacturing.

Using assumptions based on 2000 data, a manufacturing worker earning $60,000 a year pays an estimated $4,200 a year in combined income and sales tax (see Table 1). Using CERC's more conservative annual salary figure of $48,000 a year, the combined income and sales tax estimate is $3,360 a year. Losing a thousand such jobs in one year means an estimated annual state revenue loss of $3.7 to $4.2 million from the manufacturing sector.

Table 1. State Income and Sales Tax Estimates for an Average Manufacturing Job (2000)

Type of CT Tax

Tax as a

% of Income

Estimated Tax

for Manufacturing

Job Earning

$60,000 a Year**

Estimated Tax

for Manufacturing

Job Earning $48,000

a Year***

Income

Tax

3.08%*

$1,848

$1,478

Sales

Tax

3.92%*

$2,352

$1,882

Total Income and

Sales Taxes

 

$4,200

$3,360

Sources: *Congressional Quarterly's State Fact Finder 2004

**CT Dept of Labor

***CERC

The state average annual wage ($60,000) is higher than the $48,000 figure CERC used (see above) because it includes not just manufacturing production line workers, but also executive, clerical, and other white collar jobs at, or related to, a manufacturing plant.

LOCAL PROPERTY TAXES

No existing formula directly measures the impact of manufacturing job losses on property tax revenue. But using the same annual wage assumptions as those used in Table 1, we estimate property tax revenue in Table 2. This calculation shows an average manufacturing job generating from $2,011 to $2,514 a year in property taxes. Losing 1,000 such jobs would affect an estimated $2 million to $2.5 million in property tax liability. This is only an estimate and specific situations with job decreases affecting specific towns would produce different numbers.

Table 2. Property Tax Estimates for an Average Manufacturing Job (2000)

 

Tax as a

% of Income

Estimate for

Manufacturing

Job Earning

$60,000 a Year**

Estimate for Manufacturing

Job Earning $48,000 a Year***

Property Tax

4.19%*

$2,514

$2,011

Sources: *Congressional Quarterly's State Fact Finder 2004

**CT Dept of Labor data

***CERC

Job loss has only a potential and indirect impact on property taxes, in that it does not change the tax liability of a property owner who loses his job, and it does not automatically mean those taxes will not be paid. But the loss of jobs may affect the tax collection rate or could lead an unemployed worker to sell his home (moving either for new work or to economize), and extensive manufacturing job losses in a town could affect the town's overall property tax base and eventually lead to decreasing property values there.

JM:ts