Public Finance Review

Publichttp://pfr.sagepub.com/ Finance Review

Who Pays the Ticket Tax? James Alm and William H. Kaempfer Public Finance Review 2002 30: 27 DOI: 10.1177/109114210203000102 The online version of this article can be found at: http://pfr.sagepub.com/content/30/1/27

Published by: http://www.sagepublications.com

Additional services and information for Public Finance Review can be found at: Email Alerts: http://pfr.sagepub.com/cgi/alerts Subscriptions: http://pfr.sagepub.com/subscriptions Reprints: http://www.sagepub.com/journalsReprints.nav Permissions: http://www.sagepub.com/journalsPermissions.nav Citations: http://pfr.sagepub.com/content/30/1/27.refs.html

>> Version of Record - Jan 1, 2002 What is This?

Downloaded from pfr.sagepub.com by James Alm on July 15, 2014

PUBLIC Alm, FINANCE Kaempfer REVIEW / WHO PAYS THE TICKET TAX? Since 1971, the City of Boulder, Colorado, has imposed a tax of 5% on the price of admission to all public events, including movies, concerts, and theatrical performances. However, the city has recently been sued by theater owners on the grounds that the theater owners bear the burden of the tax and that this burden represents an unconstitutional infringement on the theater owners’freedom of speech. The claim by owners that they bear the burden of the tax goes directly to the issue of the incidence of the tax; that is, who bears the burden of the ticket tax? In this article, the incidence of the ticket tax under various scenarios is examined. The authors conclude that it is extremely unlikely that the true burden of the ticket tax falls on theater owners. Instead, it is found that consumers are almost certain to bear the burden of the tax. More generally, the authors conclude that most excise taxes should be viewed as falling on consumers despite claims by interested or disinterested parties to the contrary.

WHO PAYS THE TICKET TAX? JAMES ALM Georgia State University

WILLIAM H. KAEMPFER University of Colorado at Boulder

Since 1971, the City of Boulder, Colorado, has imposed a tax of 5% on the price of admission to all public events, including movies, concerts, and theatrical performances. This admissions tax, or “ticket tax,” is a relatively unimportant source of revenue for the city, accounting for less than 0.5% of total sales and use tax receipts in recent years. For example, in 1999 total sales and use tax receipts of the city were $76.8 million, whereas the ticket tax generated only $368,000. Nevertheless, the use of this ticket tax is consistent with the heavy use of sales taxes in Boulder. In 1999 total tax revenues from the retail sales tax, the business use tax, the construction use tax, the motor vehiAUTHORS’ NOTE: An earlier version of this article was presented at the Second Annual Conference on the Economics of the Entertainment Industry, California State University–Northridge, October 2000. Please address all correspondence to James Alm, Department of Economics, Andrew Young School of Policy Studies, Georgia State University, University Plaza, Atlanta, GA 30303-3083; phone: 404-651-0420; fax: 404-651-4985; e-mail: [email protected]. PUBLIC FINANCE REVIEW, Vol. 30 No. 1, January 2002 27-40 © 2002 Sage Publications

27


28

PUBLIC FINANCE REVIEW

cle use tax, license fees, and the ticket tax financed roughly half of the city’s budget. Boulder relies far more heavily on the sales tax than most other local governments, in both Colorado and other states. However, the city has recently been sued by theater owners in Boulder on the grounds that the theater owners bear the burden of the tax and that this burden represents an unconstitutional infringement on the theater owners’ freedom of speech. We cannot comment critically on the legal issues involved in the case. However, the claim by owners that they bear the burden of the tax goes directly to the issue of the incidence of the tax; that is, who bears the burden of the ticket tax? It is this issue that we examine in this article. In the next section, we discuss in more detail the background of the legal case, and this is followed by a discussion of the movie theater environment in Boulder. In the fourth section, we discuss the likely pattern of incidence under various scenarios and conclude that it is extremely unlikely that the true burden of the ticket tax falls on theater owners. Instead, we find that the burden of this tax is almost certain to fall on consumers. More generally, our analysis suggests that most excise taxes in most scenarios should be viewed as falling on consumers despite claims by interested or disinterested parties to the contrary. The final section has some concluding comments.

LEGAL BACKGROUND

As noted earlier, in 1971 the City of Boulder initiated a tax of 5% on the price of admission to public events such as movies and concerts. The tax has been in place at the same rate ever since. Over the ensuing three decades, movie theaters have come and gone in Boulder, following a pattern predicted by market forces. Large, older, and singlescreen movie houses in traditional commercial neighborhoods have gradually disappeared. They have been replaced by multiple screen sites near newer shopping areas. In December 1995, a large and technologically sophisticated multiple screen complex opened in the nearby City of Louisville, 71 2 miles


Alm, Kaempfer / WHO PAYS THE TICKET TAX?

29

from the newest theaters in Boulder. It is noteworthy, however, that this complex fell outside of the jurisdiction of the 1971 tax. Indeed, movie attendance seemed to fall off at the taxed theaters in Boulder following its opening. In 1996, the movie theater owners in Boulder jointly brought suit against the city and its tax on constitutional grounds, and they asked for a refund of remitted amounts. This case is still under consideration. The legal basis of the theater owners’ claim stems from a U.S. Supreme Court decision, Minneapolis Star and Tribune Co. v. Minnesota Commissioner of Revenue (460 U.S. 575 [1983]), an action that pertained to a tax levied by the state of Minnesota on paper and ink costs that exceeded $100,000. The newspaper charged that the tax singled out the press as opposed to other venues and, in particular, singled out only a few individual members of the group of newspapers publishing in Minnesota: namely, those large enough to have paper and ink costs in excess of $100,000. The Supreme Court found that, because of the tax’s uneven application, the tax was intended to suppress free expression by the press and was therefore content based. In the Boulder case, the theaters have maintained that the tax was similarly uneven in application due to its jurisdictional nature. Thus, they have argued that the tax restricted their rights of free speech. The city maintained that it had the right to apply the tax, citing a case in which the Supreme Court upheld the right of a municipality to enact a regulation that “serves purposes unrelated to the content of expression . . . even if it has an incidental effect on some speakers of messages but not others” (Ward v. Rock Against Racism, 491 U.S. 781, 791 [1989]). The city argued that purposes unrelated to content in its case include raising revenue and providing for the public safety of theater goers. In addition, however, the city maintained that the admissions tax is an excise tax levied against consumers and only collected or remitted by theaters, so that the theaters had no right to even claim a refund. This claim by the city amounts to a charge that the incidence of the ticket tax falls on consumers and not on suppliers. It is this claim that we investigate later.


30


ENVIRONMENT OF THE BOULDER MOVIE COMMUNITY

At the time that the suit against the City of Boulder was filed, there were five different movie houses in Boulder with a total of 17 screens. One theater was a large, older theater with only 1 screen, located in a university neighborhood and catering to a somewhat limited clientele. Another 2-screen complex featured discounted recent, but not new, releases. The other three theaters made up a traditional contemporary market of 4- to 6-screen houses showing new releases in proximity to each other. Each of the theaters in Boulder has changed ownership at least once since 1971. Table 1 lists the various Boulder theaters as well as the prices charged by each in June 1997. It should be noted that the oldest of these theaters, the Flatirons Theater, is now closed. Table 1 also provides information on the theater market in two nearby cities, Louisville and Longmont. The Colony Square 12 opened in Louisville in December 1995 amid much notice about its state-ofthe-art sound system and seating. At the time of its opening, the area around this new theater complex was in the middle of a very significant population boom, during which the immediate area grew from a population of only a few thousand to one of almost 50,000. This complex is 7 ½ miles away from Boulder, a drive that typically takes no more than 15 minutes. Table 2 shows that there seems to have been a large impact on the gross revenues of many of the Boulder theaters from the opening of the Louisville complex. The theater owners in fact claim that this decline in revenue represents evidence that the burden of the ticket tax is on theater owners. It is this claim that is examined in the next section.

THE INCIDENCE OF THE TICKET TAX: SOME POSSIBLE SCENARIOS

The incidence of taxation is a well-developed area of study in public economics, and the incidence of a selective excise tax like the ticket tax has been examined at some length (Harberger 1962; Mieszkowski 1967; McLure 1975; Shoven and Whalley 1984; Pechman 1985; Kotlikoff and Summers 1987; Fullerton and Rogers 1993). There are


TABLE 1:

Movie Ticket Prices (as of June 1997)


Theater

Address (in Colorado)

Basemar Cinema Saver Flatirons Theater (United Artists) Arapahoe Village (Mann)

2990 Baseline Road, Boulder 1089 13th Street, Boulder 2480 Arapahoe Road, Boulder

Crossroads 6 (Mann)

30th Street and Pearl Street, Boulder 25th Street and Arapahoe Road, Boulder 1164 Dyer Road, Louisville

Village 4 (United Artists) Colony Square 12 (Mann)

Adult Evening Price

Adult Matinee Price

Children and Seniors Price

Student Discount Price

Distance From 28th Street and Canyon Boulevard (Boulder, Colorado)

Number of Screens

$1.75

$1.75

$1.75

None

1.4 miles

2

$7.00

$4.25

$4.00

None

1.0 miles

1

$6.50

$4.25

$4.00

300 yards

4

$6.50

$4.25

$4.00

$5.50 with ID $5.50 with ID

400 yards

6

$7.00

$4.25

$4.00

None

200 yards

4

$7.00

$4.25, Monday through Friday; $4.75, Saturday, Sunday, and holidays

$4.00

None

7.5 miles

12

Sound System

THX Surround Sound

31

(continued)

32 TABLE 1:

Continued


Children and Seniors Price

Student Discount Price

Number of Screens

Address (in Colorado)

Adult Evening Price

Twin Peaks 20 (United Artists)

Twin Peaks Mall, Longmont

$6.25

$4.00

$4.00

None

12.1 miles

10

Courtyard 4 (United Artists)

Parkway Center, Longmont

$6.25

$4.00

$4.00

None

13.4 miles

4

Theater

Adult Matinee Price

Distance From 28th Street and Canyon Boulevard (Boulder, Colorado)

Sound System 2-Sony Dynamic Digital Sound; 8-DDS 2-Dolby Stereo; 2-Dolby Mono


TABLE 2:

33

Boulder, Colorado, Theater Revenue Changes, 1995-1996

Gross Revenue Boulder Theater Baseman Cinema Saver Flatirons Theater Crossroads 6 Arapahoe Village Village 4

1995

1996

Percentage Change

$409,948 $198,083 $1,434,133 $2,273,407 $1,345,849

$450,255 $277,569 $1,251,806 $1,387,659 $1,027,112

+9.8 +40.1 –12.7 –39.0 –23.7

features of the Boulder ticket tax that make much of this existing analysis of little use here. However, it is useful to start with the standard tax incidence analysis of an excise tax and then to introduce those specific variations in the Boulder environment that affect the conclusions. Consider first the simplest case (Scenario 1), the introduction of an excise tax in a single, perfectly competitive market. It is well known that the split of the tax between consumers and producers depends on the relative elasticities of demand and supply; consumers bear relatively more of the tax burden when elasticity of supply is greater and relatively less of the burden when elasticity of demand (in absolute value) is greater. Even in this simple world, then, there are two circumstances in which producers—the theater owners—bear the full burden of a ticket tax: if demand is perfectly elastic or if supply is perfectly inelastic. A simple algebraic example illustrates this scenario. Suppose that a perfectly competitive market has a demand curve defined by (P = a – bQ) and a supply curve defined by (P = c + dQ), where a, b, c, and d are positive parameters. The imposition of a specific excise tax T changes the supply curve to (P = c + T + dQ), where the price P is interpreted as the gross-of-tax price paid by consumers. Solving these equations gives [P = (ad + bc + bT)/(b + d)]. The tax therefore raises the price gross-of-tax paid by consumers and lowers the price net-of-tax received by producers; that is, ∂P/∂T = b/(b + d), and the incidence is in general split between consumers and producers depending on the slopes (and the elasticities) of the demand and supply curves. The incidence falls completely on producers (e.g., ∂P/∂T = 0) only in the special—and unrealistic—cases that b = 0 or d approaches infinity; the


34


former case implies that the demand is perfectly elastic, and the latter case implies that supply is perfectly inelastic. Altering this simple model to allow for monopoly provision of movies does not change the basic result.1 Now, it is possible to argue that the demand for tickets may well be elastic, given the number of substitutes that are available for this activity. It is also possible to argue that, at least in the short run, supply is likely to be inelastic. Nevertheless, it is implausible to argue that the combination of elasticities is such that the full burden of the ticket tax falls on suppliers. Instead, even in the short run, the incidence is likely to be split between consumers and producers, and, as the elasticity of supply increases with an increase in the time horizon, the relative burden on producers becomes even less. In fact, it seems likely that in the long run the elasticity of supply becomes perfectly elastic in the movie industry. In this setting, the burden of the ticket tax falls completely on consumers. In consequence, the simple model of tax incidence does not give much support to the theater owners’ economic claim that they bear the full burden of the ticket tax. Instead, a more plausible conclusion is that consumers bear the bulk of the burden. Let us therefore consider more complicated scenarios. Recall that there are essentially two producers of movie entertainment: the Boulder theaters in which the ticket tax is imposed and the surrounding area theaters in which there is no tax. If these two markets are fully linked so that there are two (competitive) producers in the market, then it is straightforward to show that part of the ticket tax is again shifted to consumers, depending on the relative elasticities of demand and supply. It is important, however, that the part of the ticket tax that is shifted from consumers to producers falls only on the taxed producer. The two competitive producers must sell at the same price to consumers, but one producer is also required to pay an excise tax whereas the other is not. To illustrate this Scenario 2, suppose now that there are two perfectly competitive firms that provide movie entertainment, each of whom has supply schedule given by (Pi = c + dQi), where i = 1,2 and c and d are parameters; suppose that only Firm 1 is subject to the excise tax T; and suppose finally that demand is unchanged at (P = a – bQ).



35

Because both firms must sell at the same price to consumers, the total industry supply is given by [Q1 + Q2 = (2P – 2c – T)/d]. The equilibrium price now becomes [P = (ad + 2bc + bT)/(2b + d)]. The tax again raises the gross-of-tax price paid by consumers by an amount that depends on the elasticities of demand and supply (e.g., ∂P/∂T = b/(2b + d)), so that consumers bear some of the burden of the ticket tax and bear more of the burden the greater the elasticity of supply and the lower the elasticity of demand. However, the part of the tax burden that falls on producers falls only on the taxed producer; that is, the untaxed producer receives the tax-inclusive price P, whereas the taxed producer receives only (P – T). In this scenario, then, only the taxed producer bears that part of the ticket tax that falls on producers. It is quite possible that this is the implicit scenario that the Boulder theater owners have in mind. The presence of untaxed theaters in the surrounding Denver metropolitan area further supports the conclusion that Boulder owners may bear a disproportionate burden of that part of the ticket tax that is shifted away from consumers. However, even in this scenario, it is exceedingly unlikely that Boulder theater owners bear the full burden of the ticket tax; that is, the price received by Boulder theater owners does not fall by the full amount of the ticket tax. Instead, much of the tax burden is still likely to fall on consumers—recall that ∂P/∂T = b/(2b + d)—given the relative elasticities of demand and supply. Even more complicated scenarios generally imply that consumers are likely to bear the bulk of the tax burden. These other scenarios recognize several other key aspects of the Boulder movie environment that must be remembered. First, the ticket tax has been imposed continuously since 1971, and in the ensuing 29 years, every single theater in Boulder has either changed ownership, been newly built, or been extensively remodeled. Second, the population of the Boulder area has grown by several hundred percent since 1971, which implies that the market for movie theater showings can be characterized as fairly dynamic. Given these facts, consider the incidence of the ticket tax before the opening of new regional theater complexes outside of Boulder in the mid-1990s, and then consider the impact on the incidence after the opening of the new complexes.


36


It seems clear that Boulder theater owners would only enter the market if they were confident that they could earn a competitive return. This suggests that the full incidence of a tax imposed in 1971 must fall on others besides current theater owners. There are three possible parties on whom the incidence may fall: consumers of movies; the original 1971 theater owners; and owners of other, fixed factors of production who are involved in the delivery of movies to the public, mainly the owners of the property on which the theaters are built. Start with the third possible candidate. Although land is fixed in supply to all uses in Boulder—indeed, various zoning restrictions in Boulder introduced over the years have dramatically increased the relative scarcity of land within the city limits—land is not fixed in supply to specific uses. Any prospective user of land must bid the land away from other users. In this process, it seems unlikely that the incidence of the ticket tax is shifted back to a property owner who has alternate uses for his or her land. In the second possibility, it is conceivable that the incidence of the tax—and even the incidence of a tax levied at a 5% rate well into the future—could be shifted onto original theater owners at the time of transfer by capitalizing the taxed-away profits into the purchase price of the assets at the time of sale. However, although this is possible, it seems unlikely. The supply of movie services is likely to be elastic. Furthermore, recall that every theater now in operation in Boulder has either been built or extensively remodeled since 1971. This fact suggests that current owners have been actively expanding capacity to serve a growing market. If the tax had been negatively capitalized into asset prices at the time of transfer, one would not expect additional infusions of capital into the market. In consequence, it is likely that the remaining possible candidate— those who consume the services of movie theaters, or consumers— have borne the full burden of the ticket tax, at least before the opening of the new complexes. The opening of the new complexes complicates the analysis. In the presence of the new theaters in Louisville (and also in Longmont, 12 miles from Boulder), the demand for tickets in Boulder will become more elastic and will also likely decrease. It is this decline in Boulder theater attendance that generated the decline in City of Boulder ticket



37

revenues. Nevertheless, it is hard to avoid the conclusion that consumers will still bear the burden of the tax, at least those consumers unwilling or unable to drive to the surrounding areas. As argued earlier, immobile factors cannot bear the burden of the tax, given the alternative uses of the land. Current Boulder theater owners also cannot bear the burden: The long-time existence of the ticket tax in a rapidly growing market implies that the theater owners have fully incorporated the tax into the price paid by consumers, leaving no burden on other participants. A simple general equilibrium model that captures these different possibilities (Scenario 3) generates the same basic conclusion: Consumers are likely to bear the bulk of the burden of the ticket tax. Consider a world in which there are two representative consumers, both of whom have utility functions that depend on consumption of a numeraire commodity and two types of movie commodities. The two movie types are meant to denote movies produced by one sector (or jurisdiction) and those provided by another, and the movies are close but not perfect substitutes in the representative consumers’ utility functions. Also, the two consumers differ in their elasticities of demand for movies, with one consumer type (the unresponsive type) having relatively inelastic demands for both movies and the other (the responsive type) having relatively elastic demands. All goods require the use of two factors of production. One factor (labor) has a perfectly elastic supply, whereas the other factor (land) has a supply that is neither perfectly elastic nor perfectly inelastic. The commodities are produced competitively and at constant returns to scale. The only tax in this world is an excise tax T on one movie type. These assumptions are meant to capture the essential elements of the theater market: multiple consumer types purchasing movie services provided in multiple jurisdictions and produced by combining factors of production with differing supply elasticities. It is possible to show that the incidence of the ticket tax falls in general both on consumers and on land. However, this general conclusion is modified significantly as some of the underlying assumptions change. As the supply of land becomes more elastic—and so the supplies of taxed and untaxed movie services also become more elastic— the burden on land owners declines. Furthermore, as the demands for movies become less elastic for both consumers, the burden on con-


38


sumers increases. Finally, as the demands for movies by the unresponsive consumer become even less elastic, this consumer bears successively greater shares of the burden of the ticket tax. All of these modifications lead to the conclusion that consumers are likely to bear the burden of the ticket tax. These modifications also reflect the nature of the theater market in the Boulder area. In short, the conclusion from the simplest scenario seems resurrected in the more realistic scenarios: It is (immobile or unresponsive) consumers who bear the burden of the ticket tax. As long as there are some moviegoers who are unwilling to leave the taxed theater market in Boulder, the incidence of the tax falls on them. Of course, if the market shrinks to a great enough extent, some theater operators may choose to leave the Boulder market, as one did in recent months. However, this exit should be ascribed to market dynamics (including the presence of new, nearby theaters) rather than to the tax. Even aside from the validity of the legal argument of the theater owners against the ticket tax, the validity of the economic argument is groundless.

CONCLUSIONS

The actual incidence of this minor tax is of little importance for the overall burden of taxation in the City of Boulder and its surrounding areas. Suppose that consumers do in fact bear the full burden of the ticket tax. Then, according to the Bureau of Labor Statistics (2000), the ticket tax has a progressive impact on the distribution of income because the share of fee and admission expenditures rises significantly with income.2 However, the added tax burden depends on the share of fees and admissions expenditures in consumers’ budgets and, in the aggregate, entertainment expenditures were only 1.2% of total household expenditures in 1999. The incidence of the ticket tax is clearly of much less importance than the incidence of other taxes, such as the individual income tax, the payroll tax, the corporate income tax, or general sales taxes. However, it seems likely that similar incidence questions will increasingly become an issue in localities around the country. Many local governments are turning to specific excise taxes to finance their ex-



39

penditures, and they are imposing these taxes in a setting in which neighboring jurisdictions may not always follow suit. Even if regionalbased taxes are imposed, the incidence of these levies will depend on the actions of governments immediately outside the regions and on the willingness or ability of consumers to move to those venues. In short, the issues in the Boulder ticket tax are of relevance in many situations in which some kind of sales tax is imposed. In this light, the conclusion that consumers are almost certain to bear the burden of the tax— in a wide variety of scenarios—is an important one. It implies that most excise taxes should be viewed as falling on consumers despite claims by interested or disinterested parties to the contrary.

NOTES 1. With monopoly, the equilibrium price with the tax becomes [P = (ab + ad + bc + bT)/(2b + d)], so that [∂P/∂T = b/(2b + d)]. 2. For example, the share of aggregate expenditures on fees and admissions by quintile is 6.2% for the lowest 20% of the income distribution; and the shares are 8.8%, 13.4%, 23.3%, and 48.3% for the next four quintiles, respectively (see Bureau of Labor Statistics 2000).

REFERENCES Bureau of Labor Statistics. 2000. Consumer expenditure survey. Washington, DC: Bureau of Labor Statistics. Fullerton, Don, and Diane Lim Rogers. 1993. Who bears the lifetime tax burden? Washington, DC: Brookings Institution. Harberger, Arnold C. 1962. The incidence of the corporation income tax. Journal of Political Economy 70:215-40. Kotlikoff, Laurence J., and Lawrence H. Summers. 1987. Tax incidence. Chap. 16 in Handbook of public economics, vol. 2, edited by Alan J. Auerbach and Martin S. Feldstein. New York: North-Holland. McLure, Charles E. 1975. General equilibrium incidence analysis. Journal of Public Economics 4:125-61. Mieszkowski, Peter M. 1967. On the theory of tax incidence. Journal of Political Economy 75:250-62. Pechman, Joseph E. 1985. Who paid the taxes, 1966-85? Washington, DC: Brookings Institution. Shoven, John B., and John Whalley. 1984. Applied general equilibrium models of taxation and international trade. Journal of Economic Literature 22 (3): 1007-51.


40


James Alm is a professor in and chair of the Department of Economics in the Andrew Young School of Policy Studies at Georgia State University. Much of his research has examined the responses of individuals and firms to taxation in such areas as tax reform, social security, housing, indexation, tax compliance, and, especially, the income tax treatment of the family. William H. Kaempfer is a professor of economics and associate vice chancellor of academic affairs for budget and planning at the University of Colorado at Boulder. His academic research focuses on international political economy, public choice economics, and the economics of sports.
