A COMING BLOW FOR STATE BUDGETS

The December 2008 issue of State Legislatures magazine quotes some of my projections about possible future impacts of 3D printing on state budgets. Here is the long version of those projections, taken from my work in progress, The 3D Printing Revolution: Social and Economic Impacts.

State budgets are still reeling from the impact of the personal computer, the Internet, and e-commerce and the federal moratorium on taxing Internet sales and services. Attempts to make sales taxes more uniform from state to state and to revise legislation to make those taxes more collectable may help. But there’s a new computer-related impact on sales taxes that will be more difficult to cope with.

The average state meets about a third of its revenue needs from sales taxes. In 2007, Sami Dakhlia of the University of Southern Mississippi and Robert P. Strauss of Carnegie-Mellon University (“Should Sales Taxes Be Imposed on E-Commerce?” August 12, 2007, available from the Social Science Research Network, http://ssrn.com/abstract=1006880) found that about a fifth of sales tax revenues are potentially threatened by untaxed e-commerce sales. In November 2007, Florida said $2 billion of its $3.4 billion budget shortfall is due to uncollected e-commerce sales taxes. In 2008, with the national economy pinched by the collapse of the sub-prime mortgage industry and ensuing foreclosure crisis, and by rising oil prices, many states found themselves struggling with budget shortfalls. According to the Center on Budget and Policy Priorities, even before the current financial meltdown, half the U.S. states were facing budget shortfalls for fiscal year 2009. Amounts varied from $59 million (Vermont) to $16 billion (California), with the total topping $40 billion. Consequences are expected to include increases in other taxes, including income taxes, and cuts in services such as public health, education, and even highway maintenance.

How bad is the problem, really? It’s hard to say, but e-commerce has grown tremendously in the last few years. In the worst case, according to Dakhlia and Strauss, sales tax revenues will drop by 20 percent. Since sales taxes provide a third of state budgets, those budgets will take a seven percent hit even as demands for government expenditures increase. Consequences for services and infrastructure maintenance, already visible, will grow worse until other taxes are imposed.

The bad news does not stop with e-commerce. A new technology is now moving from industry to the home with the potential to reduce sales tax revenue much more. With e-commerce, the transactions exist to be taxed. With this new technology—3D printing--they do not.

3D printing is also known as rapid-prototyping or fabbing. It can be used to make replacement parts for appliances, a new head (or leg) for a broken doll, a specially shaped piece for a hobby project, decorative switch plates, coat hooks, children’s sandals, or a thousand other items. Once consumers have 3D printers, they will have a China on their desktop, and they won’t be spending nearly as much money at the local hardware store or Wal-Mart.

One of the new machines is the Desktop Factory, priced at just under $5,000 (compared to $20,000 for the cheapest of the machines available just two years ago). It works by building objects one layer at a time (like a deli meat slicer in reverse) out of plastic powder fused by intense light. The machine easily fits on a desktop and weighs less than 90 lbs. It can make things up to 5 inches on a side with layers a hundredth of an inch thick, slightly thicker than those laid down by the industrial machines.

The technology, according to its proponents, is about where the personal computer was in the mid-1970s. The personal computer took about two decades to create the Internet and e-commerce revolution. It seems a reasonable extrapolation that the 3D printer will have a similar impact, perhaps in less time. Indeed, the people behind the Desktop Factory say their goal "is to one day make 3D printing as common in offices, factories, schools and homes as laser printers are today. Just as desktop publishing exploded as prices dropped and laser printers became ubiquitous, so too will new uses for 3D printing emerge as devices become inexpensive and widely available."

If that goal is achieved, consumers will be happy. But government runs on taxes. If a manufacturer goes out of business because its erstwhile customers are printing instead of buying, it no longer pays corporate income taxes, and its employees no longer pay personal income taxes. If the company goes bankrupt, even property taxes may be lost. Meanwhile, those same erstwhile customers are no longer buying gasoline to drive to the store.

We do not yet have a clear idea of what proportion of total sales might be displaced by home 3D printing, nor of how those displaced sales will split between e-commerce and “bricks-and-mortar” commerce. But it is surely safe to say that there will be such a split and that therefore home 3D printing will increase the loss of sales tax revenues above what is already being experienced. The blow to state and national budgets could easily surpass ten percent, and with the added impact of lost corporate and personal income taxes, property taxes, and gas taxes the blow could be much greater. Exactly how bad the blow will be is impossible to tell at this point, but it seems realistic to say that it will be worse than the impact of e-commerce alone.

If state revenue is reduced by any significant amount, there will be effects in many areas--education, human services, health care, highway maintenance, law enforcement, and more. States may be reluctant to raise taxes, but their needs will not go away. If the shortfalls do not prove to be temporary, taxes will have to go up.

The question is which taxes. Since the single largest state revenue source is personal income taxes, that may seem the obvious choice, though it would not be a popular one. New taxes on 3D printers and the raw materials they require are another option, but under development is an open-source printer (the RepRap project) that will be capable of printing itself and will use multiple materials that could be prepared at home. The tax potential may be limited. A more likely solution may be licensing possession and use of 3D printers, with licensing fees taking the place of actual taxes.

Further down the road, we do have to worry about expansions of the individual citizen’s ability to make whatever he or she needs at home. In fact, we are likely to see that ability increasing year by year, with purchases of goods other than groceries, appliances, houses, and vehicles declining year by year. The result could be a shrinking national and even global economy. Since we are accustomed to a growing economy, generating predictable returns on investment, producing more goods for consumers who every year buy more and more and pay more and more sales taxes, and providing ever more jobs, this will be a serious matter.

The future is difficult to predict with any certainty. But the technology of 3D printing is developing rapidly, and its impacts may be large. It’s too early to panic, but it is not too early to start the conversation about what this technology may mean for state government.