Week 7: California State and Local Government Finance

• Guest Speaker: Michael Cohen, Legislative Analyst’s Office, Local Government Section– Proposition 13 and other state-local finance issues– State-local finance reform prospects

• Carryover from week 6– Principles and issues of taxation– Revenue politics -- fairness– Tax expenditures

• Preview of ethics in public budgeting and finance

Vocabulary

• Progressive and regressive taxes

• Tax burden (per $1000 of personal income)

• General tax

• General Fund/Special funds

• Fees/user fees

• Assessments

• Special funds

• Tax expenditures

• Gann Limit/State Appropriations Limit (expenditure limit)

Taxes for State and Local Government

Principles of sound tax policy:

• Equity

• Administrative feasibility

• Appropriateness

– sufficient; stable; predictable

• Political feasibility (acceptance)

• Accountability/visibility

– payer understands charges

Revenue Politics

• Successful political leadership

– confront public good and fairness issues

– go public with options

– good planning, no surprises

– honesty

• Failed leadership

– avoidance/lack of full disclosure

– require gimmicks and fixes

– earmark now, move later

– temporary taxes for ongoing needs

Sales Tax Issues

Logic: capacity to pay as measured by consumer spending

Issues for continued vitality of sales tax:

• Exclude business inputs (against political pressure)

• Minimize exemptions of household purchases

• Include services in addition to goods

• Include out-of-state purchases (mail order, e-commerce)

Income Tax Issues

Logic: capacity to pay as measured by earnings

Issues:

• Stability

– less stable than other taxes

– volatile now with high tech economy

– capital gains and stock options income

• Controlling deductions, exclusions, credits

Property Tax Issues

Logic: capacity to pay as measured by real property holding

• Public opposition

– to rates and rate increases

– to nature of the property tax (importance of private property in US economy and ideology)

– subjectivity

• Evolution away from original intent to tax assets to taxing only one form of asset

• Importance to school finance

Tax Expenditures versus Budgeted Expenditures

• Similarities to budgeted expenditures– aimed at accomplishing public policy objectives– cost to the taxpayer– subject to interest group pressure– “pork” for constituents

• Differences from budgeted expenditures– harder to count--must estimate– subject to far less analysis– beneficiaries harder to discern; less visible– more resistant to cuts -- become entitlements

Some Ethical Issues in Public Finance

• Estimate of available revenues

– Are there circumstances when withholding information could be ethical?

– Choosing optimistic v pessimistic scenarios

• Impact of tax policies

– Short-term v long-term impacts (leave problems for successors)

– Political expediency to gain passage (features or gimmicks that aren’t fiscally sound)

Preview of Week 8

• Guest Speaker: Betty Masuoka

– Assistant City Manager, City of Sacramento– Topics:

• city budget process: expenditures and revenues• major revenue/financing issues facing the city

• School Finance• E-commerce• ICMA Case Studies