Transcript The Politics of Taxation and Finance

Politics in States and Communities
(15 Ed.)
Thomas Dye and Susan MacManus
Edited by Bob Botsch for POLI 458
Chapter 14
The Politics of Taxation and Finance
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Learning Objectives
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Describe how much money federal and state governments spend, discuss the
extent to which spending has increased over time, and compare spending patterns
between local and state governments.
Compare and contrast state and local taxes, including property taxes, sales taxes,
excise taxes, and income taxes; evaluate whether each of these taxes is
progressive, regressive, or proportional; and describe other revenue sources for
state and local governments.
Discuss the differences in tax policy among the states, and explain what accounts
for these differences.
Describe Americans’ attitudes about taxes, various mechanisms that are
sometimes used to limit taxes, and the impact of such tax limits.
Outline the sources of fiscal stress in state and local governments, and assess how
efforts to relieve this fiscal stress impact citizens.
Describe legal restraints on state and local government debt; explain how state
and local governments can undertake capital projects nonetheless by issuing
bonds; compare and contrast different kinds of bonds: general obligation, revenue,
and industrial development bonds; and discuss how the federal tax code treats
income from different types of bonds.
Describe what happens when a local government faces bankruptcy, and assess the
financial health of U.S. cities in the wake of the Great Recession.
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An Overview of Government Finances
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National spends more, but some goes to state and local!
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The federal government spends $3.5 trillion annually
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State and local governments an additional $1.6 trillion
Growth of government spending: Gross domestic product (GDP) is the total
value of all the goods and services produced in the United States in a year; a
measure of the size of the U.S. economy
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Federal spends app 22% of GDP (trends)
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State and local app 11%
State and local governments direct most of their spending toward education,
social services (welfare and health), public safety (police and fire), and
transportation
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Types of Taxes and Politics
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Local property taxes: Largest source of revenue for local governments;
are usually regressive
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State sales taxes: Important source of revenue for state governments
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Selective sales (excise) taxes: Cigarette, alcohol, and gas: States vary a lot
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State income taxes: Imposed by all but seven states; may be progressive
or flat, with various exemptions, #1 source in states where used
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Corporate taxes: In 44 states; popular with voters but may cause
businesses to relocate
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Lottery and gambling revenue: Administrative costs take 50 percent, 2%
of state revenue
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User fees/charges: Fastest growing source of state and local revenue
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Total Government Expenditures (state and
local) as a Percentage of GDP
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Revenues and Expenditures: States versus Localities
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Revenues and Expenditures: States versus Localities
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Revenues and Expenditures: States versus Localities
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Income Taxation in the States
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Explaining State Tax Systems
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Tax burden is taxes as a percent of a person’s income; the larger the
proportion of the income paid in taxes, the larger the tax burden.
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Progressivity and Regressivity: Progressivity increases and
regressivity decreases with higher levels of state income; overall state
and local taxes are regressive, which is largely attributed to state and
local government reliance on sales and property taxation rather than
progressive income taxation (but income taxes often are in practice
closer to flat than progressive)
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Revolting against Taxes and Spending
• Popular Opposition to Rising Taxes
• Tax Limitations
o Property Tax Limits—may limit mils, increases, or reassessments
o Personal Income Limits—placed in constitution to make change hard
o State Expenditure Limits—limit to % of total personal income, or limit by
% population growth or by % growth in state economy
o Prohibitions on Specific Taxes—income, food, drugs, rents, or services
o Exemptions and Special Treatments—homestead exemptions for the
elderly
• Impact of Limits—made life tough for local govts
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Per Capita State and Local Government
Tax Revenue (Levels) and Tax Burdens
When Spending Cuts are Necessary: The
Great Recession & Cutback Management
• Fiscal Stress in the States—decline in construction and housing
prices in high growth states like Nevada
• Fiscal Stress at the Local Level—demands up as revenue down
• Difficult Decisions
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Resist cutting (Washing Monument strategy) or smooth the decline?
Take one deep gouge or a series of decrements?
Share the pain or target the cuts? “Across the board” politically easier
Promote efficiency (fire, police) or programs for the vulnerable (e.g.
youth programs, summer camps, upgrades in housing)
• Cutback (Retrenchment) Strategies:
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The no-change strategy—across the board/seniority/hiring freezes
A hierarchy of community-needs strategy—ranking programs
A “privatizing” strategy—taxes become user fees
A reduction in capital spending strategy—deferred maintenance
A reduction in labor strategy—freezes, layoffs, labor contracts and
benefits (al la Scott Walker in Wisconsin)
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State/Local Debt for Capital Improvements
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Capital Financing—borrowing money for improvements—outside typical
requirement for a balanced budget
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Constitutional Restrictions—debt ceilings both state and local, usually
only for general obligation bonds
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General Obligation versus Revenue Bonds
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Industrial Development Bonds—special revenue bonds to buy and
develop land for new business
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Municipal Bond Interest Deductibility—attractive to hi income people
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Public Bonds for Private Uses—controversial b/c subsidizes private entities
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Federal Tax Reform and Municipal Finance—1986 law that varies federal
tax exemptions with whether “essential,” “nonessential” or “private”
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Debt Patterns—varies with states and region—PAYGO financing in cons
states (like SC where Gov Haley threatened to veto any new bond bill)
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Spending and Borrowing
When a Local Government Goes Bust
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Cause—slow recovery from the great recession
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Bankruptcy: (30 cities since 2010) and having federal bankruptcy courts
take over fiscal control
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Imposed painful rescues—some cities (e.g.Detroit) in deep financial trouble
have been “rescued” by state and federal governments—very painful for
local employees and retired employees—severe losses in income
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The goal: Financial resiliency: Governments must implement strategies to
balance service levels and resources, fund reserves, capital, and liabilities,
early warning systems, and create a culture of flexibility and responsiveness
to combat future crises
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On the Web
• http://www.gpoaccess.gov/usbudget/
U.S. Federal Budget
• www.ntu.org
National Taxpayers Union
• www.taxfoundation.org
The Tax Foundation
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