Transcript Week 7 Part 2

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
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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