Politics in States and Communities (15 Ed.) Thomas Dye and Susan MacManus

The Politics of Taxation and Finance Chapter 14 The Politics of Taxation and Finance © 2014 Pearson Education, Inc. All rights reserved.

Learning Objectives 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 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 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. © 2014 Pearson Education, Inc. All rights reserved.

An Overview of Government Finances The federal government spends $3.5 trillion annually, 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 State and local government spending: State and local governments direct most of their spending toward education, social services (welfare and health), public safety (police and fire), and transportation; spending patterns are different between states and local governments © 2014 Pearson Education, Inc. All rights reserved.

Types of Taxes and Politics Local property taxes: Largest source of revenue for local governments; are usually regressive State sales taxes: Most important source of revenue for state governments Selective sales (excise) taxes: Cigarette, alcohol, and gas: States vary a lot State income taxes: Imposed by all but seven states; may be progressive or flat, with various exemptions Corporate taxes: In 44 states; popular with voters but may cause businesses to relocate Lottery and gambling revenue: Administrative costs take 50 percent User charges: Fastest growing source of state and local revenue © 2014 Pearson Education, Inc. All rights reserved.

Government Expenditures as a Percentage of GDP © 2014 Pearson Education, Inc. All rights reserved.

Revenues and Expenditures: States versus Localities © 2014 Pearson Education, Inc. All rights reserved.

Revenues and Expenditures: States versus Localities © 2014 Pearson Education, Inc. All rights reserved.

Revenues and Expenditures: States versus Localities © 2014 Pearson Education, Inc. All rights reserved.

Income Taxation in the States © 2014 Pearson Education, Inc. All rights reserved.

Explaining State Tax Systems 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. Progressivity and Regressivity: Progressivity increases 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 © 2014 Pearson Education, Inc. All rights reserved.

Revolting against Taxes and Spending Popular Opposition to Rising Taxes Tax Limitations Property Tax Limits Personal Income Limits State Expenditure Limits Prohibitions on Specific Taxes Exemptions and Special Treatments Impact of Limits © 2014 Pearson Education, Inc. All rights reserved.

Per Capita State and Local Government Tax Revenue (Levels) and Tax Burdens

When Spending Cuts are Necessary: Cutback Management Fiscal Stress in the States Fiscal Stress at the Local Level Difficult Decisions Resist cutting or smooth the decline Take one deep gouge or a series of decrements Share the pain or target the cuts Promote efficiency or equity Cutback (Retrenchment) Strategies: The no-change strategy A hierarchy of community-needs strategy A “privatizing” strategy A reduction in capital spending strategy A reduction in labor strategy © 2014 Pearson Education, Inc. All rights reserved.

When Ends Don’t Meet: State and Local Debt Capital Financing Constitutional Restrictions General Obligation versus Revenue Bonds Industrial Development Bonds Municipal Bond Interest Deductibility Public Bonds for Private Uses Federal Tax Reform and Municipal Finance Debt Patterns © 2014 Pearson Education, Inc. All rights reserved.

Spending and Borrowing

When a Local Government Goes Bust Slow recovery from the great recession: Instead of officially declaring bankruptcy and having federal bankruptcy courts take over fiscal control, some cities in deep financial trouble have been rescued by state and federal governments The goal: Financial resiliency: Governments must implement strategies to balance service levels and resources, fund reserves, capital, and liabilities, and create a culture of flexibility and responsiveness to combat future crises © 2014 Pearson Education, Inc. All rights reserved.

On the Web http://www.gpoaccess.gov/usbudget/ U.S. Federal Budget www.ntu.org National Taxpayers Union www.taxfoundation.org The Tax Foundation © 2014 Pearson Education, Inc. All rights reserved.