Week 6: Revenue Politics and Revenue Issues Guest Speaker: Brad Williams, Senior Economist, LAO –Overview of revenues for California State Budget –Issues in revenue forecasting Carryover from week 5 –Budget reallocation –Budget processes Revenue politics –Principles and issues of taxation –Tax expenditures Preview of week 7

Budget Reallocation The value of reallocating resources –meeting changing priorities –differential growth rates among units –static budgets Challenge of reallocation –political -- sense of fairness –requires analysis Built-in constraints –Entitlements and spending floors (e.g. Prop 98) –permanent positions and labor intensive organizations –Organizational culture

Budget Process Designed to meet organizational goals Reflects organizational culture Variables –players –rules/procedures/documents/timelines –balance of executive/legislative power –degree of centralization/coordination –top-down/bottom-up –openness to internal members –openness to external community

Revenue Politics Successful political leadership –confront public good and fairness issues –go public with options –good planning, no surprises Failed leadership –require gimmicks and fixes –earmark now, move later –temporary taxes for ongoing needs

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

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 Broad public acceptance as fair 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 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

Preview of Week 7 Guest Speaker: Fred Silva –Public Policy Institute of California –Formerly State Senate Budget Advisor Topics –State-local fiscal relationship in California –Proposition 13 –Intergovernmental issues Student questions Preview of ethics issues in budgeting and finance