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