1. Politics in States and Communities (15 Ed.) Thomas Dye and Susan MacManus Edited by Bob Botsch for POLI 458

2. © 2014 Pearson Education, Inc. All rights reserved. Chapter 14 The Politics of Taxation and Finance

3. © 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 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.

4. © 2014 Pearson Education, Inc. All rights reserved. An Overview of Government Finances National spends more, but some goes to state and local! –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 –Federal spends app 22% of GDP (trends)trends –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

5. © 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: 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, #1 source in states where used Corporate taxes: In 44 states; popular with voters but may cause businesses to relocate Lottery and gambling revenue: Administrative costs take 50 percent, 2% of state revenue User fees/charges: Fastest growing source of state and local revenue

6. © 2014 Pearson Education, Inc. All rights reserved. Total Government Expenditures (state and local) as a Percentage of GDP

7. © 2014 Pearson Education, Inc. All rights reserved. Revenues and Expenditures: States versus Localities

8. © 2014 Pearson Education, Inc. All rights reserved. Revenues and Expenditures: States versus Localities

9. © 2014 Pearson Education, Inc. All rights reserved. Revenues and Expenditures: States versus Localities

10. © 2014 Pearson Education, Inc. All rights reserved. Income Taxation in the States

11. © 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 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)

12. © 2014 Pearson Education, Inc. All rights reserved. Revolting against Taxes and Spending Popular Opposition to Rising Taxes Tax Limitations oProperty Tax Limits—may limit mils, increases, or reassessments oPersonal Income Limits—placed in constitution to make change hard oState Expenditure Limits—limit to % of total personal income, or limit by % population growth or by % growth in state economy oProhibitions on Specific Taxes—income, food, drugs, rents, or services oExemptions and Special Treatments—homestead exemptions for the elderly Impact of Limits—made life tough for local govts

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

14. © 2014 Pearson Education, Inc. All rights reserved. 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 oResist cutting (Washing Monument strategy) or smooth the decline? oTake one deep gouge or a series of decrements? oShare the pain or target the cuts? “Across the board” politically easier oPromote efficiency (fire, police) or programs for the vulnerable (e.g. youth programs, summer camps, upgrades in housing) Cutback (Retrenchment) Strategies: oThe no-change strategy—across the board/seniority/hiring freezes oA hierarchy of community-needs strategy—ranking programs oA “privatizing” strategy—taxes become user fees oA reduction in capital spending strategy—deferred maintenance oA reduction in labor strategy—freezes, layoffs, labor contracts and benefits (al la Scott Walker in Wisconsin)

15. © 2014 Pearson Education, Inc. All rights reserved. State/Local Debt for Capital Improvements Capital Financing—borrowing money for improvements—outside typical requirement for a balanced budget Constitutional Restrictions—debt ceilings both state and local, usually only for general obligation bonds General Obligation versus Revenue Bonds Industrial Development Bonds—special revenue bonds to buy and develop land for new business Municipal Bond Interest Deductibility—attractive to hi income people Public Bonds for Private Uses—controversial b/c subsidizes private entities Federal Tax Reform and Municipal Finance—1986 law that varies federal tax exemptions with whether “essential,” “nonessential” or “private” Debt Patterns—varies with states and region—PAYGO financing in cons states (like SC where Gov Haley threatened to veto any new bond bill)

16. Spending and Borrowing

17. © 2014 Pearson Education, Inc. All rights reserved. When a Local Government Goes Bust Cause—slow recovery from the great recession Bankruptcy: (30 cities since 2010) and having federal bankruptcy courts take over fiscal control 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 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

18. © 2014 Pearson Education, Inc. All rights reserved. On the Web http://www.gpoaccess.gov/usbudget/ U.S. Federal Budgethttp://www.gpoaccess.gov/usbudget/ www.ntu.org National Taxpayers Unionwww.ntu.org www.taxfoundation.org The Tax Foundationwww.taxfoundation.org