Week 6: State-level Finance Issues

• Guest Speaker: Brad Williams, Senior Economist, LAO

– Overview of revenues for California State Budget

– Issues in revenue forecasting

• Revenue politics

– Characteristics and strategies

– Principles of taxation

– Tax policy issues

– Tax expenditures

• Preview of week 7

Rubin’s Three Characteristics of Revenue Politics

The problem: getting support for increasing revenues is much harder than getting support for spending proposals

1. Public officials must go about getting support very carefully

2. “anti-revenue” politics: politics of protection from taxation, tax reductions, exceptions

3. Attention to protecting individuals, interest groups, regions from taxation leaders to piecemeal, complicated, inconsistent, inequitable structures => pressures for reform

Strategies for Getting Support for Tax Increases: Good, Bad, Ugly?

• Confront issues of fairness, public good, options• Accountability for use of funds• Timing – e.g. crisis• Earmark revenues

– case studies: California Lottery; Proposition 42• Temporary increases• Tax politically weak/outsiders• Gimmicks (smoke and mirrors)

What makes for successful leadership in revenue politics?

Principles of sound tax policy:

• Equity– similar situations treated similarly– differential burdens fair

• Administrative feasibility– efficient, uniform– high degree of voluntary compliance

• Appropriateness – sufficient; stable; predictable

• Political feasibility (acceptance)• Accountability/Visibility

– payer understands charges

Income Tax Issues

• Logic: capacity to pay as measured by earnings

• Importance: over half of State General Fund

• Policy issues

– tax rates v tax base (deductions, exclusions, credits)

– simplification (relates to acceptance)

– reliance on volatile source

Sales Tax Issues

Logic: capacity to pay as measured by consumer spendingImportance: provides about 1/3 of state and city revenues

Policy issues:• Role in local finance (regional growth)• Exemptions of household purchases• Tax expenditure programs• Include services in addition to goods –erosion of base• Internet sales

– fairness and revenue issues

Property Tax Issues

• Logic: capacity to pay as measured by property holding

• Importance: about 30% of local revenues

Policy Issues

• public opposition – ideological reasons

• equity

• allocations by state among local governments

• assessment methodology (subjectivity leads to public opposition)

• importance to school finance (other states)

Tax Expenditures

Purposes• Promote certain economic behavior

– e.g. research and development• Prevent harmful activity

– e.g. tax benefits for alternative fuel• Tax relief for certain segments of society

– e.g. low-income tax credits• Facilitate tax administration

– e.g.conform to Fed tax

Criteria• Efficient accomplishment of policy goal• Subject to review and periodic reporting

Tax Expenditure Programs: Revenue Effects

• Personal Income Tax– $18 billion– 62% of tax revenue collected

• Bank and Corporation Tax– $3 billion– 54% of tax revenue collected

• Sales and Use Tax– $6 billion– 26% of tax revenue collected

• Total– 37% of state tax revenue collected Source: LAO

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– not directly measurable--must estimate (indirect

effects)– subject to far less analysis– less visible; beneficiaries harder to discern– more resistant to cuts -- become entitlements

Preview of Week 7

• Guest Speaker: Russ Fehr, Sacramento County

– County financing issues

• Proposition 13 and beyond

– Sacramento County – revenues and budgeting

• County government: prospects for fiscal reform

• Preview of ethics in public budgeting and finance

• Memo #3 due on agency revenues