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New Federalism Beginning in the 1980s, there was a dramatic reduction in federal assistance to states and local governments. In program after program,

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Presentation on theme: "New Federalism Beginning in the 1980s, there was a dramatic reduction in federal assistance to states and local governments. In program after program,"— Presentation transcript:

1 New Federalism Beginning in the 1980s, there was a dramatic reduction in federal assistance to states and local governments. In program after program, federal funding has either dropped sharply or, as with Urban Development Action Grants and general revenue sharing, has been eliminated altogether. The 1991 federal budget showed an overall decline of 68 percent in dollars targeted to urban programs over a ten-year period.

2 Fiscal Effects of Devolution By 1980 three-quarters of the revenues in cities like Detroit and D.C. came from the Federal Government This has declined steadily over the last 20- 30 years. Weir (1996) – States poach from local revenue sources Welfare reform will reduce incomes of urban poor

3 Local Financing 101 1. Income sources are limited: –Not all cities have the power to use sales or income taxes. –Intergovernmental revenue is diminishing –Voter initiatives have lowered property taxes –Voter initiatives requiring majorities or super majorities to pass any type of tax or fee hikes

4 2. cities have gotten around these with creative borrowing techniques: –general bond obligations –revenue bonds –moral obligation bonds –lease-purchasing agreements 3. other techniques: –privatization –gambling

5 Municipal Finance and Taxes Four questions arise when considering municipal finance. 1 Why should the government provide goods and services? 2 Which goods and services are usually provided by governments? 3 How are they paid for? i.e. what is the source of revenues? 4 What are the planning implications of these provisions and methods of payment?

6 Question 1. Why should Government provide goods and services? a. Public or Collective goods b. Economy of scale- Water, sewer, electricity, postal service, telephones, etc. c. Merit Goods - Everyone benefits e.g. education and health. d. Externalities - e.g. water and air pollution. e. Social Preference -- Public Responsibility - libraries, jails, voting f. Government Responsibility for Income Redistribution. Examples: public housing, school lunches, food stamps, welfare payments, public hospitals, Medicaid, free vaccinations etc.

7 The Sexy Services Criminal Justice –Police –Courts –Jails Education Health & Welfare –The poor –Children services –Mentally ill

8 The Not So Sexy Solid Waste Disposal Parks Libraries Water Services Fire protection Transportation

9 These services seem trivial when adequately provided but they are vitally important to the well being of individuals and cities.

10 How to save money on services? Cut services –Which ones? Privatization –What sectors? Education Fire Ambulance Jails Airport Rent government office space

11 Las Vegas Schools Growing Pains 38 new schools in three years and 1,000 new students a month. Nevada’s budget allocation per student has historically been about $1,000 less than the national average The school district is the sixth largest in the country and one of the fastest growing The district's budget is more than $1 billion. EDUCATION

12 Argument for Privatization Competition Circumvent civil service system Less capital outlays for infrastructure Easier to add or cut services

13 Argument Against Privatization Not always efficient (economy of scale) Initial bid is low but often cost increase Private company cut corners-deliver inferior services Private sector less responsive to citizens Contracting reduces the expertise of government employees Affirmative Action issues/Union issues

14 Privatization and Education Milwaukee –Not difference in test results –Little oversight of voucher schools East Harlem –Gave parents a choice –Gave teachers great autonomy –Selection bias (outside students)/more money? Charter Schools –Test results showed charter students lagged behind traditional public schools

15 3. How are the Services Financed? There are four principle sources of government revenue: Taxes User Charges Inter government transfers Debt Financing.

16 A.Taxes Primarily property tax - Such taxes are dependent upon the expertise and/or honesty of the property assessor Inventory tax, personal property tax (car registration), hotel tax Excise taxes e.g., cigarettes, liquor, jewelry, etc. Income taxes - Generally reserved for states and nations In Ohio - $60,000 annual income Federal (28%) State (5.7%) Municipal (2%) Sales taxes - tend to be regressive

17 Income Tax Nevada's Individual and Corporate Income Tax System Nevada assesses no corporate or individual income tax, joining Texas, Washington, South Dakota and Wyoming as the only states to levy neither type of income tax.

18 Property Taxes Oldest and most common local funding source Characteristics: Easy to design taxing area to fit any purpose Highly unpopular Seen as inequitable, arbitrary Rates now capped due to tax revolts Nevada’s ranking 30th highest nationally

19 How much property taxes do we pay and where does it go?

20 Las Vegas and Clark County, NV Vehicle privilege taxes Las Vegas Beltway Gasoline taxes Streets and roads Sales taxes Transit Aviation fuel taxes Airport access projects Lodging taxes Las Vegas Blvd, other tourism-related roads Las Vegas Beltway under construction

21 Motor Fuel Taxes Not widely used as a local tax: Narrow base  high marginal tax rates Regressive In most of the 15 states that allow local fuel taxes: Expenditures restricted to roads or transportation Voter approval required about half the time Revenues put in county road/bridge funds

22 Motor Fuel Taxes

23 Sales Taxes Characteristics: Regressive but perceived to be “fair” High revenues for low pain Outsiders contribute large share of revenue

24 Sales Taxes

25 Expanding use Sales taxes Development taxes Tourism taxes (hotels, restaurants, rental cars, etc.) No clear trend Fuel taxes Vehicle taxes Income taxes Property taxes Overall Trends

26 Vehicle Taxes Two primary taxing traditions. “Registration Tax” a.k.a. “Wheel Tax” Usually flat fee, based on vehicle weight or class Transportation user fee “License Tax” a.k.a. “Ad Valorem Tax” Usually based on vehicle value or age Originated as a personal property tax General revenue source In practice, distinctions not so clear

27 Vehicle Taxes

28 B. User Charges Direct charge to consumers for things used, e.g. toll bridges, water, sewers, parking, licenses, tuition, rents, fees, fines, trash collection etc. Works well and fits the free market ideals of western society Somewhat regressive in that the poor use a larger part of their income for consumption than to the wealthy

29 C. Inter governmental transfers May aid in redistributing wealth geographically They also allow state and federal governments to encourage certain goods, services and behaviors by local governments. Some transfers are restricted for certain purposes (categorical grants) Some are for purposes to be chosen by local governments or states (block grants)

30 D. Debt Financing Many expenses are covered at about the same time they are incurred Some costs such as bridges, dams, reservoirs, schools, buildings, subways, etc. create benefits which will accrue to future generations. These benefits may carry on for 10-100 years or more. Appropriate to charge future generations for them as well as the current population by borrowing money to pay for them now and repaying that money over the next 10-30 years. One way is to issue municipal bonds

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