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 spending Importance: 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