1. G RUBER C HAPTER 9 O THER R EVENUE S OURCES

2. A LTERNATIVES TO T AXES I NCLUDE Types Charges Fees Licenses Lotteries The distinction between fees and taxes is important because many statutory and constitutional rules govern states’ authority to tax rate rarely affect their ability to charge fees. Intergovernmental aid differ significantly from traditional taxes. This revenue source is not necessarily collected from individuals living or firms conducting business in the state. The public services provided by states depend largely on nontax revenue.

3. P OLICY I SSUES P RESENTED BY N ONTAX R EVENUE When state governments can raise revenue from indirect methods such as intergovernmental aid and licenses, many states may feel less pressure to address the problems that continue to plague virtually every type of tax. Strengthening sales and business taxes requires large-scale reform that would generate significant political debate and controversy. In the short run using nontax revenue to offset a declining tax base may allow policymakers to postpone facing the political maelstrom of tax reform.

4. DANGERS OF R ELYING ON N ONTAX R EVENUE The burden of paying taxes for these revenues falls on taxpayers who do not live in the state and do not have a stake in the financial security or public policies of the state. Since citizens are not paying the full cost of services, state spending is likely to be ineffective. Democratic principles require that those who benefit from government policies be responsible for payment of these services. While nontax revenue will continue to grow in the near future, it is incapable of sustained growth. Most sources of nontax revenue are – in the long run – incapable of growing to meet spending needs. Many types of nontax revenue are unpredictable. Many sources of nontax revenue pose serious equity problems. User fees, charges, and especially state lotteries are decidedly regressive.

5. I NTERGOVERNMENTAL A ID Federal monies are primarily provided to fund congressionally mandated programs or to further policies that serve national interests. Most federal funds are provided for mandated public safety projects (particularly those concerning the war on terrorism), Medicaid, temporary assistance for needy families, and other wealth- transfer payments, administered by the states. In most cases, the revenue simply reimburse it’s the state for the cost of administering the programs. Without this reimbursement, most states would not undertake certain projects.

6. D ECEPTIVELY L ARGE A MOUNTS OF F UNDING State governments generally cannot spend federal monies as they wish. Thus aid received from the federal government lesson state control over the underlying policy program. Federal funding is almost always payment for mandates issued by the federal government. The monies are rarely available to be used by the states at their discretion. When states have discretion, funds may be spent on programs or policies that have little to do with the intended federal purpose.

7. L OTTERIES /G AMBLING By all measures, gambling and particularly lotteries are regressive. Gambling can be addictive. From a policy standpoint, the risk that residents will become addicted to state- sponsored gambling is a serious pitfall of legalized gambling. Proponents argue that allowing states to run and regulate gambling is a better option than having organized crime do so. While the majority of students in many states support lotteries, gambling offends a sizable segment of society. Many people find gambling, whether legally sanctioned or not, immoral and unethical. These individuals question whether the state should be promoting a morally questionable activity is a way to pay for government. In most states, gambling advocates have turned the question from the morality of gambling to the use of gambling revenue to pay for politically attractive programs. In most states, lottery proceeds are earmarked for either education spending or assistance to the elderly. Those who would curb lottery activity must overcome the charge that a change in policy would hurt funding for schools and seniors.

8. U SER F EES, L ICENSES, AND S ERVICE C HARGES Increasingly, however, state governments have adopted a wide range of fees, licenses, and charges to supplement their general budgets. The benefits theory of taxation; in other words, these and charges are acceptable, because those who use the service pay the fee. Policy makers will need to address two primary problems related to user fees, licenses and charges in the coming year. Fees and charges tend to be regressive. The number of services for which the state can charge fees is limited. By charging a fee, the states, effectively prevent part of their populations from receiving the services. Moreover, because most fees do not cover the costs of providing the benefit, those using fee-based government services effectively receive a subsidy.