answer this

 

For the opening discussion of this class, I want to see your answers develop in two parts. Before answering the discussion topic, you should read Chapters 1 and 2, and review the associated lecture PPT in the “Lectures” section of the class.

As the title of this course suggests, this class focuses on the specific nuances of financing and administering the expenditures of public organizations – more specifically, governmental bodies. Though the text focuses rather heavily on local government, most of the concepts that you will read and learn about during this course applies in some fashion or other to all levels of government in the United States.

There is not a citizen nor resident of the United States that is not in some way affected by public finance, whether that be from paying property taxes on a home to paying sales tax at the Chik-Fil-A drive-through window. 

For the first part of your answer, describe your initial impression of the methods and general fairness of the various financing mechanisms available to your local government that you know of, whatever they may be – sales tax, income tax, etc. Describe only that with which you have some familiarity, i.e. you do not need to read ahead in the text or take a crash course on taxation.

For the second part of your answer, describe your initial impression of the administration and expenditures of your local government to the best of your knowledge.

Once you have posted your answer, compare and comment on your experience with your local government’s financing and expenditures with that of your fellow students.

I am specifically interested in the impressions as we begin this course that you all have about the operation of your own local governments as pertains to collecting and spending money, and how that compares to that of your classmates. Later in this course we are going to revisit these impressions, after we have had a fair amount of time reviewing the meat-and-potatoes of taxation, budgeting, and administration.

Remember to post, and respond to your classmate’s posts, by the deadlines listed in the calendar & syllabus!

Public Finance Administration

Chapter 1

Context of Local Government Finance

Economic Nature of Government Services
Government vs. Private Sector
Private sector produces private goods/services only
Government produces public and private goods
What’s the difference?
Private goods can be divided into units, and those unwilling/unable to pay can be excluded
Example: Can’t afford Nikes? No Nikes for you!
Public goods cannot be divided into units, and the nature of the service/goods does not allow for exclusion
Example: If your town offers police services, the very nature of patrolling makes both your house and your neighbor’s house safe, even if one of you doesn’t pay taxes

Why are local budget decisions important?
Budgets give legitimacy to local government actions, as it is the expression of officials elected to represent the citizenry
Budgets help guide the bureaucratic infrastructure set up to administer local policy
Budgets allow input by the private and non-profit organizations and other interest groups to influence the nature of local social and economic climates

Local government finance trends
Changes/evolution in budgeting formats
From line-item to zero-based, performance to program budgeting, efforts by elected officials and citizens to get “more bang for the buck” or realize specific goals
Greater reliance on alternative forms of revenue rather than the typical types of taxation
Greater use of revenue to fund outside organizations to realize objectives: privatization, NGO’s, etc.
“Tax Revolts” – the refusal of citizenry to provide any further revenue; revenue stagnation

Legal basis for local revenue collection
State constitutions
Provision of forms and types of taxation by municipal subdivisions
Local charter
General enactment of powers allowed by states
Citizen referendum
Required for some forms of revenue collection and/or revenue increases

Factors that influence local finance decisions
Citizen input/involvement
“Tax Revolts”; demands for certain services or response to local conditions
Local/State/National economic factors
Local/state/federal economic booms/depressions; inflation; low/high interest rate environments; intergovernmental conflict & competition; private market pressures
Social & Demographic changes
Aging/younger population; greater diversity of population through immigration; changes in personal income of citizenry
State & Federal Law
State/federal funded/unfunded mandates; changes in law addressing social equity; prohibition against certain taxation

Public Finance Administration

Chapter 2

Revenue Choices: Pillars to Guide the Manager

The Three Pillars of Support
Equity – The fair distribution of tax burden amongst the population, the fair access to benefits derived from taxes for all
Neutrality – The minimizing of effects taxation has on free markets in a capitalistic society
Administration – The ability to effectively levy, collect and account for taxes
Known as “Three Pillars of Support” because ensuring taxes & fees adhere to these principles as closely as possible neutralizes opponents of revenue generation and helps promote the greatest possible number of proponents for the government

Choices that Promote Fairness
Equity – the idea that taxes are fair to all
Horizontal equity – taxes on people within the same economic/social circumstances are similar; i.e., property taxes would not vary wildly amongst similar sized houses within the same neighborhood
Progressive vs. Regressive taxation
Progressive – those with a greater ability to pay, pay a greater percentage and absolute level of taxation; Federal income taxes is an example of progressive taxation (in theory)
Regressive – those with less ability to pay absorb a greater proportional share of their income than those with greater income levels; Sales taxes, for example

Choices that Promote Fairness (cont.)
Equity in practice
Benefits received principle – those that derive the greatest benefits from the service should pay the greatest share of the cost
Often it is not easy to demonstrate who receives the greatest benefit from services; for example, do poverty-stricken neighborhoods that absorb more use of police services obtain the greatest benefit, or do rich neighborhoods that avoid having their houses burglarized by a robust police force profit the most?
Ability to pay principle – those that have the most amongst us should absorb a greater share of the cost of providing the service
This approach often causes backlash amongst citizen groups most likely to vote, and thus puts great pressure on politicians and government administrators

Choices that Promote Fairness (cont.)
Benefits-based levies – Generally user fees, directly assigns costs to those who use the service – water rates, recreational activities, hotel taxes, etc.
Can be problematic in that those without the ability to pay can be excluded from government-sponsored activities that theoretically should serve all citizens, or can be used to fund other functions of government that tax increases cannot
Tax exemptions – Interest groups often agitate for special taxation status for their members, which may or may not represent value to the greater community as a whole
Examples: mortgage interest deductions, sales tax holidays

Choices that Strengthen the Local Economy
Tax neutrality – The idea of levying taxes and fees in such a way that private behavior is not affected; in reality, no tax can ever be completely neutral, as redistribution of funds will always have some effect on human behavior and the economics of “free” markets
Example: Sin taxes are increasingly popular as a way of generating income from “sinners” – cigarette tax, alcohol tax, etc – but increases in tax often reduces the amount of revenue generated as individuals stop smoking, or purchase alcohol from cheaper jurisdictions; the revenue depends upon people doing exactly what, theoretically, the government says it is trying to dissuade
Taxes are generally least objectionable if they are similar in type and nature to nearby jurisdictions and similar governments; few citizens will support “unique” taxes, no matter how much ‘better’ they may be than other options
Levying taxes and user fees must always be done in the context of alternate choices available to the tax payer; if the tax can be easily avoided, or result in other consequences more detrimental than the service gained by the tax, it should probably be reconsidered.

Choices that Facilitate Effective Administration
Notification – the idea that the payer is clearly told what the tax is, how it is to be paid, and how it may change depending upon what conditions
Example: property taxes often generate significant opposition because homeowners have great difficulty understanding how the tax rate is generated
Collection – the idea that taxes are easy to collect and do not cost more to collect than they generate
Some taxes are very easy to collect – i.e. it is difficult to hide real estate, and failure to pay ultimately results in property seizure – while others can be more easily cheated on or avoided – working “under the table” to avoid income taxes; buying used items to avoid sales taxes
Enforcement – the idea that ensuring all applicable persons/entities pay their fair share, and that there are reasonable consequences for “cheating the system”

Putting it All Together: Creating a More Resilient Local Economy
Develop a strategic plan – governments should understand what taxes are palatable locally, will not undermine the local economy, and will help address issues important to those governed
Strive for tax diversification – it is always better to have moderate income derived from multiple sources than greater income from singular sources to protect against economic downturns and other issues that can affect collection of one or more types of tax/fee
Consider user fees whenever possible, with provisions available for those least able to pay; it promotes conservation of resources and assigns costs to those who use the most resources
Promote revenue self-sufficiency – governments should avoid counting on funds from other entities to provide services and function