Week 6: Revenue Politics and Revenue Issues

1. Week 6: Revenue Politics and Revenue Issues • Guest Speaker: Brad Williams, Senior Economist, LAO • Overview of revenues for California State Budget • Issues in revenue forecasting • Carryover from week 5 • Budget reallocation • Budget processes • Revenue politics • Principles and issues of taxation • Tax expenditures • Preview of week 7

2. Budget Reallocation • The value of reallocating resources • meeting changing priorities • differential growth rates among units • static budgets • Challenge of reallocation • political -- sense of fairness • requires analysis • Built-in constraints • Entitlements and spending floors (e.g. Prop 98) • permanent positions and labor intensive organizations • Organizational culture

4. Budget Process • Designed to meet organizational goals • Reflects organizational culture • Variables • players • rules/procedures/documents/timelines • balance of executive/legislative power • degree of centralization/coordination • top-down/bottom-up • openness to internal members • openness to external community

5. Revenue Politics • Successful political leadership • confront public good and fairness issues • go public with options • good planning, no surprises • Failed leadership • require gimmicks and fixes • earmark now, move later • temporary taxes for ongoing needs

6. Taxes for State and Local Government Principles of sound tax policy: • Equity • Administrative feasibility • Appropriateness • sufficient; stable; predictable • Political feasibility (acceptance) • Accountability/Visibility • payer understands charges

7. Sales Tax Issues Logic: capacity to pay as measured by consumer spending Issues for continued vitality of sales tax: • Exclude business inputs (against political pressure) • Minimize exemptions of household purchases • Include services in addition to goods • Include out-of-state purchases (mail order, e-commerce)

8. Income Tax Issues • Logic: capacity to pay as measured by earnings • Broad public acceptance as fair • Stability • less stable than other taxes • volatile now with high tech economy • capital gains and stock options income • Controlling deductions, exclusions, credits

9. Property Tax Issues • Public opposition • to rates and rate increases • to nature of the property tax (importance of private property in US economy and ideology) • subjectivity • Evolution away from original intent to tax assets to taxing only one form of asset • Importance to school finance

10. 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 • harder to count--must estimate • subject to far less analysis • beneficiaries harder to discern; less visible • more resistant to cuts -- become entitlements

11. Preview of Week 7 • Guest Speaker: Fred Silva • Public Policy Institute of California • Formerly State Senate Budget Advisor • Topics • State-local fiscal relationship in California • Proposition 13 • Intergovernmental issues • Student questions • Preview of ethics issues in budgeting and finance