Week 7: California State and Local Government Finance

1. Week 7: California State and Local Government Finance • Guest Speaker: Michael Cohen, Legislative Analyst’s Office, Local Government Section • Proposition 13 and other state-local finance issues • State-local finance reform prospects • Carryover from week 6 • Principles and issues of taxation • Revenue politics -- fairness • Tax expenditures • Preview of ethics in public budgeting and finance

2. Vocabulary • Progressive and regressive taxes • Tax burden (per $1000 of personal income) • General tax • General Fund/Special funds • Fees/user fees • Assessments • Special funds • Tax expenditures • Gann Limit/State Appropriations Limit (expenditure limit)

3. 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

4. Revenue Politics • Successful political leadership • confront public good and fairness issues • go public with options • good planning, no surprises • honesty • Failed leadership • avoidance/lack of full disclosure • require gimmicks and fixes • earmark now, move later • temporary taxes for ongoing needs

5. 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)

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

7. Property Tax Issues Logic: capacity to pay as measured by real property holding • 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

8. 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

9. Some Ethical Issues in Public Finance • Estimate of available revenues • Are there circumstances when withholding information could be ethical? • Choosing optimistic v pessimistic scenarios • Impact of tax policies • Short-term v long-term impacts (leave problems for successors) • Political expediency to gain passage (features or gimmicks that aren’t fiscally sound)

10. Preview of Week 8 • Guest Speaker: Betty Masuoka • Assistant City Manager, City of Sacramento • Topics: • city budget process: expenditures and revenues • major revenue/financing issues facing the city • School Finance • E-commerce • ICMA Case Studies