Week 6: State-level Finance Issues

1. 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

2. Rubin’s Three Characteristics of Revenue Politics The problem: getting support for increasing revenues is much harder than getting support for spending proposals • Public officials must go about getting support very carefully • “anti-revenue” politics: politics of protection from taxation, tax reductions, exceptions • Attention to protecting individuals, interest groups, regions from taxation leaders to piecemeal, complicated, inconsistent, inequitable structures => pressures for reform

3. 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?

4. 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

5. 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

6. 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

7. 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)

8. 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

9. 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

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 • not directly measurable--must estimate (indirect effects) • subject to far less analysis • less visible; beneficiaries harder to discern • more resistant to cuts -- become entitlements

11. 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