$ for Sub-Nationals

STATE & LOCAL GOVERNMENT IN THE UNITED STATES 1

Basic Terms

• Appropriations: amount budgeted • Revenue: money actually collected (gifts, intergovernmental, taxes, user fees) –

Direct General

: Those funds from/to individuals for services (contracts/employees) –

Intergovernmental

• Expenditures: money spent • Entitlements: appropriations to “entitled” groups • Budget: working fiscal document – Audit: often last part of fiscal process • Tax: any compulsory contribution for the support of government, without regard to individual benefit 2

Tax Limitations

• U.S. Constitutional limits: – Export or Import taxes or levy tonnage duties without the consent of Congress – May not interfere with federal operations – May not discriminate against interstate commerce, unduly burden it, or directly tax it.

– May not deprive persons of equal protection of the law

(treat everyone equally)

– May not deprive individuals of their property without due process

(no unlawful takings)

– McCulloch v. Maryland (1819) & Gibbons v. Ogden (1824) 3

State Constitutional Limits

• Tax & Expenditures Limitations (TELs): – Self-imposed limitations: CA Proposition 13 & other “tax revolts” – Certain types of property may not be taxed: • Educational and/or charitable • Churches or other Religious purposes • Other government property • May require certain method of raising taxes such as by referendum • Require “balanced budgets” – Economic Limits

(more later)

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Revenues

• Budget Process Lengthy: (GA = 16 months) • Several types include: – Sales: declined considerable but still major • x 44% = 1952 to 24% 2004 – Corporate income tax declined – Increasing the most is the Individual Income Tax & Non-tax revenue (more lotteries) – Intergovernmental has continued to increase since the 60s 5

Where city revenue comes from?

• 1995 = $639.2 billion (state & local) • 2006 = 1.45 trillion (state & local) • Intergovernmental Aid = 38% • Property Tax = 29% • Charges and Miscellaneous = 23% • Sales Tax = 5.8% • Individual Income tax and other = 4% 6

Property taxes

• Should have universality = levied on all forms of property • Should have uniformity = the same rate for all property (equal protection under law) • Remember this is a “regressive” tax – Question is often asked about how much renters pay in property taxes?

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Types of Property taxes

• Real property = land and improvements • Personal property(tangible) = home furnishings, appliances, automobiles, equipment • Easy to tax real property!

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Property Tax Administration

• Typically administered by an “assessor” who attempts to place a value on property…the “assessment” at a “market rate” or appraisal • Tax Rate (from anticipated revenues) – (total valuations)(tax rate)=tax revenue – Mill = 1/1000 of a dollar (.001) • Circuit breakers (homestead exemption) = 30 states allow for such deductions especially helpful for the elderly and low-income homeowners 9

Sales Taxes

• Mississippi (1932) 1 st to use sales tax • Now only 5 states that do not use it – Alaska, Delaware, Montana, Hew Hampshire, Oregon • Average = 5% (3% - 7%) • Sales Tax: of increasing use by L.G.s & still large share of state taxes • Most piggyback onto state sales tax (LOST) • Tax is regressive but many exempt groceries, medicine and other necessities 10

Income Tax

• 43 states (FL, Alaska) • 16 states allow for local income tax – Half of all revenues in Louisville, Columbus (Ohio) and Philadelphia – Considered commuter taxes when suburbanites pay income tax on what they make in the central city • Tax Reform Act of 1986 limited the federal level to 33% thereby creating opportunity for cities to increase likelihood of local income tax 11

Other Taxes

• Excise Taxes: – Benefit taxes (petrol taxes) – Sin Taxes – Severance Taxes (coal, oil, timber) • Occupational/Business license • Licensing Fees 12

Other Non-Taxes

Gambling tax – Lottery, Para-mutual, Casino, Bingo • User Fees: – Highway tolls – “Welcome stranger” tax – Developer & development fees • Impact fees • Utility fees: – Tap ons – Usage fees 13

Long/Short Term Problems

• Short-term cycles • Structural deficit: – Movement from manufacturing of tangible goods to service industry = less sales tax related – Method of shopping via internet = no sales tax • Sales tax is no longer viable to maintain current service level 14

Float the notes

• Capital Expenditures: projects whose costs are so large that it is not feasible to pay for them out of current revenue • User Benefit Equity: those who benefit should be the ones who pay and if long term project life then long term debt • Some progressive localities use “sinking funds” 15

Long term notes

• General Obligation Bonds (Full faith and Credit Bonds): impose legal obligation on citizens to repay debt – Requires voter approval through public referendum – May be used for most any purpose • Revenue bonds: User pays 16

City budget form

• A guide and overall statement of taxing and spending priorities • Generally 9-16 month process • Revenue, expenditure and debts • Must be balanced • Capital improvements (+ 5 yr) • Often must be independently audited • Incremental • Function and line itemized budget • Non-lump sum appropriations • Sometimes decremental budget 17

Public education

• Most local money spent on education (1/3 of state & local total) • Recently very controversial – 1973 US Supreme Court held that there is no federal constitutional requirement that the amount spent per pupil in each school district must be the same – However, several states ruled that their state constitutions require that education be financed in a way that avoids differences in funding due to differences in wealth among school districts 18