PUA 5305, Public Finance and Budgeting 1 Cou rse Learning Outcomes for Unit V Upon completion of this unit, students should be able to: 7. Describe the impact of budgetary deficiencies on public agencies. 7.1 Analyze the impact of issues relating to the distribution of the burden of finance. 8. Apply practical methods to reconstructing finance and budgeting techniques. 8.1 Evaluate alte rnative government financing. Re quired Unit Resources Chapter 10 : Introduction to Government Finance Chapter 18 : Fiscal Federalism and State and Local Government Finance In order to access the following resource s, click the link s below. Watch the following segments from the full video referenced below: Policies of Prejudice (Segment 7 of 30) , Racial Discrim ination in Sentencing (Segment 25 of 30) , and Effect of Mandatory Minimums (Segment 26 of 30) . Falconer, D. (Director), Shay, T. (Assistant Director), & Detroit Documentary Production (Producer). (2013). DEFORCE: The past, present, and future of Detroit [Video file]. Retrieved from https://libraryresources.columbiasouthern.edu/login?auth=CAS&url=https://fod.infobase.com/PortalPl aylists.aspx?wID=273866&xtid=50565 The transcript for this video can be found by clicking the “Transcript” tab to the right of the video in the Films on Demand database. Unit Lesson As discussed previously, one of the goals of government is to cre ate market efficiency, and this goal is facilitated through utilizing public institutions. Budgeting tools or techniques are utilized to appropriate funding to public institutions. Now, we will discuss how goods and services from public programs are financ ed . Have you wondered where the government get s its money? Federal, state, and local governments utilize the collection of taxes as one of their methods to finance public institutions and the goods or services they provide (Hyman, 2014). Other forms of re venue include charges, inflation, borrowing, and donations. Policies or legislation redistribute revenue collected from private production to the government industry . Taxation represents mandated payments and correlates with certain citizens’ activities (Hyman, 2014). Collection of taxes allows government to construct necessary public services and to ultimately restructure citizens’ capacity to function in the market . Classifications of taxes include income tax , sales tax, property tax, and other levied taxes . The Sixteenth Amendment states that the United States Congress has the power to collect taxes on personal income. Income t ax is the largest source for generating revenue. This tax is typically collected from earnings that are withheld from a citize n’s pay. Therefore, it is considered a pay -as -you -go tax. This tax reached its 100 -year anniversary in 2013 (Roberts, 2013). The evolution of the federal income tax system has prompted the tax code to grow from approximately 400 pages to over 70,000 pages (Russell, 2015). UNIT V STUDY GUIDE Government Finance PUA 5305, Public Finance and Budgeting 2 UNIT x STUDY GUIDE Title Sales tax is a tax on the retail sales price of purchase s (Hyman, 2014). State government sets the sales tax rate , and in many cases it varies for different industries and states. Government can levy other taxes as well. For example, alternative financing such as e xcise tax can be levied by federal, state, and local governments on luxury items such as alcohol, beverages, furs, tobacco pro ducts, telephone service s, airline fares, and cruise ship fares (Pashley, Silva, & W indram, 2014). Some suggest that sales tax on Internet purchases should be adopted to offset budget deficiencies. A property tax, also known as an ad valorem tax, is typic ally legislated by s tate government and collected at the local level (Hyman, 2014). This tax is calculated from the assessed value of property for taxation purpose s only. Property t ax abatements (di stributive policy) are allowed. Nevertheless, it is import ant to note that a buyer and seller agreement determines the market value of a property. Property tax constitutes the major source of revenue for local government (Hyman, 2014). However, the increase in home foreclosures, the great recession, and shrinking property tax bases have created budget gaps for local governments. As a result, local government’s capability of providing goods and services has been weakened (Chernick, Langley, & Reschovsky, 2011). Theories and opinions have emerged that local governme nt should develop other revenue strategies to bridge budget deficiencies. An interesting fact that may surprise many is that the property tax was plagued with many deficiencies prior to the great recession (Bartle, Kriz, & Morozov, 2011). These included a deficiency in the ability to create equitable property assessment, the creation of the Taxpayer Bill of Rights, and the Tea Party movement (Phillip & Scott, 2010). Leaders of the Tea Party movement advocated that certain taxpayer rights should exist during property assessments. Many local governments have sought out other revenue options. Some states are decreasing their dependence on property tax. For example, cities in Alabama are increasing other fees such as license fees and occupation fees. The genera l belief is these fees provide a more stable flow or source of revenue stream than that of property tax. Other states following this trend include Oregon, South Carolina, and West Virginia (Bartle et al., 2011). The property tax rate s tructure reflects th e relationship or connection between the amount of revenue coll ected and the tax base or value (Hyman, 2014). The tax rate can be determined when dividing the tax collected by the tax base. A proportional tax str ucture advocates that taxpayers pay the same share of income, whereas a progressive structure advances the idea that higher -income people should pay a larger share of income than lower -income taxpayers. The regressive structure exists when higher -income taxpayers pay smaller shares of their income th an lower -income taxpayers. Alternative government financing options must meet requirements such as equity, eff iciency, and administrative ease (Hyman, 2014). The equity requirement is illustrated when tax burdens are dispensed fairly for all citizens. Eff iciency incorporates generating revenue with minimal cost in the private sector. Further more , efficiency supports the idea that having a choice of alternatives generates the highest probability for officials to decide a given function of resources (Andrews & Entwistle, 2013) . Administrative ease refers to the utility and low maintenance of the revenue option. Financing s trategies that meet the aforementioned requirements include debt finance, inflation, donations, user charges, and government run enterpris es (Hyman, 2014). Debt finance , which is frequently employed, indicates the utilization of borrowed funds to finance government e xpenditures. The i nflation strategy is used by the government through increase d prices and the supply of money to compensate . D onations are characterized by voluntary contributions to governments from individuals or organizations. User charges can typically be seen in payments for access to services such as highways, bridges, and recreational facilities . Group of people at an airline ticket counter (Tennesseevols33, 2008) PUA 5305, Public Finance and Budgeting 3 UNIT x STUDY GUIDE Title These charges are collecte d from individuals who consume the good s or utilize the service s. There are many forms of user charges such as admission fees, special asse ssments, licenses, fares , or tolls. Government e nterprises sell goods or services to increase their capacity to augment revenue (Hyman, 2014). Many government units facilitate retail outlets. This market service approach is growing in momentum as state and local governments seek alternative financing (Hee Soun & Myungjung, 2014). For example, Amtrak is a federally operated service. During the great recession, the federal government became one of the largest shareholders in market investments (Templin, 2010).
Likewise, in many instances, state government monopolizes the alcohol industry (Wettenhall, 2011).
Similarly, many local governments dominate public utilities (Mantz, 2012). Fiscal f ederalism is a n economic effort of interdependence of all branches of government (Hyman, 2014). Understanda bly, c entral government has a larger pool of resources. Most agree that subnational governments need financial assistance to accomplish mandates and expenditure responsi bilities (Sharma, 2012) . As discussed previously in the course, f ederal grants account for approximately 25% of state government budget s (Hyman, 2014) . These categorical grants deliver services in the form of mandated programs such as Medicaid and Temporary Assistance to Needy Families (TANF). Public demand for these services necessitates a synchronization that can only be achieved collaboratively (Hyman, 2014) . Therefore, fiscal federalism ensures the functionality of these programs through cooperative measures. More specifically, fiscal federalism is viewed as r edistributive public policy that fosters financial equality in society (Hyman, 2014). Services provided through centralized government promote uniformity of administration across all regions of the nation. Decentralized services, unlike central, are provided and made by majority rule (Hyman, 2014). How ever, some arguments and belief systems assert that decentralization serves to help central governments implement redistributive progra ms that maximize social welfare (Sharma, 2012) . Others argue that decentralization reduces federal control, thereby minimizing societal beliefs of potential monopolistic behavior . Hence, d ecentralization promotes and protects civil liberties (Sharma, 2012) . Traits of d ecentralization include intergovernmental cooperation, revenue sharin g, and a system of checks and balances between local and federal government. Intergovernmental fiscal relation ships facilitate efficient allocation of re sources (Hyman, 2014) . Therefore, state and local governments have become dependent on fiscal assistanc e in forms of categorical grants. Grants represent a transfer of funds such as gifts or subsidies. When society presumes government is acting in their best interests, intergovernmental transfers are considered coordinating devices that governments can use to deal with deficiencies , such as fisc al externalities and inequities (Sharma, 2012) . Governmen ts can also use these transfers, Sharma (2012) asserts, to ensure national minimum standards of key p ublic services. The main source of government finance is t axes. Government uses taxes to reallocate resources away from priv ati zation toward the government sector. However, market inefficiencies oftentimes destabilize revenues. Therefore, alternative measures are pursued. References Andrews, R., & Entwistle, T . (2013). Four faces of public service efficiency. Public Management R eview , 15 (2), 246 -264 . Bartle, J. R., Kriz, K. A., & Morozov, B. (2011). Local government revenue structure: Trends and challenges. Journal of Public B udgeting, Accounting & Financial M anagement , 23 (2), 268 -287. Photo of two utility workers clearing downed power lines (Henderson, 2010) PUA 5305, Public Finance and Budgeting 4 UNIT x STUDY GUIDE Title Chernick, H., Langley, A., & Reschovsky, A. (2011) Revenue diversification and the financing of large American central cities. Public Finance & Management , 11 (2), 138 -159. Henderson, W. (2010, May 13). FEMA – 44314 – Utility equipment and workers in Oklahoma [Photograph]. Retrieved from https://commons.wikimedia.org/wiki/File:FEMA_ -_44314_ – _Utility_Equipment_and_workers_in_Oklahoma.jpg Hee Soun, J., & Myungjung, K. (2014). Enterprising government: The political and financial effects of fee – supported municipal services. Public Administration Quarterly , 38 (2), 128 -162. Hyman, D. N. (2014). Public finance: A contempo rary application of theory to policy (11th ed.) . Stamford, CT: Cengage Learning . Mantz, B. A. (2012). Optimal deb t management practices for local government enterprises. Journal of Government Financial Management , 61 (3), 18 -22. Pashley, S., Silva, J., & W indram, T. (2014). Brining clarity to fuel excise taxes and credits. Tax Adviser , 45 (4), 245 -249 Roberts, T. M. (2013). Brackets: A historical perspective. Northwestern University Law R eview , 10 3(3), 925 – 957. Russell, J. (2015, April 15). Look at how many pages are in the federal tax code. Retrieved from http://www.washingtonexaminer.com/look -at-how -many -pages -are -in-the -federal -tax – code/article/2563032 Sharma, C. K . (2012 ). Beyond gaps and imbalances: R e-structuring the debate on intergovernmental fiscal relations. Public Administration , 90 (1), 99 -128. Templin, B. A. (2010). The government shareholder: Regulating public ownership of private enterprise. Administrative Law Review , 62 (4), 1127 -1215. Tennessvols33. (2008, April 28). Ticket counter [Photograph]. Retrieved from https://commons.wikimedia.org/w iki/File:Ticket_Counter.jpg Wettenhall, R. (2011). State enterprise for ethical reasons: Mostly alcohol and tobacco. Policy Studies , 32 (3), 243 -261.