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Chapter24620PFA.pptxPublic Finance Administration
Chapter 2
Revenue Choices: Pillars to Guide the Manager
The Three Pillars of Support
Equity – The fair distribution of tax burden amongst the population, the fair access to benefits derived from taxes for all
Neutrality – The minimizing of effects taxation has on free markets in a capitalistic society
Administration – The ability to effectively levy, collect and account for taxes
Known as “Three Pillars of Support” because ensuring taxes & fees adhere to these principles as closely as possible neutralizes opponents of revenue generation and helps promote the greatest possible number of proponents for the government
Choices that Promote Fairness
Equity – the idea that taxes are fair to all
Horizontal equity – taxes on people within the same economic/social circumstances are similar; i.e., property taxes would not vary wildly amongst similar sized houses within the same neighborhood
Progressive vs. Regressive taxation
Progressive – those with a greater ability to pay, pay a greater percentage and absolute level of taxation; Federal income taxes is an example of progressive taxation (in theory)
Regressive – those with less ability to pay absorb a greater proportional share of their income than those with greater income levels; Sales taxes, for example
Choices that Promote Fairness (cont.)
Equity in practice
Benefits received principle – those that derive the greatest benefits from the service should pay the greatest share of the cost
Often it is not easy to demonstrate who receives the greatest benefit from services; for example, do poverty-stricken neighborhoods that absorb more use of police services obtain the greatest benefit, or do rich neighborhoods that avoid having their houses burglarized by a robust police force profit the most?
Ability to pay principle – those that have the most amongst us should absorb a greater share of the cost of providing the service
This approach often causes backlash amongst citizen groups most likely to vote, and thus puts great pressure on politicians and government administrators
Choices that Promote Fairness (cont.)
Benefits-based levies – Generally user fees, directly assigns costs to those who use the service – water rates, recreational activities, hotel taxes, etc.
Can be problematic in that those without the ability to pay can be excluded from government-sponsored activities that theoretically should serve all citizens, or can be used to fund other functions of government that tax increases cannot
Tax exemptions – Interest groups often agitate for special taxation status for their members, which may or may not represent value to the greater community as a whole
Examples: mortgage interest deductions, sales tax holidays
Choices that Strengthen the Local Economy
Tax neutrality – The idea of levying taxes and fees in such a way that private behavior is not affected; in reality, no tax can ever be completely neutral, as redistribution of funds will always have some effect on human behavior and the economics of “free” markets
Example: Sin taxes are increasingly popular as a way of generating income from “sinners” – cigarette tax, alcohol tax, etc – but increases in tax often reduces the amount of revenue generated as individuals stop smoking, or purchase alcohol from cheaper jurisdictions; the revenue depends upon people doing exactly what, theoretically, the government says it is trying to dissuade
Taxes are generally least objectionable if they are similar in type and nature to nearby jurisdictions and similar governments; few citizens will support “unique” taxes, no matter how much ‘better’ they may be than other options
Levying taxes and user fees must always be done in the context of alternate choices available to the tax payer; if the tax can be easily avoided, or result in other consequences more detrimental than the service gained by the tax, it should probably be reconsidered.
Choices that Facilitate Effective Administration
Notification – the idea that the payer is clearly told what the tax is, how it is to be paid, and how it may change depending upon what conditions
Example: property taxes often generate significant opposition because homeowners have great difficulty understanding how the tax rate is generated
Collection – the idea that taxes are easy to collect and do not cost more to collect than they generate
Some taxes are very easy to collect – i.e. it is difficult to hide real estate, and failure to pay ultimately results in property seizure – while others can be more easily cheated on or avoided – working “under the table” to avoid income taxes; buying used items to avoid sales taxes
Enforcement – the idea that ensuring all applicable persons/entities pay their fair share, and that there are reasonable consequences for “cheating the system”
Putting it All Together: Creating a More Resilient Local Economy
Develop a strategic plan – governments should understand what taxes are palatable locally, will not undermine the local economy, and will help address issues important to those governed
Strive for tax diversification – it is always better to have moderate income derived from multiple sources than greater income from singular sources to protect against economic downturns and other issues that can affect collection of one or more types of tax/fee
Consider user fees whenever possible, with provisions available for those least able to pay; it promotes conservation of resources and assigns costs to those who use the most resources
Promote revenue self-sufficiency – governments should avoid counting on funds from other entities to provide services and function
