StateLocal Finance

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State-Local Finance

• SGB(11) S(33, 35-36)
• Do Tax Cuts Work? Just Look at the States, by
  Stephen Moore and Stephen Slivinski.
  
• http//www.cato.org/pub_display.php?pub_id4374

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Concepts

• Revenues the governments bring in
• Tax burden a measurement of taxes paid (tax
  collections / income)
  
• State/Local Tax burdens

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Types of Taxes

• Income tax a tax on income (individuals,
  firms)
  
• Sales tax a tax levied on purchases
• Includes excise taxes (sin taxes)
• Property tax a tax levied on property owners
  based on the value of their home/property

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Types of Taxes

• Motor vehicle taxes
• Estate taxes (death taxes)
• Gift taxes

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Types of Taxes

• Severance taxes taxes on natural resources
  severed from the state
  
• Misc. taxes
• Gambling/lottery
• Travel/tourist taxes
• Misc. user fees

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Diversity of State Tax Systems
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Criteria for Evaluating Tax Systems

• Equity
• Progressive
• Proportional
• Regressive

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Criteria for Evaluating Tax Systems

• Equity - fairness
• Yield net return

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Criteria for Evaluating Tax Systems

• Equity - fairness
• Yield net return
• Elasticity tax yields should be automatically
  responsive to economic conditions (tax burden
  remains stable)
  

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Criteria for Evaluating Tax Systems

• Equity - fairness
• Yield net return
• Elasticity tax yields should be automatically
  responsive to economic conditions (tax burden
  remains stable)
  
• Ease of administration complexity, evasion

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Criteria for Evaluating Tax Systems

• Political Accountability openness of process
• Acceptability congruence with citizen
  preferences

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Sales Taxes

• 80 goes to state governments
• AK, DE, MT, NH, OR no sales tax
• Politically popular
• Highly regressive

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Sales Taxes
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Sales Taxes

• Tennessee (Memphis)
• Residents earning 25,000 or less 1,575, or
  6.3 of income for state and local taxes
  
• Residents earning 150,000 or more 9,450, or
  5.2 of income for state and local taxes
  

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Sales Tax

• Tax base is slowly eroding
• Products vs. services (1960 41, 2000 58)
• Expanding the sales tax to services (HI, SD, NM)
• Internet purchasing (1992 Supreme Court ruling)
• 2003 - 16 billion in lost revenue (NCSL / NGA)

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Income Taxes

• Largest source of state revenues
• 7 states no income tax at all (AK, FL, NV, SD,
  TX, WA, WY)
  
• 2 states tax only certain kinds of income (TN,
  NH)

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Income Taxes

• Can be progressive or proportional

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Income Taxes
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Income Taxes

• Can be progressive or proportional
• Politically unpopular
• High yield, highly elastic

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Property Taxes

• Almost exclusively a local government tax
• Primary source of local funding for education
• States now contribute a large share too
• Politically unpopular
• Tax revolt (Proposition 13)
• Stable source of revenue

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Economic Consequences of State Tax Systems

• Progressive vs. Regressive Taxes
• State income distribution
• Interstate migration
• State economic growth

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In Class Exercise

• You have just been elected governor of Kentucky.
  You have a mandate to create a new tax system for
  the state. What would it look like?
  
• List the major taxes you would recommend, and the
  corresponding of state revenue each tax would
  be responsible for. Provide an overall
  justification for your choices.

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In Class Exercise
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State Budgeting

• 1 vs. 2-year cycle
• Governor vs. Legislature
• Balanced Budgets Required in nearly all states
  (VT)
  
• Debt vs. Surplus
• Rainy day funds

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State Spending
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Total State Spending and Federal Funds Provided
to States, 2004
Over twenty-two percent of state total spending
and over forty-four percent of federalfunds
provided to states were spent on Medicaid.
Total State Spending
Federal Funds Provided to States
Elementary Secondary Education 11.4
Higher Education 10.9
Higher Education 5.6
Public Assistance 3.6
Elementary Secondary Education 21.4
Public Assistance 2.1
Transportation 8.0
Corrections 0.6
Transportation 8.0
Medicaid 22.3
Corrections 3.5
All Other 26.3
Medicaid 44.5
All Other 31.7
Source National Association of State Budget
Officers, 2004 State Expenditure Report.
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State Spending
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Gubernatorial Proposals by Policy Area 1999
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State Spending
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State Spending