Funding City Services

1
Funding City Services

• Understanding Taxes

2
Purposes for Government

• A primary reason to organize ourselves as cities
  is to foster a sense of community and belonging
• Most goals around which we form governments are
  to provide benefits that are difficult to achieve
  as individuals or through private businesses
• Who would build our roads, raise our armies, or
  provide our parks if we did not collectively do
  it?
• It is important to assure that government
  activities add to the greater public good and are
  balanced to serve major needs of all segments of
  society within our ability to pay

3
Municipal Services

• Municipalities rarely engage in some activities,
  such as welfare, education, and building
  highways, because they are the responsibility of
  other entities.
• Towns and cities provide many of the remaining
  services, including most of the services that
  directly affect our daily lives.

• Public Safety
• Police
• Fire
• Ambulance
• Water, sewer, trash
• Streets, sidewalks
• Parks and recreation
• Libraries, culture
• City planning
• Economic development

4
The Average Utah Household Pays About 600 in
Municipal Taxes Annually
5
Taxes

• We HAVE to pay for government services, and we
  mostly do so through taxes
• We pay taxes whether or not we want/use the
  services they fund
• The degree to which we think government ought to
  provide more/fewer services is a primary reason
  for voter choices
• Cities can bond (borrow) to pay for
  infrastructure improvements, but must budget
  repayment, and must have a balanced budget

6
Taxes

• Only the federal government can spend more than
  it collects in taxes, creating debt that must be
  paid by future citizens
• The national debt is now about 11,308,127,000,000
  each US citizen owes about 37,000
• This figure is up 10 in just the last 6 months,
  and is scheduled to rise by another 15-20 with
  planned federal stimulus expenditures this year

11,308,127,000,000
7
The Price of Local Government Average for Utah
Cities
8
Price of Local Government Average for State
Plus Cities
9
Price of Municipal Government by State for the
Western Region
10
Price of State Government for the Western
Region
11
Comparing Government Across Locals

• Be careful about making comparisons
• Circumstances differ across locals
• The primary reason Utah has somewhat higher state
  taxes is a much larger than average birth rate.
  Aside from much higher than average costs for
  public education, Utah governmental costs are
  below average. In fact, our per-student
  expenditures are among the lowest in the nation.
• Differences also arise because of choices about
  adequacy, affordability, and competitiveness.
• Cities try to provide what their citizens want
  and are willing to pay for

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Where Does Your Tax Dollar Go?Utah Averages
13
Common Tax Misconception

• The rich dont pay much in taxes
• Fact The top-earning 25 of taxpayers (AGI over
  64,702) earned 68.2 of the nation's income, but
  paid 86.3 of federal income tax. The top 1 of
  taxpayers (AGI over 388,806) earned
  approximately 22.1 of the nation's income, yet
  paid 39.9 of federal income taxes. That means
  the top 1 of tax returns paid about the same
  amount of federal individual income taxes as the
  bottom 95 of tax returns. In contrast, the
  bottom 50 of all taxpayers averaged 450 tax per
  person (many of these dont pay any).

14
Common Utah Tax Misconceptions

• Fallacy 24 of surveyed citizens believe cities
  receive income tax revenue
• Fact Cities dont collect income tax in Utah
  all state income tax goes to public education
• Fallacy 40 believe the state receives property
  tax revenue
• Fact Depending upon the locale, about 55 of
  this tax goes to the local school district, 20
  to the county, 15 to city

15
Your Tax Responsibility

• Typical adults pay about 25 - 40 of their
  income into taxes of all types, depending on
  their income
• Because income taxes are highly progressive, your
  burden for this type of tax depends on your
  income
• Lower income people pay very little (or no)
  Federal Income Tax
• This means that when candidates talk on and on
  about tax breaks for the poor, they arent saying
  muchIn fact, sometimes what they really mean is
  wealth redistribution (tax the rich more to give
  to poor through government programs)

16
Average Tax Burden

• In 2008, average Americans worked 74 days to pay
  their federal taxes and 39 more days to pay state
  and local taxes.
• Careful about averageremember that lower
  income persons might pay off their entire federal
  income tax in 1 week of work or less
• This means that an average American taxpayer pays
  31 of annual income for all forms of taxation
• Utah places about 20th among the states for tax
  burden (due to lots of kids and costs of
  educating themwithout the extra burden of
  education, the ranking would be much lower)

17
Most Common Forms of Taxation

• Federal and state income tax
• Usually regarded as most progressive (rich pay
  more)
• Ad valorem taxes (sales tax, tariffs,
  inheritance)
• Sales tax is usually regarded as most regressive
  (rich pay more because they buy more, but poor
  pay proportionally more of their income)
• Entitlements taxes (Social Security, Medicare)
• Property tax
• Corporate and excise taxes
• Often regarded as hidden taxes because the
  entities taxed pass on the cost to the consumer

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Federal Income TaxIts Actually Pretty Low Right
Now
In recent years, the rate is starting to rise
back up
19
We Love to Complain About Taxes

• In fact, the federal tax for most people was
  recently at its lowest rate in decades, although
  creeping back up in the last few years

20
A little over half of debt is for past defense
spending
Note Remember that this is just income tax.
The Federal budget includes other sources of
income spent elsewhere, most notably Social
Security and Medicare
21
Average Household Tax BurdenFor a Typical
Household Income of 40,000
22
Typical Tax BurdenBased on family of five,
income of 62,677
Type of Tax Tax Fed. State Schl. Cnty City
Social security 7155 45 7155 0 0 0 0
Medicare 1673 11 1673 0 0 0 0
Employment taxes 553 3.5 553 0 0 0 0
Excise taxes 281 1.8 281 0 0 0 0
Federal income taxes 230 1.4 230 0 0 0 0
State income taxes 1831 11.5 0 0 1831 0 0
Sales taxes 1805 11.4 0 1301 0 224 280
Property taxes 1437 9.1 0 0 799 431 216
Auto taxes (gas) 913 5.8 401 347 0 83 83
Total 15878 100 10293 1648 2620 738 579
of total tax 65 10 16 5 4
For this family, taxes represent about 25 of
total income
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The Federal Budget May Be in Trouble

• Whereas Federal tax rates are pretty stable,
  spending is growing rapidly
• Entitlement programs are unsustainable without
  major tax increases
• Huge debt will hamper our ability to solve our
  problems
• Fortunately, our state and local governments are
  in much better shape, mostly because of cost
  containment and avoidance of entitlements

24
2007 Federal BudgetExpenditures Revenues
(deficit of 162 billion will be in the
trillions for 2009)
25
Social Security, Medicare, Medicaid as of
Federal Budget
26
Mandatory Spending is Consuming a Growing Share
of the Federal Budget
27
Change in Composition of Discretionary Spending
28
An Aging Population

• American are living longer and having fewer
  children
• Thus, fewer workers are available to support each
  Social Security recipient

29
Health Care Costs are Rising Much Faster than the
Economy
30
Economic Trends that Challenge Municipal Taxation
Sources

• Our high birth rate and increasing longevity mean
  increased reliance on wage earners to support the
  young and old
• Our movement towards a service-based economy
  means a growing proportion of our economy is
  exempt from municipal taxation
• E-commerce generates no municipal taxation, and
  other technology reduces the need for real
  property (e.g., factories)

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Utah Tax Trends Comparing across Two Years

• 1985
• 2.5 billion total State budget
• 714 million total municipal revenue (1990)
• 7.7 of state budget dedicated to Medicaid
• 144 million state Medicaid expenditures
• Income tax burden 25 per 1,000 of personal
  income
• Property tax burden 36 per 1,000 of personal
  income
• Sales tax burden 39 per 1,000 of personal
  income

• 2005
• 9 billion total State budget
• 1.4 billion total municipal revenue (2004)
• 18 of state budget dedicated to Medicaid
• 1.6 billion State Medicaid expenditures
• Income tax burden 32 per 1,000 of personal
  income
• Property tax burden 25 per 1,000 of personal
  income
• Sales tax burden 35 per 1,000 of personal
  income

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Municipal Summary

• Although federal budgets face extreme challenges,
  municipal budgets have been relatively stable
• However, the status quo is threatened for
  municipalities because (a) they have limited
  control over their own ability to maintain
  current taxation levels and (b) other government
  entities have overcommitted or postponed meeting
  their needs
• In the last major tax overhaul (over 30 years
  ago), Utah developed a municipal tax structure
  where property taxes would mostly pay for all
  operating expenses and sales/use taxes would pay
  for capital improvements.

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Five Principles of Sound Tax Policy

1. Simple clear and easy to administer
2. Fair depends heavily on ones perspective
3. Efficient generates adequate revenue with low
   administrative cost
4. Stable predictable revenue
5. Transparent open to citizens with rational ties
   to services provided

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Surveys of Utah Citizens
Fact In Utah, property taxes are a major source
of funding for counties, cities, and schools only.
35
Surveys of Utah Citizens
36
Utahs Property Tax Burden
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Understanding Property Tax

• The county places a valuation on real property
  (homes, business, land)
• The taxing entities (cities, counties, schools)
  set a tax rate
• The tax is calculated by multiplying the assessed
  value by the tax rate (reduced by 45 for homes)
• Lindons tax rate is currently .001296
• A home valued at 300,000 would have city
  property tax of 214
• In Lindon, about 13 of your property tax is for
  the city, 72 for the school district, and 15
  for the county

38
Understanding Property Tax

• An increase in the assessed value of a home does
  not mean property tax goes up
• As assessed values go up, the tax rate goes down
  so that the same dollar amount of tax is assessed
• A taxing entity must hold a Truth in Taxation
  hearing to adjust the tax rate
• Because of inflation, the value of property taxes
  collected will steadily decline unless to taxing
  entity holds a hearing and raises the tax rate.
• Lindon has not increased the tax rate for as long
  as we have records, so homeowners now have a much
  lower tax rate than they did years ago

39
Understanding Property Tax

• As compared to other cities in Utah County,
  Lindons property tax rate is one of the lowest
• Over just the last 10 years, the contribution of
  property tax to Lindons revenue has declined
  from 38 in 1998 to just 18 in 2007
• Over time, the most stable source of municipal
  revenue will decline unless the city acts
• Contrary to the intent of the state tax plan for
  municipalities, Lindon must now heavily subsidize
  its general operations from the sales tax

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Lindons Property Tax Rate1988 to 2008
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Lindon Tax Revenues, 1998 v. 2008
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Property Taxes Failing to Keep Up with Rising
Population
43
Utahs Sales Tax Burden
Utahs ranking is now higher due to recent
reduction in our tax on food and tax increases in
other states
44
Sales Tax in Lindon

• The sales tax in Lindon is 6.75
• 1 of this, goes to cities, 4.7 goes to the
  state, .25 goes to the county, and the rest goes
  to county transportation funds
• The 1 city portion is allocated in two ways
• Half goes to the city where the tax was generated
• Half goes into a general fund that is distributed
  to all cities in the state based on population
• Because of this distribution formula, only about
  60 of the municipal portion sales taxes
  generated in Lindon comes back to Lindon City

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A Balanced Municipal Tax Portfolio

• The recent economic downturn exposes the folly of
  becoming too dependent on sales tax from a period
  of economic boom
• For the first quarter of 2009, Utahs sales tax
  is down over 11, 8th worst in the nation
• Lindons sales tax decline is a bit worse than
  this state average
• Good tax policy includes a variety of revenue
  sources, including the stability of property
  taxes and the growth ability of sales taxes

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Lindon City Budget

• For more information
• Attend Lindon City budget hearings held each
  June,
• Request budget information from out City
  Treasurer, or
• Look for detailed budget information to appear
  on-line soon