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Public finance is an area of study that has received a great deal of attention throughout the years. In recent years public finance has become more of a critical issue because of the economic recession that has plagued the country. There are various methods of public finance that exist and remain as a popular way for local and state governments to raise revenues. For the purposes of this discussion the issue of property taxes will be the focus as it pertains to local governments and the use of "user taxes" to help pay for local government services.
Public finance is described as "the branch of economics that studies the taxing and spending activities of government (Rosen, 2003)." Additionally public finance deals with the issue of both positive and normative analysis. Positive normative analysis involves factors related to cause and effect whereas normative analysis refers to ethical issues associated with the assignment of taxes and other public financing situations. In earnest public financing simply refers to the means by which governments gather revenue to finance services for the public to utilize. Without public finance it would be impossible for local governments to function efficiently and citizens would have a substantially lower quality of life as a result.
There are five types of local government funds that are utilized. These five types are as follows;
1. The general fund- this constitutes single entity which is responsible for support services including the police fire and welfare systems which are not assigned to any other funds.
2. Special- these are revenue funds that are designated to supplying services which will be financed from specifically selected revenues. For instance some locales use this type of funding to provide recreation opportunities.
3. Capital projects funds- this type of funding is a product of long-term debt and grants. This funding source is generally utilized to secure assets that will be useful beyond a one-year period.
4. Debt service funds- this funding source comes from two places including " (1) monies transferred from other funds and (2) resources from taxes, from intergovernmental grants, or from the proceeds of bond issues that have been refunded (Solano, 2004). " These funds are generally utilized to payback municipal bonds.
5. Permanent funds- this type of funding is utilized by local government to handle the financing of continuing activities such as libraries or museums. This type of funding is also unique in that it is "(1) are legally restricted to earnings derived from a safeguarded principal and (2) can be used only for programs that benefit the government or its citizens (i.e., cannot be used to benefit individuals, private organizations, or other governments) (Solano, 2004)."
Salona (2004) also explains that each of the aforementioned funds possesses a separate, fixed budget the governing body approves appropriations for that authorizes the spending of specific amounts on certain items. Also "Additional expenditures cannot be made without authorization. Under a fixed budget, appropriated funds are expendable because the authorization for spending expires at the end of the fiscal period. The budgetary transactions of managers can be easily tracked since the budget allows the governing authority to determine whether the appropriated monies were spent on the designated items and whether expenditures were kept within the stipulated amounts and time periods (Salona 2004)."
Both property taxes and use taxes play a pivotal role in ensuring the appropriate amount of revenue is realized so that the funding sources can operate in the manner intended. Property tax law can be quite complicated and varies from locale to locale. In some states there are caps place on property tax assessments and in other states senior citizens receive substantial discounts on property taxes (Dornfest et al., 2010). Such property tax restriction are often necessary to ensure that homeowners in any given population can afford to pay the property tax and will not be forced to sell of abandon their homes because they could not pay the taxes on the home.
Use tax revenue can also be a difficult issue to address as locales have the ability to impose new use taxes on products that residents did not have to pay taxes on in the past. In addition the way that the revenue is distributed can be a major point of contention and has been in many areas of the country. According to Anderson (2009) local government has to communicate so that conflict can be avoided as it pertains to how use tax revenue is distributed. Failure to do so can lead to distrust and damaged relationships amongst various districts within the same county.
The use tax can also get extremely complicated as different states have various laws related to this particular tax. For instance in California use tax is governed by the Bradley-Burns Act, also known as the "Uniform Local Sales and Use Tax Law" of 1955. The law permits counties to require sales and use taxes on retail "tangible personal properties." The Act has been controversial because it
"triggered competition among counties looking to generate extra tax revenues. By offering sales tax rebates as high as eighty-five percent, counties attempt to lure businesses away from their current locations by offering an array of financial incentives. The receiving county will get the extra Bradley-Burns tax revenue while the losing counties suffer revenue losses as a result of this relocation scheme.4 This practice "merely shift[s] revenue from one or more communities into the pockets of private entities. As such, the revenues provide no additional services or benefits to the public (Hosseini, 2010)."
Both property taxes and Use taxes can be beneficial and provide the funding that local governments need. However they can also be problematic. The next section of this discussion provides more in-depth detain of the use of property taxes and use tax as revenue streams for local government.
III. Property Taxes, Use Taxes and local government Property taxes
Property taxes are one of the tools that are utilized by various local governments across the country to obtain revenue. The United State Census Bureau explains that "Taxes consist of compulsory contributions exacted by governments for public purposes, including general revenue and/or regulation. However, this reporting category excludes employer and employee payments for retirement and social insurance purposes (classified as insurance trust revenue) and special assessments, which are classified as nontax general revenue. Taxes represented the largest source of revenue for both state and local governments in 2008, representing 48.3% of total revenue at the state level and 35.8% of revenue for local governments (State and Local Government Finances Summary)." The bureau also explains that for local governments, property taxes are the most common type of revenue. In fact property taxes accounted for an estimated $397.0 billion or 72.3% of the $548.8 billion in tax revenue received in 2008.
The depiction on the left illustrates the percentage of property tax revenue that state and local governments realized in 2008. Without such taxes a considerable amount of money would be missing from local budgets to fund the various services and projects that local government is expected to handle.
As such property taxes are an extremely important aspect of public finance in the local sector.
There have been various studies dedicated to the impact of property taxes on certain locales. For instance Song & Zenou (2009) investigated that effect of property taxes in various places on urban sprawl. The authors report that past studies have found that property tax likely influences urban development patterns. Property tax has this type of impact on urban sprawl because it
"can be viewed as a tax levied at equal rates on both the land and the capital embodied in structures while, in a pure land tax, tax on capital (i.e., improvements) is set to zero. The literature… provides an abundance of arguments for how property tax may influence land development. Brueckner and Kim (2003) were the first to provide a theoretical analysis that incorporates a land market to investigate the connection between urban spatial expansion and property tax. In their equilibrium analysis, they found two countervailing effects of property tax on the spatial size of cities. On the one hand, the improvement effect refers to the impact of the property tax in reducing the equilibrium level of improvements chosen by the developer. The lower level of improvements per acre implies a reduction in the intensity of land development and this lower density associated with property tax appears to encourage urban sprawl. On the other hand, the dwelling size effect operates through the impact of the property tax on the consumer's choice of dwelling sizes. As the tax on land and structures is partly shifted forward to consumers, there is a decrease in dwelling size due to a higher cost of housing floor space. The reduction in dwelling size implies an increase in population density and thus, a decrease in the city's size or spatial extent."
Urban Sprawl is unwanted in most localities because of the negative implications that it has on public health, culture and the changes in the…[continue]
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676). Some argue, however, that the assessment of property taxes in the United States has become regressive. That is, low-income homeowners pay proportionately more of their income on property tax than their high-income counterparts. This situation has developed as homeowner incomes have slowed while property values have raised rapidly. Not all experts agree on whether property taxes are regressive or progressive. Those who argue that property taxes are progressive point
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