Property Taxes

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 landscape of a city. For this reason local governments have to take into consideration the impact that property taxes can have on the local population. In addition to urban sprawl there are other impacts or influences that are associated with property taxes.

Some are negative while others are positive. The positive impact of property taxes involves the services and/or projects that can be financed through this particular revenue. For instance in most cities property taxes are utilized in part to finance the public education system. This is a controversial use of taxes because of the type of schools that it produces within the same state or even in the same county.

For instance schools in lower income communities are less likely to have homeowners and as such the property taxes collected are not as substantial as those collected in wealthier neighborhoods. As such children who live in the same city may attend public schools that are drastically different from one another depending on the neighborhood in which they live. Use Taxes In addition to property taxes, use taxes are also utilized in many cities throughout the country.

Scanlan (2009) explains that the introduction of use tax came about in the 1930s during the Great Depression as a result of lower personal incomes. In an effort to increase revenues 24 states decided to enact state level sales tax. However, because each state established various sales taxes there was a fear that states that had; lower rates would become tax havens and people would began crossing state borders to enjoy the lower sales tax or to avoid sales tax altogether.

The purpose of use tax is to reduce the unreasonable competition that exists between in-state sales and out-of-state sales. The sales tax rate and the use tax rate are identical. Additionally "Use tax applies when sales tax has not been charged. Purchases made over the internet and out-of-state are the most common type of transactions subject to a use tax.

For instance, if you purchased goods from a supplier located in Massachusetts, whether by mail order or by taking delivery in Massachusetts, use tax applies if the goods are brought to Maine for use here. A Maine resident or business does not escape sales tax by purchasing out-of-state or over the internet. Use tax is based on the purchase price of the item (Scanlan, 2009)." Furthermore, use tax can also be applied when a business withdraws goods from inventory for its purposes.

In such instances, use tax is determined by the cost of the item at the time it was purchased (Scanlan, 2009). Additionally frequent taxable business items include computer hardware, office supplies and equipment, janitorial supplies, software and supplies, photocopiers, fax machines and supplies. For individuals taxable purchases include downloaded music & cd's, computers, books, and clothing (Scanlan, 2009). Furthermore all tangible products bought across state borders but consumed, or stored in an individual's home state require the collection of the use tax (Scanlan, 2009).

This tax is expected to be paid to the home jurisdiction of the consumer. For example, "if a consumer from Connecticut, where the sales tax rate is 6%, buys a good in Massachusetts, where they pay a rate of 5%, for eventual use in Connecticut then the consumer still owes the 1% difference in tax rates to their local taxing authority. The constitutionality of imposing a use tax on local consumers was established by two Supreme Court decisions: Monamotor Oil Co. v. Johnson (1934) and Henneford v. Silas Mason Co. (1937).

In theory the use tax halted the benefit of shopping out of state based on sales tax rate differences alone; however, in reality, use tax collection has become a thorn in the states' sides (Scanlan, 2009)." When use tax was first introduced at the local level states wanted that company conducting the cross border sale to collect he use tax. Though, this tactic was proven to be difficult to put into practice as the states attempting to collect the tax had no jurisdiction over other states.

In addition mail order business began to gain in popularity, making the enforcement of such tax laws virtually impossible. At the current time this issue of use tax has been further complicated by the popularity of e-commerce. Now the issue is not just from state to state but from country to country and collecting such tax has become a difficult task for governments throughout the country.

There is a concerted effort to educate internet merchants on the importance of paying taxes on products purchased by people in other states, there is very little that can be done as it relates to the enforcement of such rules. Both property taxes and Use tax have become vital elements in the ability of local governments to fund services and projects. However they have also come under a great deal of scrutiny.

On the one hand citizens generally understand that the services that local government provides cannot be provided without public financing in the form of taxes. However there is often a great deal of concern about the rate at which such taxes are collected and how allocation of tax revenues is handled. According to (Bahl, 2004) )as it pertains to allocation "The most important fiscal role of local government is to decide on the level and mix of taxes and expenditures that best match the needs and preferences of the local population.

That local government's take this allocation function seriously is evidenced by the wide variety of choices they actually make (79)." At the current time there is a great deal of trouble at the local level as it relates to property tax revenues. This trouble exists because the state of the real-estate market has caused a decrease in tax revenues obtained through property taxes.

Because so many homeowners have lost their homes through foreclosure and the value of homes has decreased, local governments are not receiving the revenues they once did from property taxes. In many places throughout the country this problem coupled with other economic issues have cause serious budget crises for local governments. Such crisis has caused the layoff of thousands of teachers, cutbacks in local programs to assist the less fortunate and the elderly, and the inability of some locales to fix roads or offer citizens the proper emergency medical.