Tax expenditures and their effects on public budgeting

Public Budgeting in America

Advisory Commission on Inter… #6

Property Tax #18

Real Property #15

Full Market Value #5

Replacement cost approach #20

Income approach #14

Uniform property tax assessment #16

State equalization rate #13

Income tax #8

Tax expenditures #10

Net taxable income #19

Sales tax #11

General sales tax #12

Selective sales tax #2

Place of delivery #1

Location of the vendor #17

Regressive quality of sales tax #7

User fees #3

Value-added tax #9

Circuit breaker #4

Tax expenditures are losses to the treasury that stem from loopholes, exemptions, credits or deductions to specific categories of taxpayer or activity. These are considered tax expenditures because rather than being a form of direct government spending, they represent tax that should have been collected by the treasury but was not.

Tax expenditures affect taxpayers in a number of ways. They represent a drain on the potential tax dollars. This reduces the amount of money that is available to spend in the public budget. This reduces the amount of services that government can provide. Additionally, tax expenditures may increase the propensity of government to borrow. The result is that the taxpayer then is forced to spend some tax dollars on interest payments, rather than on goods and services. Thus, the cost of capital for government increases. Another impact is that tax expenditures favor some types of activity over others. While some taxpayers and activities receive tax breaks, others are forced to pay higher taxes in order to make up for this shortfall. Tax expenditures therefore create a degree of inequity in the tax system, where some taxpayers are essentially subsidizing the economic activity of other taxpayers, whose activities are considered more favorable by the government.

Question 3.

The property tax system has come under fire for several reasons. One of these is that the system is based on assessed value of the property, which may or may not reflect the true market value of the property. Thus, a property owner may be faced with tax hikes based on assessments that have little bearing on the actual resale value of the property. There are circuit breakers, but they are not always set or set equally, to the detriment of some taxpayers.

Another issue is that the property tax rates are typically set by the civic authorities and can vary widely within the same state or region. This is in part because the local cost of infrastructure and other expenditures accounts for a significant portion of property tax and these costs can vary significantly throughout a region. While there are mechanisms to make property tax rates more equal statewide, such as state equalization rates, they are not always utilized to their best effect.

There are also inequalities in property tax when different approaches are used. For example, if an income-generating property is taxed using the income approach, this may leave the taxation rates out of line with the actual market value of that property. The use of different approaches can also result in benefit to some taxpayers, resulting in tax expenditures. These expenditures can be a drain on other taxpayers who do not have the ability to take advantage of the tax benefits.

Scholarly Activity 2

For this final project, I will be studying four different public budgets. For the federal budget component, I will study the Summary Tables for the 2010 budget, which can be found online here: http://www.gpoaccess.gov/usbudget/fy10/pdf/budget/summary.pdf.

For the state-level budget I am taking a look at the Florida "People's" Budget for 2009-10. This can be found online here: http://peoplesbudget.state.fl.us/bdagencies.aspx?full=1. For the civic budget, I have chosen the budget for Newark, New Jersey. The city's proposed 2009 budget can be found online here: http://www.ci.newark.nj.us/government/city_departments/department_of_administration/2009_proposed_budget.php. Lastly, the agency budget I have chosen is the Environmental Protection Agency (EPA) 2010 Budget. This can be found online here: http://www.epa.gov/budget/2010/2010bib.pdf.

Description of the Budgets

The summary tables of the 2010 Federal Budget break the budget down in a variety of ways, such that the information contained is easy to digest. The first summary is the Budget Totals, which illustrates the total receipts and outlays and their impact on the debt. The other tables summarize the budget in different ways, including the effect of budget proposals on projected deficits; the cost of various government programs such as the Department of Defense and Medicaid; and they break down both the mandatory budget activities and the proposals.

The table S-7 highlights the Funding Levels for Appropriated Programs by Agency. This table allows the reader to understand the level of funding that is provided for a variety of government agencies and departments. The budget shows the current level of funding, the additional funding under the Recovery Act, the request for 2010 and then the estimates of future funding levels of each agency and department. This gives the reader an understanding of the degree to which each department and agency contributes to government spending.

The budget tables also provide an indication of the economic assumptions behind the budget figures. The government provides this information because their revenue figures in particular are based on expectations with regards to GDP and therefore taxation. This information helps observers who can then make expected adjustments to the budget based on changes in the economic landscape.

Table S-9 illustrates the financing and debt that goes into the budget. This tells the reader where the money is going to come from to pay for the budget. In particular, the government shows the amount of unbudgeted deficit that will need to be covered by debt, and what those debt levels will look like into the future.

The Florida State budget is presented in a simpler manner. It highlights both the current year's expenditure on different agencies and the governor's recommendations for the next year's budget. For each agency, not only are expenditure levels available but the funding sources are outlined. The funds typically come from either General Revenue or Trust Funds.

The Department of Education funding is given special treatment as its funding is broken down further on a special chart by education type. Within each category for all agencies, expenditures are broken down by category and sub-programs. T

There are on the Florida State budget website a myriad of other reports that break down items such as sources of general revenue, the budget's underlying economic assumptions, and some of the trust fund sources. The trust funds for the state of Florida include an Education Enhancement Trust Fund, a Principal State School Trust Fund and a Tobacco Settlement Trust Fund.

The City of Newark's proposed budget is presented with a number of tables. The first of these highlights the city's revenue sources. The operating budget also highlights the expenditures for each agency and department within the city, including administrative departments, police, fire and engineering. The department budgets provided are fairly specific with respect to cost categories.

The smaller scale of the city budget allows for the presentation to include more than just overviews of the budget items. Each specific budget item is included in this proposed budget, which enables the reader to easily understand every expenditure and source of revenue that the city has. This is a very transparent budget.

The EPA's budget includes written descriptions of the budget, but also pie charts and graphs breaking down the different components. The budget is presented in two ways, by goal and by appropriation. This reflects the complex nature of agency budgeting. The agency receives funding from multiple different sources, including a variety of appropriations. For operating purposes, however, the agency sets its budget around particular goals, such as "clean and safe water" or "land preservation and restoration." Thus, the EPA's budget illustrates the disconnect between agency funding sources and agency tasks.

When breaking down the budget by goal, there are numerous sub-goals. For example, within Goal 1: Clean Air and Global Climate Change, there are six sub-goals. The amount of money allocated to each of these is explained in the budget. Extensive notes are provided explaining the nature of the work that the EPA is doing within each sub-goal.

In explaining the sources of funding, the budget illustrates the wide range of different funding sources that contribute to the agency's budget. It is difficult to determine the ultimate source of these funds, since many of the appropriations are simply transfers of federal funding to the agency.

The EPA budget also highlights the major changes in its budget from the previous year. Each new appropriation is categorized and the nature of the change is explained. The purpose for each appropriation is also explained in detail, so that the reader can easily track the purpose of each appropriation, even those of relatively tiny amounts.

The EPA budget also explicitly highlights the ways in which the Recovery Act impacts on the EPA budget. The levels of funding provided by the Recovery Act are outlined, as are the projects on which that money will be spent.

Major Sources of Revenue

According to Table S-3, the federal government receives its revenue from a variety of taxation sources. The largest component of federal tax receipts are individual income taxes, which accounted for 45% of federal receipts in 2008. Other major sources of receipts for the federal government are corporate income taxes (12%), social security payroll taxes (26%), Medicare payroll taxes (7.6%), unemployment insurance (1.5%), excise taxes (2.6%), estate and gift taxes (1.1%), customs duties (1.1%), deposits of earnings from the Federal Reserve System (1.3%), and other miscellaneous receipts. In most years, this leaves the federal government with a budget deficit. The federal government must then issue debt in order to meet this deficit. Some debt can be issued in domestic capital markets, but most is issued to major institutional investors around the world.

The State of Florida derives its revenue from a variety of tax sources. Far and away the largest source is the state sales tax, which accounts for 78% of receipts. The other taxes are the beverage tax & licenses, corporate income tax, documentary stamp tax, tobacco taxes, insurance premiums tax, pari-mutuels tax, intangibles tax, estate tax and severance tax. In addition, the state collects revenue from a range of fees. These include public safety licenses and fees, medical and hospital fees, auto title and lien fees, service charges and others. The state also earns interest on investment holdings.

The City of Newark has two major classes of revenues. The first are revenues that the city generates internally. The second class consists of funds that are dispersed to the city from other governments or agencies. The first category includes a wide range off taxes and fees, including property taxes, payments-in-lieu, payroll tax, parking lot receipts, hotel tax, fines, interest income from investments, rent from city-owned property, taxicab licenses, restaurant licenses and miscellaneous revenues. There are a variety of fees including those for vital statistics, police fees, electrical permits, plumbing permits, parking meters, tax searches, fire fees, building permits and franchise-cable fees.

The second category consists of funds dispersed to the city by other governments and agencies. These include the energy receipt tax, consolidated municipal tax relief aid, the building aid allowance for schools and fees from the host municipality agreement with the port authority. The city accepts private grants for specific projects. The state of New Jersey finances some city-run programs such as the child and adult food program. Various other federal and state agencies, as well as Essex County, provide project-specific funding to be administered by the city. The New Jersey Department of Health and Department of Labor are particularly large contributors to the city's budget.

The Environmental Protection Agency receives its funding through a wide range of appropriations. Almost all of the funding for the EPA originates with the federal government. The EPA budget for 2010 is $10.486 billion and their request for 2010 as recorded in the federal government's budget is $10.5, indicating that the EPA is solely reliant on the federal government for its funding. There are eight appropriations used to finance the EPA. The most important of these, representing 49.5% of the budget, are the State and Tribal Assistance Grants (STAG). Other appropriations that contribute to the EPA are Science & Technology, Environment Programs and Management, Inspector General, Science & Technology, Oil, Leaking Underground Storage Tanks, Superfund and Buildings & Facilities. The federal government makes these appropriations to meet specific objectives that it has, based on the amount that it expects the EPA to contribute to the project.

Future Changes to Revenue Amounts

The federal government is anticipating revenues to decline in 2009 and make a modest recovery in 2010. These gains mirror the expectations of economic recovery, and the projections are fairly robust for the 2010-2014 period. After 2014, the projections for revenue improvements are more conservative. Part of this is because once the budget gets out that far, the government uses flat rate estimates of economic indicators. For example, the expectations for interest rates are steady from 2013 onwards. The government is essentially admitting that it cannot reasonably project out that far. As a result, the most significant expectations are those for the next few years. The government is predicting that the economy will grow rapidly from 2010 to 2012 and therefore government receipts will grow as well, given the dependence of key receipts like income tax on the state of the economy.

The federal budget also outlines the expected future revenues as a percentage of the GDP. In the current budget, the federal government expects that receipts as a percentage of GDP will increase from 15.4% in 2009 to 19.0% in 2013 and grow slowly from there. It is not explicitly stated how this will occur but given the dependence the government has on taxation of economic activity, these assumptions seem to indicate that a greater portion of economic activity in the U.S. will be taxed in coming years.

The Florida budget does not project as far into the future as the federal budget. The state has recorded a decline in receipts for 2008-09 but expects receipts to increase in 2009-10, a function of an improving economy. This projection includes most major categories of receipt, such as sales tax, beverage tax, tobacco taxes and the insurance premiums tax. The state is predicting very strong improvements in service charges, possibly because they intend to bring in new charges in this budget. The underlying assumptions about the economy that have shaped the 2009-10 budget projections are that the pace of economic decline is going to slow, but that the state will still remain in a state of sluggish growth, high unemployment and will still face steep declines in construction.

The City of Newark's budget projections are based on the expected changes to each category. With respect to fees and taxes, the city is projecting gains for some (such as property taxes) and reductions for others (payroll tax, for example). These are based on the sensitivity each has with respect to the economy. In a low interest rate environment, the city is expecting strong reduction in interest income on the surplus that it holds. The City's budget is complicated by the lack of information with respect to grants from state, county and federal agencies. These grants form a significant portion of the city's budget, but are typically allocated on an ad hoc basis. Therefore, it is difficult for the city to account for these grants in their budgeting process. The city sets aside so no expectation of any grant money, which is possible because grants are allocated for specific projects and the city is unlikely to undertake such projects without grant money. Thus, these grants and projects only appear on the budget after the fact.

The EPA's budget is expected to increase significantly for 2010. There are two reasons for this. The first is that the agency is expected to receive a $2.2 billion spike in infrastructure financing. This is the result of Obama administration policy to allocate more funding to the EPA than the agency has received from previous administrations. The second reason why the EPA budget is expected to increase so 38% in 2010 is that the government is providing the agency a total of $7.2 billion under the Recovery Act. This influx of funding will help the EPA expand its budget significantly over the coming years. In addition, the Superfund taxes on petroleum, which had expired in 1995, are set to be reinstated in 2011, providing an estimated $1 billion in additional revenues to the EPA each year. Although the EPA does not quantify the impacts of these funding initiatives on years beyond 2010, clearly the EPA budget is expected to expand significantly over the next few years.

Budgetary Fit with the Mission of Each Domain

The federal government's budget is a good fit with its mission. This budget features significant increases in spending without corresponding increase in receipts. However, the role of the federal government is not to turn a profit, but to run the nation. Thus, it is not unreasonable that the federal government run a deficit in order to provide good governance to the nation. While this point is often hotly debated, it does fit squarely within the realm of Keynesian economics, where government should be actively involved in the economy in order to reduce the amplitude of the business cycle (Blinder, 2009).

Thus, if the mission of the federal government is taken as being the provision of national-level services and to provide a degree of economic stability, then the budget does fall within that mission. There are many opponents of Keynesian theory, however, and they do not feel that economic stabilization is within the mission of the federal government. Thus, those individuals would argue that the deficit that the federal government has run for the past thirty years is dangerous and does not fall within the mission of the federal government. With respect to national-level services, the budget does account for a wide range of such programs, including national defense, the national transportation network, environmental protection, food protection and other such services best delivered on the national level.

The proposed Florida budget is a balanced budget that accounts for the provision of state-level services to the people of Florida. These include health and education programs, fish and wildlife, law enforcement, justice and agriculture. Each of these areas is the jurisdiction of the state, and the state of Florida's budget appears to meet the needs of the citizens in each of these areas. There are some cuts within each individual budget, but these appear to be within the normal bounds of fluctuation to meet the shifting service requirements over time.

The City of Newark works to provide the citizens of Newark with services such as social services, law enforcement, and city maintenance. The city is meeting these requirements with its budget, so the budget does fit within the mission of the city. It is interesting to note, however, that Newark has a large surplus, which is presently earning little because interest rates are so low. Some surplus is necessary in order to hedge against economic downturn -- the surplus shrunk $6 million last year. However, $50 million is currently sitting in the surplus, earning very little. The City of Newark could better meet its mission by using some of this service to provide additional services to its citizens, in particular in light of the economic downturn, which may increase the need for social services and law enforcement.

The Environmental Protection Agency has a unique budget in that it receives funds from a number of different appropriations and then spends the money based on a small number of strategic goals around which its operations are built. The budget shows strong expected increases in funding in the future, which will be used in part to fund the agency's clean air initiatives. The proposed increases in budget funds are allocated in the budget and it appears that much of this funding is going to be used to expand and improve existing initiatives. Each of the EPA's goals is within the scope of environmental protection and awareness. The agency is responsible for research, coordination, advocacy and enforcement of environmental policies.

How Can the Budget be Improved and Revenue Estimation be Accurately Assessed at Each Level?

At the federal level, the revenue estimates are based on macroeconomic indicators and the government's own monetary policy. One way in which this forecast can be improved is to make it more conservative. The current budget contains some optimistic projections with regards to the timing and intensity of the economic recovery. This may not be of much concern given that deviations will only affect the amount of the deficit, but the government would be better served to take a more conservative approach with its projections in order to allocate funds more effectively.

As with the federal government, the State of Florida bases its budget on forecasts deriving from expectations about the macroeconomic environment. These forecasts derive from both federal government and state government sources. The budget can be improved by specifically outlining the total receipts and expenditures. This information is not summarized, only outlined by agency. This makes it difficult to determine the state's total budget situation. There is little transparency with respect to matching funding sources and expenditures. As with the federal government, the state is somewhat optimistic in its projections. Revenues are expected to increase next year, even in economy-dependent sources such as sales taxes, yet the economic outlook does not support this optimism. In general, the state fails to offer notes to its budget that would explain some of their estimates for either receipts or expenditures. Given the optimism, it could reasonably be suspected that past performance is the metric used, perhaps based on averages of past years' increases, in conjunction with economic data. The weighting of economic data may be too low, resulting in the optimistic projections, so the state could improve its forecasting by adding emphasis to the economic data.

The City of Newark's budget could be greatly improved with the inclusion of expected receipts from federal, state and county sources. These receipts will ultimately account for a large portion of the city budget, but are not included in the projections. This is a significant shortcoming in the city's budget. To improve the accuracy in assessing estimated revenues, the city should utilize past information to help it estimate the amount of grant money it will received. Time-series estimates can be used in order to provide ballpark figures for the grants, which will give the city better information with which to work.

The EPA is basing its budget around the amount that it has requested from the federal government. This request appears to be at an agreed-upon figure, given that the federal budget includes the same figure. Thus, the EPA's forecasting is based on levels of funding that it has negotiated with the federal government. Traditionally, the EPA has received a fairly static level of funding. Thus, the best way to improve the funding model beyond this coming year is to utilize historic funding growth rates, but with the new base funding level that the Obama Administration has set for the agency beginning in 2010.

Works Cited:

United States 2010 Federal Budget Summary Tables. Retrieved July 24, 2009 from http://www.gpoaccess.gov/usbudget/fy10/pdf/budget/summary.pdf

State of Florida 2009-10 "People's" Budget. Retrieved July 24, 2009 from http://peoplesbudget.state.fl.us/bdagencies.aspx?full=1

City of Newark 2009 Proposed Budget. Retrieved July 24, 2009 from http://www.ci.newark.nj.us/government/city_departments/department_of_administration/2009_proposed_budget.php

Environmental Protection Agency 2010 Budget. Retrieved July 24, 2009 from http://www.epa.gov/budget/2010/2010bib.pdf

Blinder, Alan S. (2009). Keynesian Economics Concise Encyclopedia of Economics. Retrieved July 24, 2009 from http://www.econlib.org/library/Enc/KeynesianEconomics.html