What is one thing that you have learned about public finance and budgeting that you want to make sure you carry forward into a career in public administration?
PA 5305, Public Finance and Budgeting 1
Course Learning Outcomes for Unit VIII Upon completion of this unit, students should be able to:
5. Evaluate a model budget. 5.1 Analyze trends in taxation and how they can affect public budgeting.
8. Apply practical methods to reconstructing finance and budgeting techniques.
8.1 Summarize financial policy trends toward new alternative taxes.
Reading Assignment Chapter 16: Taxes on Consumption and Sales Chapter 17: Taxes on Wealth, Property, and Estates
Unit Lesson Domestically and internationally, officials use various taxing regimens. In previous units, we discussed taxation and the impacts of multiple tax structures as well as major tax reform policies. This unit provides a review of trends and alternatives in taxation and how they can affect public budgeting. Payment of taxes, whether they are local, state, or federal, gives public officials the necessary funding to appropriate to various programs, agencies, or public offices as indicated in a previous unit. Selected taxes are compulsory on both individuals and corporations. Others are levied only on employers. Governing authorities from city, state, or federal government regulate the amount and form of taxes imposed. Sales and income taxes are major sources of revenue for state and local government (Hyman, 2014). A sales tax is a specified percentage of the price of a good or service charged during purchases or calculated on the basis of the unit of merchandise. Similarly, income tax is a percentage based on earnings. Taxes can be evaluated in terms of their effect on the distribution of income. Some experts assert that income tax is a superior index based on the ability to pay (Hyman, 2014). Conventional wisdom suggests that the advantages of income tax include fairness and equity. Income tax is viewed as a tool that controls behavior. Experts agree that income tax has a negative impact on savings. A second disadvantage of income tax is that it causes inefficiency and disincentive to work. However, consumption tax, or indirect tax, is an alternative to income tax. The consumption tax encourages economic growth through saving. This tax is purported to be more efficient economically, and it increases incentives to work (Hyman, 2014). Supporters of consumption tax argue that it provides a compatible index of the capacity to pay, similar to sales. In addition, the consumption tax is more favorable to savings and investment incentives than income tax (Hyman, 2014). The federal government applies a consumption tax through the portal of an excise tax. The federal government levies excise taxes on commodities such as cigarettes, gasoline, tires, telephone communication, income, and alcoholic beverages. State government applies excise taxes to commodities such as fuels, tobacco products, alcoholic beverages, and other items.
UNIT VIII STUDY GUIDE
Trends in Taxation: Consumption Tax, the New Alternative
PA 5305, Public Finance and Budgeting 2
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The economic recession, state and local government budget shortfalls, declining tax base, unfunded mandates, increased demand for public services, and municipal bankruptcies are just a few of the catalysts that contribute to governments trending toward tax reform. Officials have begun to sense and recognize that citizens are experiencing excess tax burdens. Therefore, numerous state governments have adopted legislation that promotes lowering taxes, hoping to provide taxpayers some relief. Trends in creating new policies seek to reduce income tax rates as well as the rates of other taxes applicable to individuals, corporations, or both. Officials are also hoping the new policies will stimulate paths for new economic growth and revenue. Consumption tax alternatives can include a flat-rate tax, sales tax, and/or a value added tax (VAT) (Hyman, 2014). Georgia implemented a change in its traditional tax system to a flat tax of 12% for personal income taxes (Torosyan & Filer, 2014). A flat tax does fluctuate based on the amount of income earned. In conjunction with implementing a flat tax, policy for enforcement of tax collection was strengthened. Before tax reform, Georgia had more than 20 tax rates (Torosyan & Filer, 2014). After reform, the number of rates were reduced to seven (Torosyan & Filer, 2014). Citizens experienced the most notable change in personal income and social insurance taxes. Reform efforts eliminated privileges and special tax rates for the wealthy (Torosyan & Filer, 2014). The new policies were accompanied with updated administrative procedures for tax collection as well as for monitoring compliance. Proponents of the tax argued that an excess tax burden was eliminated. In contrast, opponents argued that a consumption tax would create a perfect storm of bad tax policy. Furthermore, opponents suggest that the profit margins of Georgia businesses could decline. Emerging concerns included that Georgians would choose to purchase luxury or expensive products in neighboring states such as Alabama, Tennessee, or the Carolinas. Kansas sought to promote a path to economic prosperity by increasing earnings from different portals of income ranges (Sinquefield, 2015). Kansans believed wealth creation was stimulated from economic expansion. Efforts of reform included a pro-growth consumption tax approach while simultaneously reducing income tax liability for small businesses. For individuals, the Governor of Kansas pushed for the elimination of income tax for thousands of low-income families (Sinquefield, 2015). Like many other states, Kansas was experiencing declining revenue collection. Through the new tax, Kansas raised new revenues to balance the state budget through changes such as increased cigarette and sales taxes. The sales tax rate decreased from 6.3 percent to 6.15 (Associated Press, 2015). Proponents stated that the new policy model migrated toward a fair tax and that the policy fixed the state budget as an economic stimulus. Opponents argue that the consumption tax law allows 330,000 business owners and farmers to escape taxation. Oklahoma’s tax regimen is a little unusual. Operating revenue consists of income tax; sales, selective sales, license, and other taxes; and property taxes. Oklahoma enacted legislation in 2014 eliminating tax credits on biodiesel facilities, gas used in manufacturing, and for creating new jobs in computer services (Schram, 2014). Proponents argue that consumption tax generates larger amounts of money at relatively low rates, encourages easy compliance, and encourages savings and investment. Opponents argue that consumption tax is unfair because low and middle income families could spend more on basic needs, thus resulting in a higher share in taxes. In addition, there could be increased avoidance of paying taxes because a larger share of the population make purchases over the Internet. The government proposed lowering the top state income tax as a component of the process of eliminating tax credits. Wisconsin adopted a phased-in tax credit that will reduce much of the corporate income tax for manufacturing. Officials repealed various tax credits such as for biodiesel fuel production and dairy and meat processing facility investment. Ohio’s governor, John Kasich, pushed for a 23% reduction in personal income tax phased in over a two-year period (Pelzer, 2015). Other components of tax reform included updating employer withholding tables, increasing tax deductions on business income, and increasing Earned Income Tax Credit (EITC) (Pelzer, 2015). These policy changes are the latest efforts toward eliminating the state income tax for Ohio (Testa, n.d.). The North Carolina Tax Simplification and Reduction Act of 2013 lowers taxes for all taxpayers (Ranii, 2015). The policy reduced or eliminated layers of tax rates. However, an interesting feature of this policy was the elimination of deductions and credits such as EITC, medical expenses, childcare, higher education plans, and others. Proponents argue that lowering the income tax rate allows everyone the possibility to receive more money in their paychecks. Opponents, however, suggest that some taxpayers could actually have an increase in taxes under the new plan through loss of medical deductions and other deductions typically allowed (Ranii, 2015).
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Options to reduce the tax burden on citizens could include exporting tax liability to non-residents through the charging of a tourism tax. Florida and Texas accommodate sizeable amounts of out-of-state visitors, whether they are vacationing and/or attending conferences. Government revenue collection can be stabilized through collection of hotel fees, sales taxes, food and beverage consumption, and other items. Therefore, developing attractions for entertainment or business can impact government budgets positively. All taxes have consequences, positive and/or negative. Recurring themes throughout this course have included concepts of government’s role in creating market efficiency through channels of providing goods and services, fairness and equality, efficiency, incentives for good citizenship, and encouraging positive social responsibility. Government fulfills its requirement through policy tools utilizing various taxation methods. Some taxation procedures can cause excess tax burdens. Therefore, to develop optimal tax policy, many states have considered repealing or reducing their personal income tax rates (Rickman, 2013). However, it must be evaluated if there is a lag between policy and outcomes.
References
Associated Press. (2015, May 13). Governor focused on consumption taxes to fix budget. Retrieved from http://ksn.com/2015/05/13/governor-focused-on-consumption-taxes-to-fix-budget/
Hyman, D. N. (2014). Public finance: Contemporary application of theory to policy (11th ed.). Stamford, CT:
Cengage Learning. Pelzer, J. (2015, February 2). Gov. John Kasich seeks 23-percent cut in Ohio’s personal income tax.
Retrieved from http://www.cleveland.com/open/index.ssf/2015/02/gov_john_kasich_seeks_23- perce.html
Ranii, D. (2015, March 7). Impact of NC income tax overhaul hits taxpayers. Retrieved from
http://www.charlotteobserver.com/news/local/article12938894.html Rickman, D. S. (2013). Should Oklahoma be more like Texas? A taxing decision. The Review of Regional
Studies, 43(1), 1-22. Schram, T. (2014). Is it the beginning of the end of statutory income tax credits?. Journal of State Taxation,
32(3), 17-18. Sinquefield, R. (2015, January 23). Brownback’s transition to consumption tax is a step in right direction as
Kansas marches towards zero. Retrieved from http://www.forbes.com/sites/rexsinquefield/2015/01/23/brownbacks-transition-to-consumption-tax-is- step-in-right-direction-as-kansas-marches-towards-zero/
Testa, J. (n.d.). $2.7 Billion tax cut among highlights of new state budget. Retrieved from
http://www.tax.ohio.gov/portals/0/OhioTaxAlert/ArchivedAlerts/Ohio%E2%80%99s_Newly_Approved_ Two-Year_State_Budget_Tax_law_Changes.pdf
Torosyan, K., & Filer, R. K. (2014). Tax reform in Georgia and the size of the shadow economy. Economics of
Transition, 22(1), 179-210. doi:10.1111/ecot.12034
