State and Local Finance (Geocities Rescue)
This essay covers two separate strategies to improve state and local finance, one based on the current system of taxes and the other based on the proposal for a Business Income Tax discussed above. Both of these proposals are related to the situation in Virginia. First, though, let us look at the fiscal situation generally.
Reforming Tax Structures
Two recent events in the early 2000s put most states, and their localities, into financial crisis. The first is the 2001 tax cut, which is exacerbated by the 2003 tax cuts. The new "Great Recession" has exacerbated these issues. Any state that ties its income tax structure to the federal structure loses money unless they increase tax rates. The second is the collapse of the Internet bubble. Prior to the collapse, revenues grew with income, which was overstated by the acquisition of paper millions. Most jurisdictions based their future revenue projections on this funny money and cut tax rates accordingly. These rate cuts have not been reversed, as it is easier to cut taxes than to raise them.
The current shortfalls also point to the lack of thought given to the mix of taxes at each level of government. Most state governments collect an income and/or sales tax on a statewide basis and property taxes at the local level, while funding education at the local level and welfare, social services, mental health and corrections at the state level. Roads are paid for at both the state and local levels. Additionally, most states give grants to localities, as they are more efficient tax collectors. Surveys show that the tax that is least resented is the state income tax, although that is certainly not true in all states – some of which have no state income tax at all. Currently, governments with unified budgets collect taxes from many sources and spend it on a variety of programs. There is a better way. Link revenue sources to the social purpose that the public agency is trying to accomplish. There are five kinds of revenue sources: income taxes, sales taxes, property taxes, permit fees and transportation taxes and fees.
Income taxes are redistributional in nature, so link them to the redistributional functions of government. The ultimate form of redistribution is public education, so fund all public education with state income taxes with the state distributing these funds to localities based on the needs of each jurisdiction. Money for schools is allocated based on student population and inversely related to student family income (disadvantaged areas get more money). State and local income taxes also support welfare programs, as well as mental health and family services. Property taxes are no longer used for education, as poor districts have little to draw on to fund education where it’s needed most. States which tie their income taxes to the federal system need to introduce an automatic rate increase or decrease in each bracket to compensate for changes in the federal tax code, so that federal tax cuts do not provoke a fiscal crisis in state government and tax increase do not doubly penalize state taxpayers.
Property taxes are the ideal way to fund and protect infrastructure, so they fund local streets, housing inspection and a portion of public safety. Fees collected for home building inspection, titles, etc. also support these activities. Debt service is also tied to this tax. A jurisdiction uses capital budgeting to redevelop blighted areas, with future tax collections paying off these investments. A portion of gasoline taxes also goes for local streets. Property taxes are administered at the lowest possible level, possibly even the neighborhood. Organizations like the Advisory Neighborhood Commissions in Washington, DC are given decision authority on street funding and service deployment, starting the evolution to a more direct form of democracy and service, shrinking the reach of government.
In metropolitan areas, there are often several jurisdictions responsible for the highway and mass-transit system. Washington, DC is a classic example, with a Federal District, two states, and multiple counties responsible for bus, highway, subway and commuter train systems. Competition within the system, such as price competition to minimize gas taxes, often causes other the whole system to break down with inefficient bus routes, gridlock, and deteriorating roads. For both single and multiple jurisdictions, regional authorities to pursue a common building and funding strategy for both major roads and public transportation are desirable. These authorities set gasoline taxes for the entire region, share the resulting revenue, recommend property tax rates for roads, set rail and bus fares and establish routes, establish toll roads and develop highways and rail lines. When congestion occurs on one part of the system, or to fight high levels of pollution, tolls or gasoline taxes are be increased or decreased or alternate service provided. Inefficient bus routes, which are a hold over from before light rail's reemergence, are rerouted to support the rail lines rather than compete with them. Such authorities also issue debt instruments tied to future revenue to upgrade the system.
Sales taxes fund commercial regulation, inspection, business services and public health, as well as the portion of public safety serving business interests. These funds are also distributed to jurisdictions that have greater infrastructure and public safety needs than their property tax base can meet. Sales taxes are especially useful to fund a more service oriented regulatory structure. Ombudsmen are assigned to each business or institution to coordinate all other government contact, a regulatory “cop on the beat” to handle all taxes, inspection and compliance activities at all levels of government, from the federal level to the local level. If a business needs a permit that involves coordination by more than two agencies, the Regulatory Specialist creates an electronic consolidated questionnaire that automatically files all paperwork.
Virginia’s Revenue Crisis
This menu of reforms is especially needed in the Commonwealth of Virginia, which is experiencing serious financial difficulty due to the end of the car tax and to population growth in Northern Virginia. Linking spending to revenue functions helps determine whether income taxes are adequate to fund such items as education, corrections and social services. If they are not, the obvious answer to is to raise the tax rate, which is lower than in nearby areas. Likewise, if gasoline and property taxes are inadequate to fund needed improvements, these are increased. The establishment of toll roads, especially on interstate routes between Washington and Virginia Beach also merit careful consideration. Nothing causes air pollution like idling traffic. Much of this traffic is from out-of-state travelers, so toll roads are most appropriate.
A key question raised in the 2002 tax referendum debates was whether to allow Northern Virginia to levy a higher rate for education and transportation. Central and southwest Virginia leaders stated that such a levy magnifies differences between the northern counties and the rest of the state. Whether these fears are justified or not, they must be taken into account, as well as the higher revenue needs of Northern Virginia. Most of these needs reflect the costs that go with being located in the Washington metropolitan area. Therefore, the only justification for higher income or gas tax rates is to fund regional education, social welfare, mental health, corrections or transportation partnerships, or as an offset to a much feared non-resident income tax in the District. I suspect that, given the record of mismanagement in the District government, most Northern Virginians favor the establishment of regional authorities to such a tax.
Business Income Taxes
If the federal government restructures its tax system as outlined above, and even if it does not, consider the abolition of the income tax and the sales tax and their replacement with a business income/value added tax along the lines discussed for the federal government. Such a tax includes the same credits and deductions as suggested on the federal level. Local jurisdictions with higher costs of living mandate high enough dependent tax credits so that the combination of the federal and state credits provides an adequate income. Some states where the cost of living is lower provide a lower credit, while high cost areas award a higher credit. Credits might even be set on a county-by-county basis to reflect the cost of living.
Additional deductions are established for social service contributions are also be adopted, allowing vast portions of state and local government to be replaced by faith-based organizations, includin education, mental health care, aid to needy families, workforce development and corrections.
Tax rates are set high enough to provide incentive to use these credits. If these are used the actual amount of taxes collected is very low indeed. As businesses shift to employee-ownership, which is discussed below, the need for regulation by the state will lessen. Employee-owned firms are more likely to provide safe products and workplaces (since the employees know their futures are directly on the line). As most regulation is handled by business and professional standard setting bodies, the role of government in this area diminishes.
Non-profit entities and governmental organizations also pay this tax, or an automatic contribution equivalent to the tax. Tax rates for organizations that do not rely on commercial sales are lower, although those organizations that do sell products pay an equal levy because they use the same level of government service in supporting commercial regulation. Governmental organizations make a contribution based on their total payroll, rather than their total budget, much the same way they collect state and local income taxes for their employees.
The key to understanding this tax proposal is to recall that employers collect most income taxes already. Shifting to a value added tax approach continues this, while shifting what is now a shared reporting liability by the employee and the employer totally to the employer. Such a proposal also allows most individuals to end reporting miscellaneous income from savings and investment (which are mostly taxed as part of the Business Income Tax anyway.).
In Virginia, if federal structural reform occurs first, no change is required to the Virginia Constitution to adopt this tax reform (in fact, in the event of a federal change, a constitutional amendment is required to maintain the status quo). If Virginia wishes to take the lead in tax reform, however, a constitutional amendment is necessary. Constitutional reform is also required to introduce a tax credit for faith-based schools and social services. This is needed to overturn the Blaine Amendment banning public support for religious schools. While a tax credit is not the same as direct public support, it is safer to pass an amendment, if only because some anti-Catholic bigot in civil libertarian’s clothing is likely to challenge the provision in court.
Reforming Tax Structures
Two recent events in the early 2000s put most states, and their localities, into financial crisis. The first is the 2001 tax cut, which is exacerbated by the 2003 tax cuts. The new "Great Recession" has exacerbated these issues. Any state that ties its income tax structure to the federal structure loses money unless they increase tax rates. The second is the collapse of the Internet bubble. Prior to the collapse, revenues grew with income, which was overstated by the acquisition of paper millions. Most jurisdictions based their future revenue projections on this funny money and cut tax rates accordingly. These rate cuts have not been reversed, as it is easier to cut taxes than to raise them.
The current shortfalls also point to the lack of thought given to the mix of taxes at each level of government. Most state governments collect an income and/or sales tax on a statewide basis and property taxes at the local level, while funding education at the local level and welfare, social services, mental health and corrections at the state level. Roads are paid for at both the state and local levels. Additionally, most states give grants to localities, as they are more efficient tax collectors. Surveys show that the tax that is least resented is the state income tax, although that is certainly not true in all states – some of which have no state income tax at all. Currently, governments with unified budgets collect taxes from many sources and spend it on a variety of programs. There is a better way. Link revenue sources to the social purpose that the public agency is trying to accomplish. There are five kinds of revenue sources: income taxes, sales taxes, property taxes, permit fees and transportation taxes and fees.
Income taxes are redistributional in nature, so link them to the redistributional functions of government. The ultimate form of redistribution is public education, so fund all public education with state income taxes with the state distributing these funds to localities based on the needs of each jurisdiction. Money for schools is allocated based on student population and inversely related to student family income (disadvantaged areas get more money). State and local income taxes also support welfare programs, as well as mental health and family services. Property taxes are no longer used for education, as poor districts have little to draw on to fund education where it’s needed most. States which tie their income taxes to the federal system need to introduce an automatic rate increase or decrease in each bracket to compensate for changes in the federal tax code, so that federal tax cuts do not provoke a fiscal crisis in state government and tax increase do not doubly penalize state taxpayers.
Property taxes are the ideal way to fund and protect infrastructure, so they fund local streets, housing inspection and a portion of public safety. Fees collected for home building inspection, titles, etc. also support these activities. Debt service is also tied to this tax. A jurisdiction uses capital budgeting to redevelop blighted areas, with future tax collections paying off these investments. A portion of gasoline taxes also goes for local streets. Property taxes are administered at the lowest possible level, possibly even the neighborhood. Organizations like the Advisory Neighborhood Commissions in Washington, DC are given decision authority on street funding and service deployment, starting the evolution to a more direct form of democracy and service, shrinking the reach of government.
In metropolitan areas, there are often several jurisdictions responsible for the highway and mass-transit system. Washington, DC is a classic example, with a Federal District, two states, and multiple counties responsible for bus, highway, subway and commuter train systems. Competition within the system, such as price competition to minimize gas taxes, often causes other the whole system to break down with inefficient bus routes, gridlock, and deteriorating roads. For both single and multiple jurisdictions, regional authorities to pursue a common building and funding strategy for both major roads and public transportation are desirable. These authorities set gasoline taxes for the entire region, share the resulting revenue, recommend property tax rates for roads, set rail and bus fares and establish routes, establish toll roads and develop highways and rail lines. When congestion occurs on one part of the system, or to fight high levels of pollution, tolls or gasoline taxes are be increased or decreased or alternate service provided. Inefficient bus routes, which are a hold over from before light rail's reemergence, are rerouted to support the rail lines rather than compete with them. Such authorities also issue debt instruments tied to future revenue to upgrade the system.
Sales taxes fund commercial regulation, inspection, business services and public health, as well as the portion of public safety serving business interests. These funds are also distributed to jurisdictions that have greater infrastructure and public safety needs than their property tax base can meet. Sales taxes are especially useful to fund a more service oriented regulatory structure. Ombudsmen are assigned to each business or institution to coordinate all other government contact, a regulatory “cop on the beat” to handle all taxes, inspection and compliance activities at all levels of government, from the federal level to the local level. If a business needs a permit that involves coordination by more than two agencies, the Regulatory Specialist creates an electronic consolidated questionnaire that automatically files all paperwork.
Virginia’s Revenue Crisis
This menu of reforms is especially needed in the Commonwealth of Virginia, which is experiencing serious financial difficulty due to the end of the car tax and to population growth in Northern Virginia. Linking spending to revenue functions helps determine whether income taxes are adequate to fund such items as education, corrections and social services. If they are not, the obvious answer to is to raise the tax rate, which is lower than in nearby areas. Likewise, if gasoline and property taxes are inadequate to fund needed improvements, these are increased. The establishment of toll roads, especially on interstate routes between Washington and Virginia Beach also merit careful consideration. Nothing causes air pollution like idling traffic. Much of this traffic is from out-of-state travelers, so toll roads are most appropriate.
A key question raised in the 2002 tax referendum debates was whether to allow Northern Virginia to levy a higher rate for education and transportation. Central and southwest Virginia leaders stated that such a levy magnifies differences between the northern counties and the rest of the state. Whether these fears are justified or not, they must be taken into account, as well as the higher revenue needs of Northern Virginia. Most of these needs reflect the costs that go with being located in the Washington metropolitan area. Therefore, the only justification for higher income or gas tax rates is to fund regional education, social welfare, mental health, corrections or transportation partnerships, or as an offset to a much feared non-resident income tax in the District. I suspect that, given the record of mismanagement in the District government, most Northern Virginians favor the establishment of regional authorities to such a tax.
Business Income Taxes
If the federal government restructures its tax system as outlined above, and even if it does not, consider the abolition of the income tax and the sales tax and their replacement with a business income/value added tax along the lines discussed for the federal government. Such a tax includes the same credits and deductions as suggested on the federal level. Local jurisdictions with higher costs of living mandate high enough dependent tax credits so that the combination of the federal and state credits provides an adequate income. Some states where the cost of living is lower provide a lower credit, while high cost areas award a higher credit. Credits might even be set on a county-by-county basis to reflect the cost of living.
Additional deductions are established for social service contributions are also be adopted, allowing vast portions of state and local government to be replaced by faith-based organizations, includin education, mental health care, aid to needy families, workforce development and corrections.
Tax rates are set high enough to provide incentive to use these credits. If these are used the actual amount of taxes collected is very low indeed. As businesses shift to employee-ownership, which is discussed below, the need for regulation by the state will lessen. Employee-owned firms are more likely to provide safe products and workplaces (since the employees know their futures are directly on the line). As most regulation is handled by business and professional standard setting bodies, the role of government in this area diminishes.
Non-profit entities and governmental organizations also pay this tax, or an automatic contribution equivalent to the tax. Tax rates for organizations that do not rely on commercial sales are lower, although those organizations that do sell products pay an equal levy because they use the same level of government service in supporting commercial regulation. Governmental organizations make a contribution based on their total payroll, rather than their total budget, much the same way they collect state and local income taxes for their employees.
The key to understanding this tax proposal is to recall that employers collect most income taxes already. Shifting to a value added tax approach continues this, while shifting what is now a shared reporting liability by the employee and the employer totally to the employer. Such a proposal also allows most individuals to end reporting miscellaneous income from savings and investment (which are mostly taxed as part of the Business Income Tax anyway.).
In Virginia, if federal structural reform occurs first, no change is required to the Virginia Constitution to adopt this tax reform (in fact, in the event of a federal change, a constitutional amendment is required to maintain the status quo). If Virginia wishes to take the lead in tax reform, however, a constitutional amendment is necessary. Constitutional reform is also required to introduce a tax credit for faith-based schools and social services. This is needed to overturn the Blaine Amendment banning public support for religious schools. While a tax credit is not the same as direct public support, it is safer to pass an amendment, if only because some anti-Catholic bigot in civil libertarian’s clothing is likely to challenge the provision in court.
posted by Michael Bindner at 11:20 PM
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