Government Budgeting Final

How did we balance the federal budget during the Clinton Administration? Discuss the BEA of 1990 and the OBRA of 1993.

We passed the OBRA of 1993. Understand major tenets. 

Continued the BEA of 1990, increased taxes, reduced spending, and that's how you get to a surplus

Budget Enforcement Act of 1990 - primary features: increase individual and corporate income taxes, decrease spending by setting caps (defense, non-defense discretionary, international aid), caps are set by congress via the Budget Resolution (new programs must be offset by reductions in existing programs, if spending exceeds caps, sequestration occurs), mandatory spending must be “deficit neutral” PAYGO procedures, new programs = new revenue source, new programs = cut existing programs,  if mandatory spending is not deficit neutral, sequestration occurs 

 What are the pros and cons of a federal balanced budget amendment? How are state balanced budget amendments defined?

PRO:
>>No huge deficits year after year because spending is aligned with revenue
>>We're not contributing to growing our national debt

CON:
>>How do we define a balanced budget amendment at the federal level?
>>How do we allow the government to deal with emergencies?
>>If they overspend, who gets cuts?
>>Who performs potential cuts? Executive branch, Legislative branch, Administrative responsibility?

>>Balance the operating budget only
>>States go into debt because of capital projects

Identify the constitutional requirements or parameters regarding budgeting in Arkansas and discuss how these requirements or parameters impact the budget process.

1) The General Appropriation (for government functions) has to be passed first

2) No money from treasury without appropriation

3) Specify amounts in dollars, no ranges

4) Supermajority requirement needed to pass appropriations
>>Exclusion: public schools, highways, debt

5) Taxes also have supermajority requirement
>>General sales tax not included, only need simple majority

6) Earmarked taxes -> no tax levied for one purpose shall be used for other purpose

7) Each bill must be limited to one subject

In Arkansas, who are the primary actors and what are their primary roles and responsibilities in the budget preparation and submission stage? What is the outcome or product at the end of this stage?

Executive = primary actor (Governor, Office of Budget, Office of Economic Analysis and Tax Research)

Primary responsibilities (4):
1) Sets policy for agency requests
2) Forecasts state revenue
3) Holds budget hearings
4) Recommends budget to ALC and JBC

Outcome/product: executive budget recommendation

In Arkansas, who are the primary actors and what are their primary roles and responsibilities in the legislative review and approval stage? What is the outcome or product at the end of this stage?

In what ways is the Arkansas budget process unique?

More appropriations than any other state

Revenue Stabilization - allocate general revenue, deficit reduction

Only one appropriation bill that goes through both chambers 

A legislator can hold a budget hearing and see the governor's recommendation, and the agencies' budget requests.

How did Amendment 86 to the Arkansas State Constitution change the budget process in Arkansas?

Changed the budget process. Before, we had a regular session (odd-numbered years). Amendment 86 added a fiscal session, meaning we are making budget decisions every year, and fiscal sessions are held every year. All appropriations have a 1 year limit. July 1-June 30

Identify the purposes of the Arkansas Revenue Stabilization Act.

What is an appropriation? What are the required elements of an appropriation bill in Arkansas? What are the 4 kinds of appropriation bills in Arkansas?

Regular - operations, day-to-day operation, such as equipment in the classroom, light bill, used on a daily basis

Supplemental - emergencies, a new federal grant that we did not know about when we were creating budget; additional appropriation for current year

Capital Projects - infrastructure; major infrastructure 

Reappropriation -build upon existing appropriations

What are the three methods of funding state agencies in Arkansas that receive general revenue funding? Provide examples of each method.

What is line-item budgeting? Why is the line-item approach to budgeting the most traditional and most common approach to budgeting?  What is the primary weakness of line-item budgeting? What is the primary strength?

Identify and discuss the factors that provide budgetary power to governors and legislators.

What key budget actor has the primary budgetary power in most states? Why? 

What are the top two revenue sources for the federal government?  What are the top two revenue sources for state governments (average)? For Arkansas? What are the top revenue sources for local governments?

federal government - Individual income and payroll tax

state governments - sales tax, state individual income tax

Why are most state and local revenue systems regressive?  How regressive is the state and local tax system in Arkansas?

Most states rely heavily on the sales tax and that is the most regressive tax among the big 3

They rely heavily on the sales tax. Primary revenue source for states. Property tax is only mildly regressive, but coupled with the regressive sales tax, you get a very regressive sales tax 

Identify and discuss the factors that comprise a sound revenue policy (Adam Smith and NCSL).

1) People who have more wealth should be expected to pay more
2) Taxes shouldn't be arbitrary
3) Government needs to tell people exactly when they're due
4) Shouldn't take more taxes than are needed

Revenues should (NCSL):

1) Along with spending, reflect should reflect the preferences of a majority of citizens
2) Be adequate (yield and stability)
3) Be diversified
4) NOT be earmarked
5) Be administratively feasible
6) Also, one should understand the impact of taxes on tax burden

Describe the three major revenue sources used in the US.  For each revenue source identify the kinds of items taxed (tax base), trends in taxation, the tax burden, the administrative costs or burdens of the tax, and political feasibility of the tax.

Why is the property tax the most hated tax in the country?  What have state and local governments done to mitigate some of this unpopularity?

• people think property tax is double taxation 

• Hurts “cash-poor” people 

• Anxiety about appraisals, because property taxes are based on how much your property is worth, and people don’t want to get their property appraised

• Inequitable appraisals 

• Lump-sum payments of tax

• 1) Programs to help elderly and low-income
  >>State rebate programs on state tax returns for elderly/low-income
  ---AR has general homestead tax credit of $350
  ---AR has homestead tax credit for over 65 and disabled people
  >>Deferral programs to allow elderly to defer tax until home is sold
  2) Reducing the shock of lump-sum payments
  >>Installment payments
  >>Transparency in where tax dollars go
  3) Addressing anxiety / inequitable appraisals
  >>Creating a uniform process for appraisal
  >>Training appraisers and state oversight
  >>AR Amendment 79 caps assessed value to a 5% increase

Sequestrian

Automatic cut by the OMB,

Hard rules v. soft rules

Hard rules - almost always constitutional rules; more difficult for our elected officials to change or get around; state or US Constitution (no money can be spent out of the treasury without an appropriation)

Soft rules - ordinances, laws, are easier for elected officials to get around; you can only spend 95% of an appropriation

Debt v. deficit

Federal securities

State turnback

AR gives (or "turns") back portion of revenues it receives to cities and counties

>>most often used for street and road maintenance
>>Based on population
>>Also a way to try and keep property taxes low

Ability to pay principle

Citizens should support the government in proportion to their abilities

User charge or fee

Fees charged in return for service.
With user fees, only those who receive the service bear the cost of its provision

Income elastic v. income inelastic

• Income elasticity and the economy - a tax that is going to expand and contract based on the economy) 

• Income inelastic - does not move with the economy, more stable

Progressive tax v. regressive tax

• Progressive tax system – people at the higher income level will pay a higher percentage than the lower income level, a tax that increases as ability to pay rises.
  ---Most typically associated with the income tax, where rates increase as income rises
  ---tax burden increases as income increases

• Regressive tax system – lower-income people pay more taxes as a percent of their income than more wealthy people, a tax carrying burden that is inversely related to ability to pay
  ---tax burden increases as income decreases

Real property v. personal property

• Real property (land, buildings, things not movable)

• Personal property

  • tangible property (cars, jewelry, furniture)

  • intangible property (stocks, bonds, bank accounts)

Earned income v. unearned income

• Earned - wages, salaries, commissions, tips

• Unearned - interests, dividends, capital gains, rent, inheritance, lottery winnings

Tax separation

• each level of government relies on a specific type of tax that is not encroached on by another level of government

• Federal level: individual income tax and payroll tax 

• State level: sales tax

• Cities/counties: sales tax and property tax (depends on state)

• School districts: property tax 

Intergovernmental tax immunity

• McCulloch v. Maryland (1819) → one level of government can not directly tax another level of government

• “The power to tax is the power to destroy” - Chief Justice John Marshall

• Governments cannot tax each other directly

Excise tax v. general sales tax

• excise tax - separate tax for particular items, type of sales tax

• general sales tax - all goods and services; same rate applied to different items

tax burden v. tax liability

• tax burden - taxes paid as a % of income

• tax liability - Dollar amount owed in taxes 

Earmarked revenue

• When certain revenue is reserved to be spend on a particular program or agency

• Can take away spending discretion from governor and legislators

Local option sales tax

• “Border city” problem → state allows flexibility to set rates, so that it will be competitive with a city that is in another state (Texarkana)

• Local tax base = state tax base

• Piggybacking the tax

Marginal tax rates and brackets

• For the purposes of calculating how much you owe for individual income taxes, there are different levels (brackets) that are taxed at different rates

• Different parts of your income are taxed at these different rates depending on the level they fall under

• How much you owe = sum of tax liability in all brackets

• Effective tax rate = average of all the rates of the brackets your income falls under

Horizontal equity v. vertical equity

horizontal equity - equity among those in the same economic level (income+lifestyle sim), generally agreed that those in the same economic level pay about the same in taxes, not controversial

vertical equity - how or should we treat people in different economic situations?, how much of a tax burden should different groups have?, should wealthier groups have more of a burden?, should everyone have the same? etc, very controversial

Appraised value v. assessed value

appraised value - fair market value (how much you could sell it for on the private market), do not pay taxes based on this value, this value is used to determine the assessed value

assessed value - a percentage of the appraised value, the property tax is applied to this value