Revenue & Expenditures Ch. 8 in text 1 Revenue: Five basic sources Taxes & Other Compulsory Revenue Taxes, licenses, mandatory fees Gifts & Donations Solicited through fund-raising or unsolicited Earned Proceeds from sale of goods and services Investment Interest earned from investments, which may be short- or long-term Contractual Revenue generated through contracts with third parties 2
Taxes & Other Compulsory Revenue 3 Compulsory revenue unique to public sector The reason for this is simple: Compulsory revenue means taxes, mandatory licenses & fees. Only the public sector government has the legal power to levy and collect taxes. 4
Differences among tax types Chiefly based on two fundamental factors: Who pays the tax The criterion on which the tax is based (e.g., income, property ownership, purchases, value, cost) Both factors contribute to making taxes highly contentious in contemporary society. 5 Common tax types (1) Income & payroll Primarily federal & state, also used by some local governments Deducted from paycheck and/or paid annually Sliding scale or fixed rate Property Historically the primary revenue source for local governments, including park districts; Paid quarterly/semi-annually/annually Fixed rate based on property type & property assessed value 6
Common tax types (2) Sales State & local Paid at point of sale at time of purchase & collected by merchant Fixed percent of sale, with some categories of goods & services exempted Excise All levels Paid at point of sale at time of purchase & collected by merchant Fixed percent of sale Applied to specific classes of goods & services (e.g., sporting goods, hunting/ fishing/boating equipment & licenses, sports & entertainment tickets, lodging, restaurant meals) 7 Tax effectiveness (1) Legal authority Tax must be specifically authorized by law before it can be collected Adequacy of revenue Tax must generate sufficient revenue to support the program or meet specific program-related financial goals Economic efficiency Tax should not force individuals to re-allocate individual resources or reduce consumption of goods/services (exception: taxes specifically intended to regulate behavior, e.g., tobacco or alcohol consumption). 8
Tax effectiveness (2) Administrative costs Administrative & collection costs must be low Political feasibility Taxes always politically sensitive: specific tax types, tax levels Equity (fairness) Actual and perceived tax equity has two dimensions: 1. Ability to pay the tax 2. Benefits received from paying the tax 9 Tax equity Equity means fairness & impartiality Two ways to think about equity 1. Horizontal equity treating everyone equally 2. Vertical equity treating different cases differently but consistent with established rules 10
Tax equity: Ability to pay (1) A fundamental principle of tax equity is that taxes should reflect taxpayers ability to pay. Ability to pay means more than just having enough money. Fair share No undue burden or interference with meeting basic needs No injury to basic well-being 11 Effective tax rate Distinguishing between Wealth Income Different types of taxes affect people differently depending on: Whether a tax is levied on wealth or on income How the tax is assessed Effective tax rates may be: Progressive (higher at higher wealth or income levels) Proportional (roughly constant regardless of wealth or income levels) Regressive (higher at lower wealth or income levels) 12
Tax equity: Benefits received Basic assumptions: Some benefits are simply part of a basic minimum level of human well-being. Not everyone has access to those benefits because of various constraints. (individual, social, people can providpeople use only as much of a service as they need/want. Those who use a service should pay for that service. Problems: Spillover: Not all who need services can afford them. Externalities: More people may benefit from services than actually use those services. 13 Additional considerations Economic efficiency: Taxes should not affect allocation of resources or consumption of goods/services. (Exception is taxes specifically intended to regulate behavior, e.g., tobacco or alcohol consumption). Administrative costs: Costs of administering & collecting tax should be low. Political feasibility: Political considerations constrain types of taxes used & tax levels. 14
Personal income taxes Used at all levels of government Has the following structure: Calculation of gross income Reduction of gross income through deductions & exemptions Determination of tax liability using graduated or fixed tax rates Reduction of tax liability through tax credits 15 Corporate income taxes Used by federal & state governments Applied to net profit after operating expenses 16
Payroll taxes Paid on wages & salaries (not on total income) Not revenue generating in the strict sense, but intended instead to provide benefits to people covered by the programs supported through payroll taxes Examples: Social Security Medicare Medicaid 17 Property taxes Used almost exclusively by local governments Historically the primary source of operating revenue for local governments, including park districts Paid on the current value of real & personal property the tax base (exemptions) assessment & assessed value tax rates circuit breakers Political limitations 18
Revenues come from several sources Taxes: income taxes payroll taxes property taxes transaction-based taxes, including retail sales taxes & consumption taxes User fees & charges Lotteries, casinos & other types of gambling 19 Basic structure of property tax system Real property (land, buildings) Budget needs Tax base (total assessed value of taxable property in jurisdiction) = Tax rate Property tax revenue required to meet budgetary needs Tax rate x Tax Base = Total Property Tax Revenue 20
Property tax statement 21 22
Bonds 23 Public sector bonds: 2 broad types General obligation bonds: Issued to pay for essential government services & facilities Repaid using tax revenues based on full faith and credit of government entity Revenue bonds: Issued to pay for desirable government services & facilities capable of generating revenue Repaid using revenue generated by service or facility 24
Bond types: Advantages General obligation bonds: Full faith & credit reduces risk of default taxes are a reliable revenue source Reduced risk of default makes general obligation bonds more attractive to potential purchasers, including large institutional purchasers like insurance companies & pension funds Reduced risk of default means lower interest rates (reduced cost of selling bonds) Bonds can be issued based on need for services & facilities, rather than revenue-generating capacity 25 Bond types: Advantages Revenue bonds: Only actual users of services & facilities pay for the bonds No voter approval is required Not always counted against statutory debt limit 26
Bond types: Disadvantages General obligation bonds: Require voter approval of referendum, sometimes by a special majority Tax burden may be increased, which often makes it difficult to obtain voter approval Count against statutory debt limit All taxpayers pay for the bonds, whether or not they actually use the services & facilities 27 Bond types: Disadvantages Revenue bonds: Increased risk of default (revenue generation may be negatively affected by many things, e.g., weather, competition, fads, trends, critical component failures, bad publicity) Increased risk of default makes revenue bonds less attractive on the market, including major institutional investors Increased risk of default means increased interest rates (higher costs of selling bonds) Restricted to use with services & facilities that have significant revenuegenerating potential Revenue generation may require high user fees, which may in turn limit who is able to use the services & facilities 28
Gifts, donations & grants 29 Types of gifts, donations & grants Government grants Federal & state; highly competitive; narrowly focused Sponsorships Individual & group (non-profit, corporate) Individual donations Solicited & unsolicited; often restricted to specific uses Planned giving Trusts & bequests; often restricted to specific uses These forms of revenue require systematic, sustained fund-raising. By law, restricted gifts must be used only for the purposes specified by the donors. 30
Earned income 31 Earned income Sales of goods and services Entrance & admission fees User & program fees Equipment & facility rental fees License & permit fees 32
Fees & charges Basic assumptions: People use services voluntarily. People use only as much of a service as they need/want. Those who use a service should pay for that service. 33 Investment income 34
Investment income Long-term Stocks Bonds Real estate Short-term Certificates of deposit Savings accounts In some cases, revenue from taxes, grants & gifts may be invested to earn additional income. 35 Contractual revenue 36
Examples of contractual revenue Concessionaires Naming rights Unique service providers 37 Summary of revenue sources by sector: Public Compulsory Gratuitous Earned Investment Contractual Essential: Historically the major revenue source for the public sector; recent political shifts have limited tax-based funding levels Essential: Grant funding increasingly important, especially for local agencies; donations, sponsorships & bequests address highly specific needs Essential: Fees & charges necessary to become independent of historical reliance on tax-based revenue Subject to legal restrictions on investment types & amounts, but often used Increasingly important as means to provide specialized services & facilities otherwise unlikely to be provided 38
Summary of revenue sources by sector: Nonprofit Compulsory Direct revenue usually limited, though some agencies receive public underwriting to provide specialized services Gratuitous Essential: The major revenue source for the nonprofit sector; donor types & amounts vary widely Earned Essential: Fees for goods & services an increasing component of nonprofit organizations revenues Investment Varies with organizational capacities & financial resources, can be major Contractual Increasingly important 39 Summary of revenue sources by sector: Commercial Compulsory Gratuitous None directly; may receive rebates, exemptions, tax allowances & other indirect forms of revenue Highly unusual Earned Essential: The major revenue source for commercial sector Investment Contractual Essential: A key income source, especially to cover long-term obligations like pensions & mortgages Depends on business type & scope, can be major 40
Expenditures 41 Expenditures: 2 major categories Operating expenses: Recurring expenses throughout the fiscal year, the ordinary costs of doing business Usually financed through the standard revenue sources Included in the annual operating budget 42
Expenditures: 2 major categories Capital expenditures: Large, usually one-time expenses associated with acquisition of land, construction of new facilities, major renovation of existing facilities & major equipment purchases Included in capital budget Financing depends on sector: Public: Sale of bonds (general obligation, revenue), grants (usually requiring matching funds), gifts Nonprofit: Loans, grants (usually requiring matching funds), gifts & other fundraising Commercial: Loans, sale of stock, owner/partner investment 43 Pricing 44
Pricing necessary in all 3 sectors There are two broad reasons to charge a price for services, goods & facilities: To generate revenue pricing is the basis of earned revenue To manage use & demand 45 Pricing to generate earned revenue Profit & surplus revenue Prices are benchmarked to a desired rate of return above the costs of providing a service, good or facility Cost recovery (full or partial) Prices are benchmarked to recover a specified percentage of the total costs to provide a service, good or facility the costs of specific elements or components of a service, good, or facility 46
Pricing to manage use & demand Establish the value of a service, good or facility Consumers associate price with value: No or low cost may lead consumers to attach little value to a service, good or facility. Influence behavior Charging a price may create commitment in the consumer s mind: Having paid for a service, good or facility, the consumer may be more likely to use it or to use it more frequently. Increase efficiency Pricing can be used to distribute demand more evenly throughout the day, week, or year Promote equity Pricing can be used to enable participation by less advantage groups or give preference to residents vs. nonresidents 47 Pricing strategies (1) Price penetration When entering existing market, set initial price low to capture market share then adjust as competition responds. Price skimming When entering new market, set initial price high to capture revenue then reduce as competitors enter market. Arbitrary pricing Best informed guess of consumers willingness to pay. Competitive / going rate pricing Benchmarking prices to prices charged by direct competitors. Market pricing Pricing based on assumption consumers are willing to pay more than actual program or service costs. 48
Pricing strategies (2) Differential / variable cost pricing Assumes there is no one price that fits all circumstances and/or consumers. Pricing is varied by time of day (e.g., early bird specials ), day of the week (e.g., midweek specials ), month in year (e.g., off-season or shoulder-season rates), or consumer characteristics (e.g., ability to pay, age, residency status) Differential pricing may be market-driven, policy-driven, or both 49 Pricing strategies (3) Subsidization A subsidy is financial support for a service, program, or facility using money from an outside source, that is, not generated by the service, program, or facility that is being subsidized. The outside source may be tax revenue, earned revenue generated by other services, programs, or facilities; grants & donations, etc. The subsidization rate is the amount of support drawn from the outside source, based on the benefits provided & to whom. Public (everyone benefits regardless whether they use service, program, or facility; tend to be completely subsidized) Merit (direct benefits to users and perhaps some nonusers, indirect to nonusers; tend to be partially subsidized) Private (benefit users only; tend not to be subsidized: full cost recovery or profit model) 50