by Don Greene
Former Congressman and Mayor of San Diego Bob Filner said this and then gave a more concise explanation of why paying taxes is so important. He was referring to paying taxes so that a city or other jurisdiction can function and provide services that are needed by its residents. Let me give you an example.
You just purchased a home for $400,000. The purchase price gives you deed and title to the structure in which you will live and to the property on which the structure sits. Based upon the assessed value of the property and structure, you pay property taxes to the various jurisdictions in exchange for services. You hopefully shop in your neighborhood and pay sales tax which, in turn, goes to the same jurisdictions in exchange for services.
Imagine the cost of your home if you were responsible for paving the road outside of your property, striping it and maintaining it between resurfacings. Imagine the cost of your home if you were responsible for replacing sewer and water lines and the connections leading to your home. Imagine the cost of your home if you were responsible for the full pay of a police officer and/or fire fighter on standby in case you needed to call them. The cost of your $400,000 house just sky-rocketed to an astronomical number. We pay taxes so we can do together what we can’t do alone.
How does my city earn revenue?
States, counties, and cities exist because you give them money and these jurisdictions have a fiduciary responsibility to the people they represent. Elected officials especially are responsible for the proper and best use of tax dollars. There are different ways that a jurisdiction can handle their finances, but they all point back to your wallet. Let’s look at three methods of municipal finance.
Bonding: Jurisdictions have the ability to ask their residents to take on an extra cost through the issuance of bonds. There are many types of bonds which can be discussed at a later time; suffice it to say that any type of bond that is issued will show as an extra line item on your property taxes and you’ll have to pay it annually. This, of course, is the least popular form of financing because it can very easily be characterized as a tax.
Fees and permitting charges: Often times, there are costs which are associated with doing certain activities within a jurisdiction. If you want to build an add-on to your home, there are fees associated with plan checking, building permits, inspections, and whatever else your jurisdiction has chosen to charge. For the most part, these fees are at the discretion of the jurisdiction to raise and lower as they see fit, though there are quite a few fees which are required, by State law, to be linked to specific indices or must be justified by showing actual costs incurred.
Various taxes: As mentioned previously, we all pay taxes – property tax, sales tax, and other types of assessments on our tax bills. This category is probably the largest source of revenue for most jurisdictions. The monies collected on property taxes and sales taxes make up the lion’s share of most revenue pie charts. The property tax portion can be increased over time as the value of your home is assessed at a higher rate. And sales tax revenue is directly related to the overall health of our economy; as people shop locally, revenues increase.
Most jurisdictions will have a healthy mix of these three methods. This is not an all-inclusive list of revenue streams. There are grants and various other methods of paying for programs and services of which jurisdictions take advantage. While it is true that in generally poor economic times jurisdictions suffer in their ability to budget as if there was overall prosperity, the greatest impact to the taxpayers is what their jurisdiction does with the revenue once they have it.
How does my city handle expenses?
Jurisdictions have options about how they spend the revenue which they receive. The decision makers throughout this process – the elected officials in concert with staff advisors – direct how they manage the tax dollars that you give them.
Zero-sum budgeting: Many jurisdictions use this approach when they create and pass their annual budgets. The finance department of the jurisdiction will put together a revenue projection for the upcoming year and, based upon that projection, the agency will budget to that exact number. This can be seen as a fiscally prudent method of financing. The downfall to this method is not being able to ensure the continuity of programs and services from one budget to the next; when revenues are down programs and services are cut and, if residents are dependent upon those services, more harm is done than good.
Reserves: This method is probably the most common method used among jurisdictions. Often times, when revenue projections are too conservative and there is a surplus, that money is placed into reserve accounts to be used at a later date. Conversely, when there are deficit times, the jurisdiction can draw upon the reserves to continue operations. There are many different type of reserve accounts, the most common account generally referred to is the General Fund Reserve, essentially a “catch all” for monies that can be spent in a variety of ways on unallocated expenses. Reserve accounts offer jurisdictions the flexibility to continue to offer services and programs in those years when revenue streams are deficit. Like the diversity in revenue sources, most jurisdictions use a combination of these two saving methods, along with other types, to manage their monies. The differences come in the management policies set by elected officials. In more typically conservative jurisdictions, the zero-sum budget is favored along with larger reserves. In more typically liberal jurisdictions, the budgeting approach is more forgiving and reserves tend to be smaller in size.
Which approach is better? That would depend on your politics. Ideally, an argument could be made for a fiscally conservative approach to budgeting in conjunction with a reserve policy that builds the reserves in surplus revenue years and draws from the reserves in deficit years. This type of “budget smoothing” allows for the optimum levels of services and programs to continue unhindered during varying economic times. It’s your money!
What is important to remember is this is all your money! While there can be talk of reserve accounts, revenue streams, cash flow, investment interest, etc., it all still points to your money. Your jurisdiction can only do these things with your permission. And you give said permission by voting.
If the roads in your neighborhood are in need of repair and your jurisdiction says that there isn’t enough money to fix them, you need to question on exactly what your money is being spent. If a program or service is cut and that has a detrimental effect on you and your neighbors, you need to question how your money is being spent. And if your elected officials are stockpiling your money in reserve accounts while the infrastructure of your city is falling apart, you need to question why you continue to vote for the same people.
In the next part, we’ll look at the differences in how local jurisdictions collect revenue and how they choose to manage it. A knowledgeable electorate is an empowered electorate. Your local jurisdictions collect tax dollars from you; of that you have no choice. But you do have a choice in how your tax dollars are managed and used.
We pay taxes so we can do together what we can’t do alone. We don’t give up rights to our money just because we give it to our governments.