When collecting money from your constituents, if that bill is not a user fee based on measurable use, it is general taxation. General taxation raises revenue for community costs, which cannot be attributed to a single user or beneficiary.
The majority of government revenue will likely come from general taxation. General taxation primarily comes through the sales tax, income tax (at the state and federal level), and property tax.
The necessary funding for government services should be fairly predictable. It is good practice to have a stable budget that doesn’t vary wildly from year to year. As a result, you will not want your tax revenue to fluctuate wildly either.
Taxes should rely on the least volatile revenue sources. Property taxes are a good example of a stable revenue source.
Taxes should have the lowest possible rates spread across the broadest base. This way, all payers are minimally impacted. If you are not already aware, your constituency will likely inform you of the burden that taxes impose on them. When possible, you should minimize that burden.
We understand that taxes are necessary. In even the most conservative cities across America, citizens will expect certain services and infrastructure from their government — roads, water, and schools, to name a few. Those services cost money. As a result, you are constantly engaged in a balancing act as you work to provide basic necessities funded by reasonable taxes.
The Utah Taxpayers Association has laid out some helpful criteria that should be considered when it comes to new taxes and tax policies.
Consider their questions below:
• Does the policy increase the overall tax burden borne by Utahns?
• Does the policy unfairly shift taxes from one group of taxpayers to another?
• Does the policy weaken important protections for taxpayers, i.e, Truth in Taxation?
• Does the policy place an industry, or the State of Utah, at a competitive disadvantage?
• Does the policy threaten tax rate uniformity and consistency locality to locality, state to state?
• Does the policy require taxpayers and businesses to track new or increased information to comply with reporting requirements?
• Does the policy represent an unfunded mandate to businesses which will likely increase their costs, i.e., health insurance mandates?
• Does the policy use the increased revenues for purposes which do not benefit those who pay the tax?
• Does the policy result in unnecessary governmental growth?
“In this world nothing can be said to be certain, except death and taxes.” —Benjamin Franklin
Case Studies
In order to hold local governments accountable for tax increases, Utah has a Truth in Taxation process. This requires local governments to hold public hearings whenever they are seeking to increase the tax rate. In addition to holding local governments accountable, the Truth in Taxation process also allows constituents to be heard and made aware when it comes to any tax increases.
This process can make raising the tax rate difficult, even if it is simply to keep up with inflation. Residents appearing at required hearings are not likely to support a tax increase.
Elected officials may shy away from raising taxes because of this difficult, yet required process. Simply opting out of raising property taxes is likely untenable; especially if the alternative is seeking out creative, yet questionable, methods of raising funds (such as the implementation of illegal utility fees).
Looking for ways to streamline, create efficiencies, cut bloat, and avoid providing non-essential services are just a few of the ways to initially avoid raising taxes. But if it is necessary, raising taxes will still likely be unpopular.
Regardless, help your constituents understand your decisions and hold you accountable for those decisions.
One Common Approach: Truth in Taxation as an Obstacle to Avoid
Local governments often attempt to find controversial ways to work around Truth in Taxation. This may be done out of fear of approaching citizens about tax increases.
Finding controversial ways to skirt Truth in Taxation can give you a disingenuous reputation. This may create political repercussions, as your constituents rely on this program for government transparency regarding their taxes.
Avoiding raising property taxes for long periods of time is also likely to be poor policy. Generally local governments should be analyzing every 5-7 years if a property tax increase is necessary to recapture inflation.
It is not a hard and fast rule that you must raise the property tax rate, but future elected officials will thank you if you avoid putting your city or county in the situation where a massive property tax increase appears to be needed after a period of 25+ years with no inflation increases.
A Better Way: Education and Collaboration
Truth in Taxation is not a law that should be avoided out of a fear that your constituents will be unhappy. Instead, you should work to educate constituents about the process of Truth in Taxation and the need for the occasional tax increase.
Citizens expect a lot from elected officials, and you need to help them understand that the services they expect cost money. Educating citizens about this policy, instead of looking for loopholes, will create a more effective process.
In addition, by educating citizens about this policy, you can demonstrate to them that Truth in Taxation enables you and other legislators to be transparent in policy.
Help your constituents understand, and appreciate, that Truth in Taxation allows citizens to actively participate in local policy by giving a forum to their concerns and beliefs. Education about how this initiative works, as well as its benefits, will allow you to face Truth in Taxation head on.
Taxes should be fairly and neutrally applied. Tax policy should avoid tax-shifting effects. Tax breaks or tax incentives for property taxpayers can be designed in a way to avoid shifting the burden to other taxpayers.
One Common Approach: Shift the Burden
A tax-shifting effect occurs when a policy unfairly distributes the tax burden. For example, economic incentives can erode the tax base over time if there is no return on investment that produces proven greater tax revenues for local entities. If economic incentives are not well planned and carefully considered, it can quickly become difficult to provide essential services that are funded by these taxes and force local governments to raise taxes to cover a shortfall that can be created by being too generous.
When providing these types of incentives, the “but for” argument must be considered. If an area is likely to be developed or redeveloped without the need for incentives, then governments need not provide any taxpayer dollars to spur development in an area.
In addition, the type of development must also be considered. Many entities will provide incentives to retail in order to gain a small increase in the sales tax base. Generally, it is appropriate to stay away from providing tax increment financing unless a major employer with high-paying jobs is looking to relocate or expand within your boundary.
At the end of the day, the money must come from somewhere. The tax dollars you give away through incentives will have to be made up by the taxes paid by everyone else, if policies are not in place that provide the entity an opportunity to recoup the cost. Sound policies that protect all taxpayers when it comes to incentives or tax breaks must be a priority.
A Better Way: Broad Base and Low Rates
When implementing policies that may create a tax shift, always consider whether the policy generates revenue using conservative rates across a broad base.
By applying a tax rate across a large group of people, the rate can be lowered, as opposed to a small group of taxpayers paying a much higher share. This is a much more equitable approach to taxation.
This applies to all types of taxes, including sales and property.
Conclusion
The responsibility to collect and allocate tax revenue is one of your most important responsibilities. The money you are dealing with is not yours. It was paid by your constituents in exchange for basic services they expect. Taxes should be drawn from the least volatile source of revenue and should contribute to services that benefit the community broadly.
From start to finish, the tax process should be transparent, and taxes should be as low as possible to fund only essential government infrastructure and services. Embrace the Truth in Taxation system — it was created to foster community involvement and accountable spending.
Here are the key takeaways:
• Taxes are different from fees.
• Taxes should rely on the least volatile income sources.
• Taxes should have the lowest possible rates spread across the broadest base.
• Educate your citizens regarding taxes and tax increases — do not try to hide them.