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You're going to pay sooner or later

Jack Balshaw 5/21/2003


I was talking with a guy who's in favor of any tax cut proposed. He's in favor of eliminating the inheritance tax even though he won't leave enough to have to pay any; he's in favor of eliminating tax on dividends although he doesn't get any dividends; he's in favor of getting rid of taxes on capital gains although his capital gains are minimal.

This got me to thinking about what I'd call the cascade of taxes. This relates to how taxes collected or not collected by one level of government will cascade, only down, to other levels. At the lowest, local level (which in California doesn't have the authority to tax) a tax or fee increase usually relates directly to a change in the level of some service provided.

It's not that direct for taxes collected at the Federal and State levels. Let's presume the tax reductions proposed by the President go through. Here's what's going to happen. (The program cuts I use are just examples and not necessarily where the cuts will come.)

Once the Federal tax revenues are reduced, the Federal Government will have to cut back on existing programs, say supplementary funds to put more police on the streets, or for Medicaid (MediCal) payments. This will initially affect the States and they will in turn look for ways to make up the lost federal grants.

They will immediately realize that Joe Taxpayer has just had his federal taxes reduced and therefore has money they might claim. So, the states will do two things. First they will reduce the amount of state funds normally sent down to cities and counties either directly or through cutting state programs at the local level. This will reduce their expenses so that when they raise taxes for their residents, the raise will be smaller and the state's taxpayers won't complain so much.

But, this leaves the cities and counties with less money and with less state services. How is this gap going to be closed?

About all local legislative bodies can do is increase fees. This has already been done in Petaluma. Other than that, they can talk their residents into voting assessments or parcel taxes on themselves for specified local improvements.

There is one more thing they can do, borrow against future redevelopment funds. This has already been done, like the money spent on the Payran flood project and other projects. Additionally, if the city declares fixing a city street a redevelopment project, they can also spend this money on what most people would think was a normal responsibility to be paid out of city funds.

But the magic here is that the city can also charge the redevelopment account for all overhead costs. This includes personnel time, pro rata costs for city buildings and equipment, and everything from employee retirement benefits to training. The magic is that redevelopment funds can substitute for money the city would have had to spend to keep its people employed.

So, by declaring a project a redevelopment project, money that would have been spent on the project can be transferred to other city uses and that much real redevelopment doesn't get done.

But, back to the fellow I was talking to. He won't relate that the tax reduction at the federal level caused program reductions at the state and local level. Program reductions that resulted in his state tax increasing and the city asking for increased fees (say for use of recreation facilities) or a parcel or assessment tax to fix streets or pay for police and fire department pay raises.

He'll go around thinking the Federal Government was wonderful and the state and locals don't know how to keep costs down while providing him with the services he desires.

Of course the person who received tax-free dividends or other federal tax reductions will be happy and Joe Taxpayer won't even notice.


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