Political Pitfalls of Solving Budget Problems with Taxation

Political Pitfalls of Solving Budget Problems with Taxation:
A Case Study Analysis

Matthew Howard
Northern Arizona University

PAS 421C: Public Agency Policy
February 9, 2013

Abstract

Budgeting serves three major purposes: control, planning, and management. Public agencies must create their budgets under intense political pressures from within and without. Internal competition, special interest groups, and conflicting desires in the public itself make budgeting difficult. In the case study, the City Manager faces all these challenges. His long term solutions (cross-functional teams and a review of team-generated cost-benefit analysis) have been covered previously. Here, we consider his short-term means of revenue by taxation, and the political downsides of all of them.

The Case Study in question is Balanoff and Pinto’s “What Do You do When your City is Looking at a Million-dollar Deficit in the Current Fiscal Year?” in Public Productivity & Management Review, 1999.

Purposes of Budgeting

Starling (2011) takes his three purposes of budgeting from a 1966 article in Public Administration Review: control, management, and planning (pp. 505-6).

Control. Budgets aim to control more than just how much money gets spent by an agency. They also control how, when, and on what that money gets spent. Audits play a key role in this control process. Audits check to see if the money was spent in the way it was intended. Control is less concerned with outputs and outcomes than inputs.

Our City Manager faces many decisions about controlling expenditures. But more importantly, his audit process needs refined. At the very least, the audits work well enough that he is seeing irregularities. However, no one seems to enforce audit standards, and spending is all over the map. He will need to begin holding people and departments accountable for compliance, a practice that seems absent in his current state of affairs.

Management. Budgets also set a standard for managers to monitor efficiency. They can review the outputs of their agency and compare them to dollars spent. Does the department meet performance standards for maximizing the use of public funds? Budgets help determine that, alongside analysis and measurement of the agency’s activities. These may include financial control systems to report and track an agency’s spending, and further analysis to uncover patterns and motivations in the organization (Cohen, 2002, p. 204-5).

In this case, we see something Cohen warns of: “Managers attempt… to please financial control systems. They think about what type of data they want more senior managers to see in financial tracking reports (ibid, p. 206-7). In the case study, our City Manager finds that shady budget practices have made the city appear to be more solvent than it is: shuffling expenditures into untracked accounts, relying on reserve funds to pay budget expenses without tracking the costs, and much more. At some point, creative accounting devolves into lying to make the reports look good. Our manager will need to root out these unethical and poorly-advised actions to present a clear and accurate picture of the City’s current finances.

Planning. Making a budget plays a significant role in planning. With the needs and demands of millions of citizens to address, planners must carefully select what programs to fund. Which ones contribute to economic growth? And, as we will discuss further, which ones meet the political goals of the agency and its stakeholders? A budget gives shape to a plan, clearly transforming strategic goals and policies into revenues and expenditures that will, hopefully, accomplish those aims.

Politics and Policy

Private companies can create budgets at will. Depending on their size and complexity, they might have anything from a single business owner to a finance department that reports to the CFO or the Board. Publicly owned and traded companies may add a layer of complexity by answering to shareholders. But, a governmental department or agency pursues its budgeting aims in a much more complex web of political maneuvering and obligations.

Influence of Special Interest Groups. Lobbyists and powerful, well-funded coalitions constantly seek to affect the budget process and the allocation of funds. Government must answer to the public, and these groups of citizens can derail even the most well-intended fiscal policy. “If a powerful interest group supports your request, your professional reputation and the general level of political support for your request may be irrelevant. The interest group’s strength may carry the day” (Cohen, 2002, p. 197).

Internal Politics. Some analysts identify internal agency politics as the creators of “the highest level of conflict” (ibid). If an agency has multiple programs competing for limited funding, its own departments may struggle against one another to prove their worth. Politically, a manager must consider that if he cuts someone’s pet program, he risks alienating their support at a time when he most needs it.

Conflicting Public Demands. The public wants better services from the government but would prefer to give them less money. Some of the citizens want programs that conflict with the values of other citizens, such as some public health policies. And, everyone’s immediate needs seem, of course, most pressing to them. If the City Manager seeks to please everyone, he may very well end up pleasing no one. Managers need to think strategically, see the big picture, and choose the topmost priorities. One thing is certain: no one in the public wants to pay more taxes.

Revenue in the Short Term

Our City Manager can use six different means of taxation as revenue sources in the short-term. Using them even in the short-term has political downsides as well as administrative challenges. He would do well to consider solutions in the long term that will revitalize his department from within. Placing the burden for his department’s inefficiencies on the shoulders (and bank accounts) of his constituents is not only politically dangerous but simply irresponsible. We have covered, in a previous essay, a long-term solution in forming cross-functional teams and performing cost benefit analysis of his projects from within those teams. So, here we will focus entirely on his short-term revenue possibilities.
Starling (2011) again provides a succinct summary of these tax bases in his Figure 11.6 – Pros and Cons of Six Revenue Sources (p. 517).

Personal Income Tax. Incredibly unpopular with the general public for obvious reasons, the personal income tax also disproportionately burdens the middle class. The source seems stable, but politically, one must ask why the middle class should pay for the incompetence our Manager’s predecessor.

Corporate Income Tax. Just when the city needs lifted out of its economic woes, the government imposes a tax that will depress the rate of return on any capital investments in its jurisdiction. Does that sound like a good idea? One can only imagine the political backlash as the primary investors the city needs right now begin pulling all their money out of her.

Property Tax. This stable tax has some appeal, except when we consider how delinquent amounts are collected. If the City is in an economic low to the point where jobs are dying off, people will be less likely to pay property taxes. To get the revenue, the City would have to foreclose on the property, putting people on the streets and generally making things worse for everyone. It doesn’t sound like a politically favorable situation.

Estate, Inheritance, and Gift Taxes. No one likes them. The main advantage is the progressive nature of the tax that places greater burden on those who can more easily bear it.

Sales Tax. This easily-collectible tax has major downsides. First, the tax burden goes most heavily on the poor and those with large families to feed. Second, if the tax becomes too high, people will begin exchanging goods and services in cash (or even barter). At that point, the government cannot track transactions. The revenue from them falls to zero.

User Fees. An incredibly efficient revenue source, they have one major downfall. Most government services don’t fit the “pay per use” model but come without price tags; for example, fire fighting and police service.

Again, we cannot overemphasize the Manager’s need to fix internal problems in his agency. Taxing the public in this case is more than just a political disaster. It violates the notions of public service and administrative responsibility. Mismanagement of the City caused the problems. Management needs to step up and correct their course. Taxes may provide an emergency measure, but only thinking in the long-term will solve the City’s money problems.

Conclusion

These taxation possibilities highlight the highly charged political environment in which a public manager must make financial decisions. Every category makes someone unhappy, and some of those groups exert political pressure on the City. Faced with similar pressure from special interest groups and internal competition for funds, City Managers must pick and choose their steps wisely. Taxation may make sense in the short-term to generate revenue. But, unless leaders correct their own internal mismanagement, they are politically doomed. 

References

Balanoff, H., and Pinto, C. (September, 1999). What do you do when you city is looking at a million-dollar deficit in the current fiscal year? In Public Productivity & Management Review, 23:1, pp. 83-88.

Cohen et. al. (2002). Mastering the budgetary process. In Cohen, Steven, Emicke, W., Eds., The Effective Public Manager: Achieving Success in a Changing Government, pp. 187-208. San Francisco, CA: Jossey-Bass.

Starling, G. (2011). Managing the public sector. Boston, MA: Wadsworth, Cengage Learning.

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