Government taxation: Impact of a policy

Local decision makers have power to change tax policy.

Public taxation is potentially a double-edged sword. The public expects and, on occasion, demands its units of government to provide ever-greater level of services. At the local level, such services may include police and fire protection, water and wastewater utilities, paved streets with storm sewers and streetlights and parks for recreation. Such services are not without their costs. Moreover, while the public expects these services, taxpayers are not jumping for joy when the tax bill arrives.

Taxation is different at different levels of government. The federal government relies upon the income tax as administered through the Internal Revenue Service. State governments also rely on a state income tax, but also supplement their income through additional taxes such as the individual sales tax, vehicle registration fees and the gasoline tax. The use of all of these taxes at the various levels of government will produce different results and modes of behavior. At the local level though, the property tax is the primary source of funding for all local programs. Here, one may view the use of taxation to produce a policy outcome.

Local units may develop an overall plan, mission statement or jurisdiction wide goals. Such a concept is designed to drive the budget in a certain direction to provide the services members of the local community have come to expect. In Michigan, the property tax is a result of the calculation of a taxable value times a local millage rate. While the taxable value is highly regulated process utilized by the local assessing officer to determine the tax base, the authority of the elected officials determines the millage rate. State law does regulate local units to the point of setting maximum limits for the property tax and millage rate. However, as long as a local unit of government is under the maximum allowable rate, it has the authority within statutory procedures to raise the millage rate any amount up to the allowable maximum.

As an example, assume that a local unit of government has a current millage rate of 15 mills. The maximum allowable rate by state law is 20 mills. The local policy makers (i.e. elected officials) could conceptually raise the millage rate to a higher amount and everyone’s property taxes would increase. Such a move could raise a substantial amount of money in response to a perceived need or change in policy for the local community. For instance, the local unit may be may be attempting to finance the purchase of a parcel of property to expand a fire station or as a new waterfront park. Such an expansion could improve public service and in some cases even create new employment opportunities. However, this change in tax policy could also potentially change or influence public behavior by creating a negative impact on the local real estate market. A substantial mill increase, while legally permitted in this example, may have an adverse effect on the market by slowing down the number of real estate sale transactions and, in reality, be a negative impact on the local unit by driving away potential new homebuyers even though the future expansion may increase public service and even create jobs. As with any government policy or action, moderation is the key.

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