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In this lesson we will turn our attention to the relationship of the federal government and the state and local governments.

Our focus will be on the governments of the fifty states, but we will also examine the local governments of counties, cities, towns, villages, and school boards and other elected boards.

We will begin our discussion with the state budget process.

The state budget process is much the same as that of the federal government.

It is a financial plan for the control and use of public money, public personnel, and public property.

It is also a political document.

The state budget is a statement of how the government will use its scarce resources (taxes and other revenue) to meet the financial obligations of the government including the needs of the people.

In other words, the state budget proposes to answer to the three basic economic questions, deciding who gets what and how much, and who doesn't.

Most states have now adopted the executive budget, giving the governor two vital powers:

The power to prepare the state budget thereby making a determination of resource allocation, and

the power to carry out the budget.

The governor also has the authority to administer the funds of all of the various departments in state government.

The basic steps in the budget process are much the same at the state and local levels as they are at the federal level.

Each state agency prepares estimates of the needs and expenditures in the up-coming fiscal year, and they are revised by an executive budget agency.

The revised estimates and all supporting information are brought together in a single financial program, the budget, for the governor to present to the legislature.

The budget is considered, item by item, the necessary funds are appropriated, and the necessary revenue measures are passed by the legislature.

There are four major functions that stand out as the most costly: education, highways, public welfare, retirement and unemployment compensation.

Education is by far the most expensive entry in most state and local budgets, followed by highways, welfare, retirement and jobless programs.

The spending levels for these functions could vary in states that have large cities or states that have a large land area and a small population.

How are all of these programs funded by the states and their local governments?

The huge amounts of money consumed by state and local government come from both tax and non-tax sources.

There are limitations placed on the taxing powers of the state and local governments.

The power to tax is also limited by state constitutional and statutory provisions as well as by the restrictions in the Constitution of the United States.

The U. S. Constitution places only a few restrictions on states, including the taxation on interstate and foreign commerce.

In lesson 21 we discussed how the Constitution forbids the states the power to "lay any imposts or duties on imports or exports" and "any duty of tonnage."

Time out for a review!

The concept of the reserved powers is an important part of our economic study of the Constitution.

The reserved powers are listed in the 10th Amendment, which is part of the Bill of Rights.

The 10th Amendment states "The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people."

States are also forbidden to tax the federal government or any of its agencies ever since the Supreme Court's decision McCulloch v. Maryland, 1819.

Why was this restriction placed on the states?

Chief Justice John Marshal summed up the basic reason is because "the power to tax involves the power to destroy."

The Supreme Court believed that the states did not have the power to tax the federal government under the U. S. Constitution.

In the 14th Amendment of the Constitution, the Due Process and Equal Protection Clauses also place limits on the power to tax at the state and local levels.

The Due Process and Equal Protection Clause requires that taxes be imposed and administered fairly, and not be so heavy that people would lose their property just to pay the taxes.

In addition, taxes could only be imposed for a public purpose and could not be used to benefit a private individual or group.

The Equal Protection Clause also forbids unreasonable classifications for taxing purposes.

The Equal Protection Clause does not forbid reasonable tax classifications. However, the Equal Protection Clause does forbid tax classifications that are based on race, religion, nationality, or political party membership.

The constitution of each state also limits the power to tax. Many of the states provide that taxes shall be levied only for public purposes and that they be applied uniformly.

States also ensure that taxes be collected only within the geographic limits of the units of governments which levy them (this means that taxes collected in one county must be used to fund programs in that county).

Most of the state constitutions also exempt the properties of churches, private schools, museums, cemeteries, and the like from taxation.

The state and local governments set maximum tax rates.

For example, many fix the state's sales tax at a certain percent and/or the local property tax at no more than so many mills per dollar. (A mill is one-thousandth of a dollar, or one-tenth of a cent.)

It is one dollar for every $1,000.00 of assessed value. If you have a house that is assessed at $30,000.00 and the mill levy is 10 mills, you have a tax of $300.00.

It would be unfair if all of a government's revenues were to come from one tax, such as the income, property, or sales tax. Some of the people would bear a greater burden than others, and some would not pay their fair share of the taxes.

More than 200 years ago, in his classic book, "The Wealth of Nations," published in 1776, the English economist Adam Smith laid out four principles of a sound tax system.

According to Smith, taxes must be equal, be a certain amount, and must be convenient to pay. Taxes must also be levied at amount of money needed by the government.

The sales tax is the single most important source of income among the 50 states today. It now accounts for about half of all of the tax monies collected by the states.

A sales tax is a tax placed on the sale of different commodities and paid by the purchaser. It may be either general or selective in form. A general sales tax is one that is placed upon the sale of most commodities. A selective sales tax is one placed only on the sale of certain commodities - such as gasoline.

There are two major reasons why the sales tax is so widely used.

First, it is relatively easy to collect. Secondly, it is a fairly dependable revenue producer.

But notice, the sales tax is a regressive tax and is not geared to ability to pay. It falls most heavily on those with lower incomes.

The Income Tax

The income tax levied on individuals and/or corporations yields more than 35 percent of state tax revenues today.

The individual income tax rates are usually progressive - -that is, the higher the income the higher the tax rate. The corporate income tax rates are most often uniform. They are normally assessed on a certain fixed percentage of income of companies doing business in the state.

The progressive income tax is held by many to be the fairest (or least unfair) form of taxation - especially because it may be closely geared to ability to pay.

The Property Tax

The property tax is the chief source of income for local governments today.

It accounts for approximately 80 percent of all of their tax receipts.

The property tax may be levied on real property - land, which is buildings, and improvements which go with the property if sold.

A personal property tax could be either tangible or intangible.

Tangible personal property includes all movable wealth which is visible and the value of which can be easily assessed. For example, farm implements, livestock, pianos, television sets, automobiles, and air conditioners.

Examples of intangible personal property include such things as stocks, bonds, mortgages, promissory notes, and bank accounts.

Because intangibles can often be hidden from the tax assessor, they are not taxed in many states. In others, they are taxed at a lower rate than tangible personal property.

The process of determining the value of the property to be taxed is known as assessment.

The task is usually carried out by an elected county, township, or city assessor.

Where personal property is taxed, the assessment is regularly made each year.

Property is usually assessed at less than its true market value.

Most property owners seem better satisfied if the assessment is set at perhaps one half of its real value.

Thus, a house assessed at $30,000 may actually be worth $60,000.

If the tax rate is set at 20 mills (or two percent) the tax will be $600. In reality, of course, this is the same thing as a 10 mill (or a one percent) tax on the $60,000 house.

The property tax is supported by many politicians because it is protected and its value is often inflated by governments.

The property tax may properly be required to contribute to the support of government.

The rate at which the tax is levied may be readily adjusted to meet governmental needs, and it is a dependable source of revenue.

Many politicians criticize the property tax because it is not geared to the ability to pay. It is difficult to assess all taxable property on a fair and equal basis.

Inheritance of Estate Tax

Almost all of the states levy taxes on the estates, the property and assets, of persons who have died.

An inheritance tax is one levied on the beneficiary's share of an estate. An estate tax is one levied directly on the full estate itself.

Business Taxes

A wide variety of business taxes, in addition to the corporate income tax, are also an important source of revenue in most states.

Over half of the states impose severance taxes.

These are taxes placed on the removal of such natural resources as timber, oil, gas, minerals, and fish from the land or water.

Every state has several different license taxes, fees which permit persons to engage in a business, occupation, or activity which is otherwise unlawful.

All states require that corporations be licensed to do business in the state.

Most or all states require the licensing of doctors lawyers, dentists, morticians, barbers, hairdressers, plumbers, engineers, electricians, and many others.

Many local governments impose their own business license taxes, as well.

License taxes other than for business purposes are levied in all states and are an important revenue source.

The most important are those for motor vehicles and motor vehicle operators, of course; others include such permits as hunting, fishing, and marriage licenses.

States also levy documentary and stock transfer taxes that are charges made on the recording, registering, and transfer of such documents as mortgages, deeds, and securities.

Some states also impose capital stock taxes, which are levied on the total assessed value of the shares of stock issued by a business concern.

Non-tax Receipts

government-operated businesses

Each of the states, and many of their local governments, make money from a number of different publicly-operated business enterprises.

Toll bridges and toll roads are found in many parts of the country.

Many cities own and operate their water, electric power, and bus transportation systems.

Some cities operate farmers' markets and rent out space in their office buildings, warehouses, and housing projects, own and operate dams and wharves, and so on.

The receipts from these businesses (often including profits) go toward the support of the governments which own them.

Examples of other non-tax sources include such things as court fines, the sale or leasing of public lands, and interest earned from investments.

Borrowing may be classed as a non-tax revenue.

Since they must be repaid, loans are hardly in the same class as other non-tax receipts.

States and their local governments often must borrow money for unusually large undertakings, such as public buildings, bridges and highways, that cannot be paid for out of current income.

States borrow the money that is needed for these projects through the issuance of bonds, much as the federal government does.

Individuals or groups buy the bonds, and the government will pay them back over a designated period of time.

Summary

This concludes our discussion of state and local governments.

Please remember the Constitutional relationship of the federal government with all of the states and the local governments.

There is a sharing of the power to tax, which has a tremendous influence on the economy of our country.