Question

Suppose a state is considering three different types of fiscal limits for local governments in the state--a maximum property tax rate, a limit that property tax revenue may not increase more than population and inflation rate together, or a limit that spending may not increase more than five percent. In each case, the limit may be exceeded by majority vote. Which limit is most restrictive and why? Contrast the three in terms of the sources of allowed increases in taxes or spending and the potential effect on local services.

Answer 1

A maximum property tax rate limits the revenue with the local government. This in turn limits the spending by them. The quality of the local public services will be affected. Even though initially the services can be maintained with the infusion of state funds, once the state budget becomes tighter the local government will run into shortfalls . The developmental activities will become stand still . Here to an extent non-tax revenue can be used for the developmental activities. But in some cases that may not be sufficient .

Now, when a limitation is imposed on spending by the local government, they will not be able to spend as much as they want to. The areas population will continue to grow and the authorities will not be able to meet the needs of the growing population. They will also have to pay higher price for labour and material as a result of inflation. This situation is really worse than anything because the government will not be able to do its job in any manner.

Limiting the tax revenue to a rate that reflects inflation and increases in population will be ideal. This will ensure that the real per capita spending and services will not decline over time due to the effect of inflation and growing population.