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Assignment #3, page 1a
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Assignment #3, page 1b
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a.) Though income tax would provide more progressivity there is really not much of a case to be made for financing in this way. The benefit spillovers to other regions are quite small. One could make a case for some matching money from the federal government since mass transit could be considered a merit good and a very lumpy one at that. Without some funds from the federal government to investment, though badly needed to compensate for or reduce the externality costs imposed by air pollution and congestion of roads, might not otherwise be undertaken.
All in all the property tax would be the most appropriate method of financing. Through the property tax the government can, for the most part, be sure to capture all the major beneficiaries of the BART investment, including those whose property values increase. Increase in property values is an extremely important consideration since the distribution of wealth is even more unequal than that of income. Since it is mainly the wealthy who own property the increases in property values worsen this distribution. Of course, one guiding assumption I am making is that the potential users of the system are going to be largely middle and low income people and that the incidence of the property tax falls on the higher income levels (owners of capital, business and homeowners).
b.) The major share of the investment cost should be born by tax payers. The taxpayers will be the ones who benefit from the increase in property values, stimulation of local economy, payments to factors of production, as well as the reduction in air pollution and congestion.
― 3 ―If users were to pay the investment cost the fares in order to cover average cost, would have to be quite high, thus pricing low income people out of the system. Presumably, a major goal of government spending is that redistribution of income, both real and in kind.
The maintenance cost should be shared by tax payers and users. That part of the maintenance cost which would occur at near zero rate of usage would be the share born by taxpayers i.e. the cost of simply maintaining the integrity of the capital stock. Users should pay the share of maintenance caused by substantial use i.e. wear and tear on equipment, cleaning, etc.
Operating costs should, up to a limit, be born mostly by users. Since low income people generally can't afford auto transportation and because a major goal is to attract people away from auto use, the user charge should be low enough so as to accomplish these goals. Presumably the proper amount would be somewhat below the marginal cost to drivers of operating an automobile.
c.) The scheme should be based on netting out taxes and expenditure benefits. One major beneficiary will be the middle and upper income suburb dwellers who work in San Francisoo. One method would attempt to estimate the benefits received by each jurisdiction and then, based on the market value of property, tax assessment ratios and per capita income and perhaps even the proportions of rental, owner-occupied and business property in the district, develop
― 4 ―a formula which would compensate for differences between districts in assessment ratios, applying a higher rate of tax on high per capita income jurisdictions and those with higher proportions of owner-occupied home and business property. Such a formula would attempt to achieve equity on both the benefit and ability to pay basis.
d.) The rate structure should be equal to the net marginal private benefit received by the last rider (net by subtracting all costs associated with riding BART including inconvenience, time, comfort, loss of ability to spontaneously choose destination, etc.) minus the marginal social benefit generated by BART v.s. another mode of transport.
Let us first view both alternatives in the context of equity and efficiency with respect to tax burden. In terms of efficiency, the property tax appears to be superior to the local income tax. The property tax, as long as the effective rate is not more than a small percentage above those of surrounding areas, will not cause flight of capital out of the jurisdiction. Property taxes and property values are normally reflective of the level of services provided by a jurisdiction. Since most people are quite mobile and can choose their place of residence according to how much they value public services; in this case elementary education, the property tax acts as a signaling device. One problem here however is that of equity in terms of ability to pay. For those low income people now living in Berkeley, and those outside who
― 5 ―would like to immigrate to get the higher quality elementary education for their children, there is a heavier tax burden since a greater share of their income is used for housing; and because higher rates cause capital to leave and go to other loswer-tax jursidictions. This causes rents to rise leading to a transfer of real income from the high tax jursidiction to the low tax jurisdiction.
Out flow of capital will also reduce business plant, reducing the productivity of werkers employed in Berkeley and thus their earnings; another transfer in real income. Also because of decreased demand for land the rental income from land will be lowered. These effects will be tempered to a certain extent by the higher valuation placed on residence in Berkeley given a better quality education.
One outstanding feature of a local income tax which makes it so unattractive is the effect it has on peoples real disposable income. People living in Berkeley would face a higher total tax rate and therefore would need a higher wage to end up where they were before the local income tax was imposed. Business rather than pay the higher wage will look elsewhere for labor. Most businesses like to have a ready labor supply near the business site from which to hire. This might encourage many businesses to leave Berkeley. Thus Berkeley residents will either face greater difficulty in the job market or will end up with a lower after-tax income. This could lead to an out-migration
― 6 ―of people in higher income brackets since they will pay the largest absolute amount of taxes under such a system. Thus reducing the tax base and changing the burden toward regressivity.
One advantage of a local income tax over a property tax is that it matches expenditur benefits to tax burden. The period of life when people are most productive and therefore earning the greatest income is the one in which they are most likely to have school age children.
A disadvantage shared by both the property and income tax is that, given small jurisdictions, they both promote inequality in educational opportunity. High income jurisdictions are able to tax themselves at a higher rate without as much excess burden in order to provide better education. To the extent that low income people are less mobile, due to a number of factors including discrimination, this inequality is magnified. Due to a desire to ameliorate this situation and reduce the negative impact on economic efficiency caused by tax differentials among jurisdictions, many, including myself, advocate placing the administration of the property tax at the state level.