Revenue Sources: Some Basic Definitions Property Taxes A tax placed on a fixed proportion of the value of the property. Property is usually divided between real property (land and everything on it, below it, and above it) and personal property (furs, stocks, goods of any sort). The value of the property is set by government assessors. In most places, real estate is automatically reassessed when the property changes ownership, but a community can also undertake a city-wide reassessment to bring its tax base up to date. The tax rate—how much is charged on what percent of the assessed value—is set by the governing body. Parcel taxes A parcel tax is a fixed amount placed on every piece of property in the area. For example, the Dry Creek Union School District might persuade the voters to impose a $21.00 per parcel tax for class size reduction. Everybody pays the $21.00, whether they own a mansion or a two-bedroom bungalow. Sales Taxes A sales tax is an assessment at a fixed rate on the sale of goods and services: for example, a 1.5% tax on all sales except food. Sales taxes are good sources of local revenue, but their usefulness depends on several things. The municipality has to have sales that are worth taxing, for example automobile dealerships. Sales taxes respond to the economic cycle—in good times people buy high ticket items like automobiles and washing machines. In bad times, they delay, which causes sales tax collections to go down. Sales tax money accrues to the place in which it is collected (the “point of sale” concept) unless the legislation authorizing the tax specifies a larger entity such as the County. Excise Taxes Excise taxes are taxes on specific commodities produced by businesses within a nation. The U.S. Federal raises 4.7% of its revenue by imposing excise taxes on oil and gasoline, alcoholic beverages, and the like. Theoretically, the good thing about an excise levy is that it can be used to tax a luxury or discretionary good without harming less affluent people. Or it can be imposed on the people who are actually using the resource—gas taxes to pay for highways. Excise taxes are also used to discourage consumption of “undesirable” things, such as cigarettes Excise taxes are actually regressive, since poor people smoke, drink, and drive their cars to work. And they aren’t much help to libraries unless we could find some commodity (medical marijuana?) to tax that nobody else has gotten to first. This material has been created for the Infopeople Project [infopeople.org], supported by the U.S. Institute of Museum and Library Services under the provisions of the Library Services and Technology Act, administered in California by the State Librarian. Any use of this material should credit the author and funding source. 2 Funds—Where Finance People Put the Revenue Collected A “fund” is “A sum of money or other liquid assets established for a specific purpose.” [Black’s Law Dictionary]. Normally a government entity establishes several funds that it uses as financial management tools for operating the government. Here are some examples of typical funds: Enterprise Fund: the monies collected in fees and used to operate the business enterprises of the government, e.g., the Water Department. General Fund: the government’s primary operating fund, containing the tax revenues that are not designated for a special purpose. Library Fund: Used by a County, for example, to hold and expend the property tax collected for the library that cannot be used for anything else. Internal Service Fund: A fund within a government that provides goods or services to other funds or departments. For example, the Library might be charged money for an Internal Service Fund that is being used to pay for custodial and building maintenance care of all town buildings. Bonds, General Obligation or “G.O.” A means for borrowing money. The issuer (the entity borrowing the money) has to pledge (give its bond) that it will levy the necessary additional taxes to pay back the loan. G.O. Bonds are usually issued to finance a project that will benefit the community as a whole—fire trucks, or a new main library. They often require a taxpayer approval vote. Bonds, Revenue Also a means for borrowing money, usually for projects that have a definable user or revenue base. e.g. a wastewater treatment plant that can be paid for with water rates. Revenue bonds can usually be issued without voter approval, provided they come under the entity’s debt ceiling. Bonds, Special Assessment or Special Improvement District These are used to finance projects that will benefit only a certain section of a geographic area, such as a branch library. The property taxes of the people in the defined area are raised to meet the cost of the debt payback. Tax Increment Financing A device used by redevelopment agencies, this is a way to borrow money based upon the expectation of an increase in property tax collections resulting from the improvement to be built with the borrowed money. For example, a redevelopment agency might use it to borrow money to pay for improvements to the streets and sidewalks surrounding a new shopping center. This material has been created for the Infopeople Project [infopeople.org], supported by the U.S. Institute of Museum and Library Services under the provisions of the Library Services and Technology Act, administered in California by the State Librarian. Any use of this material should credit the author and funding source. 3 Certificates of Participation or Lease Purchases These financial “devices” are a way to borrow a big lump of cash up front for a one-time project, such as expanding a branch parking lot or upgrading the automation system. Suppose you need $850,000. This amount is borrowed and paid back at a fixed interest rate over a relatively short period of time—say five years. The lender is often a consortium of investors who like the device because the interest they earn is tax free. Impact Fees An impact fee can be placed on a new housing development in a growing area. Basically, an impact fee charges the people who will move into an area not just for the land and house they are buying, but for the costs the community is going to incur for the streets, schools, libraries, hospitals, and so forth that will be used by the new population. The fees are imposed on the developer of the housing, who in turn folds them into the new homes’ purchase price. Fees and Fines Most libraries collect them. How important they are depends on the amount, and whether the library gets to keep the money. And how does a library estimate its potential fine revenue? Take the amount collected last year and divide it by the number of item checkouts. Then project/guess what checkouts might be in the coming year. Multiply this number by the result of the first calculation. $60,000 collected in 2006-07 divided by 875,000 checkouts is $0.07 per circulation. 900,000 checkouts 2007-08 will therefore generate $63,000. Gifts and Bequests “Trusts,” “legacies,” “endowments”—all these are legal terms about which you would be wise to consult Blacks’ Law Dictionary (see Bibliography). Most important is that your library has a policy specifying who may accept gifts (the Board?), the criteria for accepting (must be consonant with the library’s mission?), and to whom it is best that the gift be given (the nonprofit foundation of the Friends organization?). Make sure all the attorneys in town who specialize in wills and trusts have a copy of the policy This material has been created for the Infopeople Project [infopeople.org], supported by the U.S. Institute of Museum and Library Services under the provisions of the Library Services and Technology Act, administered in California by the State Librarian. Any use of this material should credit the author and funding source.