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CGFM Government Environment Section IV
Section IV of the CGFM Government Environment Study Guide
42
Accounting
Undergraduate 4
02/13/2011

Additional Accounting Flashcards

 


 

Cards

Term
Give an example of a progressive tax?
Definition
U.S. income tax- Rate of taxation rises with income
Term
Why is federal property not taxed?
Definition
It would violate the efficiency principle.  There would be an administrative cost of assessing and collecting the tax, simply to pass money from one government account to another.
Term
Name the greatest challege in a real property tax system?
Definition

The greatest challege in a real property tax system is appraisal and assessment.  The property must be appraised to determine market value; it must be reappraised periodically; the appropriate assessment ratio (percentage) must be applied.  Then, the tax reate is applied to assessed value.  This process is technically challenging and politically sensitive

 

The other challege is the collection of the tax.

Term
Steve just bought a home and is calculating his future property tax bill.  Calculate the tax using a tax rate of 18 mills and home value of $160,000.
Definition

1 mill = 1/10 of a percent


18 mills = 1.8%


160,000 x .018 = $2,880

Term
Define "restructuring debt".
Definition
Entities restructure debt when they issue new debt at lower interest rates to pay off older debts at higher interest rates.  They do it for the same reason homeowners refinance their mortgage, to save money.
Term
What debt instrument would be used when several governement entities participate in a lease-purchase agreement?
Definition
Certificates of participation.  Like long-term leases, certificates of participation are an alternative to traditional bond financing.  The "participants" are investors who purchase, not a bond, but the right to participate in the income stream from the lease payments.
Term
How are self financing, special purpose governments funded?
Definition
User fees.  They provide a service and charge for it such as utilities.
Term
What must tax policies address?
Definition
Why to tax, what to tax, who to tax, and how to administer the tax as well as the tax rates.
Term
Name different types of government grants.
Definition

Formula grants


Discretionary grants


Block grants

Term
How is government borrowing constrained?
Definition
Through constitutions and statutes, bond covenants and debt policies.
Term
Describe tax equity.
Definition
Tax equity continually reappears in tax policies.  It is the principle that taxes should treat taxpayers fairly.  When applied to income taxes, horizontal equity means different taxpayers with the same income level should pay the same amount of tax.  Vertical equity means taxpayers with different incomes levels should pay different amounts of tax.
Term
Identify some different tax considerations.
Definition

  • Ability to pay
  • Benefit received- is it worth establishing a new tax or raising existing taxes.
  • Collection efficiency- cost of collecting the tax should be minimal compared to the revenue generated.
  • Social and economic goals- social security tax for example ensures a minimum level of income for elderly citizens
  • Tax expenditures- exceptions to tax laws and regulations are called tax expenditures because they "cost" the public in terms of lost revenue.
  • Dedicated tax- a dedicated tax is leveied for a specific purpose and the proceeds are deposited into an account restricted to that purpose.

Term
What are the main sources of revenue for federal, state and local governements?
Definition

Income taxes are the major source of revenue for the national government an dmost states.  Levied on both individuals and corporations.


Sales taxes and property taxes are the two main sources of revenue for local governments. 

Term
Describe income tax characteristics.
Definition

  • Broad based taxes
  • Graduated tax rates, exemptions and deductions are applied to enhance horizontal and vertical equity
  • Usually progressive tax
  • Payroll taxes such as social security and medicare are not classified as income taxes, however within a broad range of income they are proportion to income thus considering it a regressive tax.

Term
Advantages to income taxes.
Definition

  • Less costly to administer than other taxes.
  • Compliance levels tend to be high
  • Income taxes respond to general economic conditions such as inflation and recessions

Term
Decribe real property taxes
Definition

  • Most familiar form of a wealth tax
  • Greatest challenge to the real property tax system is the appraisal and subsequent assessment of property values
  • Rates usually expressed in mills (1/10 of a cent or 1/1000 of a dollar)

Term
Describe Personal Property tax.
Definition

 

  • Similar to real property however personal property is mobile or can be transferred between locations.
  • Business  pay personal property tax on such items as furniture, tools and farm equipment however some smaller tools may be exempt.

 

Term
Describe intangibles tax.
Definition

  • Many assests are subject to an intangibles tax.
  • Include assets such as stocks and bonds, savings accounts and trademarks.
  • Tend to be highly controversial

Term
Describe estate and inheritance taxes.
Definition

  • Estate taxes and inheritance taxes are taxes on wealth.
  • One of the oldest forms of taxaction. 
  • Federal government only levies the estate tax
  • Some states levy both.

Term
Describe Consumption taxes.
Definition

Consumption taxes are an important source of revenue to most states and many local governments.  While consumption taxes are regressive, some argue they provide a degree of "fairness."  


Examples include sales, use, excise and value added taxes.

Term
Describe Sales Tax.
Definition

  • Most common consumption tax
  • General sales taxes are deposited into the general fund while dedicated sales taxes such as gasoline may be deposited into a special fund.
  • Certain items such as food consumed off the premise and childrens clothes are often excluded to mitigate the regressive nature of sales taxes
  • May be imposed by governments at any level, though a local government cannot impose sales tax unles authorized to do so by the state.

Term
Describe Use Tax.
Definition

  • Charged on goods purchased from out-of-state and used within the state.
  • Substitute sales tax
  • Disadvantage is the reliance of voluntary compliance, especially for individual taxpayers.

 

Term
Describe excise tax.
Definition

 

  • Applied to the consumption of a particular type of good, or to participation in a certain type of activity.
  • Usually paid when purchases are made and may be included in the price (gasoline)
  • Sometimes imposed on occupations, licenses and for enjoyment of certain privilages.
  • May be paid in conjuction with building permits, dump fees and even parking spaces
  • Advantage is that they link taxation to specific services and often used to fund specific things. Gasoline to highway funds.

 

Term
Describe Contracts
Definition
The first form of intergovernmental financing.  They are voluntary arrangements entered into for the mutual benefit of both entities.  Common contracts between local governments or state and local governments often define joint use of buildings and equipment and facilities.
Term
Describe Category Grants.
Definition

  • Can be classified as formula grants or discretionary grants.
  • Can only be used for activities in a specific category of purpose.

Term
Describe formula grants.
Definition

  • Amount based on a formula contained in law or regulation.  (Factors include: Population, per capita income, degree of substandard housing.)
  • Many education grants are formula grants.
  • Amount received based on eligibility requirements satisfied.

Term
Describe Discretionary grants.
Definition

  • Transfer funds to be used for a specific purpose
  • Awards are up to the discretion of the entity providing the funds
  • Competitive
  • Awards based on subjectivity, amount of funding and quality of proposals.

Term
Describe Block Grants.
Definition

  • Transfer funds for broadly defined purposes
  • A single block grant may provide funds for several related activities
  • Contain comparatively few requirements for how money is spent offering maximum flexibility to the state and local govts.

Term
Describe Shared Revenues.
Definition

  • Usually associated with revenue sharing between state and local governments.
  • Most instances, shared revenue funs are provided with few constraints so that local entities have maximum flexibility.
  • Often provided per a formula, such as population per county or miles of road per county.

Term
Describe some Grantor expectations.
Definition

  • Accountability- Comply with terms, end receipients are eligable receipients
  • Proper control and management of transactions
  • May expect recipient to comply with certain cross-cutting requirements.  This refers to broad goals of the grantor that are not directly related to the purpose of the grant.
  • For example recipients may be required to uphold certain civil rights and environmental protection objections.

Term
Descibe some other forms of revenue.
Definition

  • License fees- often associated with business activity
  • User fees- charged imposed on specific beneficiary of a good or service.  Used to fully or partially recover costs and expand services without raising taxes.
  • Donations- Voluntary contributions that confer no rights or benefits to the giver
  • Lotteries and Gambling
  • Investments- See Investments Flashcard

Term
Describe some investment characteristics.
Definition
Most entities establish investment policies that define the type and grade of investment vehicles eligible for public funds.  Many states sponsor Local Government Investment Pool that operates like a mutual fund.  Government Finance Officers Association publishes guidelines for investment pools.
Term
Describe the purpose of debt.
Definition

  • Most common purpose for state and local levels is to fund capital improvements
  • May also be used to provide interim financing in anticipation of future receipts.  Tax anticipation notes (TANs), Revenue Anticipation notes (RANs) or Grant Anticipation nots (GANs)
  • Issue new debt that allows them to pay off existing debt at more favorable interest rates.
  • Advanced refunding- New debt proceeds are used to buy securites that are placed in escrow.  The interest is used to pay of old debt.
  • U.S. Constitution allows the govt to use debt to fund current operating expenses.

Term
Debt limitations and Covenants
Definition

All governments are limited as to the amount of debt they can incur.  For state and local govts the debt limit is establised in the constitution or in statutes.  

 

Covenants are legal requirements pertaining to a specific bond issue.  Typically define the maturity date and revenue stream that will be used to repay the debt, the interest rate and repayment schedule.

Term
What are the three E's of Government Debt?
Definition

Equity- Repayment of debt should be borne by those benefiting from the project.

 

Effectiveness- The debt issue should provide sufficent funds for the project.

 

Efficiency- Loaned funds should be obtained at the lowest cost possible relative to the risk.

Term
Describe General Obligation Bonds.
Definition

  • Secured by the full revenue base of the issuer.  "Full faith and credit"
  • Are more likely to be subject to debt limits
  • Used to fund projects that benefit all citizens served by the government.
  • Lower interest rates than revenue bonds
  • Generally require voter approval

Term
Describe Revenue Bonds.
Definition

  • Secured by a specific source of financing, such as revenue from the project being funded or a dedicated tax.
  • Usually higher interest rates

Term
Describe term bond, serial bond and warrant.
Definition

  • Term bond- is a large block of bonds maturing in a single year, usually many years after issuance.  Usually associated with a sinking fund.
  • Serial Bond- features maturities every year, annually or semi-annually.
  • Warrants- Governments may use warrants to pay off debt.  It is is an order by authorized executive official that directs the treasury to pay a specific sum to the bearer.  Similar to a check.

Term
Describe Notes.
Definition

Generally short term but play a supporting role in long term financial management.


Short-term notes may be used as a financial management tool in anticipation of other revenue.  (BAN and RAN)


Lower interest rates than bonds

Term
Describe Certificates of Participation
Definition

  • Like long-term leases, certificates of participation are an alternative to traditional bond financing.
  • Participants are investors who purchase the right to participate in the income stream.  
  • Typically financed through a financial institution and the lease payments are to the institution which provides the investors a share of the payments.
  • Asset may transfer to the govt when the lease term ends.

Term
Describe some credit rating factors.
Definition

  • Covenant or details of the individual issue
  • Debt management issues
  • Economic base
  • Financial Performance
  • Administrative issues

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