Fiscal First Aid
Levy a Broad Tax Increase. A distressed government likely has not earned the trust of its citizens. Large tax increases may further alienate citizens, reducing their support for government, at best, and prompting a tax revolt at worst. Rather, governments should concentrate on maximizing efficiency and focusing on priority services.
- While a broad tax increase is fair – everyone pays – it may not be in the best long-term interest of government. It could reduce citizen support for government, hurt economic competitiveness, and remove pressure for needed reform. It is essential to carefully evaluate all legal and economic implications of a proposed tax increase. There may be limitations on the government’s capacity as well as limitations on overlapping rates that cause conflict. Further, a tax increase may cause negative results on collections if there are large taxpayers adversely affected. Perceptions of inequity or misfeasance may also trigger expensive and extended legal battles.
- A tax increase should always be accompanied by a plan to cuts costs. This is vital for retaining credibility with the public.
Create Special Taxing Districts. Some states allow local government to create special districts for specific purpose and that levy their own tax. This can off-load service responsibilities and/or create a new source of revenue.
- Implementing special taxing districts to get around local tax limitations increases government fragmentation, thereby increasing the total price of government citizens are subject too and therefore their ability to support public services.
- Issue specific taxation creates misperceptions about community and organizational priorities leading to funding discrepancies that are difficult to address due to the myriad restrictions established through special districts, authorities, and dedicated taxes.
Human Resources and Benefits
Make Across-the-Board Wage Cuts. This destroys morale and drives off high-performing employees.
- This destroys morale and drives off high-performing employees.
Defer Compensation. If the budget doesn't exist to pay employees today, benefits that provide compensation in the future can be provided. Examples include post-retirement health benefits or increased pension benefits.
- This only defers the financial reckoning day and can create extremely large liabilities that hit the budget much sooner than expected. This is a slippery slope and can be difficult to reverse.
- Use relevant data like OPEB liability and pension funding ratios to fully disclose and analyze the cost and impact of deferred compensation.
BP Ensuring the Sustainability of Other Postemployment Benefits (2007)
Large or Sustained Across-the-Board Budget Cuts. Across the board cuts usually reduce the value created by public services, making government seem ineffective and this problem is amplified when the cuts are large or when across-the-board cuts are repeatedly used as first aid tactic. Reduced public value lowers citizen opinion of government, making it less likely they will support new taxes and fees. It could also really hurt the poor if crucial social services are diluted. These do not reflect priorities of the organization or take goals into consideration.
- Across-the-board cuts have certain, cursory sense of fairness because they “spread the pain” equally.
- However, this assumes that all services are of equal importance to the citizens and that programs have roughly equal ability to absorb cuts.
- It can be extremely difficult to communicate the impacts of across-the-board cuts to the public and governing body.
- There is a limited amount of cuts that can be made or that can be sustained for an extended period without directly impacting services. There may not be any more “fat to cut” out of City Hall.
- It can be important to future priority discussions and for citizen support of service reductions that citizens be involved and impacted by reductions. If future cuts are anticipated or the reductions are quasi-permanent, they can be mislead by the impression that earlier cuts were not real or were only a reduction of “waste.”
Fiscal First Aid Quick Reference: Across the Board Budget Cuts