3-part Finance & Budgeting exam questions (PDF attached!)
Part I Number Crunching Questions (10 points each).
1. A Midwestern state aids its institutions of higher education by giving a credit against its income tax equal to 50 percent of any gift to such institutions (subject to a limit of $50 credit per person). Two residents of that state, Mr. Blue (in the 15-percent federal tax bracket) and Ms. Jones (in the 35-percent federal tax bracket), each contribute $100 to an eligible state university.
a. How much will state tax liabilities of each change as a result their gifts?
b. State income tax payments and contributions to charitable organizations (such as universities) are both currently deductible from the base used to compute federal liability. How much will federal tax liability change for Mr. Blue and Ms. Jones as a result of their contributions?
c. Considering both changes in federal and state liability, what is the net after-tax cost of Mr. Blue’s and Ms. Jones’s gifts? (Hint: Subtract the changes in state and federal liability from $100)
d. Suppose the state program changed from a credit to a deduction. If the state tax rate were a flat 3 percent, how much would state liability form Mr. Blue and Ms. Jones change?
e. From the previous computations, which approach (credit or deduction) do you suppose universities in the state would favor? Why?
2. The following data are for city A in Florida in the fiscal year 2011: Budgeted city expenditure $18,000,000 Estimated revenue from grants, fees and licenses $6,000,000 Assessed value of Property $142,000,000
a. What is the city property tax millage rate?
b. The Wooden family has property with assessed value of $150,000 and market value of $250,000. The Wooden family is qualified for the homestead exemption, which is $50,000. What is their tax bill from City A? c. If the Wooden family wants to take the advantage of the portability amendment, they sell the property and buy another one at the price of $300,000. What is the assessed value on the new property? And what is the property tax liability on the new property?
Part II Essay Questions (20 points each, 1 to 2 pages in length):
Please answer the following questions and use some “real-world” examples to support your answers whenever possible.
1. Why is property tax unpopular to tax payers? What property tax relief mechanisms can local government adopt to make it more palatable to tax payers? Please give some real world examples.
2. Most state governments have raised their sales tax rate over the past 20 years, while doing little or nothing to increase the sales tax base. Please explain why this is a serious problem from the long-term viability of revenue stream for state and local governments?
3. City A has decided to shift municipal garbage-collection financing from the property tax to user charges. Describe some ways in which such a system could be implemented and argue user charge is a better way to finance garbage-collection than the property tax.
Part III Analytical question (20 points, 2 to 3 pages in length)
Comparing the effects of three changes to the property tax:
1) Assume that the mayor of your city is concerned about the property tax burden on low-income households. She has asked you to analyze two proposals: (1) a $10,000 homestead exemption on owner-occupied property per household on the property taxes for low-income homeowners (must have income less than $20,000 to qualify); and (2) a comprehensive reassessment of all property. She has asked you to compare the impact on three typical households (please see PDF table.)
* The market value of an apartment is what it would sell for as a condominium.
The other pertinent information for your analysis includes: – all households have 4 persons -nominal property tax rate: 5% of assessed value -official assessment ratio: 50% -assume all property taxes on rental property are passed onto the renter Using this information answer the following questions. Show work in Excel!!
a) Calculate the property taxes paid by each household and the two types of “effective tax rates” (total taxes divided by income, and total taxes divided by market value) for the following three cases:
–without the homestead exemption or reassessment
–with the homestead exemption of $10,000;
–with reassessment of property.
You can assume reassessment means that all estimated market values are brought up to actual market value. The assessed values will adjust to keep the official assessment ratio equal to 50%. Compare the impact of these two proposals on horizontal and vertical equity relative to the present system.
b) If you assume that tax rates can be adjusted so that these two proposals raise the same revenue, evaluate them on the other criteria. Based on your evaluation of all criteria, which would you recommend?