When government policy makers face a surplus at the end of a year, there is usually intense political pressure to either increase spending on services or to reduce tax rates, both of which can lead to long-term financial problems. Decreasing taxes can cause political problems when future economic conditions require a higher tax rate again, and increasing services can lead to waste and violation of the public mandate if citizens fail to support new programs.
In 1997, the City of Farmers Branch, a northern suburb of Dallas, created the Tax Divided Program in an effort to maintain a constant tax rate and continue to offer a high level of service while rebating surplus funds to taxpayers. Faced with high tax revenue, but no indication that their long-term financial situation would remain as positive, the city decided that refunding dividends above their revenue needs would allow them to keep a steady level of taxation and spending.
The program is based conceptually on the private sector practice of declaring a dividend after certain objectives are met, instead of the common governmental attitude of spending all possibly tax revenues on new programs even when existing needs are satisfied. An independent audit evaluates the city's financial, service, and capital needs each year, after which a portion of any surplus funds is returned to taxpayers in the form of dividend checks. While Alaska had been giving checks to its residents on surplus oil revenues for years, this is the first local program of this sort to be successfully implemented. Many other municipalities have expressed interest in the program.
The program serves all tax-paying individuals and businesses, around 13,000 separate households and commercial entities, in Farmers Branch. Checks are sent directly to taxpayers, in proportion to the amount of property tax paid during the previous fiscal year. In 1997, over $560,000 were returned to taxpayers, with $720,000 more in 1998. Regardless of the fact that each check is for an average of around $50, the very fact that the government is returning money to citizens has been a great psychological boon for the citizens of Farmers Branch, who trust the government much more to exercise good stewardship of their tax dollars.
Even during tighter times, taxpayers now have evidence that their government does not blindly spend every dollar available to them, but makes sensible decisions about town priorities before deciding how much to use. In 1999, although the city found a budget surplus, they determined that all capital needs of the city were not being adequately met because of increased construction costs, so the dividend was deferred.
The level of control the dividend program allows for state finances keeps the local government responsive to changing needs and priorities, while maintaining a level of fiscal responsibility through the fixed tax rate. Instead of lowering taxes during boom years and raising them again when the government is more pressed for money, the dividend program releases much of the pressure for officials to constantly fluctuate taxation and spending from year to year.