Hypothecated tax

Hypothecation in the taxation sense is the dedication of the revenue of a specific tax for a specific expenditure purpose. (The original definition of hypothecation is a pledging of assets: the expected revenue from the tax in question is pledged to a particular cause). It is otherwise known as ring-fencing.

Dedicated taxes are often subject to unexpected shortfalls and surpluses. This may create political pressure to adjust the tax, to budget non-dedicated revenues for the purpose in question, or to reallocate surplus funds to other purposes. Examples of hypothecation in this sense include the gasoline tax in the United States which is dedicated, or "earmarked" in the jargon of American public finance, to the funding of transportation infrastructure.

A common example in many European countries is a television licence. Here, all owners of television sets are obliged to pay the government an annual fee to use their televisions. The proceeds of the fee are then used to fund public broadcasting. Another example is a dedicated tax on the private trading of securities (for example, 0.3 cents per dollar traded) used to fund public works programmes directly or to pay the finance costs of such programmes.