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How Alternative Revenue Structures Are Changing Local Government

Tracy M. Gordon and Kim Rueben

May 2010, English

In this paper, Tracy M. Gordon and Kim Rueben note that the revenue mix for local government changes frequently in response to economic shocks, policy shifts, and technological advances in tax collection and administration, and that there seems to be a tendency toward the continuation of past practices in local public finance. Thus, if the property tax is a major revenue source for a municipality, local officials may continue with this path. Many state lawmakers have considered relief measures for property tax limits in view of the fiscal needs of local governments. For example, Florida, Georgia, Indiana, and Texas contemplated the possibility of eliminating their property tax limits altogether in 2007. Despite suggestions from many authors that other local taxes should be used, Gordon and Rueben suggest the continuous prevalence of the property tax.

When considering the impacts of alternative revenue sources on local budgets, Gordon and Rueben believe that including public expenditures in the analysis is critical. Although linking revenues to spending is hard to do, voters must realize the implications of their decisions about any tax policy changes. They argue that the key for any revenue system is transparency and accountability. The only way to increase revenues is for municipalities to deliver better outcomes for the taxes levied.

Gordon and Rueben also think that the 2008 financial crisis might have created a favorable time to rethink the current structure of U.S. fiscal federalism. Municipal expenditures that have large spillovers might be reassigned to higher levels of government. The provision of club-goods-like public services should be delegated to the private sector. For local revenues, they argue for state expansion of tax instruments available to localities and a relaxation of federal government rules on intergovernmental transfers.

Gordon and Rueben also observe that data for comprehensive analyses of local fiscal dynamics are limited. For example, systematic information about development impact fees, TIFs, BIDs, and HOAs does not exist, leading to reliance on simulation models and stylized data to examine the fiscal impacts of these instruments.

This paper was presented at the Lincoln Institute’s Land Policy Conference of 2009 and is Chapter 16 of the book Municipal Revenues and Land Policies.