Public Finance

What's the Problem?

Municipal budgets across the United States are distressed. The COVID-19 pandemic has added to long-standing problems, as over the last forty years federal and state governments have pushed responsibilities onto the local governments without providing adequate financial resources. Between 1977 and 2017, state and local governments collected less than 96 cents in revenue for every dollar of spending. These shortfalls have led to deficits and reduced services, which disproportionately impact working-class communities and communities of color—the same communities hit hardest by the pandemic. As corporations and wealthy individuals have increasingly avoided paying their fair share of taxes, local governments have become dependent on regressive mechanisms like service fees, which also disproportionately impact disadvantaged communities.

Local finance and revenue policy should adopt high-road strategies to improve public investment by placing financial burdens on those best equipped to bear them. After state and federal transfers, local governments rely primarily on taxes and user fees to fund programs and operations. Properly structured taxes, for both individuals and corporations, are a much more equitable means than fines and fees and should be used whenever possible. For local policymakers interested in learning more about progressive finance and revenue policy,  Local Progress provides a helpful introduction.  

What are People Currently Doing? 

Many state governments prevent municipalities from levying local income taxes (see the ProGov21 Home Rule Roadmap for more on state preemption of local laws), but 17 states allow them. Where possible, local governments should enact progressive income taxes with refundable Earned Income Tax Credit (EITC)  provisions that provide cash to lower-earning families and strengthen local economies. New York City  and Washington, DC, for example, both increased their local EITC to provide greater support to low- and median-income residents.  

Property taxes are another critical source of municipal revenue and while many states cap rates or preempt innovative strategies, there are still options for local governments to generate revenue equitably and effectively. Properties that are owned by tax-exempt entities still consume government services, shifting costs onto residents. To better allocate these costs, municipalities can institute Payments in Lieu of Taxes (PILOTs) programs, which negotiate voluntary payments from tax-exempt entities to cover costs they incur by accessing public services. The arrangements vary: some take the form of long-term contracts with routine annual payments, others are irregular one-time payments, and still other PILOTs agreements include the provision of services from NGOs to the community. Boston’s PILOT project raised $17 million in revenue and created a democratic process by which organizations could negotiate payment contributions. The Lincoln Land Policy Institute is a leader in PILOTs policy and has published best practices reports and other research in this area. PILOTs programs, however, should not be used as backdoor subsidies for taxpaying entities. Take the example of Memphis, which created a budget crisis by offering corporations PILOTs agreements that reduced property tax revenue in exchange for economic development goals that were never achieved.

Other types of property taxes can raise revenue while incentivizing socially productive uses for real estate. Mansion taxes are real estate taxes that can take the form of either progressive annual property taxes (that charge higher rates for high-value luxury properties) or real estate transfer taxes that increase at a certain dollar amount. Los Angeles’ mansion tax applies a 4 percent fee to real estate transfers over $5 million and a 5.5 percent fee on real estate transfers over $10 million, with proceeds being used on affordable housing and homelessness prevention initiatives.  

Local property taxes can also be structured to disincentive land speculation and maximize the social value of real estate. Vacancy taxes are taxes charged to owners of unused or underused property to create financial penalties for real estate speculation and force property owners to make their holdings useful for the local economy. Vancouver’s vacancy tax charges property owners one percent of their property’s assessed value if it is unoccupied for more than half of the year. In the US, Oakland has passed a vacancy tax, and cities such as San Francisco are currently evaluating proposals. Split-rate property taxes, which tax land separately from buildings and improvements on it, are an economically efficient tool for ensuring that property owners maximize their real estate’s social and economic value. Split-rate taxes have recently been considered locally in Detroit and at the state level in Minnesota, and are common across the state of Pennsylvania.

One of the most important things local governments can do is establish programs to help residents maximize state and federal tax credits, bringing more money into the local economy and improving residents’ well-being. More than 20 percent of eligible taxpayers fail to claim their federal EITC, depriving local communities and economies of a critical source of investment. To avoid this, local governments in Dayton, OH, and Cuyahoga County, OH have established and publicized free tax preparation clinics to help residents maximize their tax benefits. Additionally, the National League of Cities has created a policy guide for city officials seeking to help eligible residents access and maximize their tax benefits.

Unfortunately, fines and fees for public services and municipal code violations have become a major source of income for municipalities across the United States. Usually, fines and fees are imposed at a standard rate without accounting for income. This system fails to disincentivize the wealthy from over-consuming city services or violating local laws and at the same time traps low-income residents in cycles of debt and incarceration (as was revealed in the investigation of the police shooting of Michael Brown in Ferguson, MO). Where it is possible, local governments should implement progressive fine and fee structures, such as income-based fine scales, ability-to-pay programs, and segmented pricing. San Francisco and Chicago have implemented programs that adjust tickets to income, provide time extensions for those struggling to pay, and sometimes waive old debts in exchange for one-time payments. While such programs are exceptions in the United States, Finland and Sweden have implemented income-based scales that calculate traffic fines based on an offender's daily disposable income, effectively holding wealthy offenders accountable and generating significant amounts of revenue.

Cities that own their utilities can also charge higher user fees to commercial and/or bulk users of utilities. Conservation pricing models that apply higher fees for heavier use, shifting revenue burdens away from residents and onto bulk users like tax-exempt institutions and commercial entities. Austin implemented a pay-as-you-throw program for solid waste services, with pricing scales that charge industrial customers higher rates as they consume more public waste removal services. Cambridge has tiered rates for water and sewer services, with separate metering for commercial and residential users, while Arlington also charges residential users lower rates for water consumption than commercial customers.

Taking it to the Next Level

Special Assessment Districts (SADs) help ensure that everyone benefits when public investment increases the value of privately held land by capturing a portion of public infrastructure-driven real estate appreciation and returning it to local taxpayers. SADs fund public works by establishing supplementary taxes only for parcels that will directly benefit from planned infrastructure. Both Washington, DC and Alexandria, VA have used SAD districts to fund the construction of metro rail stations: when these projects increased the value of nearby real estate, supplementary SAD assessments allowed these cities to capture a portion of this new value to help pay for the infrastructure that drove it. But it doesn’t always have to be construction: Orland, CA created a special assessment ​​to fund new parks and improved maintenance at other parks, while Santa Monica, CA has a special assessment district to conserve green space. Both of these projects increased the value of nearby properties, and SADs allowed the cities to reduce the costs to residents who did not financially benefit. The League of Minnesota Cities has a helpful toolkit on how local governments can best use SADs, examining case studies and best practices for this form of value capture.

Helpers, Allies, and Other Useful Organizations

• Lincoln Institute for Land Policy seeks to improve the quality of life through the effective use, taxation, and stewardship of land. 
• National League of Cities: is an organization of city, town, and village leaders focused on improving the quality of life for their constituents through strengthening local leadership, influencing federal policy, and driving innovative solutions.
• ITEP: The Institute on Taxation and Economic Policy maintains an incredible Microsimulation Tax Model, among many other invaluable resources.
• Local Progress is an organization of local elected officials committed to building power within underrepresented communities, distributing innovative policy ideas, and fighting to reshape what is possible in local communities across the country.