6.2 Property Taxation in the Present
6.2.3 Reliance on Other Revenue Sources
With a decreasing reliance on property tax revenue immediately following the tax revolts and no corresponding cuts in expenditures, intergovern- mental grants, user fees and charges, and miscellaneous revenue have become increasingly important sources of revenue for local governments (O’Sullivan, 2001). Intergovernmental funds have become a major source of local finance as the federal government collects much of its revenue through income and payroll taxes and then transfers a portion to state and local governments (Kahan, 2003). In 1999 intergovernmental revenue among state and local governments rose to approximately twenty-five percent of total revenue, which has primarily been used to finance education (Kahan, 2003). More importantly, however, has been the increasing use among state and local governments of user charges and fees and other tax revenue sources. Local governments are increasingly more reliant on local option sales and income taxes as major sources of revenue. This is due in large part to the increasing property tax limits for municipalities, counties, and school districts as well as the increased use of user charges and fees by special districts (McGuire, 2001).
After the property tax, the second largest source of local government revenue consists of other tax revenues, particularly the local-option sales tax (Brunori, 2003). Thirty-three of the forty-five states that have sales taxes allow local governments a local option (Brunori, 2003). Twenty-three states even allow both cities and counties to levy a sales tax locally (Brunori, 2003). Around the year 2000, sales tax revenues had significantly increased to a level higher than both income and property tax revenue (O’Conner, 2003). These taxes are usually implemented in addition to similar taxes already collected by states by adding a local rate onto the state rate, which is subsequently collected as part of the state tax (Brunori, 2003). In this type of system, vendors typically collect the aggregate sales tax from consumers and remit it to the state. The state subsequently remits the local portion of the collected sales tax to the local government corresponding to where the purchase or transaction was made. Thus, the administrative burdens associ- ated with collecting these taxes fall largely upon the merchants remitting the tax and the state collecting the tax; therefore, local governments spend little money on collecting the taxes. Because of the convenience to both taxpayers and local governments, the local option sales tax has become rather popular for state and local government finance.
There are both advantages and disadvantages to the increased use of other tax revenues, including sales, income and excise taxes. Although more regressive than the property tax, consumers have a tendency to favor sales and excise taxes because they only pay taxes on what they consume (Brunori, 2003). In addition, state governments often implement these taxes and absorb the administrative costs, while local governments must absorb the administrative costs for property tax implementation (O’Conner, 2003). Finally, these taxes are generally more responsive to economic growth than the property tax (O’Conner, 2003). A disadvantage, however, is that these other taxes are already heavily used by state and federal governments making the combined rates very high (McGuire, 2001). In addition, local- option sales and excise taxes are not as reliable as the property tax for producing a stable revenue stream (Brunori, 2003). They are less stable than the property tax, because they fluctuate with the economy. This is one reason that state and local governments suffered from the recession around the beginning of the 21st century (O’Conner, 2003). Moreover, many goods, particularly groceries, medicine, and utilities are exempt from these taxes (Brunori, 2003). Finally, as a result of the shifting economy from a basis of tangible property and manufacturing to one based on services and intangible property, the sales tax base has subsequently reduced (Brunori, 2003).
Despite the lesser reliability of these taxes, however, their importance for state and local finance has increased considerably. Much of this increasing dependence on other sources of tax revenue was brought about by the tax revolts. As of 1977, $5.4 billion in revenue was generated from local-option sales and excise taxes, which was approximately 7%
of total tax revenue (Brunori, 2003). In 1999 these figures had increased to 11% of total tax revenue for a total of $36 billion (Brunori, 2003).
However, these taxes continue to comprise a greater proportion of state tax revenue than local revenue (O’Conner, 2003). As a percentage of total local revenue, these taxes have remained at about 3% for many years (Brunori, 2003). While the aggregate amount of revenue generated from other tax sources has grown, local governments rely more heavily on user fees and intergovernmental aid to replace their lost property tax revenue (Brunori, 2003).
User charges and fees are also common alternatives to the property tax and are primarily used to finance utilities and sanitation services (McGuire, 2001). Almost all governments around the country impose user fees and charges upon the users of many government services such as parks, sani- tation, sewage, airport services, parking, and others (Brunori, 2003).
Between 1973 and 1991, user charges increased 112 percent while the property tax only increased 12 percent (Downing and Bierhanzl, 1996).
The Property Tax: Past, Present and Future g 171
In 1999 user fees made up approximately 20% of total local revenue or
$195 billion, which was an increase from 1992 of 8% and over $60 billion (Brunori, 2003). The increase in user fees and charges is largely the result of the ability of local governments to consistently secure and increase other revenue sources (Brunori, 2003). In addition, user fees and charges are regarded as economically efficient because they are limited in their distribution, usually to the services for which they are collected (Brunori, 2003). Ultimately, they are efficient in that only those who use the service pay the fee (Brunori, 2003).
The limitations to user charges and fees are inherent in the design of this financing mechanism. There are a limited number of services that can be financed through user charges and fees, namely those services to which government can deny access. User charges and fees function similarly to a private market pricing system, in that supply of the public good or service is only allocated to those who value it most, which is determined by their willingness to pay (Downing and Bierhanzl, 1996). Public goods that are nonexclusionary, or exclusion from which would be harmful for the com- munity at large, are not suitable for financing through user charges and fees. Thus, services like providing police and fire protection and clean air are generally not available for user fees (McGuire, 2001). In addition, user charges and fees utilize pricing principles based on marginal cost of pro- duction and distribution and consumer demand (Downing and Bierhanzl, 1996). Marginal costs and demand for public goods vary considerably among communities, which directly affects the price charged for the service (i.e. the user fee), the number of individuals who are able and willing to pay the fee, and subsequently the provision level of public goods financed through user charges and fees. ‘‘Like prices, user charges should reflect the cost of providing additional units of the publicly provided good, a cost that often varies by location’’ (Downing and Bierhanzl, 1996, 263).
Finally, there is only so much local governments can charge for a service before the public will stop using it (Brunori, 2003). However, if the price charged for a good or service does not reflect the actual costs of providing it, there is an incentive for consumers to overuse the service, and the quantity demanded will not necessarily reflect consumers’ willingness to pay the full cost of providing the service (Downing and Bierhanzl, 1996).
For these reasons, the amount of revenue generated from user charges and fees is less able to grow continually or increase drastically. As a result of these limitations it is expected that revenue generated from user charges and fees will level off or decline slightly at some point in the future (Brunori, 2003). Nonetheless, user charges and fees will likely continue to remain a significant amount and important component of local government revenue (Brunori, 2003).