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A Revenue Guidefor Local Government
2nd edition
Robert L. Bland
University of North Texas
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Table of Contents
1. Revenue policy and the local economy
2. Revenue policy choices
3. Strategic revenue choices
4. The property tax
5. The general sales tax
6. Excise taxes
7. The income tax
8. Service charges and regulatory fees
9. Impact fees and special assessments
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Chapter 1
Revenue policy and the localeconomy
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Legal basis for local revenues
Taxing powersTaxing of income, consumption, or wealth (property)
Proprietary powersOwnership and operation of enterprises, yieldingfees-for-service
Regulatory (or police) powers
Regulation of land use Licensing of various professions or activities Inspection and certification of food
establishments
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Three tax bases
Income Personal Corporate
Consumption General sales tax Excise (or selective) taxes
Wealth (property) Estate tax Property tax
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Early warnings
Regional tax and collection rates
Regional business investment
Regional population changes
Local financial condition
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Red flags for revenue problems
Persistent budget deficits
High delinquency rates
High vacancy rates
Aging population and housing stock Repeated postponement of infrastructure
replacement
Stagnant business investment
Steadily increasing tax rates Increased conflict during budget preparation
Little open space available for new development
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Creating a more resilient local economy
Develop a strategic plan
Avoid tax favors
Diversify tax base
Increase use of service charges
Limit nuisance taxes
Promote revenue self-sufficiency
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Strategies forstrengtheningthe localeconomy
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External influences on localgovernment finance
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Trends in local government finance
1. Greater financial self-sufficiency
2. Increased intergovernmental competition fornew business
Tax competition
Tax exportation
3. Citizen distrust of government
4. Increased economic uncertainty Cyclical shifts
Sectoral shifts
Population movement
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Chapter 2
Revenue policy choices:
Principles to guide managers
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Three pillars of support
Equity
Neutrality
Effective administration
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Equity in theory
Horizontal equity
Vertical equity
Regressive distribution
Progressive distribution
Proportional distribution
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Elements of a fair revenue structure
1. Benefits-based levies
2. No tax favors to special groups
3. Ease the burden on the poorest; dontpunish the wealthiest
4. Tailor tax structure to communitys age,
income distribution, and preference forpublic services
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Relationship of political environment
to revenue structure
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Neutrality in theory
Public goods and services
(e.g., national security, land use controls)
Private goods and services(e.g., utilities, recreation, parks, public transit,education)
Merit goods(e.g., a municipal airport, a county library, arabies vaccination program)
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Neutrality in practice
Broader base, flatter tax rate
Benefits-based taxes and charges
Smaller tax rate differentials
Carefully designed business taxes
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Guidelines for business taxation
Any tax on business should be widely usedthroughout the state or region.
Statewide taxation of the less mobile components of
production imposes a uniform tax rate, thusenhancing tax neutrality.
Statewide sales taxes on business purchases arepreferable to local governments defining the tax base.
Business taxation promotes greater cooperationbetween a state government and its cities andcounties.
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Tips for would-be tax reformers (1)
Heavy use of a tax exposes its defects.
Moderate tax rates on a broader tax base arebetter than higher tax rates on a narrower taxbase.
Improving the equity and neutrality ofexisting taxes is better than introducing a
new tax.
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Tips for would-be tax reformers (2)
Incremental tax reforms are more likely tosucceed than sweeping tax reforms imposedover a short period.
Easiest reform is elimination of nuisancetaxes that have low revenue yields and highadministrative and/or compliance costs.
Excise taxes, especially sin taxes andthose borne by nonresidents, are the leastpolitically objectionable.
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Getting to neutrality: Tips for managers
1. There is no perfect tax source.
2. Local tax and revenue policies should minimizemarket distortions and maximize economic growth.
3. Special tax favors increase inequities and lessenneutrality.
4. Local policies that promote horizontal equity arepreferable to those that promote vertical equity.
5. Benefits-based levies offer the best option forpromoting horizontal equity and tax neutrality.
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Phases of effective tax administration
Notification
Collection
Enforcement
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A formal policy statement . . .
1. Helps management and council membersagree on how government should finance itsoperations
2. Provides continuity in the procedures used tofund services
3. Saves time for executives and legislators;requires those seeking an exception toprovide justification; makes it easier to adjustindividual fees annually to comply with policy.
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Chapter 3
Strategic revenue choices:
Using tax policies for economic
and social purposes
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Factors escalating competition for
new business
Increased mobility of business
Stagnant growth, particularly inmanufacturing
Reduction in federal grants and greater
service responsibility shifted tosubnational levels
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Determinants of business location decisions
For location selection Supply and cost of labor
Proximity to suppliers and markets
Presence of agglomeration economies
For plant relocation No expansion space Need to modernize
Need to move closer to labor supply
Other factors
Average level of education in workforce Energy costs
Weather
Transportation networks
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Local taxes and business location
Research has shown that
Taxes have no bearing on location
Nontax factors do influence location decisions
Firms in manufacturing and wholesale trades are more sensitive
to property tax rates than firms in other industries
Inordinately high local tax burdens may promote the emigrationof labor
Above-average property tax burdens will ultimately forceproperty values down as businesses and households relocate tolower-tax areas.
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Tax relief for business investment:
Nontax incentives
Subsidized loans
Industrial development bonds (IDBs)
Land acquisition
Site preparation
Preemployment training
Publicly provided infrastructure
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Tax relief for business investment:
Tax incentives Tax abatement
A temporary reduction in a businesss property (or sales)tax burden.
Tax increment financing (TIF)The dedication of property tax revenue from arearedevelopment to finance development-related costs inthat area.
Tax exemption
The exclusion of certain types of transactions or objectsfrom the tax base.
Tax creditA dollar amount by which a taxpayers liability may bereduced.
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Locally financed tax incentives (1)
Research has shown that tax incentives
Are economically most easily justified inmarginal cases
Are politically most appropriate forgovernments with high and persistent rates ofunemployment
Enable governments to more equitably align the
tax burden on business, particularly for mobilesectors
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Locally financed tax incentives (2)
Research has shown that tax incentives
Aren't as necessary where agglomerationeconomies exist
Are best recovered through increasedrevenues from an income or sales tax ratherthan from the property tax
Are less beneficial to local governments ineconomically linked metropolitan areas.
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A typology of tax incentives
All incentives are intended to influence tax liability.Some do so by manipulating the tax base, others bymanipulating the tax rate, and still others by directlyaltering tax liability.
Tax base Tax rate Tax liabilityTax abatement Split tax roll Tax credit
Tax assessment freeze Tax rate freeze Tax levy freeze
Tax (freeport) exemption Tax dividend
Tax increment financing Tax rebate
Tax holiday Tax amnesty
Tax base sharing
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Pros of tax increment financing (1)
TIF can finance otherwise economicallyinfeasible projects.
City loses no tax revenue.
Property owners within the zone pay full shareof property taxes.
TIF bonds are not included in a citys generaldebt obligations.
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Pros of tax increment financing (2)
Development is financed from increasesin tax revenues generated.
Once TIF bonds are retired, the city andother affected taxing units get theadvantage of the full tax base andincreased tax revenues.
No voter approval is required.
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Cons of tax increment financing (1)
Taxpayers outside the district must pay forincreased service needs that result fromredevelopment.
There is no voter accountability.
Cities may abuse the program by Capturing taxes on development that would
have occurred anyway or using captured taxrevenue to provide basic city services
Stretching the definition ofblightto allow use ofTIF in areas that dont need publicly subsidizedassistance.
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Cons of tax increment financing (2)
TIF debt is more expensive to service.
Development plans cant be easily altered.
Other taxing units must give up part oftheir tax revenues with no voice in howthat money is spent.
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Guidelines for using tax incentives (1)
Leaders should develop a strategic planthat identifies
The communitys economic strengths,
weaknesses, opportunities, and threats Goals, measurable objectives, and
strategies for achieving them
Measurable benchmarks for assessingprogress.
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Guidelines for using tax incentives (2)
A local government should have access to atleast one broad-based nonproperty tax tocapture more revenue benefits fromeconomic growth.
Larger jurisdictions are better able to ensurea good match between taxpayers who bearthe cost of incentives and those who benefitfrom the increased economic activity.
Economically declining jurisdictions tend togive away too much when trying to attractnew business.
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Guidelines for using tax incentives (3)
Where agglomeration economies alreadyexist, tax incentives arent needed.
Tax incentives are most justified forindustrial and technology development.
In the long term, locally financed taxincentives shift the cost of services toother taxpayers, providing an incentive forthem to move to a lower-tax area.
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Examples of broad tax relief measures
Proposition 13, California, 1978
Proposition 2-1/2, Massachusetts, 1980
Proposition 62, California, 1986
Taxpayer Bill of Rights (TABOR),Colorado, 1992
Act 77, Pennsylvania, 1994
Hancock Amendment, Missouri, 1996
Proposition 218, California, 1996
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Noted repercussions of Proposition 13 (1)
Greater concentration of decisionmaking at state level
Significant reduction in localgovernment fiscal and politicalautonomy
Less local government accountability
Marked increases in horizontal inequitiesbetween new buyers of property andlong-term residents
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Noted repercussions of Proposition 13 (2)
Significant shift in property tax burden tohome owners and away from businessowners
Chronic housing shortages, resulting inlower profit margins for newerdevelopments
Competitive disadvantages for newercommercial businesses
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Disasters and revenue policies
Emergency management involves
Mitigation
Preparedness
Response
Recovery
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Chapter 4
The property tax
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Municipal government dependence on
the property taxRevenue as a percentage of general revenues
__________________________________________________________
Revenue source 1991-92 1996-97 2001-02__________________________________________________________
Property taxes 25.1 22.7 22.8All other taxes 22.3 23.9 24.2Service charges 18.7 20.9 20.4
Utility charges 22.1 21.4 21.5
Other non taxes 11.9 11.1 11.1
100.1 100.0 100.0
Total general revenue(in millions)a $161,293 $202,674 $255,220
_____________________________________________________aIncludes utility charges but excludes intergovernmental aid, liquor store income, and
insurance trust revenue.
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County government dependence on
the property taxRevenue as a percentage of general revenues
__________________________________________________________
Revenue source 1991-92 1996-97 2001-02__________________________________________________________
Property taxes 43.5 38.6 38.4All other taxes 15.0 17.0 17.1Service charges 25.6 29.1 29.1
Utility charges 1.8 2.2 2.1
Other non taxes 14.1 13.1 13.2
100.0 100.0 99.9
Total general revenue(in millions)a $94,808 $122,161 $161,483
_____________________________________________________aIncludes utility charges but excludes intergovernmental aid, liquor store income, and
insurance trust revenue.
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Types of property
Real propertyLand
Farmland Open spaces Timberland
MineralsImprovements
Buildings (residential,commercial, industrial)
Infrastructure Underground
improvements
Personal propertyTangible
Inventory Equipment Vehicles
Jewelry Artwork Furniture
Intangible Stocks Taxable bonds/notes Insurance policies Bank deposits Patents, copyrights Trademarks Accounts receivable
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Establishing taxable value
Terms to understand
Market value
Sales price
Consideration
Appraised value
Sales comparisonmethod
Cost method
Use (or production)
value
Mass appraisal
Assessed value
Acquisition value
Equalized value
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Advantages of the property tax
Provides a stable source of revenue
Reaches nonresident property owners
Finances property-related services
Is difficult to evade
Promotes local autonomy
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The property tax cycle
AppraisalDetermines the value of property for tax purposes,using legally specified standards of valuation
AssessmentAdjusts appraised value to determine the taxablevalue of property
CollectionInvolves the preparation and distribution of taxnotices to both current and delinquent taxpayers
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Strategies for improving property
tax collection: Current taxes Use well-designed tax statements
Mail reminder notices 2-3 weeks before taxes
are due Keep taxpayer records current, especially
mailing addresses
Build taxpayer goodwill through more
convenient collection points and office hours
Apply penalties and interest rates thatdiscourage delinquent payment
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Strategies for improving property tax
collection: Delinquent taxes
Pursue delinquencies immediately and aggressively
Increase the intensity and urgency of each
successive notice of delinquency Use discretionary powers (e.g., setoff provisions)
Contract out collections to a law firm or collectionagency
Publish names of taxpayers and amounts owed in anewspaper
Use small-claims court for minor cases
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Public attitudes toward taxes
Percentages identifying tax as the least fair________________________________________________
Type of tax 2001 1994 1990________________________________________________
Property tax 22 28 28
Federal income tax 30 27 26
State income tax 13 7 10
State sales tax 13 14 12
Dont know 10 11 9
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Taxpayer dissatisfaction (1)
Reason forTax falls on unrealized capital gains, making it punitive forthose who are property rich but cash poor
Measures to reduce Tax liability freeze
Tax rate limits or freeze
Homestead exemption
Tax deferral program
Split tax roll
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Taxpayer dissatisfaction (3)
Reason forAnxiety about appraisal
Measures to reduce
Full disclosure or truth-in-taxation Fractional assessments
Cap on increase in assessments
Classification of property values
Use-value appraisals Acquisition-based appraisals
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Taxpayer dissatisfaction (4)
Reason for
Inequitable assessments and appraisals
Measures to reduce
Full-value assessments
More frequent reappraisal
Full-time appraiser
State oversight of local appraisal practices
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Steps in full disclosure
1. Determine a tax rate that will yield the sametax levy produced in the preceding year. Thisis called the effective orconstant yield rate.
2. Publish the effective rate in the newspaper.
3. Adopt a tax rate that will generate sufficientrevenues to balance the current operating
budget, and advertise or notify propertyowners of the percentage difference betweenthe final rate and the effective rate.
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IAAO appraisal standards
Intra-area coefficients of dispersion (CDs)for single-family residential property shouldbe less than 10 percent.
Intra-area CDs for all other types of propertyshould be less than 15 percent.
Where property is classified and assessedat different fractions of appraised value, the
average assessment ratio for each classshould be within 10 percent of the legallyprescribed level of assessment.
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Chapter 5
The general sales tax
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The role of the general sales tax
Once one level of local government has access to it,pressure builds to extend authority to other levels.
Over time, states tend to decouple their tax basefrom that of their local governments.
Tax rates tend to rise as expectations for servicesgrow and other revenue sources become limited.
Local governments increasingly rely on it becauseof its greater responsiveness to economic growth.
The more dependent a locality is on the tax, themore vulnerable its operating budget is tofluctuations in the business cycle.
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Variations of local control
Local Local Local
No local discretion discretion discretion Local
control over base over rates over liability administration
(15) (4) (22) (3) (7
a
)
_____________________________________________________Note: Numbers in parentheses reflect the number of states in which each
variation exists.
a Local administration is available in seven states. In Alaska, which hasno sales tax, and Louisiana, local governments must collect their ownsales tax. Most smaller local governments in the other five states opt forstate administration while the more populous cities and counties preferto enforce and collect the tax locally.
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Municipal government dependence
on the general sales taxRevenue as a percentage of general revenues
__________________________________________________________
Revenue source 1991-92 1996-97 2001-02__________________________________________________________
Property taxes 25.1 22.7 22.8
General sales tax 7.5 8.1 8.4Selective sales tax 5.1 5.3 5.5
All other taxes 9.7 10.5 10.3
Service and utility charges 40.8 42.3 41.9
Other non taxes 11.9 11.1 11.1
100.1 100.0 100.0Total general revenue
(in millions)a $161,293 $202,674 $255,220
_____________________________________________________aIncludes utility charges but excludes intergovernmental aid, liquor store income, and
insurance trust revenue.
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County government dependence on
the general sales taxRevenue as a percentage of general revenues
__________________________________________________________
Revenue source 1991-92 1996-97 2001-02__________________________________________________________
Property taxes 43.5 38.6 38.4
General sales tax 8.7 10.1 9.7Selective sales tax 2.1 2.3 2.5
All other taxes 4.2 4.6 4.9
Service and utility charges 27.4 31.3 31.2
Other non taxes 14.1 13.1 13.2
100.1 100.0 100.0Total general revenue
(in millions)a $94,808 $122,161 $161,483
_____________________________________________________aIncludes utility charges but excludes intergovernmental aid, liquor store income, and
insurance trust revenue.
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Factors affecting the sales tax base
Inclusion of services
Internet sales
Exemptions for food
Population changes
State regulation
Tax base conformance
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Issues in designing a local sales tax
Effect on local retail sales
Effect on the property tax burden andgovernment spending
Impact on the distribution of tax burdens
Exportability
Coordination of rates
Dedication of revenues to particular services
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State concerns when granting local
governments access to a sales tax
Should voter approval be required?
How much discretion should localgovernments have in choosing a tax rate?
Should tax liability be based on point of saleor point of delivery?
Should the state collect and enforce the tax?
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Chapter 6
Excise taxes
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Common types of excise taxes
Benefits-based taxes Gross receipts taxes on utilities Hotel/motel occupancy
Motor fuels
Sumptuary (sin) taxes Alcohol / mixed drink Tobacco Gasoline and diesel fuel
Privilege taxes
Occupation privilege Admission Restaurant meal Deed transfer (real estate) Bank franchise
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Trends reflecting revenue potential
Large urban cities and resort communities make thegreatest use of excise taxes.
Use of locally levied excise taxes varies widelyamong states.
Gross receipts taxes on utilities are the largestsource of excise tax revenue for municipalities.
Dependence on excise tax revenue has grownamong cities and counties.
The greater the use of excise taxes with broaderbases, the heavier the dependence on excise taxrevenue.
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Municipal government dependence
on excise taxesPercentage of Number of statestotal excise tax where municipalities
Type of excise tax revenue, 2001-02 levy tax, 2002_____________________________________________________
Public utilities 61.6 40
Hotel/motel occupancy 15.0 37Restaurant 4.0 14
Motor fuels 2.2 9
Alcoholic beverages 1.7 8
Tobacco products 0.9 19
Other excise 14.6
Total excise revenue
(in millions) $13, 964.83__________________________________________________________
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County government dependence on
excise taxes Percentage of Number of statestotal excise tax where counties
Type of excise tax revenue, 2001-02 levy tax, 2002____________________________________________________
Hotel/motel occupancy 20.0 38
Public utilities 28.5 27Motor fuels 19.0 12
Alcoholic beverages 3.0 13
Tobacco products 1.7 8
Restaurant 3.0 14
Other excise 25.0
Total excise revenue
(in millions) $4, 034.67____________________________________________________
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Hotel/motel occupancy taxes:
Issues of concern Effects on local business
Convention and tourism industries Price inelasticity
Effects on local government budgets Promotion of tourist-related services Income elasticity
Administering the tax
Frequency of remittance Enforcement powers Auditing authority
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Motor fuels taxes: Issues of concern
Effects on sales
Potential border-city/county effects Gasoline consumption Distribution of tax burden
Coordination of tax rates
Regional/countywide imposition
Pro rata revenue allocation
Administering the tax Uniform adoption and rates State collection
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Sumptuary, privilege, and other
non-benefits-based taxes
Significant border-city/county effects
High administrative costs
Low revenue yield
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Significant legislation
Tax Reform Act of 1986 State and local sales taxes no longer deductible
from federal returns
State and local income and property taxes stilldeductible
American Jobs Creation Act of 2004
Restored deduction for state and local sales taxes,but only if income liability isnot deducted
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Municipal government dependence
on income taxesRevenue as a percentage of general revenues
__________________________________________________________
Revenue source 1991-92 1996-97 2001-02__________________________________________________________
Property taxes 25.1 22.7 22.8
General and selective sales tax 12.6 13.4 13.9Income taxes 6.3 6.8 5.9All other taxes 3.4 3.7 4.4
Service and utility charges 40.8 42.3 41.9
Other non taxes 11.9 11.1 11.1
100.1 100.0 100.0Total general revenue
(in millions)a $161,293 $202,674 $255,220_________________________________________________________aIncludes utility charges but excludes intergovernmental aid, liquor store income, and
insurance trust revenue.
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County government dependence on
income taxesRevenue as a percentage of general revenues
__________________________________________________________
Revenue source 1991-92 1996-97 2001-02__________________________________________________________
Property taxes 43.5 38.6 38.4
Income taxes 1.6 1.8 2.0All other taxes 13.4 15.2 15.1
Service charges 25.6 29.1 29.1
Utility charges 1.8 2.2 2.1
Other non taxes 14.1 13.1 13.2
100.0 100.0 99.9Total general revenue
(in millions)a $94,808 $122,161 $161,483_________________________________________________________aIncludes utility charges but excludes intergovernmental aid, liquor store income, and
insurance trust revenue.
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Tax rate x tax base = revenue yield
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Types of income
Personala Business ________________ ___________________Earned Unearned Proprietaryb CorporateWages Interest Net profits Net income
Salaries Dividends Gross income
Tips Capital gains
Commissions Rent
Royalties
Inheritancec
Giftsc
a The sum of earned and unearned sources.b Unincorporated businesses and professions.c Normally taxed separately and not included in income tax base.
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Steps in establishing tax liability
Step 1: Define gross income
Step 2: Deduct adjustments
Result: Adjusted gross income (AGI)
Step 3: Deduct personal exemptions
Step 4: Deduct standard (or itemized) deductions
Result: Taxable income
Step 5: Multiply taxable income by appropriate tax rate
Step 6: Deduct tax credits
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Income tax bases used
Narrowest Broadest________________________________________________
Earned only Earned and Personal and Earned, Personal,proprietary proprietary proprietary, proprietary,
and corporate and corporate
Alabama Ohio Indiana Philadelphia MichiganPennsylvania Maryland Ohio New York City
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Issues in designing a local income tax
Effects on the local economy
Effects on local government budgets
Commuters
Local government discretion in adoptionand administration
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Strategies for taxing commuters
Tax credited to Commuters taxed Tax credited jurisdiction of at a lower rate to jurisdictionemployment than residents of residence
Kentucky Michigan Indiana
Kansas City, Mo. Philadelphia New York City
St. Louis, Mo. Yonkers, N.Y. Pennsylvania
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Benefits of state administration
Taxpayer compliance costs reduced
Collection costs lowered
A more uniform level of enforcement
Only one audit necessary
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Government goods and services
Public goods and services
(e.g., national security, land use controls)
Private goods and services
(e.g., utilities, recreation, parks, public transit,education)
Merit goods
(e.g., a municipal airport, a county library, arabies vaccination program)
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Benefits-based levies
SpecialBenefit assessments User taxes charges
Benefits-based leviescommonly used bylocal governments
Development Utility servicefees License and charges
permit fees
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Advantages of service charges and fees
Reduce wasteful consumption
Reflect extent of citizen demand for service
Are equitable
Improve productivity by ensuring thatbudget choices are based on relationship ofservice levels to demand
Can influence private behavior towardsocially desirable ends
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Municipal government dependence
on user charges Service and utility charges as apercentage of general revenues
________________________________________________________
Revenue source 1991-92 1996-97 2001-02________________________________________________________
Property taxes 25.1 22.7 22.8
All other taxes 3.4 3.7 4.4
Service charges 18.7 20.9 20.4
Utility charges 22.1 21.4 21.9Other non taxes 11.9 11.1 11.1
100.1 100.0 100.0
Total general revenue
(in millions)a $161,293 $202,674 $255,220_______________________________________________________aIncludes utility charges but excludes intergovernmental aid, liquor store income,
and insurance trust revenue.
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County government dependence on
user charges Service and utility charges as apercentage of general revenues
________________________________________________________
Revenue source 1991-92 1996-97 2001-02________________________________________________________
Property taxes 43.5 38.6 38.4
All other taxes 15.0 17.0 17.1
Service charges 25.6 29.1 29.1
Utility charges 1.8 2.2 2.1Other non taxes 14.1 13.1 13.2
100.1 100.0 100.0
Total general revenue
(in millions)a $94,808 $122,161 $161,483_______________________________________________________aIncludes utility charges but excludes intergovernmental aid, liquor store income,
and insurance trust revenue.
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Areas in which some services arefinanced by charges and fees
Recreation and leisure activities
Utility services
Public works Police protection
Planning and economic development
Sanitation and animal control Health
Transportation
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Areas in which some activities areregulated by local government
Animal registration
Amusement and recreation
Building construction
Food service
Businesses and occupations
Health care facilities and services
Planning, zoning, and development
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Recommendations for charging feesfor use of public rights-of-way
Modify state law to say that localgovernments are legally and economicallyjustified in requiring compensation
Periodically reappraise fair market value ofeasements
Explore feasibility of constructing andmaintaining own fiber-optic networks andleasing capacity to private interests
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Issues in adoption of service charges
Which services can be sold?
Which services shouldbe sold?
Is it more equitable to charge users or levy a tax?
Do surrounding jurisdictions levy a charge forthe service?
How do citizens feel about higher local taxes?
How will the charge affect service use?
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Barriers to increased use of servicecharges
Absence of precedence
Service user opposition
Piecemeal adoption of charges and fees
Antiquated state statutes
Service staff resistance
Regressivity
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Stages in the review of service charges
1. List services
2. Codify charges and fees by function
3. Review charges and fees annually
4. Recommend adjustments where appropriate
5. Conduct cost-of-services study
6. Introduce incentives
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Approaches to pricing services
Full-cost and return-on-investmentpricing
Partial-cost pricing
Competitive pricing
Marginal-cost pricing
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Justifications for partial-cost pricing
for merit services Some benefits accrue to the whole
community.
The local government wants to stimulatedemand for the service.
Enforcement of the charge at full cost wouldresult in widespread evasion.
The service is used primarily by low-incomehouseholds.
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A cost-of-services study . . .
Provides rationale for the price to becharged
Helps determine whether to contract out
or use in-house personnel
Identifies cost of providing the service
Direct costs: Expenses that would be eliminated if
the service were discontinued
Indirect costs: Cost of support (or staff) services
provided by one department to other departments
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Types of costs
Direct Indirect
Personnel: Administrative:
Wages General government
Benefits Departmental
Other: Other:
Equipment Operating
Supplies CapitalContract services
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Strategies for improving collection:
Current accounts Use well-designed tax statements
Keep accounts current, especially mailingaddresses; develop a consolidated database
Provide for Web-based payments, automaticbank draft options; allow credit or debit cardpayments
Apply penalties and interest charges that
discourage delinquency
If cost-effective, contract out collections
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Strategies for improving collection:
Delinquent accounts Establish legal authority
Establish liability for utility charges
Specify steps for collection and increase theintensity of each
Use discretionary powers (e.g., setoffprovisions, attornment of rent, liens on property)
Require a deposit
Contract out collections to a private law firm
Develop an amnesty program
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Provisions of a revenue policy
statement Integration with budget process
Schedule for cost-of-services study
Levels of subsidy
Collection
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Chapter 9
Impact fees and specialassessments
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Impact fee
A charge to developers for the cost of
off-site capital improvements needed
to serve a new development.
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Stages in adoption of an impact fee
1. Prepare land use plan
2. Define service areas and determine capitalneeds in each
3. Develop capital improvements plan and
prepare budget
4. Determine capital improvements needed toserve new residents
5. Adopt impact fee by ordinance or order
6. Establish accounting guidelines for recordinguse of revenue from fee
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Issues in design of an impact fee
Types of improvements to be financed(scope)
Basis for each propertys liability (structure)
Rates charged to different classes ofproperty (stratification)
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Issues in collection of an impact fee
Determination of when to collect fee
Two-year phase-in
Accounting procedures to documentthat fees were used to finance projectsdirectly benefiting those paying thefee
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Objections to impact fees
Effect on housing prices
Unfairness to new residents (doublepayment problem)
Windfall to current residents
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Required conditions for capitalization
Home buyers will comparison shop
Substitute housing is readily availablenearby
Impact fees arent levied by all
governments within the region or atthe same rates
Impact fees: Constitutional tests of
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Impact fees: Constitutional tests ofvalidity
Fees must be specifically and uniquelyattributable to the new development (IllinoisSupreme Court, 1961)
A reasonable relationship must exist betweenthe development where the fee is assessed andthe beneficiaries of the service (CaliforniaSupreme Court, 1971)
A rational nexus must exist between the newdevelopment and the facilities financed with thefee (Wisconsin Supreme Court, 1966)
Guidelines for a legally acceptable
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Guidelines for a legally acceptablefee ordinance (1)
Secure competent legal expertise early
Document improvements (and cost)
needed to serve new growth
Ensure that the fee doesnt generate
more revenue than the cost of neededimprovements
Guidelines for a legally acceptable
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Guidelines for a legally acceptablefee ordinance (2)
Refer to the state statute authorizingthe levy
Document that the fee hasnt beenused to renovate existing facilities
Specify types of development subjectto the fee and whether redevelopmentor tax-exempt property is included
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Special assessment
A levy on property owners for the
increased property value created by
the installation of nearby publicimprovements
Stages in adoption of special
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Stages in adoption of special
assessments1. Initiate project
2. Complete a feasibility study
3. Hold public hearing on the projects feasibility
4. Authorize project
5. Prepare and mail assessments
6. Hold public hearing on assessment roll
7. Issue assessment certificates
Components of enabling legislation
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Components of enabling legislationfor special assessments
Level of local government with authority tolevy the assessment
General procedures for adoption
Types of improvements eligible for financing
Basis for allocating costs
Option for installment payments
Maximum interest rate on payments