Reasons for and against Diversifying Local Government Revenue

Capture Local Revenue Raising Capacity

More generally, revenue sources differ along several dimensions. They differ in terms of their revenue raising capacity, stability over the business cycle, growth rate, equity, ease of administration, economic effects, acceptability by citizens, etc. Thus, alternative revenue portfolios could be constructed, each of which would yield a difference mix of characteristics. Several authors have explored this idea and estimated the trade-offs among some of these characteristics.⁷

Just as investors have different preferences for risk and return, local governments may differ in their preferences over the various revenue characteristics. The citizens of one jurisdiction may have a preference for revenues that are tied to the benefits received from public services, while another jurisdiction may be more concerned with the regressivity of their revenue structure.⁸ Thus, if a local government can use alternative revenue instruments, the local government can choose the revenue portfolio that more closely achieves its desired mix of characteristics.

Reduce Reliance on the Property Tax

Equity

Another argument for revenue diversity is premised on the notion that beneficiaries of local public services should pay a fair share of the cost of public services. This is particularly relevant for tourists and commuters who impose costs on local governments but do not pay any property taxes to the local government. (Of course, a business’ property, and thus the property tax revenue, is positively related to the number of workers the business employs. To that extent, property tax revenue is generated indirectly from commuters.) To the extent that property taxes and other revenue sources do not capture the cost of the service burden placed on a jurisdiction from nonresidents, a sales tax or an income tax might do better. Clearly, a sales tax only generates revenue from a nonresident to the extent that he or she purchases taxable products or services. Tourists and shoppers are likely to make larger purchases than workers, and thus are more likely to contribute more revenue per trip.

On the other hand, local payroll taxes can broaden the base of who pays for local public services to include nonresident workers (Wallace and Edwards 1999). Of course a local payroll tax will generate revenue only from workers and not from other visitors to the jurisdiction.

In the 1970s there were various attempts to measure whether nonresidents “exploited” central cities in the sense that the cost of providing public services to nonresidents exceeded the revenue they generated. One of the first such studies (Neenan 1970) found a significant net benefit to nonresidents, i.e., nonresidents received more in benefits than the taxes and fees they paid to the central city. However, other studies found much smaller effects. Bradford and Oates (1976) found that the net effects of nonresidents on net costs (i.e., cost imposed by nonresidents less revenue collected from nonresidents) were of minor quantitative importance. Shields and Shideler (2003) also found that there is not a significant equity issue due to non-residents. The results do depend on the local government’s revenue structure.

Revenue Stability and Other Characteristics of Taxes

A fourth argument for a diversified revenue structure concerns the stability of total revenue over the business cycle. Just as a diversified investment portfolio can reduce the overall risk of a loss, a diversified revenue structure can reduce the risk of revenue loss to the local government. To the extent that the effect of changes in economic conditions have differential effects on tax sources, a diversified tax structure will have a smaller risk of revenue decline in the face of economic recessions. Of course, if changes in economic conditions have the same effect on all revenue sources, diversification will have no effect on revenue stability.

Economic Efficiency

A final reason for revenue diversification is that financing local public services through user charges and fees promotes an efficient level of public services.⁹ Charges and fees, when appropriately designed, serve as signals of the cost of the public service, similar to prices for private goods. Since user charges vary with the amount of service consumed, individuals can adjust their consumption in response to the charge. In other words, user charges or fees are benefit charges. Taxes, on the other hand, are paid regardless of the level of consumption of public services, and therefore the effective marginal cost that the citizen pays to consume one more unit of the public service may be perceived to be zero. As a result, the quantity demanded of public services financed with taxes will be higher than what is socially optimal because each individual taxpayer ignores the extra cost that results from his or her consumption of the public service. (See the section on charges and fees for a more extensive discussion of user charges.)

Directory: wp-content -> uploads -> 2016
2016 -> 2017 afoCo Landmark Scholarship Program
2016 -> Instructions for the Preparation of Camera-Ready Contributions to the Conference Proceedings
2016 -> Step student Scholarships for Year 10-13
2016 -> The united church of canada
2016 -> Idan raichel biography – May 2016 Brief Producer, keyboardist, Lyricist, composer and Performer Idan Raichel
2016 -> An introduction to centre’s interventions expanding access to justice
2016 -> Sanchar Shakti
2016 -> Unit analysis should help here. We want number of bananas
2016 -> The Autobiography of Elder Joseph Bates
2016 -> The Great Heat and the Rhode Island Deep Water Bay Scallop (Argopecten irradians) Fishery 1875-1905

Download 1.02 Mb.

Share with your friends: