Local Fiscal Politics

•  Local governments spending growing since WWII –  more services = need more $$ –  300% –  Peaked in 1970s

•  Federal aid to cities declined –  Local sources harder to tap

•  60% of ‘local’ money from local taxes & fees •  40% from state & federal government

Local Governments depend heavily on money transferred from state & federal governments

Health & human services

Where does the money go?: •  Education •  Health / social services •  Housing / parks •  Transit •  Police, Fire, jails •  Administration

•  planning •  public works

Local TAX sources

•  Property Tax 72% –  this # inflated by schools

•  Local sales tax 11% •  Local income tax 6% •  Misc taxes 6% •  Selective sales tax 5%

Property Tax

•  Less total local revenue from property tax today than 50 years ago

•  Traditional rationale –  taxed real wealth (progressive) – owning property = ability to pay – owning = need for public services – public services increase property values

Property Tax

•  Contemporary Problems –  least popular tax –  less real wealth now in property – home price inflation erodes ability to pay

•  assessment increase a hidden tax – now a regressive tax

Property Tax

•  Your tax = –  (value * assessment rate) * tax rate – state law sets all 3 elements

•  Example –  ($250K * .95) * .013 = $3,087 –  ($400K * .95) * .013 = $4,940

Property Tax

•  Problems – Law requires periodic reassessments – At times, rapid value increases – Tax Revolts

•  Initiative 722, 747 (WA); Prop. 13 (CA); Measure 5 (OR)

•  722 = 2% ltd in increased revenue collected •  747 = 1% ltd in increased revenue collected

–  state court Nov. 2008 ruled I-747 unconstitutional –  Legislature adopted 1% limit on total collections

» Banked capacity

Property Tax

•  Other issues –  lump sum payments – delinquencies: 2 - 15% – exemptions

•  ag land preservation •  universities •  public / govt. buildings •  non-profits

Sales Tax

•  #2 source; major source for Cities •  State sets base rate

–  cities / counties / transit districts can add to base –  Washington = 6.5% –  Sound Transit = .4% –  City of Seattle/King Co. 2.6%

•  Crim justice levy (.10); King Co. (.15); Metro (.80); City (.85); Sound Transit (.4); etc.

–  TOTAL = 9.5%

Sales Tax

•  Rational –  taxes ability to consume – consume more, pay more – make out-of-town folks pay

•  in fragmented region....

Sales Tax

•  Issues – Regressive tax

•  people in lowest income brackets consume all of their income; wealthy consume much less of their income

•  with exemptions, tax less regressive

– Highly cyclical tax •  durable good sales drop in recession (like now)

Local Income Tax

•  Few place use this – Local option in OH, PN – some states grant power case-by-case – NYC has local income tax

•  Rational –  tax wealth; progressive –  tax outsiders

Other Local Rev. Sources

•  Local taxes only about 40% of local revenue – 40% of total $$ from state / fed government – 16 -18% of total $$ = charges & fees

•  Charges & fees about 27% of all LOCALY generated revenues

Charges and Fees

•  Examples –  Development impact fees –  park entrance fees –  storm water fees –  sewerage fees –  airport departure / landing fees –  golf course user fees –  parking fees & fines –  911 charges –  Bus fares

Charges and Fees

•  What if National government funded by charges and fees? – why not? – How are cities different?

•  What would we charge for? – Airport use, highway use, EIS reviews…

Charges & Fees

•  Rationale – only pay if you want service – use more, pay more – with taxes so unpopular, only way to fund

services •  Issues

– ability to pay?

Debt

•  Local governments can deficit spend •  Capital vs. operating debt •  Capital budgets

–  infrastructure; long-term borrowing •  Types of Bonds

– General obligation public votes – Revenue bonds no public vote?

Debt

•  Creative use of revenue bonds – non- guaranteed –  interest paid from revenue of project

•  dorms, toll-roads, business parks, ferry terminals, airports,

– big growth area •  25% of local debt now •  can ‘operating’ stuff be rolled into debt issue?

–  staff people, staff time, etc

Local Fiscal “Crisis”

•  End of Federal gravy train 1970s – no more easy revenues

•  Property Tax revolt 1980s – hard to raise taxes

•  Globalization of capital 1990s – sales tax sources (firms) more mobile

•  Great recession of late 2000s

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state  taxes  as  %  GDP  

Global  fiscal  crisis  

Dot com Bubble bursts

Iranian oil, cut 1980

Oil crisis, 1973

Interest rates spike

Trends in state tax revenues as % of GDP

Property tax revolts

Local Fiscal Politics

•  How fund a city? – Equity issues

•  everyone shares burden of costs –  according to ability to pay? –  according to what they use?

» what if we applied this logic to fed govt?

– Reality •  nail the newcomers with charges & fees vs •  old-timers subsidize costs of new folks