Table of Contents
Introduction
Municipalities are funding their budgets pushed to the brink. In many communities, the tax base is declining (Augustine, Bell, Brunori & Youngman, 2009) while the amount of services expected by residents is staying the same, or even increasing. In some cases, functions formerly performed by the state or federal governments are being “downloaded” to the already overloaded municipalities, further exacerbating the problem.
The most common response by hard-hit municipalities is to raise sales taxes. Unfortunately, as a regressive tax, the lowest income-earners in a community are hardest hit by these changes. (Encyclopædia Britannica, 2011)
This post is based in large part on the work of The Center for Popular Democracy. Their report, coauthored with Local Progress (2015) is titled Progressive Policies for Raising Municipal Revenue. It reviews a number of strategies that are presented below that allow municipalities to raise revenue progressively – that is, increases that raise revenue while taxing lower income individuals lesser than higher-income individuals.
The Current Revenue Generation Model
Most municipalities in the United States generate their tax revenue from property taxes.
Beyond property taxes, many municipalities generate revenue using sales taxes. In Iowa, it’s actually easier to list the communities that do NOT collect a Local Options Sales Tax (LOST):
| County | Community |
| ADAIR | Casey |
| ADAMS | Lenox |
| BENTON | Walford |
| CEDAR | Wilton |
| CERRO GORDO | Nora Springs |
| CHICKASAW | Protivin |
| CLARKE | Hopeville |
| CLARKE | Unincorporated |
| CRAWFORD | Dunlap |
| DUBUQUE | Durango |
| FAYETTE | Stanley, Sumner |
| FLOYD | Greene |
| FLOYD | Nashua |
| FRANKLIN | Ackley |
| GREENE | Ralston |
| GUTHRIE | Adair |
| GUTHRIE | Coon Rapids |
| JASPER | Mitchellville |
| JEFFERSON | Coppock |
| JOHNSON | Coralville, Cosgrove, Frytown, Iowa City, Joetown, Morse, North Liberty, Oakdale, Oxford, Shueyville, Tiffin, Unincorporated, University Heights |
| KEOKUK | North English |
| MONROE | Moravia |
| MUSCATINE | Walcott |
| OSCEOLA | Allendorf |
| OSCEOLA | May City |
| OSCEOLA | Unincorporated |
| PLYMOUTH | Sioux City |
| POLK | Ankeny, Berwick, Bondurant, Clive, Farrar, Granger, Grimes, Johnston, Norwalk, Saylorville, Unincorporated, Urbandale |
| POTTAWATTAMIE | Shelby |
| RINGGOLD | Clearfield, Shannon City |
| TAMA | Le Grand |
| WARREN | Ackworth, Sandyville, Spring Hill, Farnhamville |
The problem with the sales tax, as mentioned above, is that it is regressive. As the poor disproportionately spends their income on the basics (food, shelter, gasoline in a car to get to work, etc.) they are likely to spend much more of their income on sales taxes than wealthy individuals. This contributes to exacerbating inequality and limiting opportunities for individuals to build wealth.
Increased wealth helps communities collect more taxes and fund more services, so it is in their best interest to pursue progressive policies.
Future Revenue Generating Options
There are a number of strategies that can be used to raise revenue in more equitable ways, these include:
- Applying utility fees to capture not-for-profit revenue
- Negotiating Payment in Lieu of Taxes (PILOT)
- Convert city services to public utilities
- Implementing conservation pricing
- Creating or expanding municipal income taxes
- Eliminating corporate tax breaks
- Expanding the Earned Income Tax Credit
- Factoring development fees into real estate expansion
- Implementing Commuter / Occupational Privilege taxes
- Stratifying property taxes
- Writing General Funds Transfer Agreements
Each of these will be reviewed in more detail below.
Expand Earned Income Tax Credits
The Earned Income Tax Credit (EITC) is “is a federal tax benefit for low and moderate-income working people. The EITC offsets some or all of a worker’s federal income taxes and in many cases provides a supplemental source of income to help offset other taxes, such as sales or payroll taxes.” (TCWF, .d.)
Iowa already provides a 15% EITC – this means that whatever amount you receive in federal EITC, you’ll receive 15% of that amount to offset your state taxes. Iowa is one of 25 states and DC that provides a state EITC (IRS, 2019)
The Institute on Taxation and Economic Policy (2014) has written a report on the advantages of the EITC. As they note, “[t]he simplest, most effective, and most targeted way to begin to counteract regressive state tax codes is a refundable state Earned Income Tax Credit (EITC).”
Although a state EITC does not directly raise revenue, as a refundable credit in Iowa this is money that will go directly into low and middle-income resident pockets, that they can re-invest.
Eliminate Corporate Tax Breaks including Tax-Increment Financing and Business Improvement Districts
Tax-Increment Financing
Tax-Increment Financing (TIF; Farris & Horbas, 2009) is a way of subsidizing a development. Essentially, some of the property tax you would owe is spent on infrastructure improvements on your property or in your area.
Unfortunately, research indicates that TIF do not increase property values any faster than non-TIF regions, while depriving municipalities of major revenue. (Dye & Merriman, 2006)
Business Improvement Districts
Business Improvement Districts (BID; Morçöl & Wolf, 2010) are areas that raise revenue by levying businesses in the district and then use that money to provide additional services. These BIDs are often established in already wealthy areas, and thus serve to maintain inequality. (Local Progress, 2015, p.37)
Create or Expand Municipal Income Taxes
States can use municipal income taxes, which are by definition progressive, in order to raise revenue in a fair way. In 2009, 82% of Iowa school districts (covering 98 of Iowa’s 99 counties) used these taxes, called local income surtaxes. (Fiscal Partnership, 2009)
As the Fiscal Partnership report notes, millions of additional revenue could be generated with these surtaxes, which can equal 1-20% of the state income tax that an individual pays.
Sigourney, Iowa has no municipal income tax, but a Sigourney Schools applies a 1% surtax on the amount an individual pays in state taxes.
Convert City Services (Electric, Garbage, Sidewalks, Sewers) to Public Utilities
Sigourney, Iowa already provides garbage in the fairest and most sustainable way, “Pay As You Throw” (PAYT) where you’re charged based on the amount of bags you use.
The Environmental Protection Agency (EPA) supports PAYT because it increases recycling, ensures the right amount of revenue for the amount of trash thrown away, and allows individuals who use less trash to save more money. (EPA, 2016)
Other services can be converted in this same way. For example, water is currently provided by Sigourney as a utility and charged monthly.
Sidewalks can be funded like Ithaca, NY did with Sidewalk Improvement Districts. (Nocella, 2014) Individual homes pay $70 from their property taxes towards sidewalks, while commercial and larger properties are charged by the square foot. This ties the bill to the amount of expected foot traffic so that sidewalks and other government services can be
Create Conservation Pricing Programs
In order to understand conservation pricing it’s helpful to understand different price points used for services. A flat fee is what it sounds like, you pay the same amount no matter how much of a resource you use. In a uniform rate, you are charged a flat fee per unit, based on how much you use. Block pricing involves charging different amounts per use, which can effectively be a conservation pricing program. (Edwards & Sutherland, 2019)
Conservation pricing involves charging higher fees the more you use the resource. For resources like water, this can be an effective way to reduce waste of water and increase environment sustainability, while also generating revenue from the highest users of water (e.g. pool owners, hotels/motels and golf courses.)
If the pricing is done correctly, a residential user without these things will pay less, in effect being subsidized by the higher payer.
Apply Utility Fees to Capture Not-for-Profit Revenue
Nonprofit organizations are exempt from property taxes in all 50 states (Kenyon & Langley, 2011) even though these organizations, which can be quite large, still receive city services like fire and policing.
By specifically turning services into public utilities (as noted above), nonprofits can pay their part for these services which can help levy the playing field. This is especially true when there are large nonprofits like hospitals or universities.
Write a General Funds Transfer Agreement
Once you’ve converted services to utilities, it’s possible that you may be generating more than their operating costs in revenue, which is fantastic because that money can be put back into the city. Depending on the organizational structure of those utilities, however, you may be prohibited from spending that money on sources outside of the utility itself.
Depending on the type of utility and the amount of revenue being generated, a General Funds Transfer Agreement allows you to transfer excess revenue from the utility to other needed parts of the general funds budget.
An example where this was used positively was in Jacksonville, Florida which used some of the money raised by its electric utility to fund its underfunded pension.
Implement Commuter / Occupational Privilege Taxes
Some communities are bedroom communities, also known as commuter towns. These communities are primarily residential while the residents commute to other communities for employment, and potentially retail and other services. (Shapiro, 2013)
Those bedroom communities are funneling residents into other communities that may put strain on the local infrastructure without paying into them in the form of property taxes. The solution to this are taxes called commuter or occupational privilege taxes.
For example, Philadelphia’s commuter tax – the highest in the nation – is 3.4567% on income earned by non-residents who work in the city. (McCrystal, 2019)
Factor Development Fees into Real Estate Expansion
When new real estate is built, local governments have the option to charge development fees, also called impact fees. Impact fees are “charges levied against new development in order to generate revenue for the purpose of funding capital improvements necessitated by that development.” (Development Planning & Financial Group, 2016, p.6)
According to the Impact Fee Handbook (Development Planning & Financial Group, 2016, p.120), Iowa does not currently charge impact or development fees. This is a significant potential loss of revenue.
Although 29 states have adopted some form of development fees, Iowa is not one of them. (Rupan, 2018)
Stratify Property Taxes (So Commercial Areas Pay More)
Property taxes differ widely in different jurisdictions. Twait et. al. (2018) from the Lincoln Institute of Land Policy has produced a state-by-state comparison of the property taxes in four classifications: homestead (homes/dwellings), commercial, industrial and apartments, based on the taxes paid in each state’s largest city.
Across the US, the median homestead tax rate was 1.495%. In Des Moines, Iowa it was 2.26%.
Across the US, the median commercial property tax rate was 2.055%. Again, in Des Moines, the rate was 3%.
The US industrial tax rate was 1.499% while in Des Moines it was 1.73%. Finally, the US apartment tax rate was 1.834% and in Des Moines it was 3.34%.
These numbers suggest that while Des Moines is already stratifying their tax rates nicely (ensuring that higher earning commercial properties also pay a larger portion of tax), because of the way the analysis was done it’s not clear if other Iowa cities are doing this as well.
Build a PILOT (Payment in Lieu of Taxes) Program
We noted above that nonprofit organizations are exempt from property taxes. This applies no matter how large they are. Some universities can stretch out for acres – with Berry College in Rome, GA sitting on a whopping 27,000 acres (Berry College, n.d.)
PILOT agreements are generally worked out with the state or federal government, who will compensate the local government in lieu of the taxes the government would pay. ( https://www.doi.gov/pilt/ )
Conclusion
As you can see, there are numerous opportunities for municipalities to raise money in a progressive, rather than regressive way. Many communities may have already implemented some of these ideas – and some of them might not be right for your community – but it’s worth a look.
References
Augustine, N.Y., Bell, M.E., Brunori, D., & Youngman, J.M. (2009) Erosion of the Property Tax Base: Trends, Causes and Consequences. Cambridge, MA: Lincoln Institute of Land Policy. Retrieved on September 9, 2019 from
https://www.lincolninst.edu/sites/default/files/pubfiles/erosion-of-the-property-tax-base-chp.pdf
Berry College. (n.d.) “Quick Facts About Berry College” Retrieved on September 12, 2019 from https://www.berry.edu/about/quick-facts
Development Planning & Financing Group, Inc. (2016) Impact Fee Handbook. Retrieved on September 12, 2019 from https://www.nahb.org/advocate/-/media/8B12E2AABAE549F49CDC751B378C737A.ashx
Dye, R. & Merriman, D. (2006) Tax Increment Financing: A Tool for Local Economic Development. Lincoln Institute of Land Policy. Land Lines. Retrieved on September 12, 2019 from https://www.lincolninst.edu/publications/articles/tax-increment-financing
Edwards, E.C. & Sutherland, S.A. (2019) A Guide to Municipal Water Conservation Pricing in Utah. Utah State University Extension. Retrieved on September 12, 2019 from https://digitalcommons.usu.edu/cgi/viewcontent.cgi?article=2956&context=extension_curall
Encyclopaedia Britannica. (2011). “Regressive tax”. Encyclopædia Britannica. Retrieved on September 9, 2019 from https://www.britannica.com/topic/regressive-tax
Environmental Protection Agency (EPA). (2016) “Pay-As-You-Throw Programs | Conservation Tools | US EPA” Retrieved on September 11, 2019 from https://archive.epa.gov/wastes/conserve/tools/payt/web/html/index.html
Farris, S. & Horbas, J. (2009) Creation vs. Capture: Evaluating the True Costs of Tax Increment Financing. Journal of Property Tax Assessment & Administration. 6(4). Retrieved on September 2019 from https://web.archive.org/web/20150923210409/http://www.cookcountyassessor.com/forms/creationvscapture.pdf
Fiscal Partnership. (2009) “Understanding local income surtax in Iowa.” Retrieved on September 12, 2019 from https://www.iowapolicyproject.org/2009docs/090122-incomesurtax.pdf
Internal Revenue Service (IRS). (2019) “States and Local Governments with Earned Income Tax Credit | Internal Revenue Service.” Retrieved on September 12, 2019 from https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/states-and-local-governments-with-earned-income-tax-credit
Institute on Taxation and Economic Policy. (2014) Improving Tax Fairness with a State Earned Income Tax Credit. Davis, C., Davis, K., Gardner, M., Mitchell, D., & Wiehe, M. Retrieved on September 12, 2019 from https://itep.org/wp-content/uploads/eitc2014.pdf
Kenyon, D.A. & Langley, A.H. (2011) The Property Tax Exemption for Nonprofits and Revenue Implications for Cities. Lincoln Institute of Land Policy. Retrieved on September 12, 2019 from https://www.urban.org/sites/default/files/publication/26756/412460-The-Property-Tax-Exemption-for-Nonprofits-and-Revenue-Implications-for-Cities.PDF
McCrystal, L. (May 15, 2019) Philly’s wage tax is the highest in the nation. Here’s everything you need to know about it. The Philadelphia Inquirer. Retrieved on September 12, 2019 from https://www.inquirer.com/news/wage-tax-rate-philadelphia-business-jobs-reduction-reform-20190515.html
Morçöl, G., & Wolf, J. F. (2010). Understanding Business Improvement Districts: A New Governance Framework. Public Administration Review, 70(6), 906–913. Retrieved on September 12, 2019 from https://0-doi-org.aupac.lib.athabascau.ca/10.1111/j.1540-6210.2010.02222.x
Nocella, M. (May 7, 2014) “More Ithaca Sidewalks May Be Repaired Under New Program” Ithaca.com. Retrieved on September 12, 2019 from https://www.ithaca.com/news/more-ithaca-sidewalks-may-be-repaired-under-new-program/article_5ebaaa1e-d5fe-11e3-9eaa-0019bb2963f4.html
Rupan, S. (2018) Developmental Impact Fees: Process | Analysis | Implementation. Manhattan Community Board. Retrieved on September 12, 2019 from https://www1.nyc.gov/assets/manhattancb1/downloads/pdf/studies-and-reports/Sarita_Impact%20Fee%20Report_2018.pdf
Shapiro, G. (2003). Bedroom communities. In K. Christensen & D. Levinson (Eds.), Encyclopedia of community: From the village to the virtual world (Vol. 1, pp. 87-88). Thousand Oaks, CA: SAGE Publications, Inc. doi: 10.4135/9781412952583.n36
Tax Credits for Workers and their Families. (n.d.) “Earned Income Tax Credit – Tax Credits for Workers and their Families” Retrieved on September 12, 2019 from http://www.taxcreditsforworkersandfamilies.org/federal-tax-credits/earned-income-tax-credit/
Twait, et. al. (2018) 50-State Property Tax Comparison Study. Lincoln Institute of Land Policy & Minnesota Center for Fiscal Excellence. Retrieved on September 12, 2019 from https://www.lincolninst.edu/sites/default/files/pubfiles/50-state-property-tax-comparison-for-2017-full_1.pdf