A Report on Local Government Funding: An Overview of By

A Report on Local Government Funding: An Overview of
National Issues and Trends
- Prepared for the Local Government Funding
System Reform Project
By
Gordon Shuford and Richard Young
February 2000
Institute of Public Affairs – Center for Governance
University of South Carolina
Gordon Shuford
South Carolina Department of Revenue
Columbia, South Carolina 29201
(Mr. Shuford is currently a Senior Analyst with the Ways and Means Committee of the
South Carolina House of Representatives).
Richard D. Young
Center for Governance
Institute of Public Affairs
University of South Carolina
Columbia, South Carolina 29208
The views presented here are not necessarily those of the South Carolina Department of
Revenue, the South Carolina House Ways and Means Committee, or the Institute of
Public Affairs of the University of South Carolina.
2
CONTENTS
Section
Page
I.
Introduction…………………………………………………………………..6
II.
Challenges Facing Local Governments……………………………………..8
Demographic Changes
Federal and State Unfunded Mandates
Telecommunications and Utility Deregulation
Economic Development
Technological Changes
Aging and Inadequate Infrastructure Systems
Health Care and Cost Containment
Urban Sprawl and Smart Growth
III.
Overview of Local Revenue Sources…………………………………………13
IV.
General Trends in Local Government……………………………………….17
Greater Fiscal Self-dependence
Increased Intergovernmental Competition
Mistrust of Government
Economic Uncertainty
V.
The Property Tax and Local Governments………………………………….23
Property Tax Dissatisfaction
Approaches to Property Tax Relief
Advantages of the Property Tax
VI.
Local Option Taxes…………………………………………………………….28
Local Option Sales Taxes
Local Individual Income Taxes
Local Business Taxes
Local Motor Fuel Taxes
Local Option Accommodations and Hospitality Taxes
VII.
User Fees and Charges…………………………………………………………35
Advantages and Disadvantages of Service Fees and Charges
Impact Fees
Special Waste Management Fees
VIII. Emerging Trends in Local Government
Funding………………………………………………………………………….39
Internet Taxation
Sales Taxation of Services
3
Certificates of Participation
IX.
School Finance……………………………………………………………….44
School Finance Litigation
School Finance Relief: Michigan and Wisconsin
Tax Credit Relief Programs
Educational Choice
X.
Criteria to Evaluate Revenue Sources………………………………………49
XI.
Conclusion…………………………………………………………………….51
References/Bibliography……………………………………………………...52
Appendices…………………………………………………………………….56
A Checklist of Evaluating Local Option Taxes
Local Option Lodging Taxes -- 1997
Local Option Restaurant Taxes -- 1997
"Plain English" Summary of the Internet Tax Freedom Act
"Should Policymakers Care About the Growth of Internet Commerce?"
Internet Commerce Statistics "Increase Seen In Internet Shopping"
Tax Burden -- 1996 State and Local Revenue Per Capita
Tax Burden -- 1996 State and Local Revenue as a Percentage of Personal Income
Fiscal Impact of Internet Sales Tax Losses -- FY 1997 - 98 Revenues (States)
Principles for Appropriate Use of User Charges in State and Local Government
Trends in Reliance on Taxes, User Charges and Other Revenues
Defining and Categorizing Taxes, Charges and Other Revenues
Tax and Expenditure Limitations -- Local Governments
`
4
LIST OF FIGURES
Figure
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Page
30-Year growth in State and Local Government Revenue by Selected Sources..13
Local Government General Revenue by Source FY 1965-66…………………..14
Local Government General Revenue by Source FY 1995-96………………..…15
Percent of Local Government Revenue FY 1965-66 through FY 1995-66……..16
Local Share of Combined State and Local Revenue from Own Sources……….17
Local Option Sales Tax Authority 1997 -- State, County, City, and Other…….29
Local Option Personal Income Taxes 1997 -- State, County, City, and Other…31
Local Option Business Taxes 1997 -- State, County, City, and Other………….32
Local Option Gasoline Taxes 1997 -- State, County, City, and Other………….33
Selected Government Services Amenable to User Fees and Charges…………..35
Web Commerce Statistics……………………………………………………….40
Sales Taxation of Services -- Survey Categories…………………………..……42
Percentage of School Revenue -- Local, State and Federal 1995 to 1996………46
5
I. Introduction
Local government finance consists essentially of two fundamental aspects; namely, the
raising of revenue and the expenditure of revenue. What distinguishes local government
finance from the monetary affairs of the private sector is, of course, that local government
is aimed at supporting and maintaining public goods and services. To achieve these
public goods and services, therefore, local governments must acquire funds through
taxes, fees, charges, and debt financing.
The property tax has been and remains the "mainstay" for local government revenue.
However, sales taxes and especially user fees and charges, and to a limited degree income
taxes, are becoming widespread alternatives to the property tax. This has been evidenced
in local government finance trends since the 1970's.
Indeed, changes are occurring at lightening speed in local government funding, as are
changes in local government service needs. This is because local government funding and
service needs are inherently bound together and are influenced by economic, social,
demographic, and technological trends.
Several national trends are specifically impacting local government funding. The
shrinking amount of federal funding to local governments is often mentioned as the most
important trend over the past twenty years. In 1978, federal grants-in-aid to states and
local governments amounted to 26.5 percent of their total funding. Over the 1990 to 1995
period, this amount averaged five percentage points less, or 21.5 percent. The
repercussion from this decrease in federal intergovernmental aid was inevitable. Local
governments are now required to rely more on own-source funding.1
Also, since the beginning of the late 60's and early 70's, there has been a sustained
resistance and opposition by taxpayers -- towards all levels of government -- to any new
taxes and, generally speaking, increases to existing ones. This resistance, which has been
referred to frequently as a "taxpayers' revolt," has had a profound affect on local tax
policy, especially with regard to the property tax.
Further, in the sphere of increasing global competitiveness, industries and businesses
have been and will continue rapidly changing the way they do work. Computing and
telecommunications are transforming business practices. Corporations are downsizing
and the services industry is gaining a strong economic foothold as once did the
smokestack factories of yesterday.
Electronic commerce is likewise emerging as a major trend. Consumers are using the
Internet to make purchases, to buy and sell stocks, and to carry out a multitude of other
"commonplace" financial transactions.
1
Tom Bonnett. "Is the New Global Economy Leaving State-Local Tax Structures Behind?" Fiscal Affairs.
National Conference of State Legislatures: Denver, CO. March 1999.
6
Consumption patterns are changing too due to the demographic shifts in our population.
Senior citizens, for example, are becoming more and more a major influence in economic
markets, healthcare, and financial investment.
All of these pressures and influences, and many more, are having significant effects on
governments and their funding mechanisms.
In this report, these trends and issues facing local governments and their funding
resources will be examined. The intent is to give the reader some understanding of the
challenges that local governments are confronting and the responses that local
governments are, as a result, taking to meet these challenges.
As such, this report will review local government funding from a national perspective and
will attempt to analyze, in broad terms, what local governments appear to be
encountering, doing and where they may be headed in the future. This will include
discussion and analysis of the following:
n
n
n
n
n
n
n
n
n
A brief review of external conditions (challenges) affecting local government finance.
An overview of local revenue sources.
Discussion of general trends in local government funding.
Discussion of the local property tax.
Discussion of sales, income and other alternative local option taxes.
Discussion of user fees and charges.
An analysis of emerging or "future" trends in local government finance.
An overview of issues and trends in school finance.
A review of criteria to evaluate revenue sources.
7
II. Challenges Facing Local Governments
Local governments across the United States are facing significant challenges that impact
their revenue funding structures. These challenges are occurring as a result of several
external and internal conditions. These conditions include demographic changes, federal
and state unfunded mandates, telecommunications and utility and deregulation, economic
development, technological changes, aging and inadequate infrastructure systems,
healthcare and cost containment, and urban sprawl or "conversion of prime lands."
Demographic Changes
Population and economic growth patterns are requiring local governments to reexamine
their revenue and expenditure needs and priorities. The aging population, for example,
will require different and appropriate public policy responses heretofore not considered
by local government officials. Changes in wealth, income and consumption will
necessitate that many local government officials reevaluate their revenue raising systems
to insure stability, equity, and efficiency.
The U. S. Census Bureau reports that as of January 1, 1997 the total national population
was 266,490,000 persons. This is an increase of 17,722,000 or 7.1 percent since the 1990
census. Of this increase, the elderly in the United States has increased significantly,
particularily those individuals 85 years and older. As of 1997, the number of Americans
65 years and older was 33,993,000, an increase of 2,914,000 or 9.4 percent from 1990.
More notable is the 85 years and older population which increased from 3,022,000 in
1990 to 3,821,000 in 1997, or by 799,000 (26.5 percent).2
Federal and State Unfunded Mandates
Some of the costliest mandates in the past ten years encompass public policy areas such
as solid waste management, corrections, Americans with disabilities, indigent health care,
fair labor standards, and housing state agencies. Local governments have had no choice
but to tap own-source revenue to pay for these services required by state and/or federal
government(s). This situation is clearly placing considerable stress on existing local
revenue sources. 3
For example, the U. S. Conference of Mayors stated in a report that the Clean Water Act
cost cities with populations of 30,000 or more approximately $3.6 billion in 1993. This
figure is expected to increase further from 1994 through 1998 and total $29.3 billion.
Similarly, for the same four-year period, the Safe Drinking Water Act is expected to cost
2
U. S. Bureau of Census. 1997 Population Profile of the United States. U. S. Department of Commerce:
Washington, D. C. August 7, 1998.
3
South Carolina Association of Counties. Summary: The Impact of Unfunded Mandates. The South
Carolina Association of Counties: Columbia, S.C. February 1995.
8
municipalities $8.6 billion, and the Resource Conservation and Recovery Act to cost $5.5
billion. 4
Telecommunications and Utility Deregulation
Local governments are currently grappling with the complicated fiscal and legal issues
related to federal deregulation. The Telecommunications Act of 1996 was intended to
bring competition into a traditionally monopolistic industry area. The same is true for the
Public Utility Regulatory Policies Act of 1978, the Energy Act of 1992, and the Federal
Energy Regulatory Commission Order Nos. 888 and 889, which deregulated the gas and
electric industries.5 This deregulation of telecommunications and utilities has profound
implications for local revenue raising, especially with regard to property taxes and local
franchise fee payments.
Currently, 42 states have or are planning public hearings, forums, and debate on electric
deregulation. Thirty-two states have conducted or are presently conducting legislative
studies on electric deregulation. And during 1998, 25 states introduced some form of
legislation pertaining to deregulation of electric services.6
Economic Development
Local governments want to attract economic development to their jurisdictions, but they
must also seek to fund the accompanying public costs associated with such development.
In response, many state and local governments mandate that incentives be dependent
upon performance. Any direct payments, infrastructure improvements, or tax incentives
would be dependent on measurable goals such as employment increases, minimum wage
levels, or capital investments. Additionally, many political subdivisions have developed
cost/benefit models to help quantify the public costs and benefits of proposed industrial
developments to ensure that the project provides a positive net impact to the community. 7
South Carolina’s economic development process has been very successful in recent years.
Since 1995, announced capital investment has exceeded $22 billion and created 111,000
jobs. Approximately 85 percent of the total investment and 72 percent of the jobs were
created by existing companies in South Carolina.8
For the same time period, all investments have provided $10.7 billion in net benefits to
4
U. S. Conference of Mayors. Impact of Federal Unfunded Mandates. U. S. Conference of
Mayors:Washington, D. C. October 26, 1993.
5
National Conference of State Legislatures. Electric Utility Restructuring Series. National Conference of
State Legislatures: Denver, CO. 1996.
6
Cost Control Associates. Electric Deregulation Status. (Chart) Cost Control Analysts: Glen Falls, NY.
1999.
7
Ronald Snell. A Review of State Economic Development Policy, A Report from the Task Force on
Economic Incentives. National Conference of State Legislatures: Denver, CO. 1998.
8
South Carolina Department of Commerce. 1998 Annual Report. South Carolina Department of
Commerce: Columbia, SC, 1999.
9
South Carolina, according to the state's Secretary of Commerce, Charles Way. Of this
total net benefit, $3.53 billion is estimated to have come from development that received
state and local incentives.
Technological Changes
Y2K problems (principally, for 1998-99 costs associated with computer software and
hardware upgrades and other compliance adjustments), technology training and
competency, security and control, and privacy issues are some of the costly
administrative and operational issues that local governments must tackle. Additionally,
the implications of Internet and e-commerce for such traditional local revenue sources as
sales taxes and business licenses are important tax issue areas that local government must
examine carefully in the future.9
In retrospect, though Y2K problems were fewer than anticipated, nevertheless the
"preventive costs" to local governments were substantial. Prior to January 1, 2000, for
example, the U. S. Conference of Mayors surveyed 220 cities (with populations of 30,000
or more, except for three instances) as to the readiness of municipalities for Y2K. Ninetyseven percent of the cities responding stated that they had a plan to address Y2K
problems. Of this percentage, all but seven had completed half of their planned
assessments and over a third were totally complete. Seventy-nine percent had completed
more than half of their necessary repairs or replacements. For 136 municipalities, the
costs associated with Y2K compliance were estimated to total $296 million (ranging from
$2,000 to $59 million per municipality).10
Aging and Inadequate Infrastructure Systems
Increasing limitations on local revenue and expenditures make it more difficult for local
governments to construct and maintain roads, water pipes, sewers, schools and other local
facilities. Aging and inadequate infrastructure needs will increasingly place more and
more pressure on both state and local governments to respond appropriately.
South Carolina is a prime example of a state with substantial current and future regional
and local infrastructure needs. According to a 1997 report issued by the South Carolina
Advisory Commission on Intergovernmental Relations, South Carolina's total
infrastructure needs (backlog, rehab, and new growth) for the period 1995 through 2015
will cost a staggering $56.678 billion. Roads, bridges and other transportation category
needs will total $28.811 billion alone. Other infrastructure needs included in the nearly
$57 billion estimate are: health (public health care, water supply, waste water disposal,
and solid waste management) at $7.783 billion; education (public and higher education)
$10.218 billion; commerce (economic development, farmland retention, energy, and
9
American Institute of Certified Public Accountants. Top 10 Technology Issues. American Institute of
Certified Accountants :New York, NY. December 1997.
10
U. S. Conference of Mayors. The Status of Y2K Compliance in City Governments. U. S. Conference of
Mayors: Washington, D. C. January 1999.
10
telecommunications) $3.852 billion; public safety, administration, and welfare $2.634
billion; recreation and culture $1.516 billion; and environment $1.865 billion. 11
Health Care and Cost Containment
Managed care and consolidation of health services are revolutionizing the health care
industry. Local governments and hospitals will inevitably be both instrumental in, and
affected by, this transformation. 12
In 1999, national health expenditures are estimated to be $1,228.5 billion or 13.9 percent
of the Gross Domestic Product (GDP). The 1999 per capita national health expenditure is
estimated at $4,340. In 2005, national health expenditures are predicted to be $1,799.5
billion or 15.6 percent of the GDP while per capita expenditures are expected to grow to
$6,061.13
Rising medical costs are a worldwide problem, but nowhere are they
higher than in the U.S. Although Americans with good health
insurance coverage may get the best medical treatment in the world,
the health of the average American, as measured by life expectancy
and infant mortality, is below the average of other major industrial
countries. Inefficiency, fraud and the expense of malpractice suits
are often blamed for high U.S. costs, but the major reason is over
investment in technology and personnel. America leads the world in
expensive diagnostic and therapeutic procedures, such as organ
transplants, coronary artery bypass surgery and magnetic resonance
imaging. Orange County, California, for example, has more MRI
machines than all of Canada. (www. mediconsultinc.com/Leading
_Edge/healthcarecosts.htm)
Urban Sprawl and Smart Growth
Since the beginnings of the Post-World War II era, the United States has experienced
tremendous growth. Many Americans have retreated to the suburbs and this in turn has
meant that millions of acres of farmland and "greenspace" have been converted into
residential housing, office parks, and shopping centers. The result has been, and remains,
unchecked urban sprawl.14
11
S. C. Advisory Commission on Intergovernmental Relations. South Carolina Infrastructure Needs (1995
- 2015). Advisory Commission on Intergovernmental Relations: Columbia, SC. 1997.
12
National Conference of State Legislatures. Critical Issues in State-Fiscal Policy. National Conference of
State Legislatures: Denver, CO. 1997.
13
U. S. Department of Health and Human Services. National Health Expenditures and Selected Economic
Indicators (1970 - 2008). U. S. Department of Health and Human Services. Washington: D.C. September
23, 1999.
14
International City/County Management Association. Service Report. (Vol. 31, Number 4) International
City/County Management Association: Washington, D.C. April 1999.
11
Of particular importance is the fact that sprawl has resulted in individuals depending on
their automobiles to get virtually anywhere. The average U. S. Driver spends 443 hours
per year (the equivalent of 55 eight-hour workdays) coming and going to points of
destination. Traffic jams and pollution arise from such situations. Indeed, it is estimated
that vehicles produce 12 billion pounds of toxic chemicals each year in the U. S.
(www.sierraclub.org/sprawl/Factsheet.asp)
Consequently, local governments are faced with the demands of new and expanded
infrastructure, and other public services (police, fire, etc.). The economic costs, not to
mention the environmental and quality of life effects of urban sprawl, are enormous. For
example, in Prince William County, Virginia, officials estimate that the 1998 costs to
local government for services for a new house were $17,000. The developer or impact
fees being charged at this time were only $2,000. These fees have since (in mid-1999)
been raised to $10,218. And in Montgomery County, Maryland, county officials spent
$500 million to close 60 schools while at the same time building 60 new ones in new
residential areas.15
15
Ibid.
12
III. Overview of Local Revenue Sources
Local revenue sources have grown significantly over the past three decades. This growth
is attributable to a number of factors including those discussed briefly in the previous
section of this report. Other factors, such as a decrease in federal aid to state and local
governments (causing a measurable revenue shift from federal grants-in-aid to state and
locally derived revenues) will be discussed later. (See Section 4 of this report, page 17).
Revenue sources at the local level consist mainly of "own-source" general revenue, and
federal and state government transfers or "intergovernmental aid." Own-source revenues
are those monies raised strictly from local authorizations and include taxes, fees, charges,
and loans and bonds. The U. S. Bureau of Census collects data on local government
finance and has organized this financial data into standard categories. The Bureau of
Census' "own-source" category for local government, for example, includes property
taxes, local sales and income taxes, local motor vehicle license taxes, and various locally
instituted charges and fees (e.g., impact fees, EMS fees, fire protection fees, "fines,"
parking fees, and recreation charges).
Analysis of Selected Revenue Growth
Based on an analysis of the most recent available U. S. Bureau of Census data, the impact
that local government taxation has on the public increased dramatically from FY 1966
through FY 1996. A 30-year history of local government revenue collections shows that
local revenue increased by 1,256 percent (FY 1965-66 through FY 1995-96).16 While
state revenue collections have increased at approximately the same pace, this rate of
growth far exceeds any index of national economic growth.
Figure 1
30 Year Growth in State and Local Government Revenue by Selected Sources
(Data not adjusted for inflation.)
FY 1965-66
Combined
State & Local
Total Revenue
97,619
General Revenue
83,036
From Federal
13,120
From State
0
From Local
0
Own Source General Revenue
84,499
Taxes
69,916
Property Tax
56,741
Sales and Gross Receipts
19,085
General Sales Tax
9,225
Selective Sales Taxes
9,858
Individual Income Tax
4,760
Corporate Income Tax
2,038
Motor Vehicle Licenses
NA
Other Taxes
9,860
Charges & Misc. Revenue
13,175
Current Charges
9,372
Misc. Revenue
3,804
Utility and Liquor Store Revenue
6,619
Insurance Trust Revenue
7,964
State
55,246
46,757
11,743
0
503
43,000
29,380
834
17,044
7,873
9,170
4,288
2,038
NA
9,172
5,131
3,606
1,526
1,361
7,128
FY 1995-96
Local
59,268
53,172
1,378
16,395
0
41,499
27,361
23,836
2,041
1,352
688
472
0
NA
688
8,044
5,766
2,278
5,258
837
Combined
State & Local
1,513,633
1,222,820
234,890
0
0
987,930
689,038
209,439
248,992
169,071
79,921
146,843
32,009
13,770
37,983
298,891
182,200
116,691
75,325
215,486
State
966,808
770,516
270,984
0
13,384
549,147
418,390
9,973
206,114
139,363
66,751
133,546
29,315
12,681
26,758
130,757
67,258
63,498
7,078
189,213
Local
803,736
709,216
26,906
243,573
0
438,736
270,601
199,467
42,832
29,709
13,123
13,295
2,693
1,088
11,224
168,134
114,941
53,193
68,246
26,273
30-Year Growth
Combined
State & Local
State
1451%
1650%
1373%
1548%
1690%
2208%
0%
0%
0%
2561%
1069%
1177%
886%
1324%
269%
1096%
1205%
1109%
1733%
1670%
711%
628%
2985%
3014%
1471%
1338%
NA
NA
285%
192%
2169%
2448%
1844%
1765%
2968%
4061%
1038%
420%
2606%
2555%
Source: U. S. Bureau of Census. Government Finances. U. S. Department of Commerce: Washington, D.C. 1998.
16
U. S. Bureau of Census. Government Finances. U. S. Department of Commerce: Washington, D. C.
1998.
13
Local
1256%
1234%
1853%
1386%
0%
957%
889%
737%
1999%
2097%
1807%
2717%
NA
NA
1531%
1990%
1893%
2235%
1198%
3039%
For instance, local revenue growth has increased more than three times faster than
inflation, 1.3 times faster than personal income growth, and 1.5 times faster than the U. S.
GDP (Gross Domestic Product).17 This growth resulted from increased rates on
traditional taxes (local property, sales, and income taxes), and the introduction of new
sources of tax revenue mostly in the form of user charges and fees.
Additionally, in FY 1966 local governments nationwide required approximately $303 per
person to fund desired expenditures. By FY 1996, local governments were collecting
$3,030 per person in order to meet preferred expenditure levels. Further, while the ability
of taxpayers to pay local levies has increased during the past 30 years, the percentage of
personal income gleaned (expropriated) by local governments increased even faster, from
10.7 percent of all U. S. personal income in FY 1966 to 13.2 percent in FY 1996.18
The changing sources or distribution of local government revenue can be seen in Figures
2 and 3 below. Each division of the pie (Figures 2 and 3) presents the percentage of total
local revenues for the listed categories that include property taxes, sales taxes, income
taxes, state governmental aid, federal aid, charges and miscellaneous fees, and other
taxes. The largest change evidenced is the lessening of the reliance on property taxes.
Instead of comprising almost one-half of local revenues in FY 1966, for example,
Figure
F i g u r2e
Local Government General Revenue by Source
FY 1965-66
S a l e s T a x e s
3 . 8 %
C h a r g e s & M i s c .
15.1%
O t h e r T a x e s
1 . 9 %
P r o p e r t y T a x
44.8%
Federal Gov't
2 . 6 %
S t a t e G o v ' t
30.8%
I n c o m e T a x
0 . 9 %
property taxes account for 28 percent in FY 1996. State intergovernmental transfers have
increased from 30.8 percent in FY 1966 to 34.3 percent of local government revenue in
FY 1996. The third slice of the local revenue pie is fees from current charges and
miscellaneous general revenue. This category, comprised of user fees for hospitals, roads,
17
18
Ibid.
Ibid.
14
airports, sewage, and waste management, has grown from 15.1 percent in FY 1966 to
23.7 percent in FY 1966.19
Figure
Figure 3
Local Government General Revenue by Source
FY 1995-96
Sales Taxes
6.0%
Property Tax
28.1%
Charges & Misc.
23.7%
Income Tax
1.9%
Other Taxes
2.1%
Federal Gov't
3.8%
State Gov't
34.3%
The fluctuating importance of revenue categories over this 30-year period is shown below
(Figure 4). The increasing share of local revenue from charges and fees in the early
1970's corresponds to the decreasing significance of property tax. The rapid decrease in
property tax collections, beginning in FY 1978, resulted from the reduced collections
under Proposition 13 in California and similar tax cut or legislative provisions in Idaho,
Nevada, and other states.
19
Ibid.
15
A second round of tax revolts occurred in the 1990's when property tax collections once
again began to approach 30 percent of total local revenues. This was the case in South
Carolina, Michigan, and Wisconsin. Once federal government grants peaked in FY 1979,
local governments immediately began to increase the dependence on sales and gross
receipt taxes and the user fees and charges imposed on recipients of local government
services.20
Figure 4
Percent of Local Government Revenue
50
45
40
35
Percent
30
25
20
15
10
5
0
66
71
76
81
86
91
96
Fiscal Year
Federal Government
State Government
Property Tax
Individual Income Tax
Sales and Gross Receipts Tax
Charges & Miscellaneous
Source: U.S. Bureau of Census. Government Finances. U.S. Department of Commerce: Washington, D.C.
1998.
20
Ibid.
16
IV. General Trends in Local Government
Because of these evolving sources of funding, local governments and their revenueraising systems are experiencing four general trends that have impacted their ability to
raise revenue. These trends are:
n
n
n
n
Greater fiscal self-dependence and revenue diversification.
Increased intergovernmental competition.
Mistrust of government.
Economic uncertainty. 21
Greater Fiscal Self-dependence
With the advent of federal devolution starting in 1978, and the subsequent decline in
federal intergovernmental aid, local governments have increasingly become dependent on
own-source revenues to fund their service programs.22 As shown in Figure 4 on the
previous page of this report, federal government transfers accounted for almost ten
percent of local government revenue in FY 1966. This proportion fell to less than five
percent by FY 1987. This trend towards more local revenue self-dependence is also seen
in the Figure 5 below. Figure 5 shows the change in the local government share of
combined state and local revenue. Nationwide, the local government share fell 50.6
percent in FY 1966 to a low of 43.4 percent of all state and local revenue collected in FY
1980. This trend has reversed slightly so that the local government share increased to
44.4 percent by FY 1996. In other words, local governments are collecting a larger share
of the combined state and local dollars.
Figure 5
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
Local Share of Combined State and Local Revenue from Own Sources
(Millions of Dollars)
General Revenue from Own Sources
Total
State
Local
69,916
34,511
35,405
76,122
37,782
38,340
84,083
43,197
40,886
95,397
49,537
45,861
108,898
57,507
51,392
118,782
61,290
57,492
135,100
70,651
64,449
150,921
80,432
70,489
165,899
89,157
76,742
181,141
96,784
84,357
200,586
107,401
93,185
223,221
121,191
102,031
246,368
135,638
110,730
268,115
150,906
117,209
299,293
169,266
130,027
333,109
187,373
145,736
21
Local %
50.6%
50.4%
48.6%
48.1%
47.2%
48.4%
47.7%
46.7%
46.3%
46.6%
46.5%
45.7%
44.9%
43.7%
43.4%
43.8%
Robert L. Bland. A Revenue Guide for Local Government. International City/County Management
Association: Washington, D.C. 1989.
22
Note: Concurrently, in 1978, the "taxpayers revolt" began in California with the passage of Proposition
13. This occurrence marked the beginnings of serious and widespread resistance to property taxes and
contributed to the consequent shift to other local revenue sources.
17
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
Total
369,236
396,895
445,794
491,525
528,308
571,168
609,543
660,020
712,700
748,108
794,117
839,771
884,996
940,733
987,930
State
205,996
217,752
249,290
275,422
294,902
317,106
338,280
366,712
391,101
408,188
436,848
465,308
487,780
523,466
549,147
Local
163,240
179,143
196,504
216,103
233,406
254,062
271,263
293,308
321,599
339,920
357,269
374,463
397,215
417,268
438,783
Local %
44.2%
45.1%
44.1%
44.0%
44.2%
44.5%
44.5%
44.4%
45.1%
45.4%
45.0%
44.6%
44.9%
44.4%
44.4%
Source: U. S. Bureau of Census. Government Finances. U. S. Department of Commerce: Washington, D.C. 1998.
Given the need for greater self-reliance (i.e., diversification), local governments were
forced to diversify their revenue sources. While the property tax has been the mainstay of
local government revenue collections, taxpayer resistance to the property tax compelled
local governments to make up the revenue through other means. This trend toward
diversifying local revenues has placed considerable emphasis on the local option sales
tax, and to a lesser degree, the local option income tax.
In 1976, 4,893 local jurisdictions imposed local sales taxes. By
1994, that number had grown to 6,579, including local governments
in four states that first authorized this tax during that period. The
number of local governments with income taxes rose over the same
period from 3,088 to 4,111.23
This diversification can also be seen in the earlier trend chart, or Figure 4 above, page 16.
At the same time of the decrease in federal governmental aid in FY 1979, local
governments began increasing their emphasis on sales taxes. From FY 1966 to FY 1996,
reliance on sales taxes by local governments almost doubled, and by 1996, represents six
percent of all local government revenue.
However, the largest change in own-source revenues has been the increase in user fees
and charges. User fees and charges are usually levied by local governments, but not
always, for voluntarily purchased public services. These fees and charges pay for specific
services that directly benefit individuals.24 Such fees and charges may include, for
instance, those which pay for water and sewer services, recreation (e.g., golf green fees),
hospital care, solid waste disposal, and fire service.
As discussed earlier, this revenue category has grown 57 percent since FY 1966, but most
of this growth occurred after the reduction in federal government transfers in FY1979.
23
Holly Ulbrich. "Financing Government: Using Fees and Charges." The South Carolina Policy Forum.
USC Institute of Public Affairs: Columbia, S.C. Spring 1997.
24
John E. Peterson and Dennis R. Strachota, Editors. Local Government Finance -- Concepts and
Practices. Government Finance Officers Association: Chicago, IL. 1991.
18
Again referring to the earlier trend chart (Figure 4), it can be seen that prior to FY 1979,
local fees and charges accounted for a steady 15 percent of local government revenues.
Concurrently with reductions in property taxation and federal government aid, charges
and user fees rapidly increased in relative importance in the local government revenue
mix. By FY 1996, user fees and charges accounted for approximately one-fourth of all
local revenue collections. 25
Increased Intergovernmental Competition
Counties, municipalities, school districts and special tax districts are competing among
themselves for scarce local revenue monies. This unprecedented level of "inter-local
competition" takes on two distinct forms. These forms are (1) the competition for tax
bases, both property and business development tax bases, and (2) the exportation of the
tax burden. 26
Counties, cities, and other local governments compete for revenues from the same tax
bases. The property tax base is clearly the area of greatest local rivalry. Property taxes
still comprise the lion's share of local revenues though their reliance has diminished over
the past twenty years. Still, according to 1994 census data, property taxes contributed to
75 percent of all local own-source government tax collections.27 Additionally, it should
be noted that school districts are especially dependent on property taxes as, in most cases,
it represents their sole source of local tax revenues.
Since each local government jurisdiction competes with others for property tax revenue,
considerable attention and care is given by local elected officials to policy decisions
affecting property tax rates. Hence, while multiple jurisdictions vigorously compete for
their share of the property tax base and revenues, local decision-makers are sensitive to
the logic and reality that the property tax base is a shared one and is limited.
Also, inter-local competition for business investment is fierce. Local governments, with
the collaboration of state economic development officials, are packaging an array of tax
and other incentives to lure companies to their jurisdictions. Local governments are
offering fee-in-lieu of tax agreements, land, loans, and infrastructure incentives. Local
governments hope to expand their tax bases in this way and to attain a reputation for a
friendly business climate.28
Another trend in intergovernmental competition is the exportation of tax burdens.29 Tax
exportation involves the policy of taxing nonresidents for local sales and services. These
include principally local taxes on motel and hotel accommodations, and local taxes on
restaurants. Forty-three states authorize one or more local governments to tax local
25
U. S. Census Bureau. Government Finances. op. cit.
Bland. A Revenue Guide for Local Government. op. cit.
27
National Conference of State Legislatures. Critical Issues in State-Local Fiscal Policy. National
Conference of State Legislatures: Denver, CO. 1997.
28
Bland. A Revenue Guide for Local Government. op. cit.
29
Ibid.
26
19
accommodations. The other seven states that do not authorize local governments to levy
an accommodations tax, rather, impose state taxes on short-term or overnight lodgings.30
Further, restaurant taxes are imposed by local governments in 27 states. Restaurant taxes,
sometimes called "hospitality taxes," are taxes on the sale of prepared meals and
beverages sold in establishments for consumption on or off premises.31 This tax excludes
school and other institutional prepared meals and beverages. Restaurant tax rates range
from .5 percent to 9 percent.32
Mistrust of Government
The contemporary brand, so to speak, of the "mistrust of government" was triggered by
the troubled economic environment of the late 1970's and the property tax revolt
culminating in the passage of Proposition 13 in California. Property taxes have typically
been high on the public opinion polls as the "most hated tax," and as a consequence, this
has engendered distrust of governments generally. The result has prompted the electorate
to clasp vows of less government and lower taxes. Since indeed the chief source of ownsource revenues for local governments is the property tax, local government and local
officials have been the target of considerable taxpayer resistance and mistrust.
For many states, the mistrust and revolt resulted in a number of tax and expenditure
limitations, or as they are known by acronym, "TELS." By the early 1980's, 43 states had
imposed some kind of property tax limitations or relief. 33 (See Appendices).
More recently, the non-profit organization, Americans for Tax Reform, has made
considerable strides to limit the imposition of any new taxes at all levels of government -federal, state and local. This effort has been institutionalized by the signing of a "no tax
pledge," by elected officials, stating that they will not vote for any new taxes or tax
increases.34
Why has the property tax been such a contributor to taxpayer unrest? First of all,
property taxes are more "conspicuous" than other taxes. They are often paid in lump
sums.35 This is particularily noticeable by older homeowners who are more typically free
of mortgage payments and subsist on limited incomes. Also, many taxpayers complain
that property taxes appear to be capricious, that is, property values and taxes vary from
neighbor to neighbor without any understandable rhyme or reason. Neighbors and friends
who compare property taxes are unable to differentiate among local taxing jurisdictions,
and likewise, are unable to comprehend the reason behind the wide variances in
assessments and rates.36
30
National Conference of State Legislatures. Critical Issues in State-Local Fiscal Policy. op. cit.
Ibid.
32
Ibid.
33
The Washington Times. "Annals of the Taxpayer Rebellion." The Washington Times: Washington, D.C.
June 27, 1998.
34
Ibid.
35
Hal Hovey. The Property Tax in the 21st Century. The Finance Project: Washington, D.C. May 1996.
36
Ibid.
31
20
Part of the problem with the taxpayer's perception of the property tax has been the real
estate market conditions.37 Property values have, in many cases, experienced dramatic
increases. Homeowners feel that this increase in value is beyond their control and are
resentful of corresponding "substantial" property tax increases. Contributing to this
situation are long periods between reassessments. Properties that have not been
reassessed for lengthy periods, as many as ten years in some instances, have increased
significantly in value. Property tax increases due to these circumstances cause taxpayers
to be both shocked and outraged. Local government officials are blamed and public
dissatisfaction leads to mistrust of government.
Economic Uncertainty
The economy affects all levels of government and their revenue structures. This is
especially true of local governments. A change in the economy, brought about for
example by inflation or recession, will obviously have an effect on local government
funding as well as expenditures. The more diverse local revenue sources are the better
position local governments will be in to adjust or adapt to changing economic
conditions.38
Further, local governments, especially those in larger metropolitan areas of 50,000 or
more, that target high-growth industries, are particularily more assured of making it
successfully through uncertain economic times. This is so because of the trend towards
economic expansion in technologies and service businesses and away from smokestack
industries. Local governments in urban settings, such as, Cincinnati, Atlanta, and
Charlotte, are illustrative of this strategic economic approach. 39
Population shifts are another major economic factor affecting local revenue-raising effort
and capacity. These shifts vary in size and scope and can have a notable impact on local
governments.
Population shifts from central city to suburbs, or from the frostbelt
to the sunbelt and back to the frostbelt, or across national borders are
a major influence on the revenue yield of a local government's tax
base. Research has found that when population declines, revenue
yields decline more quickly than local government expenditures.
This is because expenditures tend to be fixed, at least in the short
run. Revenue yield can change much more quickly than costs for
debt service, pensions, and maintenance of existing public facilities
can be curtailed.40
37
Bland. A Revenue Guide for Local Government. op. cit.
Ibid.
39
Ibid.
40
Ibid.
38
21
The property tax base is the most susceptible to population shifts.41 A substantial decline
in population causes the property tax base to fall proportionally. Local governments must
then scramble to make what adjustments they can to revenue and service program
structures. Conversely, a sizable increase in population places new demands on local
governments and then the game becomes one of "catch-up."
41
Ibid.
22
V. The Property Tax and Local Governments
Local tax revenues fall into two main categories: property and non-property types.
Property taxes apply to real property (land and/or improvements, e.g. physical structures
such as houses and buildings) and personal property (all "other" property, tangible or
intangible, e.g., automobiles, machines, equipment, stocks and bonds).42 Property taxes
are the oldest tax imposed in the United States and are the only major tax imposed by all
50 states.43 Non-property types include income and sales taxes, and taxes or fees on
"privileges" (e.g., motor registration fees, business licenses, and water or sewage fees).
Property taxes continue to be the major source of local revenue, though there has been a
measurable shift to non-property revenue sources. In this section of the report, the
property tax will be discussed.
In 1995-96, according to the U.S. Bureau of Census, the property tax yielded $199.5
billion in local revenues.44 This yield represents approximately 75 percent of all local
own-source revenues. However, property taxes are shown to be in the decline when
compared to 1970 data. In 1970, property taxes contributed to 84 percent of all local
government tax collections.45 This nine-point percentage drop in property tax revenues
has been brought about by several changes over the past twenty-five years, the most
important of which is the "property tax revolt."46
Property Tax Dissatisfaction
According to public opinion polls and scholarly literature on the topic, property taxes are
both the least popular and "most hated" of all taxes. Property taxes are disliked, among
other reasons, because they place hardships on taxpayers with low incomes and high
property wealth. 47 This is especially true for retirees and farmers. (However, property
taxes, like other taxes, are subject to criticisms common to all types. These include the
claims that taxes remove purchasing power from the consumer, distort economic
incentives, and contribute to an increasing and unwieldy bureaucracy.)48
In particular, why are property taxes so unpopular? Their unpopularity comes about due
to some the following:
n Property taxes are a tax on unrealized capital gains. The property tax is a tax on
wealth, not income or consumption. As such, it is unavoidably an "unrealized" tax on
capital gains. This is again onerous to property rich and cash poor taxpayers,
42
Susan A. MacManus. Revenue Patterns in U.S. Cities and Suburbs: A Comparative Analysis. Praeger
Publishers: New York, N.Y. 1978.
43
Charlie B. Tyer. "The Property Tax: Why It Persists." The South Carolina Forum. Institute of Public
Affairs: Columbia, SC. Spring 1993.
44
U.S. Bureau of Census. "United States State and Local Government Finances by Level of Government."
U.S. Bureau of Census: Washington, D.C. 1996.
45
National Conference of State Legislatures. Critical Issues in State-Local Fiscal Policy. op. cit.
46
Ibid.
47
Hal Hovey. The Property Tax in the 21st Century. op. cit.
48
Ibid.
23
particularily pensioners. Several tax reduction measures or schemes have been
introduced over the years to counteract this punitive situation, such as, "circuitbreakers" programs, tax rate and levy freezes, homestead exemptions, and tax deferral
programs.49
n Property taxes are often paid in a lump sum, making them highly visible and, in many
cases, financially burdensome. Property taxes are most often collected once a year.
The general exception to this is when mortgage companies escrow the tax in monthly
installments. Some states have permitted local governments the option to collect taxes
in quarterly installments, and to use tax vouchers which can be purchased throughout
the year, in $50 to $500 denominations, at the convenience of the taxpayer.50
n Property tax reassessment causes confusion, anxiety and anger. The reassessment of
property can be a shock to homeowners in those instances where property appreciates
considerably in value. This "sticker shock" occurs particularily when reassessment is
done infrequently. Recent trends undertaken by local governments to remedy this
situation have included fully disclosing the reappraisal process or "truth-in-taxation,"
classification of property by types, and use-value appraisals.51
n Property appraisals are generally perceived to be inequitable in many parts of the U.S.
This perception is due to the fact that most state laws allow assessments to be less
than 100 percent of estimated market value. Other factors contributing to this
perception is a lack of qualified appraisers in some local jurisdictions, and a scarcity
of uniform appraisal methods and oversight.52
Approaches to Property-Tax Relief
While there are several approaches to property-tax relief, the meaning of property-tax
relief can be defined in broad, yet universal terms. "Property-tax relief" is generally
defined as any measure that reduces reliance on property taxes.53 As such, it is regarded
as any program or policy -- federal, state and/or local -- that relieves the property tax
burden. 54
Property-tax relief is widespread and popular. Between 1970 and 1994, property taxes as
a share of state-local taxes decreased from 39 percent to 32 percent. Further, twenty-one
states reduced their reliance on the property tax by more than ten percentage points.
Kansas (-19.8 %), California (-19.6 %), and Ohio (-18.7%) had the largest decreases in
property taxes.55
In 1994, Michigan voters approved a much-publicized property tax relief initiative.
Similarly, South Carolina and Wisconsin passed legislation reducing their property tax
burdens on taxpayers in 1995. Subsequently, several other states have launched studies to
49
Robert L. Bland. A Revenue Guide for Local Government. op. cit.
Ibid.
51
Ibid.
52
Ibid.
53
John E. Peterson and Dennis R. Strachota, Editors. Local Government Finance -- Concepts and
Practices. Government Finance Officers Association: Chicago, IL. 1991.
54
Hal Hovey. The Property Tax in the 21st Century. op. cit.
55
National Conference of State Legislatures. Critical Issues in State-Local Fiscal Policy. op. cit.
50
24
examine their individual property tax situations with their chief aim being to consider
various property-tax relief measures.56
There are several property-tax relief approaches that have been used over recent years.
These include partial exemptions, credits, refunds or rebates, freezes, use-value
assessments, re-classification, circuit breakers, and deferrals. Circuit breakers and
deferrals are two specific property-tax relief mechanisms that have gained popularity.
In over 30 states, circuit breaker programs provide qualifying taxpayers an income tax
credit or rebate of specified amounts on property taxes incurred whenever such taxes
exceed specified percentages or amounts of household income. Most states restrict circuit
breaker benefits to low-income elderly and disabled persons. Some states, however, allow
benefits to all low-income persons and, in some cases, this applies to both homeowners
and renters alike.57
Circuit breakers again identify or pinpoint when property taxes, as compared to income,
are excessive and thus reach a threshold or "overload;" hence, the name "circuit breaker."
This threshold is usually determined as a ratio of property taxes paid to household
income, or as a set income ceiling that typically ranges from $5,000 to $20,000.58
If the circuit breaker or threshold is determined strictly by a ratio formula, the following
might apply. For example, suppose a taxpayer has an income of $12,000 and pays a
property tax of $900. If the state defines an income threshold of 5 percent and grants a 60
percent relief, than the tax refund would amount to $180.59 This relief is calculated as
follows:
$900 - $600 (.05 x $12,000 = $600) = $300 x .60 = $180
Circuit breakers are considered flexible and easy to administer as part of the overall state
income tax process. Circuit breakers focus on those persons in greatest need of propertytax relief and rank high in terms of tax equity. 60
Another relief mechanism that targets those individuals experiencing hardships in paying
property taxes due to low-incomes, specially the elderly and the disabled, is tax deferral.
As the name implies, tax deferral programs defer or delay property tax payment, or a
portion of it, until a later time. The cost of this deferral of tax payment is usually offset by
a lien against the property. With this program, taxpayers in 22 states who have seen their
property taxes rise beyond their means can keep their homes and not feel obliged to either
borrow money or sell their homes.61
56
Hal Hovey. The Property Tax in the 21st Century. op. cit.
John L. Mikesell. Fiscal Administration: Analysis and Applications for the Public Sector. Fourth Edition.
Wadsworth Publishing Company: Belmont, CA. 1995.
58
Charlie B. Tyer. "The Property Tax: Why It Persists." The South Carolina Forum. op. cit.
59
John L. Mikesell. Fiscal Administration: Analysis and Applications for the Public Sector. Fourth Edition.
op. cit.
60
Ibid.
61
Ibid.
57
25
Interestingly, a survey on the awareness and popularity of property tax deferrals found
that less than eight percent of the eligible taxpayers applied for the deferral programs.
Reasons stated for the unpopularity included: 1) taxpayers did not feel they needed the
assistance; 2) taxpayers needed more assistance in applying for the programs; and, 3)
taxpayers did not desire the tax liens from the abatement program.62
Advantages of the Property Tax
Despite dissatisfaction with the property tax, and the resulting property tax relief efforts
that have occurred over the past few years, the property tax -- as stated earlier -- still
remains local government's primary own-source revenue. This durability testifies, as the
literature suggests, to its advantages as a tax source. These advantages include:
n
n
n
n
The property tax is a stable source of revenue.
The property tax is used by local governments to finance property-related services.
The property tax is easy to administer and is difficult to evade.
The property tax has allowed states to establish a unique form of autonomy from state
and federal governments.
n Property taxes generally causes minimal distortion of economic activity.63
The chief reason for the continued prominence of the property tax among local
government revenues is its stability. It is acknowledged among experts to be the premier
tax for a reliable flow of revenue. Unlike local option sales and income taxes, which
fluctuate more readily due to changes in the economy, property tax revenues remain
fairly consistent and reliable during the budget year. This stability is due to the fact that
any abrupt change in the economy takes considerably more time to have a significant
change in property values and ownership or use.64
Another advantage of the property tax is that local government services directly benefit
property owners. Roads, street lighting, sidewalks, and storm-drainage are services
expected by property owners, as are police and fire services. Taxpayers see, understand
and appreciate the direct correlation between property taxes paid, and local services or
benefits received.65
Property taxes are both easy to collect and difficult to evade. According to the literature,
and as compared to other taxes, property tax collection rates are extreme high, typically
in the range of 92 to 96 percent of the current levy. 66 And because most states authorize
local governments to impose late fees and fines, including most importantly, liens against
62
David Baer. Awareness and Popularity of Property Tax Relief Programs. American Association of
Retired Persons: Washington: D.C. 1998.
63
Robert L. Bland. A Revenue Guide for Local Government. op. cit.
64
Ibid.
65
Ibid.
66
Ibid.
26
delinquent property taxes, property taxes are less subject to evasion than many other
types.67
Finally, property taxes have become the special and distinct fiscal jurisdiction of local
governments. Since the early part of the 20th century, local governments have gradually
assumed fiscal autonomy from federal and state governments by capitalizing on and
maintaining the use of the property tax. And additionally, since the property tax has -- by
definition -- a broad tax base and mix of tax classifications and rates, it tends -- generally
speaking -- to cause minimal distortion to economic activity and growth. 68 Both of these
characteristics are considered advantageous by local government officials.
67
68
Ibid.
Ibid.
27
VI. Local Option Taxes
The property tax is essentially the only tax which local governments utilized as a revenue
source until the depression era of the 1930's when other alternative sources were
seriously examined and then added to provide a mix of local revenues. Again, beginning
with the property tax revolt of the late 1960's and 1970's, local governments pursued
revenue alternatives and diversification even more vigorously. Today, while property
taxes are still the key revenue source for local governments, the use of local option taxes
is expanding. 69
This expansion of local option taxes has been limited to mainly local option sales and
income taxes. In 1970, there were 23 states permitting the local option sales tax and ten
authorizing the local option income tax. As of 1997, there were 33 states that authorized a
local option sales tax and 16 states that authorized some kind of local income tax. 70
Other non-property taxes levied by local governments include business taxes, motor fuel
taxes, lodging or accommodation taxes, and restaurant or hospitality taxes.71
Why do local option taxes make sense? An important rationale for the levy of nonproperty taxes, and hence revenue diversification, is that their use provides local
governments with a more equitable and responsive revenue system.72 Diversification
promotes equity by providing for a larger tax base. This larger local tax base in turn
provides for the inclusion of taxes from non-property owners, e.g. sales and income, and
therefore gives the local revenue system more evenhandedness or equity.
Also local option taxes make sense because they help keep property taxes lower.73 This
lowering of the property taxes, based on an extensive literature review, is indeed the
single most important reason for revenue diversification and optional local taxation.
Local Option Sales Taxes
The sales tax is the most widespread used local option tax. Currently, 33 of the 45 states
with sales taxes authorize local governments to levy a sales tax. Thirty-two states give
counties local option sales tax authority, and 24 states allow municipalities to tax sales.
Twenty-three states allow -- together -- both counties and municipalities sales tax
authority. And although Alaska does not have a state sales tax, it does permit the local
option sales tax for counties and cities.74
69
Holley H. Ulbrich. "Nonproperty Taxes." Local Government Finance: Concepts and Practices. Editors
John E. Petersen and Dennis R. Strachota. Government Finance Officers Association: Chicago, IL. 1991.
70
National Conference of State Legislatures. Critical Issues in State-Local Fiscal Policy. op. cit.
71
Ibid.
72
Holley H. Ulbrich. "Nonproperty Taxes." Local Government Finance: Concepts and Practices. op. cit.
73
Ibid.
74
National Conference of State Legislatures. Critical Issues in State-Local Fiscal Policy. op. cit.
28
Further, nine states authorize "other" local government jurisdictions the power to tax
sales. Illinois, Missouri, Florida, Texas, Colorado, Utah, and California allow transit
districts to levy sales taxes. Georgia and Louisiana allow school districts to tax sales.75
One problem commonly related to the local option sales tax (LOST) is the concern for
local retail competition. Those local governments which have a LOST, or who are
contemplating a LOST, are often concerned that surrounding localities, which do not
have a sales tax, will take away both customers and retailers. Another problem with the
LOST is that it is a regressive tax. This regressive element of the LOST is especially
accentuated in those states, for example, that tax food and medical prescriptions.76
Figure 6
Local Option Sales Tax Authority
1997
State
New England
Connecticut
Maine
Massachusetts
New Hampshire
Rhode Island
Vermont
Middle Atlantic
Delaware
District of Columbia
Maryland
New Jersey
New York
Pennsylvania
Great Lakes
Illinois
Indiana
Michigan
Ohio
Wisconsin
Plains
Iowa
Kansas
Minnesota
Missouri
Nebraska
North Dakota
South Dakota
Southeast
Alabama
Arkansas
Florida
Georgia
Kentucky
Louisiana
Mississippi
North Carolina
Puerto Rico
South Carolina
Tennessee
Virginia
West Virginia
Southwest
Arizona
New Mexico
Oklahoma
Texas
75
76
County
City
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
Other
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
Ibid.
Ibid.
29
3
State
Rocky Mountain
Colorado
Idaho
Montana
Utah
Wyoming
Far West
Alaska
California
Hawaii
Nevada
Oregon
Washington
Total
County
City
Other
3
3
3
3
3
3
3
3
3
3
3
3
3
3
24
9
3
3
32
Source: Commerce Clearing House, State Tax Guide, March 1997. From National Conference of State Legislatures. Critical Issues in State-Local Fiscal Policy. National
Conference of State Legislatures: Denver, CO. 1997.
Local Individual Income Taxes
Local individual income taxes are authorized in fifteen states. Though Georgia and
Arkansas permit local governments -- counties and municipalities -- to tax income, none
have done so.77
Local individual income taxes take on two forms: First, there are "head taxes." "Head
taxes are taxes which are withheld from employees based on a flat rate per month
regardless of income."78 These head taxes are allowed in only two states, Colorado and
Washington. The second form of local individual income tax is also the most common
form and is the tax levied on (as a percentage of) personal income.79
Local income tax use varies from states like New York -- where
only two cities levy an income tax -- to ten states where local
income taxes may be imposed statewide. School districts in Iowa,
Kentucky, Ohio and Pennsylvania may levy income taxes. In most
states, however, cities or counties levy the tax.
State laws vary on whether the state and local bases are the same.
Local governments in Iowa and Maryland impose income taxes as a
percentage of the state income tax liability (a "piggyback" tax). On
the other side of the spectrum are New York and Pennsylvania,
where certain cities are permitted to levy income taxes using a tax
base completely separate from the state tax base.80
Some points about local income taxes are worth noting. First, the use of local income
taxes lends itself to improving progressivity, i.e., tying taxation more directly to the
ability to pay. Second, local income taxes lead to issues related to "situs," or questions
related to taxation on the basis of where a person lives or where a person works. And
77
Ibid.
Ibid.
79
Ibid.
80
Ibid.
78
30
finally, local income taxes are deductible from federal adjusted gross income, which is
advantageous to those persons who itemize.81
Figure 7
Local Option Personal Income Taxes
1997
State
Alabama
Arkansas*
Colorado
Delaware
Georgia*
Indiana
Iowa
Kentucky
Maryland
Michigan
Missouri
New York
Ohio
Pennsylvania
Washington*
Cities
Counties
3
3
3
3
3
3
3
3
3
3
Schools
Other
3
3
3
3
3
3
3
3
3
3
3
3
Income(I)
Or
Head(H)
I
I
H
I
I
I
I
I
I
I
I
I
I
I
H
Statewide(
S) or
Enumerate
d(E)
S
S
E
E
S
S
S
S
S
S
S
E
S
S
E
*Arkansas and Georgia -- No localities currently levy income taxes.
*Washington -- Taxes on transit systems.
S: Allowed statewide.
E: Specified localities only.
Income -- Levied on personal income.
Head -- A tax levied at a flat rate per employee per month.
Source: Commerce Clearing House, State Tax Guide, March 1997. From National Conference of State Legislatures. Critical Issues in
State-Local Fiscal Policy. National Conference of State Legislatures: Denver, CO. 1997.
Local Business Taxes
Local business taxes are authorized in 14 states. Municipalities are allowed to tax
businesses in all fourteen states. Counties are permitted to tax businesses in Georgia,
Kentucky, Virginia, and Tennessee. Local business taxes are allowed for certain specified
counties in the State of Oregon. Kentucky and Pennsylvania authorize school districts to
levy local business taxes.82
Local business taxes take on four forms of taxation among the authorizing states. These
include:
n An income tax levied on business income allocated to activities performed within the
jurisdiction.
n A payroll tax levied as a percentage of payroll in the jurisdiction (certain localities in
California, Missouri, New Jersey, and Oregon).
n A license tax or an occupational license as a privilege tax typically levied on gross
receipts.
81
82
Ibid.
Ibid.
31
n A "head tax" levied at a flat rate per employee per month (certain localities in Illinois
and Washington).83
Issues associated with local business taxes include their effects on business location and
expansion competition and incentives, and the differential impact of local payroll taxes
on labor intensive businesses.
Figure 8
Local Option Business Taxes
1997
State
California
Georgia
Illinois
Kentucky
Missouri
Michigan
New Jersey
Ohio
Oregon
Pennsylvania*
Tennessee
Virginia
Washington
West Virginia
Cities
3
3
3
3
3
3
3
3
3
3
3
3
3
3
Counties
Schools
Other
3
3
3
3
3
3
3
3
3
Income(I)
Payroll(P)
License(L)
Head(H)
Or Other(O)
P
L
H
I
I,P
I
P
I
I,P
I,L,O
I
L
L,H
I
Statewide(S)
or
Enumerated(
E)
E
S
E
S
E
S
E
S
E
S,E
S
S
S
S
*Pennsylvania -- (O) Other: real estate occupancy tax based on assessed value.
Income -- Levied on business income allocated to activities performed within the jurisdiction.
Payroll -- Levied as a percentage of payroll in the jurisdiction.
License -- An occupational license as a privilege tax typically levied on gross receipts.
Head -- A tax levied at a flat rate per employee per month.
Source: Commerce Clearing House, State Tax Guide, March 1997. From National Conference of State Legislatures. Critical Issues in
State-Local Fiscal Policy. National Conference of State Legislatures: Denver, CO. 1997.
Local Motor Fuel Taxes
Local governments in 14 states have local option motor fuel taxes. Motor fuel or gasoline
taxes are levied on a per-gallon basis. Two states, Alabama and California, have no
limitations on the rate for their local gasoline tax, though California does require voter
approval. The remaining states' rates for the local gasoline tax varies from $.01
(Tennessee) to as much as $.12 (Florida). In Hawaii, the state legislature sets its local rate
statewide.84
Alabama, Arkansas, California, New Mexico, Tennessee, and Virginia authorize both
counties and municipalities to impose motor fuel taxes. It should be noted that Tennessee
limits participation to counties that have a transportation district, and Virginia limits
83
84
Ibid.
Ibid.
32
counties to those with mass transit systems. Oregon specifies that only certain counties
and cities may levy a gas tax up to $.03.85
Florida, Hawaii, Montana, and Nevada allow counties only to levy motor fuel taxes.
South Dakota permits only cities, and Illinois allows only the city of Chicago to levy a
gas tax at a $.05 rate.86
One issue worth noting with regard to the local motor fuel tax is that localities located
where high concentrations of traffic are found will benefit most from the levy of the
gasoline tax (e.g., interstates and other major transportation thoroughfares). This situation
can create revenue disparities among local governments since surrounding areas may
have fewer or no major transportation routes. It further can place appreciable tax burdens
on areas with mainly local or resident traffic patterns.87
Figure 9
Local Option Gasoline Taxes
1997
State
Alabama
Arkansas
California
Florida
Hawaii
Illinois
Montana
Nevada
New Mexico
Oregon
South Dakota
Tennessee
Cities
Counties
3
3
3
3
3
3
3
3
Statewide(S) or
Enumerated(E)
S
No limit.
S
S
S
E
No limit, but voter approval required.
Up to $.12
Set by legislature.
$.05 in Chicago only.
3
3
3
3
S
S
E
Up to $.09.
Up to $.02
Up to $.03 in specified areas.
3
S
3
3
3
3
3
Comments
Up to $.01. (Tax may be levied by
counties with transportation districts).
3
3
Virginia
S
Up to two percent. (Two percent sales tax
on motor fuels is authorized in counties
with qualifying mass transit systems).
Washington
3
S
Up to ten percent of state rate. (In addition
to counties and cities, towns within ten
miles of the Canadian border may levy up
to $.01 per gallon).
Source: Commerce Clearing House, State Tax Guide, March 1997. From National Conference of State Legislatures. Critical Issues in
State-Local Fiscal Policy. National Conference of State Legislatures: Denver, CO. 1997.
Local Option Accommodations and Hospitality Taxes
The accommodations or lodging tax is a prevalent local optional tax among the states. In
fact, 43 states authorize local governments to tax hotel or motel, overnight-type stays.
(See Appendices.) Because accommodation taxes affect nonresidents or outside visitors,
it is a favorite tax method for the exporting of local tax burdens. This obviously makes
the accommodations tax popular with elected local government officials.88
85
Ibid.
Ibid.
87
Ibid.
88
Ibid.
86
33
Restaurants, or establishments which sell prepared food and beverages, are taxed by local
governments in 27 states. Restaurant or "hospitality" taxes are imposed as a percentage of
the total food and beverage sale. Local restaurant tax rates range from one-half of a
percent in three states, to nine percent as is imposed by localities in New Jersey.
Combined state and local sales tax rates, with restaurant taxes included, range from six to
13 percent.89 (See Appendices).
89
Ibid.
34
VII. User Fees and Charges
With local governments looking towards greater revenue diversification, user fees and
charges have gained prominence and have become the fastest growing local revenue
source in recent years. In 1996, user fees and charges levied by local governments made
up roughly 25 percent of all local revenues, up from less than 15 percent in 1966. 90 (See
Figure 3, earlier in this report, page 15).
As to how user fees and charges are defined, the literature states that they are generally
considered a mix of payments for services and goods, which provide for individual
benefits, to those willing to pay. Unlike "public services and goods," user fees and
charges are services and goods sold in discrete units for a price, and non-buyers are
excluded from receiving any of their benefits.91 They are based on a quid pro quo
principle, and are not considered taxes since they are generally, but not always, noncompulsory and have no effects of redistribution (i.e., to those individuals not paying the
fees or charges and not receiving the consequential benefits).92
User fees and services cover a number of services and activities. These include services
such as recreation and leisure activities (athletic fields, greens, parks, and swimming
pools), utility services, sanitation control, police protection (funeral escorts, vehicle
impoundment and serving warrants), health, and transportation (parking garages, parking
meters and hangar rentals). Activities commonly regulated by local governments, for
which a fee or charge is required, include animal regulation, amusements (fireworks,
movie theaters, and parades), building construction, food service, businesses and
occupations, and zoning and redevelopment.93
Figure 10
Selected Government Services Amenable to User Fees and Charges
Special police work
Parking
Solid waste management
Recreation
Health and Hospitals
Transportation
Education
Resource management and development
Sewerage
Utilities
Service for stadium or auditorium events
Garage, meters
Collection, disposal
Golf courses, tennis courts, park admissions, concessions, rescue insurance
Ambulance charges, inoculations, hospital rates, health insurance premiums
Transit fares, bridge and highway tolls, airport landing
Rentals of special books, equipment or uniforms
Surveys, extension service inquiries, tree nursery stock
Treatment, disposal
Water, electric, gas, and transit
Source: John L. Mikesell. Fiscal Administration: Analysis and Applications for the Public Sector. Fourth
Edition. Wadsworth Publishing Company: Belmont, CA. 1995.
90
Ibid.
Robert L. Bland. A Revenue Guide for Local Government. op.cit.
92
Milton Z. Kafolis. "Local Service Charges: Theory and Practice." State and Local Tax Problems. Editor
Harry L. Johnson. The University of Tennessee Press: Knoxville, TN. 1970.
93
Robert L. Bland. A Revenue Guide for Local Government. op. cit.
91
35
Advantages and Disadvantages of Service Fees and Charges
What are the advantages of service fees and charges? The primary advantage cited in the
literature is that user fees and charges reduce the wasteful utilization of governmental
services and, therefore, reflect more accurately the true costs associated with a particular
service or good. This is obvious since the service fee or charge is tied directly to usage.
The more water one uses, for instance, the more one pays. Hence, people will be more
conservative and constrained in water consumption if it is not "free." This in turn allows
for better costing of services.94
Other advantages include:
n Service fees and charges give local governments a precise record or documentation of
service demand.
n Similarly, since service fees and charges are based on the quantity used by each user,
they give local governments a clear indication of the level of service preferred by the
user, thereby limiting the unnecessary expansion of government facilities, equipment
and personnel.
n Service fees and charges allow for a high degree of equity and fairness since those
using the service pay in proportion to usage and benefits received. Those not using
the service, of course, do not pay.
n Service fees and charges are an excellent alternative to administrative rules,
regulations and ordinances since they can be used to influence social behavior
towards desirable social ends (e.g., solid waste fees to reduce waste refuse and the
costs associated with landfills and pollution).95
Disadvantages associated with user fees and charges also exist. One such disadvantage is
that user fees and charges have sometimes a "regressive pattern" associated with them,
taking a larger percentage of monies from low-income persons than from more affluent
ones. This is especially true for user services and goods that are necessary to everyday
living conditions and needs. For example, everyone needs fresh, potable water, the poor
as well as the rich. But if everyone, rich or poor, pays the same price, than the poor pay a
far greater share of their available income than the rich. Hence, user fees and charges can
be regressive.96
Another disadvantage to user fees and charges is a political one. Local government
officials are reluctant sometimes to add fees or charges for services since many people
assume that they are already paying taxes for these services. When people resist paying
fees or charges because they assume they are already paying taxes for them, and when
these same people are particularily vocal about such fees, politicians tend to avoid such
funding mechanisms.97
94
Ibid.
Ibid.
96
John L. Mikesell. Fiscal Administration: Analysis and Applications for the Public Sector. Fourth Edition.
op. cit.
97
Ibid.
95
36
Impact Fees
Several national trends are coming into play with regard to user fees and charges. One
major trend beginning to take hold is the increase in the use of "impact fees."
Many local governments are experiencing, and others potentially, substantial increases in
population and development. This growth requires local infrastructure services and
goods, and this consequently costs cities and counties money. As such, local governments
are using impact fees to offset the costs associated with rising infrastructure needs.98
Impact fees are charges to developers to provide for the costs of infrastructure and offsite improvements (parks, fire houses, and other similar local government facilities).
Traditionally, all users would bear the costs of development. However, with the reduction
of federal government aid, and taxpayer resistance to increases across-the-board, impact
fees have, and continue, to gain greater acceptance as a way to meet public costs due to
growth. 99
Current literature states that impact fees are most widely used by local governments in
the South and Southwest -- the "sunbelt states" -- where heavy population growth and
development have been occurring over the past five to ten years. Also, the use of impact
fees is politically popular with current business owners and residents who do not have to
bear the cost burden of such new development.100
The advantages of impact fees are several. First, impact fees assist local governments in
tying infrastructure needs and costs directly to development. Secondly, impact fees
mollify the anti-growth, anti-development sentiments held by some persons. And finally,
impact fees provide, it is argued, a better quality of life, through proper infrastructure
planning and implementation, benefiting the entire community. 101
On the downside, impact fees are feared by some because they might contribute to
increased housing costs in the future. Another objection to impact fees is that they are
basically unfair because they require developers to pay for "public facilities" initially, as
an impact fee, and then later, again in the form of taxes and other user fees and
charges.102
Special Waste Management Fees
Local governments are also advancing another trend in user fees and charges. This is the
"pay as you throw" or "PAYT" revenue-raising method that is gaining popularity
98
Jerry Kolo and Todd J. Dicker. "Practical Issues in Adopting Local Impact Fees." State and Local
Government Review. Volume 25, No. 3. Fall 1993.
99
Robert L. Bland. A Revenue Guide for Local Government. op. cit.
100
Ibid.
101
Ibid.
102
Ibid.
37
nationwide.103 This method is favored for meeting the increasing costs accompanying the
collection and disposal of solid waste by reducing the volume going into landfills.
Most control of waste going into landfills has been voluntary and has typically taken the
form of local municipal recycling programs. Some cities offer curbside pick up for these
programs, while others, including primarily counties, provide central locations for the
disposal/recycling of cans, plastics and newspapers. Cities and counties also provide
recycling programs for other waste such as that for grass clippings, leaves and Christmas
trees.104
Recycling again is voluntary and involves no additional cost to the consumer and
resident. Conversely, PAYT programs charge a fee per unit of waste disposed of -usually per bag or cart of waste collected -- with no charge for separated recyclable
waste. Additionally, in a few localities, "waste is only collected if it placed in a colorcoded bag, available for a fee, from a municipality."105
With federal environmental mandates in place since 1994, local governments and their
landfill programs have incurred substantial increases in costs due to compliance.
Estimates for local government compliance costs are as much as $10-plus billion by the
beginning of year 2000.106
These federal waste management rules and regulations set minimum standards for where
landfills can be placed, how they must be designed and operated, and how they must be
closed and monitored for 30 years.107
103
Holly Ulbrich. "Financing Government: Using Fees and Charges." The South Carolina Policy Forum.
USC Institute of Public Affairs: Columbia, SC. Spring 1997.
104
Ibid.
105
Ibid.
106
Tom Arrandale. "A Guide to Environmental Mandates." Governing Magazine. Congressional Quarterly,
Inc. Washington, D.C. March 1994.
107
Ibid.
38
VIII. Emerging Trends in Local Government Funding
Several important issues and trends impacting local government funding are emerging.
Policy decisions affecting these emerging trends will be of tremendous import to local
government finance in their immediate and long-term futures. A review of current
literature suggests three such arising "issue/trend" subject areas: (1) Internet taxation, (2)
taxation of services, and (3) the use of certificates of participation.
Internet Taxation
The use of the Internet for retail sales has catapulted since 1995 and is expected to
continue to grow significantly over the next five to ten years. This poses two difficult and
puzzling questions for local government funding. First, do indeed local governments have
the authority to collect sales taxes over the Internet, and if they do not, shouldn't local
governments be seriously considering the acquisition of such authority? Second, how can
local governments collect sales taxes for goods sold over the Internet? 108
In 1998, Congress passed legislation ("The Internet Freedom Act") that places a threeyear moratorium on new taxes on Internet access and services. This legislation further
provides for the creation of an advisory committee to examine the issues dealing with
electronic commerce as well as direct mail sales taxes. This committee is required to
recommend appropriate federal legislation sometime in the year 2000. And lastly, this
legislation permits those states with existing Internet taxes to continue with their taxation
by "re-affirming" their respective legislation within the period of one year.109 (See
Appendices).
As of 1998, fourteen states and the District of Columbia have enacted statutory authority
to tax Internet access. The State of Oregon imposes an Internet tax on gross receipts.110
Though most of these states are permitted to levy a sales tax on Internet access, whether
or not they actually do levy such a tax, or enforce their Internet tax laws, is unclear.
Why is Internet taxation an important issue for government? Sales over the Internet are
booming and are projected to be immense in the near future. "It has been projected that
sales over the Internet will reach $1.5 trillion by the year 2002."111 Local governments,
and state governments, are weighing the possibilities of losing billions of potential sales
tax dollars if such sales transactions remain untaxed. (See Appendices).
108
Molly R. Bernhart. Internet Taxation: What Counties Need to Know. National Association of Counties:
Washington, D.C. 1998.
109
Ibid.
110
Ibid.`
111
Ibid.
39
Figure 11
Web Commerce
n In early 1999, 87 million North Americans and more than 150 million people worldwide were
using the Internet.
n In 1998, 63 percent of U.S. Internet users made a purchase online and 81 percent of these
users plan to shop online during 1999.
n During the 1998 holiday season, 43 percent of all Internet users bought products online.
n Business sales on the Internet reached $43 billion in 1998. Web revenues are expected to
grow to $109 billion in 1999.
Sources: Neilson; Intelliquest; Louis Harris and Associates; and Forrester Research.
Several practical problems, however, surface in connection with taxing sales through the
Internet. One such problem is that some states, and many local jurisdictions, do not
impose a sales tax. What if a person in a taxing jurisdiction sends a purchase to another
jurisdiction that does not levy a sales tax? Another problem is that the sales tax rate
structure varies from state to state and from one locality to the next. Internet businesses,
in order to collect correctly the sale tax, would have to differentiate among hundreds of
variable tax rates. Also, tax rates change from time to time. How would this situation be
accounted for? Additionally, once the tax is collected, how would it be returned to the
appropriate taxing jurisdiction? 112 These and many other questions pose serious issues for
Internet taxation.
A paper published by the National Association of Counties suggests a number of possible
solutions to address these issues or problems related to taxing the Internet. One solution
is to require, presumably through federal legislation, a single sales tax rate. This would
mean that over 30 states would have to come on board with a satisfactory and agreeable
uniform rate. Another suggestion, which would be perhaps less disruptive to current state
rate practices, is to establish so-called "state-run clearinghouses" that would collect and
redistribute sales taxes resulting from purchases over the Internet.113 (See Appendices).
Sales Taxation of Services
For over a little more than the past three and half decades, the U.S. has been shifting from
an industry-based economy to a more service-oriented one. While this shift was initially a
gradual one, since the mid-to late 1980's, it has accelerated appreciatively. Economists,
for instance, point to the change in the share of personal consumption spent on services in
the U.S., which increased from 26 percent in 1960 to 42 percent in 1991. They further
point to the fact that as a percentage of U.S. domestic product, services have grown from
about 60 percent in 1970 to more than 70 percent in 1991.114
112
Ibid.
Ibid.
114
Washington Research Council. Policy Brief: Sales Taxation of Services. Washington Research Council:
Olympia, WA. April 1993.
113
40
The result of this shift in spending patterns has had an effect on both state and local
revenue. Sales taxes have been affected especially. With shrinking sales tax bases (i.e.,
tax bases growing more slowly than population and personal income), a number of state
and local governments have been looking at ways to remedy this situation. Sales taxation
of services has been such a remedy. Indeed, a number of states have already seriously
started moving towards taxation of services. It is predicted that states and local
governments might need to look closer at this increasingly important trend in taxation.
The Federation of Tax Administrators recently updated, in July of 1996, an in-depth
survey of the services taxed by states.115 This survey identifies 164 individual servicerelated transactions that are currently taxed by the states. These individual services are in
turn placed into eight service categories: Utilities (Number of Individual Services in this
Category = 16), Personal Services (N= 20), Business Services (N= 34), Computer
Services (N= 6), Admissions/Amusements (N= 14), Professional Services (N= 8), and
Other (N= 47).116
The survey found that because of relatively stable state budgets and an overall good
national economy, states have recently been reluctant to impose new tax increases or new
types of taxes. Since 1990 no state could be identified as taking what might be identified
as a "broad expansion" of their sales tax bases. Nevertheless, a few states have made
"selective" changes to their sales tax bases to increase the taxation of services. These
states include Arkansas, Ohio and South Dakota.117
n In 1993, Arkansas increased the number of services taxed from 52 to 65.
n Also in 1993, Ohio increased its number of services taxed from 42 to 52.
n In 1995, South Dakota raised its number of services taxed by 11, from 130 to 141.118
It should be noted that, according to the survey, only Hawaii and New Mexico are the
"most inclusive" in placing a sales tax on services. Hawaii taxes 157 individual services,
and New Mexico, 152. South Dakota and West Virginia tax more than 100 services.
Delaware and Washington also tax a large number of services.119
115
Federation of Tax Administrators. "FTA Surveys Sales Taxation of Services." Reprinted from Tax
Administrators News. Federation of Tax Administrators: Washington, D.C. December 1996.
116
Ibid.
117
Ibid.
118
Ibid.
119
Ibid.
41
Figure 12
Sales Taxation of Services
Survey Categories
Utilities
Personal Services
Business Services
Computer services
Admissions
&
Amusements
Professional Services
Other Services
All states except Alaska, Idaho, Nevada and Oregon tax some form of utilities.
The survey examined 20 personal service areas, including, barbers, dating
services, and laundry services. The newest services to be taxed in this area include
health clubs (20 states), 900 phone services (24 states), and gift wrapping (18
states).
Thirty-nine business services where examined. These include advertising,
employment agencies, security, investigative, and court reporting. Printing is taxed
in 45 states. Photo finishing and photocopying are taxed in 44 and 42 states
respectively.
Nine states, including the District of Columbia tax computer services including
information services.
Admissions and amusements are the most widely taxed services category.
Only Hawaii and New Mexico tax all eight services in this category, including
medical-related professions. South Dakota, e.g., taxes accountants, attorneys,
engineers and land surveyors. West Virginia and Texas tax land surveyors only.
Other services include such services as construction, transportation and storage,
insurance and real estate.
Source: Federation of Tax Administrators. "FTA Surveys Sales Taxation of Services." Reprinted from Tax Administrators News.
Federation of Tax Administrators: Washington, D.C. December 1996.
Certificates of Participation
One approach that local governments have been utilizing for debt financing, and which is
expected to be more prevalent in the future, is the use of Certificates of Participation or
"COPs."
Certificates of Participation are a form of lease purchase financing. COPs create a taxexempt lease to make capital improvements, or to purchase equipment. This would
include, for example, facilities construction or renovation for municipal or county
buildings, fire stations, libraries, and parking garages. Equipment purchases through COP
arrangements might include fire and rescue equipment, portable classrooms, police
vehicles, road maintenance equipment, and computers.120
In practice, a COP is a lease purchase agreement that is divided and sold to investors in
the form of a certificate, similar to stocks. COPs are usually sold in denominations of
$5,000, but this can vary. Rating agencies typically give COPs appropriate investment
ratings though some local governments do issue and insure their own certificates.121
With the issuance of Certificates of Participation, a local government -- the lessee -purchases property or equipment through a lease purchase agreement from a lessor,
typically a vendor. Under this agreement, the lessor sells the COPs to investors which
provides money to the local government. The local government pays on a per annum
120
Jim Culotta. "Certificates of Participation: An Innovative Financing Alternative for Counties." Research
Briefs. The National Association of Counties: Washington, D.C. February 1999.
121
Ibid.
42
basis lease payments, principal and interest, to the certificates holders. The lessor
receives a portion of the lease payments as tax-exempt interest.122
The literature suggests that the use of COPs has several advantages and may be a good
alternative to traditional bond financing. These include:
n A COP financing arrangement can include all costs of the purchase (facility or
equipment) by a local government. Payments on COPs can include insurance costs
and other such costs usually not associated with the purchase of an asset.
n In most cases, COPs do not affect statutory or constitutional debt limitations for local
governments.
n COPs are a good way to address unforeseen cash flow problems of local
governments.
n COPs do not require a referendum.
n COPs allow local governments to purchase needed equipment immediately to
accommodate growing or emergency needs.123
122
123
Ibid.
Ibid.
43
IX. School Finance
Public education in the United States is funded mainly by state and local governments
with a small share of funding coming from federal monies and some modest support,
comparatively speaking, from private and non-profit organizations.126 According to the
National Conference of State Legislatures, total revenues for public schools K-12 for the
period FY 1994 were $255.8 billion. Of this total, state revenues comprised 46 percent,
local revenues were 46.8 percent, and federal funds accounted for 7.2 percent.127 It
should be noted that most federal funds are aimed at the economically disadvantaged and
include such programs as those that provide for remedial education and lunch
subsidies.128
The FY 1996 U. S. average percentages of school revenues differed slightly than those in
FY 1994: state school revenues were 47.9 percent; local were 45 percent; and federal, 7.1
percent. Average revenue per pupil for FY 1996 was $6,853.129
For the same FY 1996 period, South Carolina's funding percentages were as follows:
state sources 46.1 percent, local monies 45.2 percent, and federal 8.7 percent. Georgia's
educational funds, for comparison purposes, were 52.6 percent state, 40.7 percent local,
and 6.7 percent federal. North Carolina's percentages of school revenue from state, local,
and federal, however, were decidedly different: state 66.5 percent; local 24.9 percent; and
federal 8.6 percent.130 (See Figure 13 below, page 46).
Public education has long been essentially a state and local responsibility and educational
finance reflects this fact. State general funds (mainly sales, income and corporate taxes)
and special earmarked revenues (excise taxes, lottery funds, and miscellaneous revenues)
constitute the state share of public school finance. Local school districts are largely
dependent on property taxes. However, due to equity questions related to the property
tax, as well as the property tax revolt sentiment that generally persists, other local school
revenue alternatives are slowly making some progress. These alternatives include “selling
unneeded property to finance capital projects, leasing property, engaging in enterprise
activities to acquire revenue, raising monies through non-profit arrangements, and
seeking corporate and community monies." 131
126
William L. Waugh, Jr. “Financing Public Education in the Towenty-First Century.” David Brunori
(Editor). The Future of State Taxation. The Urban Institute Press: Washington, D.C. 1998.
127
National Conference of State Legislators. School Finance. National Conference of State Legislators:
Denver, CO. January 8, 1999.
128
William L. Waugh, Jr. “Financing Public Education in the Twenty-First Century.” David Brunori
(Editor). The Future of State Taxation. op. cit.
129
National Educational Association. Ranking of the States. National Educational Association: Washington,
D.C. 1997.
130
Ibid.
131
William L. Waugh, Jr. “Financing Public Education in the Twenty-First Century.” David Brunori
(Editor). The Future of State Taxation. op. cit.
44
One major shift in school finance gaining attention, and being put into practice in many
locales, is the move to consumption taxes or sales taxes. For instance, the Georgia
legislature passed a local option sales tax in 1997 to allow school district's to apply a onecent levy to support school construction and maintenance. Georgia's school infrastructure
needs, like that in South Carolina, are driving up the costs of education. Georgia's logic
for using the local option sales tax for school construction and renovation is that the sales
tax is easily administered and exportable. The Atlanta Public School System, for
example, estimates that 40 to 60 percent of the school local option sales tax will come
from nonresidents.132
School Finance Litigation
For the past 20 years the role of the property tax in school finance has been challenged in
the courts. According to the literature, as of 1995, 43 states have been involved in
litigation pertaining to the issue of equity in school finance.133
The legal issue is quite straightforward. Is the property tax, used to finance schools at the
local level, unfair to pupils in school districts with low property wealth? Property rich
school districts obviously have an advantage over poorer districts – they have more local
revenues derived from the property tax to better fund their schools. More local money,
therefore, equals more successful schools. The inequities are seen – from school district
to school district -- in school performance, teacher quality, materials, equipment and
facilities.
Proposition 13 in California was, in essence, a result of this legal question. In Serrano v.
Priest (1976), the California Supreme Court ruled that the legislature “must reduce the
inequities in per student spending across all school districts to within $100 of the state
mean.”134 This caused school district-to-district funding to be marginal and hence
taxpayers saw no benefit in living and educating their children in certain school districts.
Basically, the funding mechanism for schools had been reduced to a single level playing
field. Wealthy communities, not seeing any advantage to higher property taxes to support
schools, joined in the property tax revolt and voted for the tax limitations under
Proposition 13.135
132
Ibid.
Steven M. Sheffrin. “The Future of the Property Tax: A Political Economy Perspective.” David Brunori
(Editor). The Future of State Taxation. The Urban Institute Press: Washington, D.C. 1998.
134
Ibid.
135
Ibid.
133
45
Figure 13
Percentage of School Revenue from Local, State, and Federal Resources
Percentage of School Revenue from Local, State, and Federal Resources, 1995 to 1996
State
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
U.S. Average
Local
Funds
19.1
23.9
49.3
21.1
50.3
50.3
56.5
26.7
85.3
43.3
40.7
2.0
31.1
61.3
42.5
45.4
37.3
23.9
32.5
45.5
54.9
59.2
35.6
43.8
29.1
55.8
40.4
57.3
60.9
90.0
56.0
14.9
54.6
24.9
46.5
52.0
27.6
36.4
52.6
55.0
45.2
63.7
40.9
47.7
35.2
65.2
58.4
24.3
33.7
51.5
44.5
45.0
State
Funds
70.9
63.6
42.0
65.4
44.2
44.2
39.1
65.2
N/A
49.5
52.6
89.5
61.2
29.9
52.3
49.5
57.4
67.2
54.4
47.5
39.3
35.5
57.9
51.7
55.6
37.3
49.6
38.4
34.4
7.0
40.3
74.3
39.3
66.5
42.5
41.7
63.5
56.5
41.8
41.0
4601
26.1
50.3
43.5
58.4
29.7
36.3
69.4
58.5
44.1
49.0
47.9
Federal
Funds
10.0
12.6
8.7
8.5
5.5
5.5
4.4
8.2
14.7
7.2
6.7
8.4
7.7
8.8
5.2
5.1
5.3
8.9
13.2
6.9
5.8
5.3
6.5
4.5
15.3
6.8
10.0
4.2
4.7
3.0
3.6
10.7
6.1
8.6
11.0
6.3
8.9
7.1
5.6
4.0
8.7
10.1
8.7
8.8
6.4
5.1
5.3
6.3
7.8
4.4
6.5
7.1
Revenue Per Pupil•
$4,810
10,078
5,532
5,160
5,714
6,296
9,499
8,245
6,703
6,927
6,467
7,418
4,892
7,071
7,135
6,252
7,104
6,288
5,272
6,738
7,434
8,087
8,086
7,662
4,680
6,220
6,260
5,765
6,126
7,138
10,825
6,588
10,323
5,617
5,514
6,352
5,180
6,394
8,693
8,191
6,037
5,673
4,915
6,137
4,499
8,237
6,075
6,942
7,631
8,082
7,114
6,853
• Revenue includes funds received for construction and for contributions to employee retirement accounts
Source: National Education Association. Ranking of the states: 1996. Washington, DC: NEA, 1997
46
School Finance Relief: Michigan and Wisconsin
Like South Carolina’s 1995 Property Tax Relief Program, the states of Michigan and
Wisconsin have taken steps to reduce property taxes associated with school finance. The
tax relief methods taken by these two states have, however, been different.
In 1993, Michigan’s property taxes were one of the highest in the U.S. In the fall of that
same year, a drastic effort was taken to remedy the situation. Legislation was introduced
to eliminate the property tax in Michigan completely. Eventually, in 1995, a compromise
was reached and a referendum was held to determine if voters wanted to reduce local
property taxes and instead raise the state sales tax from four to six percent. The
referendum succeeded with the result being that the local share of elementary and
secondary school funding was reduced from 66 percent to 32 percent.136
In 1993, Wisconsin’s state legislature mandated that revenue caps be imposed on local
school districts as a way to reduce property taxes. This initiative was not entirely
effective and the following year the legislature approved legislation that required that the
state provide two-thirds funding for all public schools.137 If the state was unable to meet
the two-thirds requirement, a statutory provision would kick in to restrict any property tax
increases. The ultimate purpose of the legislation was to reduce property taxes by 40
percent.137
Tax Credit Relief Programs
Some states are providing taxpayers with school (K-12) tax credit/deduction relief
programs. In 1997, three states approved such programs. These states were Minnesota,
Iowa, and Arizona.
Minnesota increased the state’s education deduction program for elementary school
children (K-6) to $1,625, and for middle and secondary schools (grades 7-12), $2,500.138
Additionally, for families with a yearly income under $35,000, an education tax credit of
up to $1,000 per child and $2,000 per family was allowed. This tax credit applies toward
transportation expenses associated with school, non-religious books, computers and
software, and tutoring.139
Iowa passed legislation allowing a tuition tax credit. The credit is equal to ten percent of
the first $1,000 (or $100) for each pupil (or dependent) in K-12, for tuition and texts
(non-religious).140
136
Ibid.
Ibid.
137
Ibid.
138
National Conference of State Legislatures. “NCSL:net – Tuition Tax Credit.” National Conference of
State Legislatures: Denver, CO. 1999.
139
Ibid.
140
Ibid.
137
47
Arizona’s legislature approved a tax credit for making a charitable contribution to private
schools that provide tuition assistance to low-income pupils. The credit extends up to an
amount of $500. The tax credit is being challenged by a coalition of Arizona educational
groups.141
Educational Choice
Traditional school finance methods also are being supplanted by a variety of
“educational choice” approaches. These include charter schools, voucher programs, and
"inter-district choice of school by students." As of January 1999, 25 states and the
District of Columbia have approved legislation permitting charter schools.142 Currently,
no states have adopted or put into practice any voucher schemes.143 However, the City of
Milwaukee has adopted a voucher program entitled, “Parental Choice.” Also, Cleveland
has implemented a voucher program recently. Both cities’ programs include private and
religious schools, and both programs are being challenged in courts as to their
constitutionality. 144
Another approach to “educational choice” is the movement from "district-driven" school
finance systems to individual or "school-based" finance ones. Traditional school district
systems raise revenue district-wide, and receive intergovernmental aid. These districts
then determine which schools will receive what resources in terms of teachers,
instructional facilities, equipment, school buses, etc. Under these circumstances, the
schools themselves seldom receive actual monies. Hence, financial and management
choices are often strictly district-driven, and individual schools are limited in their fiscal
discretions and options.145
Some argue that this district-finance orientation should be shifted to a school-based
system. Why a school-based emphasis? Mainly, the rationale is to re-structure and re-tool
school operations and management, placing emphasis individual school accountability,
and improving overall school performance.146 Other reasons include:
n
n
n
n
n
Increased public or community support for schools;
Adjustments for regional differences in purchasing power;
Assurance for extra funding for special needs children;
Better rewards for teacher performance and student improvement;
Improvement of overall school efficiencies.147
141
Ibid.
National Conference of State Legislators. School Finance op. cit.
143
Note: Puerto Rico passed a voucher program in 1998 that applied to both private and religious schools.
The program was quickly nullified by the Puerto Rican Supreme Court.
144
National Conference of State Legislators. School Finance op. cit.
145
Allan R. Odden. “Redesigning School Finance: Moving the Money to the School.” University of
Wisconsin: Madison, WI. 1995.
146
Ibid.
147
Ibid.
142
48
X. Criteria to Evaluate Revenue Sources
Many commissions have been created to study the strengths and weaknesses of state and
local tax systems. Periodic review of government tax policy is especially important as
many taxes and fees are based on rules and decisions made 50 years ago or more.124
Almost all states have recognized this need and formed tax study commissions during the
last 20 years. Recent findings of these commissions include defining the standards,
principles, and values used to judge the overall tax system and any proposed
modifications. South Carolina's recent Joint Tax Study Commission is an example of this
approach. The nine members of the commission agreed upon five criteria to measure the
current tax structure, and any tax policy changes to be seriously considered.
n Responsiveness to interstate and international competition. Tax rates and tax
structures should be competitive and flexible in order to foster economic
development.
n Balance and reliability. Tax systems should be designed so that they spread risk and
tax burden, and assure adequate revenue. State and local governments should have the
ability to generate revenue, which would be consistent over time, and sufficient to
meet the needs of government.
n Accountability. To the extent possible, the governmental entity spending the revenue
should be responsible for collecting the tax.
n Political acceptability and responsibility. Taxpayers believe that the distribution of
the tax burden should be fair, and that they should have an understanding of the
burden as allocated. Taxpayers also believe that they should have an understanding as
to why the tax dollars are necessary as well as how they will be spent. This means
that, in essence, a tax system should collect only what is necessary for government to
function. When revenues exceed what is necessary for government to function, tax
rates should be examined and adjusted as appropriate.
n Ease of compliance and administration. Taxpayers should be able to prepare for and
comply with a tax. The amount and rate of taxes, together with the manner of
calculation and payment, should be clear and plain. Tax systems should be evaluated
and coordinated so that no group of taxpayers is taxed by multiple levels of
government for the same income base (or tax stream). Additionally, taxes should be
levied at a time, and in such a manner, that is most likely convenient and "hassle-free"
for the taxpayer. Finally, the quality of the tax system facilitates taxpayer compliance
by minimizing time and effort to comply, while at the same time, minimizing the cost
of revenue administration. 125
Study commissions in Wyoming and West Virginia have generally agreed with the above
criteria and have included additional standards addressing, for example, the "desire to
reduce progressivity," including "tax preference inequities." Once the desired criteria of a
"good" tax system are established, assessment or measurement of how well the current
124
Note: See Appendix for additional evaluative criteria established by the National Conference of State
Legislatures.
125
S. C. Joint Tax Study Commission. "Joint Tax Study Commission Progress Report." S. C. Joint Tax
Study Commission: Columbia, SC. 1999.
49
system fulfills these ideals can be performed. Consideration of these widely recognized
criteria of a sound tax system aids in ensuring that any modifications will "help rather
than hinder" taxpayers.
50
XI. Conclusion
In this report, an overview of local government funding -- from a national perspective -is presented. Local government funding is, of course, vital to America's political
subdivisions. Local officials are compelled nowadays to look to the policies and practices
of other local governments and national trends to help facilitate meeting growing public
needs. This report attempts to provide some insight into the issues and trends that are
prevalent across the U. S. as they relate to local revenue-raising.
The challenges that local governments and their financial structures are facing are
daunting. A dramatically shifting demographic profile of the U.S. population and
economy is forcing local governments to re-think their revenue-raising systems. Add to
this scenario unfunded mandates, utility deregulation, technological changes, health care
costs, and the problems associated with urban sprawl, and the challenges are immense.
Local revenue sources have increased to meet demands. As stated earlier in this report, a
30-year history of local government revenue collections shows that local revenue has
increased by well over 1,000 percent, from FY 1966 to FY 1996. Property taxes, local
sales taxes, intergovernmental aid, and user charges and fees have grown, shifted, and/or
re-adjusted over recent years to accommodate changing public service needs. Local
governments have had to become more fiscally self-dependent and revenue
diversification has become a fiscal public policy necessity.
Local governments, rocked by tax revolts and limited financial resources, have been
competing against one another (counties, cities, school, districts, and special tax districts)
"to make ends meet." Property taxes remain important to local government finance, but
other revenue sources have gained ground, especially user fees and charges. Local option
taxes have also become more common, such as the local option sales tax and
accommodation taxes.
Internet and e-commerce are changing significantly the way consumers purchase goods
and services. Estimates vary, but Internet sales are expected to amount to hundreds of
billions of dollars worth of sales within a short period of time. Along with catalog sales,
the cost in lost revenues to state and local governments could be catastrophic. Indeed,
local governments must give serious attention and action to the Web and its implications
and affects on local finance.
School finance is an important component of local government finance. Questions of
equity and reliance on the property tax must be carefully studied and new funding
strategies must be explored if schools are to prosper and provide adequate education for
our children.
In sum, this report aims at providing the reader with a brief view of national issues and
trends in local government finance. The reader will hopefully find this discussion useful
-- at least as a springboard -- to survey and research, in greater detail, the lessons to be
learned from local governments across the U. S.
51
References/Bibliography
American Institute of Certified Public Accountants. Top 10 Technology Issues. American
Institute of Certified Accountants:New York, NY. December 1997.
Tom Arrandale. "A Guide to Environmental Mandates." Governing Magazine.
Congressional Quarterly, Inc. Washington, D.C. March 1994.
David Baer. Awareness and Popularity of Property Tax Relief Programs. American
Association of Retired Persons: Washington: D.C. 1998.
Molly R. Bernhart. Internet Taxation: What Counties Need to Know. National
Association of Counties: Washington, D.C. 1998.
Robert L. Bland. A Revenue Guide for Local Government. International City/County
Management Association: Washington, D.C. 1989.
Tom Bonnett. "Is the New Global Economy Leaving State-Local Tax Structures
Behind?" Fiscal Affairs. National Conference of State Legislatures: Denver, CO. March
1999.
California State University. Economic Data and Links. (Bureau of Labor Statistics)
California State University: Fresno, CA. 1999.
Central Midlands Council of Governments. 1999 Economic Investments. Central
Midlands Council of State Governments: Columbia, SC. 1999.
Cost Control Associates. Electric Deregulation Status. (Chart) Cost Control Analysts:
Glen Falls, NY. 1999.
Jim Culotta. "Certificates of Participation: An Innovative Financing Alternative for
Counties." Research Briefs. The National Association of Counties: Washington, D.C.
February 1999.
Federation of Tax Administrators. "FTA Surveys Sales Taxation of Services." Reprinted
from Tax Administrators News. Federation of Tax Administrators: Washington, D.C.
December 1996.
Hal Hovey. The Property Tax in the 21st Century. The Finance Project: Washington, D.C.
May 1996.
International City/County Management Association. Service Report. (Vol. 31, Number 4)
International City/County Management Association: Washington, D.C. April 1999.
52
Milton Z. Kafolis. "Local Service Charges: Theory and Practice." State and Local Tax
Problems. Editor Harry L. Johnson. The University of Tennessee Press: Knoxville, TN.
1970.
Jerry Kolo and Todd J. Dicker. "Practical Issues in Adopting Local Impact Fees." State
and Local Government Review. Volume 25, No. 3. Fall 1993.
Susan A. MacManus. Revenue Patterns in U.S. Cities and Suburbs: A Comparative
Analysis. Praeger Publishers:New York, N.Y. 1978.
John L. Mikesell. Fiscal Administration: Analysis and Applications for the Public Sector.
Fourth Edition. Wadsworth Publishing Company: Belmont, CA. 1995.
National Conference of State Legislatures. Critical Issues in State-Fiscal Policy. National
Conference of State Legislatures: Denver, CO. 1997.
National Conference of State Legislatures. Electric Utility Restructuring Series. National
Conference of State Legislatures: Denver, CO. 1996.
National Conference of State Legislatures. “NCSL:net – Tuition Tax Credit.” National
Conference of State Legislatures: Denver, CO. 1999.
National Conference of State Legislators. School Finance. National Conference of State
Legislators: Denver, CO. January 8, 1999.
National Educational Association. Ranking of the States. National Educational
Association: Washington, D.C. 1997.
Allan R. Odden. “Redesigning School Finance: Moving the Money to the School.”
University of Wisconsin: Madison, WI. 1995.
John E. Peterson and Dennis R. Strachota, Editors. Local Government Finance -Concepts and Practices. Government Finance Officers Association: Chicago, IL. 1991.
Ronald Snell. A Review of State Economic Development Policy, A Report from the Task
Force on Economic Incentives. National Conference of State Legislatures: Denver, CO.
1998.
S. C. Advisory Commission on Intergovernmental Relations. South Carolina
Infrastructure Needs (1995 - 2015). Advisory Commission on Intergovernmental
Relations: Columbia, SC. 1997.
S. C. Association of Counties. Summary: The Impact of Unfunded Mandates. The South
Carolina Association of Counties: Columbia, S.C. February 1995.
53
South Carolina Department of Commerce. 1998 Annual Report. South Carolina
Department of Commerce: Columbia, SC, 1999.
S. C. Joint Tax Study Commission. "Joint Tax Study Commission Progress Report." S. C.
Joint Tax Study Commission: Columbia, SC. 1999.
Steven M. Sheffrin. “The Future of the Property Tax: A Political Economy Perspective.”
David Brunori (Editor). The Future of State Taxation. The Urban Institute Press:
Washington, D.C. 1998.
Charlie B. Tyer. "The Property Tax: Why It Persists." The South Carolina Forum.
Institute of Public Affairs: Columbia, S.C. Spring 1993.
Holly Ulbrich. "Financing Government: Using Fees and Charges." The South Carolina
Policy Forum. USC Institute of Public Affairs: Columbia, S.C. Spring 1997.
Holley H. Ulbrich. "Nonproperty Taxes." Local Government Finance: Concepts and
Practices. Editors John E. Petersen and Dennis R. Strachota. Government Finance
Officers Association: Chicago, IL. 1991.
U. S. Bureau of Census. Government Finances. U. S. Department of Commerce:
Washington, D. C. 1998.
U. S. Bureau of Census. 1997 Population Profile of the United States. U. S. Department
of Commerce: Washington, D. C. August 7, 1998.
U.S. Bureau of Census. "United States State and Local Government Finances by Level of
Government." U.S. Bureau of Census: Washington ,D.C. 1996.
U. S. Conference of Mayors. Impact of Federal Unfunded Mandates. U. S. Conference of
Mayors:Washington, D. C. October 26, 1993.
U. S. Conference of Mayors. The Status of Y2K Compliance in City Governments. U. S.
Conference of Mayors: Washington, D. C. January 1999.
U. S. Department of Health and Human Services. National Health Expenditures and
Selected Economic Indicators (1970 - 2008). U. S. Department of Health and Human
Services. Washington: D.C. September 23, 1999.
Washington Research Council. Policy Brief: Sales Taxation of Services. Washington
Research Council: Olympia, WA. April 1993.
The Washington Times. "Annals of the Taxpayer Rebellion." The Washington Times:
Washington, D.C. June 27, 1998.
54
William L. Waugh, Jr. “Financing Public Education in the Towenty-First Century.”
David Brunori (Editor). The Future of State Taxation. The Urban Institute Press:
Washington, D.C. 1998.
55
Appendices
56
Appendix 1
A Checklist of Issues for Evaluating Local Option Taxes
The expansion of local taxing authority may have important implications for individual
taxpayers, businesses and the economy. Listed below are key policy issues that
legislatures may need to consider when determining whether to grant additional taxing
authority to local governments.
Local Accountability and Flexibility
Local option taxes improve accountability to taxpayers by placing taxing and spending
decisions closer to the people. This may be especially important in geographically large
states that encompass regions with divergent political views. Local option taxes allow
voters, either directly or through their representatives, to choose whether to increase taxes
to pay for services that state taxpayers may be unwilling to fund.
Limits on State Revenue Options
Once local option tax provisions are in place, removing or modifying them is difficult
because of the revenue impact on local governments. For example, Colorado, Georgia
and North Carolina decided to reduce the tax burden on the poor by eliminating food
from the state sales tax base. Due to the potential local revenue loss, however, food was
not exempted from the local sales tax base. Local option taxes also will increase
combined state-local tax rates, possibly limiting states' flexibility to raise tax rates in the
future. State policymakers should consider how granting local taxing authority could
affect future state tax system modifications.
Administrative and Compliance Costs
States should recognize that poorly designed local option tax structures will increase
administrative and compliance costs for taxpayers and local governments alike, which, in
turn, may adversely affect a state's economic competitiveness and business climate. Local
option tax structures that grant local and municipal governments the autonomy to
establish separate tax bases, exemptions and collection activities will increase taxpayer
compliance costs and confusion.
On the other hand, assuming local option taxes are permitted by the legislature,
uniformity among such taxes will benefit localities and taxpayers alike. Local option tax
systems that are added to existing uniform, statewide tax bases minimize compliance
costs for taxpayers and preserve the state government's ability to maintain control over
the state's economic competitiveness and business climate as a whole. In addition,
mandated uniform statewide exemptions and exclusions-and a homogeneous tax form
57
that allows taxpayers to report and remit local option taxes at the same time as the state
level tax-will lead to a more efficient, effective and equitable tax system.
Uniformity also will reduce the potential for competition among localities that want to
attract new or expanding businesses, and a single set of tax rules will reduce the costs and
hazards of litigation for all parties. Finally, local tax structures that are centrally
administered by the state will minimize administrative expenses for local governments. In
many states, local option taxes are collected for local governments by the state for a small
administrative fee.
Balance
One principle of a high quality revenue system is balance. Balance means that states have
a roughly equal mix of income, consumption and property taxes. Balance allows states to
keep rates as low as possible in any one tax, minimizing the potential that the tax system
will distort economic behavior. Balance also improves the stability of state-local revenue
systems by distributing the tax burden to various types of economic activity. States must
consider how granting local option taxation will affect the balance of the state-local tax
system.
Responsiveness to Economic Growth
Economists use the term elasticity to describe the responsiveness of a tax--or a tax
system- to personal income growth. Elastic sources increase more quickly than personal
income, while inelastic sources increase more slowly than personal income. Income taxes
are typically the most elastic state-local revenue source, while excise taxes typically are
the most inelastic. State policymakers should consider whether the local option tax source
will produce the long-term revenue growth necessary to finance the programs being
funded by local governments. Authorizing an inelastic revenue source to pay for highgrowth programs like jails or health care may lead to budget problems in the future.
Fiscal Disparities
There will be disparities in the tax base available to finance services any time local rather
than state taxes are used. The primary reason that states have expanded their role in
funding education is to alleviate these disparities. Although property tax disparities
receive a good deal of attention because of their school financing role, other tax sources
actually may create larger fiscal disparities. When evaluating the use of local option
taxes, state policymakers should consider whether a local option tax alternative will
improve or exacerbate the fiscal disparities among local governments in the state.
58
Inter-local Competition
Just as states compete with one another on the basis of tax policy, local option taxes may
lead to competition among local governments. This competition may create an
adversarial relationship between cities and suburbs, as both try to use a competitive tax
policy to lure businesses and residents. Such competition does not improve the state's
overall economic performance and may divert resources from more productive uses.
Competition also may place poorer localities and inner cities at a disadvantage in relation
to their wealthier neighbors because property wealth usually is correlated with income
and consumption. Thus, local governments with strong property tax bases may have less
need for revenue and can levy local option taxes at lower rates than their poorer
neighbors.
Progressivity and Regressivity Of the State-Local System
State decisions about the type of local option taxes authorized can significantly alter the
progressivity of the state-local tax system. In our federal system, the federal government
makes extensive use of the income tax but levies few consumption taxes. By default, state
and local governments must rely primarily upon property and consumption-based levies
that are regressive. Policymakers should consider whether a proposed local option tax
alternative will increase or decrease the regressivity of state-local systems.
Statewide vs. Enumerated Local Option Taxes
States differ on whether all local governments or only those that meet certain criteria may
levy local option taxes. In some states, only the largest cities or counties may levy taxes,
while other states grant statewide authority. States that grant authority broadly may help
minimize the tendency for tax rates to be higher in larger cities.
Voter Approval
States vary considerably on voter approval requirements for local taxes. It is not
uncommon for a state to require voter approval for some local taxes but not others. Voter
approval requirements make it more difficult for local governments to levy or increase a
tax and may delay imposition of a tax until the next election. Also, if voter approval is
required for some local levies but not others, the local governing body may choose the
path of least resistance and impose taxes that do not require voter approval. On the other
hand, voter approval requirements force local governing bodies to carefully justify tax
increases. Such requirements tend to minimize the number of times that local
governments seek rate increases, creating a more stable tax climate.
Federal Deductibility
State and local income and property taxes are deductible from federal adjusted gross
income, while sales and other consumption taxes are not. Federal deductibility can reduce
59
the tax price of income and property taxes, particularly for those taxpayers who face high
federal income tax rates. Shifting from deductible to nondeductible local taxes will
increase the amount of federal taxes paid by state residents.
Source: National Conference of State Legislatures. Critical Issues in State-Local Fiscal
Policy. National Conference of State Legislatures: Denver, CO. 1997.
60
Appendix 2
Local Option Lodging Taxes
1997
Table
State
New England
Connecticut
Maine
Massachusetts
New Hampshire
Rhode Island
Vermont
Middle Atlantic
Delaware
District of Columbia
Maryland
New Jersey
New York
Pennsylvania
Great Lakes
Illinois
Indiana
Michigan
Ohio
Wisconsin
Plains
Iowa
Kansas
Minnesota
Missouri
Nebraska
North Dakota
South Dakota
Southeast
Alabama
Arkansas
Florida
Georgia
Kentucky
Louisiana
Mississippi
North Carolina
Puerto Rico
South Carolina
Tennessee
Virginia
West Virginia
Southwest
Arizona
New Mexico
Oklahoma
Texas
Rocky Mountain
Colorado
Idaho
Montana
Utah
Wyoming
Far West
Alaska
California
Hawaii
Nevada
Oregon
Washington
Total
County
City
Other
(state lodging taxes)
(state lodging taxes)
3
(state lodging taxes)
(state lodging taxes)
3
(state lodging taxes)
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
(state lodging taxes)
3
3
3
3
3
3
3
38
3
38
7
Source: Commerce Clearing House, State Tax Guide, March 1997. From National Conference of State Legislatures. Critical Issues in State-Local Fiscal
Policy. National Conference of State Legislatures: Denver, CO. 1997.
61
Appendix 3
Local Option Restaurant Taxes
1997
Table
State
New England
Connecticut
Maine
Massachusetts
New Hampshire
Rhode Island
Vermont
Middle Atlantic
Delaware
District of Columbia
Maryland
New Jersey
New York
Pennsylvania
Great Lakes
Illinois
Indiana
Michigan
Ohio
Wisconsin
Plains
Iowa
Kansas
Minnesota
Missouri
Nebraska
North Dakota
South Dakota
Southeast
Alabama
Arkansas
Florida
Georgia
Kentucky
Louisiana
Mississippi
North Carolina
Puerto Rico
South Carolina
Tennessee
Virginia
West Virginia
Southwest
Arizona
New Mexico
Oklahoma
Texas
Rocky Mountain
Colorado
Idaho
Montana
Utah
Wyoming
Far West
Alaska
California
Hawaii
Nevada
Oregon
Washington
Total
County
City
Other
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
14
18
4
Source: Commerce Clearing House, State Tax Guide, March 1997. From National Conference of State Legislatures. Critical Issues in State-Local Fiscal
Policy. National Conference of State Legislatures: Denver, CO. 1997.
62
Appendix 4
"Plain English" Summary of The Internet Tax Freedom Act
(P.L. 105-277)
Included as Titles XI and XII of the Omnibus Appropriations Act of 1998; Approved as
H.R. 4328 by Congress on October 20, 1998; Signed as Public Law 105-277 on
October 21, 1998.
Background:
The Internet Tax Freedom Act is based on a simple principle: Information should not
be taxed. As we enter the digital age, the age of information, establishing this principle
in law will have profound and long-lasting consequences. Given the pace of the
Internet's growth--the U.S. Commerce Department recently told us that the number of
Internet users and the number of web pages are doubling every 100 days--protecting the
Internet, and the information and commerce exchanged over the Net, from special and
discriminatory taxation on a national basis will prove a further stimulus to the continued
technological and commercial development of this dynamic new medium.
The Internet Tax Freedom Act is needed not just to give the Net room and time to
grow, but also because the Net is inherently susceptible to multiple and discriminatory
taxation in a way that commerce conducted in more traditional ways is not. The very
technologies that make the Net so useful and efficient--notably its decentralized, packetswitched architecture--also mean that several States and perhaps dozens of localities
could attempt to tax a single Internet transaction. The Internet Tax Freedom Act will
protect commerce conducted over the Internet from being singled out and taxed in new
and creative ways, and will give Americans the reassurance they need that they will not
be hit with unexpected taxes and tax collecting costs from remote governments.
Summary:
The Internet Tax Freedom Act has undergone a number of changes since it was
introduced by Rep. Christopher Cox (R-CA) and Sen. Ron Wyden (D-OR) in March
1997. Most of these changes are the result of months of intense negotiations with State
and local government leaders. As a result, the legislation has been altered to reflect
State and local concerns, and now reflects a balanced compromise between the national
interest in protecting this burgeoning marketplace and the importance of guarding
against erosion of the State and local treasuries.
In March 1998, Rep. Cox held a news conference to announce the support of the
National Governors' Association, the National Conference of Mayors, the National
Conference of State Legislatures, the National Association of Counties, and the
63
National League of Cities for the revised legislation. Numerous changes were made to
cause state and local governments to drop their opposition, including: shortening the
moratorium to 3 years; providing for a more targeted moratorium instead of a blanket
prohibition on all Internet-related taxes; and creating a temporary commission to study
the complex state and local tax issues relating to electronic commerce.
Highlights of the law:
• 3-year moratorium on special taxation of the Internet. Bars state or local
governments from taxing Internet access (i.e. the $19.95 or so that many
Americans pay monthly to America Online, CompuServe, Erol's, or other
similar services to access the Internet) from October 1, 1998 until October 21,
2001. A limited "grandfather" clause permits the handful of states already taking
steps to tax Internet access--Connecticut, Wisconsin, Iowa, North Dakota, South
Dakota, New Mexico, South Carolina, Tennessee, Texas, and Ohio--to continue
to do so if they can demonstrate that their taxes had already been "generally
imposed and actually enforced" on Internet access providers prior to October 1,
1998. Nevertheless, it is not expected that all of these states will in fact choose
to tax Internet access: Connecticut and South Carolina, for instance, have
already indicated they intend to abide by the national moratorium.
• 3-year moratorium on multiple and discriminatory taxes on electronic
commerce. Bars state or local governments from imposing taxes that would
subject buyers and sellers of electronic commerce to taxation in multiple states.
Also protects against the imposition of new tax liability for consumers and
vendors involved in commercial transactions over the Internet, including the
application of discriminatory tax collection requirements imposed on out-of-state
businesses through strained interpretations of ‘nexus.’ It also protects from
taxation, for the duration of the moratorium, goods or services that are sold
exclusively over the Internet with no comparable offline equivalent.
• Establish commission to study question of remote sales. A temporary Advisory
Commission on Electronic Commerce will study electronic commerce tax issues
and report back to Congress after 18 months on whether electronic commerce
should be taxed, and if so, how they can be taxed in a manner that ensures such
commerce won't be subject to special, multiple, or discriminatory taxes. State
and local elected officials will be given a prominent voice on this commission.
Congress, of course, retains full authority to change or discard the
Commission's proposals.
• No federal taxes. Sense of Congress that there should be no federal taxes on
Internet access or electronic commerce.
• Declares that the Internet should be tariff-free zone. Calls on the Clinton
Administration to work aggressively through the EU and WTO to keep
electronic commerce free from tariffs and discriminatory taxes. Asks Commerce
Department to report to Congress on barriers hindering the competitiveness of
U.S. businesses engaged in electronic commerce abroad.
64
Legislative History:
Rep. Cox and Sen. Wyden introduced H.R. 1054/S. 442, the Internet Tax Freedom
Act, in March 1997. In the House, the legislation was referred to two main committees,
the Commerce Committee and the Judiciary Committee. Hearings were held in both
committees in July 1997. In October 1997, the Commerce Subcommittee on
Telecommunications and the Judiciary Subcommittee on Commercial and
Administrative Law each approved amended versions of the legislation. Subsequent to
these markups, Rep. Cox negotiated an agreement with state and local leaders and
introduced a new bill (H.R. 3849) in May 1998 reflecting this agreement, which was
approved on May 14, 1998, by the Commerce Committee on a 41-0 vote. On June 17,
1998, the Judiciary Committee reported out virtually identical legislation (H.R. 3529,
introduced by Rep. Steve Chabot) by voice vote. The main difference between the two
bills was that, on the latter bill, Judiciary was the primary committee of jurisdiction,
whereas the Commerce Committee was the primary committee on H.R. 3849. To
reconcile these jurisdictional differences, on June 22, 1998, Rep. Cox introduced a new
version (H.R. 4105) that merged these two separate bills into one unified version,
taking the state and local tax provisions from the Judiciary Committee's bill and
important FCC language from the Commerce Committee's bill. On June 23, 1998,
H.R. 4105 was brought up and approved by the full House by voice vote.
In the Senate, S. 442 was referred to the Commerce Committee, which held hearings in
May 1997 and approved the legislation in November 1997 by a 14-5 vote. Following
the House's unanimous approval of H.R. 4105, in July 1998 the Finance Committee-which had recently obtained a sequential referral on S. 442--held hearings on the
legislation, and voted 19-1 to approve amendments to S. 442 that reflected the
consensus reflected in the House-passed language. The full Senate took up S. 442 in
September 1998, and spent two and a half weeks debating the legislation before
approving it on October 8 by a 96-2 vote. The Senate language was subsequently rolled
into the Omnibus Appropriations bill that was approved by Congress on October 20.
Bill Clinton signed the entire package--including the Internet Tax Freedom Act--into
law on October 21. Under the terms of the new law, the Internet tax moratorium is
officially in place, and will be in effect from October 1, 1998 until October 21, 2001.
Source: www.house.gov/chriscox/nettax/lawsum.html, 1999.
65
Appendix 5
Should Policymakers Care About the Growth of Internet Commerce?
Policymakers, Internet entrepreneurs, and corporate tax
professionals are spending considerable time lately discussing the growth
of Internet commerce and its possible implications for state economic
growth, economic development, and state and local revenues. State and
local policymakers fret about the potential loss of sales and use tax
revenues as more and more commerce shifts from local vendors to the
Internet. Internet vendors and other “remote sellers” counter that state and
local sales taxes are way too complicated to impose a collection obligation
on them.
Complicating state and local efforts to make their case is the
fundamental economic reality that has been reported in recent issues of
Reports. States are sitting on enormous reserves and fiscal conditions
continue to be excellent. USA Today reported in July, without much
argument, that even with tax cuts states cannot spend the money fast
enough. Even as business-to-consumer Internet sales explode, state and
local sales tax revenues continue to grow at 5-6% – hardly indicative of a
sales tax revenue crisis.
Is the Internet a threat to the future of the state and local sales tax,
or are state and local governments crying wolf?
The issue of whether states can collect sales and use taxes on sales
by remote vendors is not new. The US Supreme Court ruled in 1967, in
the Bellas Hess case, that states could not impose a sales tax collection
obligation on sellers that do not have “nexus” in their state. The Court
defined nexus as a “physical presence,” although states and businesses
have been fighting in the courts ever since over what constitutes a physical
presence. This ruling was upheld in the 1992 Quill case, which reaffirmed
that only Congress could allow states to impose a collection obligation on
remote sellers.
Can Destination-Based Taxes Survive in a Digital World?
Since their inception in the 1930s, state sales taxes have been
imposed on the “destination” principle. That is, the state where the buyer
uses or consumes the product – not necessarily the state where the product
is purchased or the seller is located – has the authority to impose the tax.
Such a system was relatively easy to administer in an era where consumers
66
bought tangible
transactions.
products
from
in-state
vendors
in
face-to-face
Courts have long recognized the power of states to tax activity
within their borders. Under the destination principle, states impose “use”
taxes in situations where a product is purchased in another state and
brought into the state for use in the buyer’s home state. If a consumer
purchases a car in a neighboring state, the sale is exempt in the seller’s
state but taxable in the buyer’s state at the time of registration.
The problem for states is not a legal one but a practical one. States
can impose the use tax, but how can they collect it. For cars, boats, and
other items that must be registered with state authorities, compliance is not
a problem. But for everything else, it’s a huge problem.
For in-state firms, states clearly have the power to compel sellers
to collect and remit the tax. But out-of-state firms without nexus are
shielded from a collection obligation by the court cases mentioned above.
State efforts to create a voluntary system, where citizens report their outof-state purchases and pay taxes due, have been woefully unsuccessful.
Most citizens do not even know that they are liable for the tax, and those
that understand the laws know their chances of getting caught are close to
zero.
Sales taxes based upon the destination principle have become even
more problematic in an era where consumers are buying services and
digital products. For services, it is not always easy to determine where the
service is performed. If a person hires an out-of-state lawyer to draft a
will, is the service performed in the lawyer’s home state or in the
purchaser’s home state? If the service is taxed on the destination principle
by the consumer’s home state, collection becomes a problem because the
out of state provider may lack nexus.
For this and other reasons, states have struggled with the question
of whether and how to tax services under the sales and use tax. The
European Community is also struggling with these same issues in the
context of their destination-based value added taxes (VAT).
Digital products raise a whole new set of issues. For digital
products, it may not necessary for the vendor to know where the buyer is
or where the buyer will use a product. All the seller needs to know is the
credit card number of the purchaser. As more and more products are sold
in digital form – music CDs and movies, for example – the “sourcing” of
transactions becomes more problematic. When “electronic cash” begins to
take hold in the next decade, these difficulties will become more
pronounced. Firms argue that to ask where a customer lives may be seen
67
as an invasion of privacy, even though firms ask all kinds of similar
questions for marketing purposes.
Why not just avoid this problem altogether and shift to a so-called
“origin based” system that imposes taxes based upon the location of the
seller? Under such a system, people who buy software from Microsoft
would pay the Washington sales tax instead of the tax in their state of
residence. States are concerned that such a system would lead vendors to
locate in states without sales taxes – or to threaten such moves to get the
legislatures and governors to approve exemptions for their products. One
could easily imagine Microsoft moving their retail sales operations to
Oregon. Just the threat of such a move would likely cause Washington
policymakers to exempt sales of software.
This old problem has taken on a new twist with the emergence of
the Internet as a powerful tool for direct selling. The Internet offers sellers
the opportunity to sell goods into a state without a sales force, without
sending catalogs into a state, and in the case of “digital products,” without
even sending a physical product into a state. Some states have tried
creative approaches to assert that Internet vendors have nexus, such as
declaring that the presence of a World Wide Web “server” creates nexus.
However, states are no more likely to be successful than they were with
arguments that sending catalogs or goods into a state by common carrier
creates nexus.
What is making some state and local policymakers nervous is the
uncertainty about how big Internet selling will become. Professor Austan
Goolsbee of the University of Chicago synthesized the range of estimates
from several forecasters into the following:
1998 -- $1.5 billion
1999 -- $8.0 billion
2002 -- $120 billion
These projections for exponential growth in business-to-consumer
Internet sales provoke skepticism in some quarters. However, even the
most fantastic projections from one or two years ago have turned out to be
too low. These projections, combined with Wall Street’s exuberance for
anything.com, have forced even the most traditional retailers to embrace
web selling with astonishing speed. Wal-Mart, Nordstroms, and most of
the other successful “bricks and mortar” retailers are rushing to have web
offerings in time for the Christmas holidays. This means that when the
dust settles early next year, Internet sales to consumers will likely shatter
projections again.
68
The mail order industry took roughly 25 years to grow and mature
into a major force in American retail, with sales of over $80 billion today.
Updating estimates from the a 1994 Advisory Commission on
Intergovernmental Relations report, roughly $5 billion per year in legally
due sales and use taxes goes uncollected on mail order sales. Internet
retailing, after taking account of the fact that Internet sales will cannibalize
traditional mail order sales, could exceed this $5 billion within the next
four years under the conservative estimates cited above.
The National Tax Association Project
This potential revenue loss has the attention of state and local
policymakers. Two years ago, state and local officials entered into
discussions with a diverse group of representatives from the business and
academic community to see whether a consensus could be reached on how
to modify state and local sales and use taxes to reflect the reality of
electronic commerce. These discussions were convened by a neutral third
party: the National Tax Association.
Some government and business representatives hoped that these
discussions might lead to the “grand compromise” that had been eluding
state and local governments since the 1967 Bellas Hess decision. Under
such a deal, states would implement a series of major sales tax
simplification measures that would remove the “undue burden of
collection” on remote sellers. Remote sellers with sales above a certain
amount would be required to collect and remit sales taxes.
The incentive for state and local governments to deal was the huge
potential revenue loss from remote sales. State and local governments
would be forced to “put their money where their mouth is” – is the threat
of sales tax revenue erosion so great that they would be willing to live
with limits on their sovereign rights. Limits discussed in the NTA Project
included a single statewide rate to replace various local option levies; new
standardized definitions of products and services; limits on the frequency
and timing of rate changes; limits on audit authority; acceptance of
standardized forms, filing procedures, and deadlines; and other limits.
The incentive for the business community to make a deal was the
prospect of a radically simpler sales tax system that would reduce
compliance costs dramatically for multi-state firms that have nexus in
many states.
These firms include large national chain stores,
telecommunications companies, and catalog sellers that have voluntarily
agreed to collect sales and use taxes.
A “simplification for collection” deal would free remote sellers to
pursue business strategies without concern for triggering tax collection
69
obligations. For example, retail analysts are predicting that “clicks and
mortar” – storefronts with little inventory where consumers can try
products and place orders – will let Internet sellers compete more
successfully with traditional retailers. Gateway Computer has been
successful using this model to sell custom-made computers to consumers
that are not yet comfortable buying products sight unseen.
Not all business representatives want a deal, however. With retail
margins in the single digits in many product lines, the ability to sell
directly to consumers without collecting a 6-8% sales tax is a big
competitive advantage for some remote sellers. Some NTA Project
business representatives were adamant that no deal be reached.
Ultimately, the NTA Project failed to reach an agreement.
However, the Project issued a final report in September that explored the
issues under negotiation and presented the issues confronting
policymakers and business representatives. (The full report is available on
the NTA website at www.ntanet.org)
The Advisory Commission on Electronic Commerce
Contributing to the failure of the NTA Project to reach agreement
may have been the existence of the federal Advisory Commission on
Electronic Commerce. This Commission was created by Congress as part
of the Internet Tax Freedom Act, legislation passed in 1998 that places a
three year moratorium on new state and local taxes on Internet access
charges. The Commission is charged with recommending to Congress
whether and how federal, state, and local taxes ought to be applied to
access to the Internet, goods and services purchased over the Internet, and
telecommunications services generally.
The Commission itself is comprised of eight business, eight state
and local government, and three federal government members. However,
the members do not break down along business/government lines. Several
of the most strident anti-tax members are government members, while
several business members seem to be moderates on tax issues.
The Commission is important because it will release its
recommendations during the height of the political season: March 2000.
Already, several members of Congress are looking to make the 3-year
moratorium on Internet access charges permanent. The Internet remains
the “golden child” of Washington politicians due to its fundraising
potential and high tech job creation allure. Some members of Congress
will be looking for any cue from the Commission to pre-empt state and
local taxation, since gridlock may prevent any meaningful federal tax
relief from passing before the 2000 election.
70
The Commission has held two meetings so far. At its September
meeting in New York, the Commission heard testimony from “expert”
witnesses on telecommunications taxes and sales and use taxes. The
Commission members also spent considerable time debating philosophical
differences among its members on whether taxes are too high. However,
hints of where the members stand on these issues began to emerge as well.
Dean Andal, the elected Chairman of the California Board of
Equalization and a government representative on the Commission, has put
forth two proposals that state and local governments view with some
trepidation. His first proposal is to codify the Quill decision in federal
statute and extend its nexus provisions beyond the sales tax to include
state corporate income and other business activity taxes. This would be
accomplished by amending PL86-272, a 1950s federal law that protects
multistate firms that sell tangible goods from paying income taxes in states
where they lack physical presence.
His
second
proposal
concerns
property
taxes
on
telecommunications providers. It calls for amending the federal “4R Act”
to prohibit the “discriminatory” assessment and taxation of
telecommunications property. The current law granted this special
treatment to railroads back in the 1970s, when railroads were going
bankrupt. It allows railroads to go directly into federal court to challenge
local property tax assessment practices and has caused major fiscal
headaches for many Midwestern and Western states.
It is not clear whether Andal’s proposals have broad-based support
beyond the five or so anti-tax Commission members. Many of the
business representatives on the panel have taken a middle-ground
approach. At the September meeting, Governor Mike Leavitt of Utah
proposed that the National Governors Association (which he chairs this
year) convene state tax professionals to determine whether a technologybased system for collecting sales taxes on remote sales could be
developed.
After much wrangling, the Commission agreed to let the NGA
group and any other interested parties examine the feasibility of such a
system before the next Commission meeting in San Francisco on
December 14th . Commission members agreed that the system must have
the following attributes:
1. Provides for radical simplification of sales and use taxes
2. Is technically feasible
3. Imposes no new taxes
4. Removes administrative burdens from sellers
71
5. Respects the privacy of consumers
6. Respects state sovereignty
7. Treats sellers in a competitively neutral manner
8. Does not discriminate against out-of-state sellers
9. Protects firms from multiple audits
10. Is compatible with international trade
11. Is Constitutional
12. Respects Indian sovereignty
Possible Commission Outcomes
Deadlock – The members cannot achieve consensus on a recommendation
to Congress that gains the two-thirds majority necessary for adoption.
Under this scenario, it is likely that there will be at least two groups
pushing Congress to act in the wake of the failure to achieve consensus.
One group will be the anti-tax group urging federal pre-emption of state
and local laws. The second group will be the government group that
supports letting state and local governments solve this problem using
technology and simplification of state and local sales taxes.
Technology-based solution – A group of government and business
representatives provides a two-thirds majority support for a technologybased solution that requires states to simplify their sales and use taxes in
exchange for an expanded duty to collect on mail order sellers. Such a
solution would require Congressional approval, or could be accomplished
by states working together.
Internet as a Tax Free Zone – The Commission may recommend that the
Internet be anointed as a tax-free zone. This could be done by codifying
Quill, as suggested by Dean Andal, or by extending the three-year
moratorium on taxes on Internet access indefinitely. Legally, it is doubtful
whether Congress can prohibit states from taxing sales from other states
but it can certainly preserve the status quo that prevents states from
imposing a collection duty on out-of-state merchants.
The most likely outcome from the Commission is probably
deadlock, which would leave state and local governments with the current
system.
Outlook for Sales Tax Simplification
States have the ability to overcome the Supreme Court’s Quill
decision if they adopt a simple enough sales tax system that is no longer
an “undue burden” on remote sellers. This does not require federal
legislation, but it does require states to work together to bring more
uniformity to sales and use taxes. Even if 25 or 30 states adopt a uniform,
72
simplified system, multi-state firms can cite the undue burden from the
remaining holdout states.
Recent history does not bode well for multi-state cooperation. In
the income tax area, states have been moving away from the three factor
formula designed to standardize apportionment of income of multi-state
sellers. On sales taxes, states continue to adopt provisions like temporary
sales tax “holidays” that are a nightmare for remote vendors to comply
with. In the current fiscal environment, with states flush with surplus
cash, there seems to be no urgency for states to act to modernize and
simplify sales and use taxes.
Two things could change this outlook: the threat of federal preemption or an economic downturn. Even then, it is unclear whether states
have the institutional capacity and political desire to work cooperatively to
modernize sales and use taxes for the 21st Century.
Source: Scott Mackey. "State Policy Reports." National Conference of State Legislatures:
Denver, CO. 1999.
73
Appendix 6
Increase Seen in Internet Shopping
The second annual America Online/Roper Starch Cyberstudy, a sample of
approximately 1,000 adult Americans who use online or Internet services from
home, reveals how and why they use the medium, how it is affecting their lives
and society, what prompts their activity online, and their thoughts about its future
impact.
The study found that shopping scored the most dramatic climb among Internet
activities. Forty-two percent of Internet consumers say they regularly or
occasionally make a purchase online, compared to 31 percent in the 1998 study an increase of one-third. That increase was fueled in part by 54 percent more
women - 37 percent compared to 24 percent in 1998 - shopping online this year.
Internet users connected three years or longer engage in more everyday activities
online than newcomers (those online one year or less), the study found. These
activities include getting information about and buying products, checking local
entertainment information, booking travel, communicating with business
associates, trading stock, tracking portfolios, and banking online.
The survey also demonstrates that Internet consumers are becoming more
mainstream, as more older Americans and people of more moderate incomes and
educational backgrounds went online over the past year. Despite this shift,
however, online consumers remain more affluent and educated than the
population at large. Similar to last year's study, more women (55 percent) than
men (45 percent) this year were new to the Internet. Thirty percent of this year's
new Internet consumers are college graduates, compared to 43 percent of 1998
newcomers, and 23 percent of the population at large. The median household
income of newcomers this year is $41,250, compared to a national average of
$38,900, and a median among last year's newcomers of $53,000.
"Out of all online activities, 'making purchases' shot up the most this year," said
Bob Pittman, America Online's President and COO. "One-third more Internet
consumers say they are shopping online, with women shoppers increasing by over
50 percent. We are seeing the online population become more like the mass
market, with women again coming online faster than men. Overall, the fact that
the more time people spend online the more they do bodes well for the future
growth of this medium."
74
Web Veterans vs. Newcomers
Online 3+ years
Hours per
week online
Likely to check
stock portfolio
Likely to
bank online
Likely to trade
stock online
Newcomers
10.5
6.6
47%
24%
23%
11%
21%
6%
Source: AOL/Roper Starch
While online shopping is most popular among more experienced users, it has
increased among all online groups, including Internet newcomers. In addition to
revealing the rapid growth of e-commerce this year, the study contains evidence
that it will continue to grow rapidly in years to come. Thirty-seven percent of all
consumers say they will increase the number of purchases they make online in the
next few years.
This year's survey shows that just over half (53 percent) of those who have been
online three years or more engaged in online shopping, compared to 28 percent of
those who are new to the medium. Similarly, these more experienced users report
spending more online, averaging $266 worth of purchases in the three months
preceding the survey compared to $109 for online newcomers.
One of the clearest trends identified in the study is that the longer Internet users
spend online, the more central the medium becomes to their lives. Those online
more than three years report spending an average of 10.5 hours per week online,
compared to 6.6 hours for newcomers. And, the more time they spend online, the
more they do. Consumers with more than three years experience online are almost
twice as likely to check their stock portfolios as newcomers (47 percent vs. 24
percent), more than twice as likely to participate in online banking (23 percent vs.
11 percent), and three times as likely to trade stocks online (21 percent vs. 6
percent).
Internet consumers are interested in a full range of emerging online activities, the
study found. Eighty-six percent report that they are very interested or somewhat
interested in being able to send and receive pictures from friends and family
online. Among younger Internet users, music is the hot new application, with 61
percent of 18-24 year-olds listening to music online. Forty-one percent of Internet
consumers are interested in being able to go online using a cellular phone or
personal organizer, and 35 percent in being able to go online from public booths
or kiosks. Nearly two-thirds of online users (64 percent) would be interested in
being able to check their telephone voice mail using their computer.
75
Among the other activities drawing interest include taking a class online (69
percent), holding video conferences with friends or family members (67 percent),
voting or registering to vote online (64 percent), or paying their bills online (55
percent).
The America Online/Roper Starch Youth Cyberstudy examined the attitudes and
activities of 9-17 year-olds, and found that 63 percent of youngsters prefer going
online to watching television, while 55 percent choose online to talking on the
telephone.
Young people (9-17 years old) go online more frequently as they grow older, the
study found. On average, 9-11 year-olds go online 2.8 days per week compared to
4.5 days per week for 15-17 year-olds. Communication tops the list of favorite
youth activities online - led by writing letters or notes to friends (59 percent) and
using instant messages (52 percent). Among younger children, ages 9-11, game
playing is the most common activity, with 58 percent of them participating. More
than three-quarters (76 percent) of 9-17 year-olds are interested in downloading
music.
The study also shows that online kids share their parents' eagerness to embrace
new online technologies. Seventy-eight percent of the 9-17 year-olds surveyed are
interested in sending or receiving pictures online, 76 percent in downloading
music, 70 percent in having live video conferences with friends, and 63 percent in
watching short cartoons or video clips online.
Among the benefits young people see for themselves from the online medium are
increased interest in current events (44 percent), and improvements in the quality
of their friendships (39 percent), their writing or language skills (36 percent), and
their performance as a student (33 percent).
The study was based on a random survey of approximately 1,000 adults (18 years
+) and 500 young people (9-17 years old) who subscribe to an Internet/online
service at home. Interviews were conducted via telephone in July 1999 and the
results of the adult sample have a +/-3 percent margin of error, while the youth
sample has a margin of error of +/-4 percent.
November 12, 1999
CyberAtlas
The Web Marketer's Guide to Online Facts
This article can be found online at:
http://cyberatlas.internet.com/big_picture/demographics/article/0,1323,5901_238221,00.html
76
Appendix 7
1996 State & Local Revenue
Tax Burden -- Per Capita
Total Own Source Revenue
($million)
Per Capita
Rank
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Dist. of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
12,599
7,211
13,709
7,047
124,281
13,877
15,150
3,285
3,039
51,343
25,477
5,300
3,829
43,596
19,188
10,412
9,266
12,184
13,781
4,296
18,906
25,834
35,688
21,077
7,884
16,208
2,758
6,149
6,095
3,758
36,981
6,160
97,207
24,064
2,238
38,751
9,705
12,093
41,960
3,561
11,820
2,149
15,064
61,059
6,524
2,104
22,663
22,410
5,427
20,488
2,275
2,948
11,880
3,096
2,808
3,899
3,630
4,627
4,531
5,596
3,565
3,465
4,476
3,221
3,680
3,285
3,651
3,603
3,137
3,167
3,457
3,727
4,241
3,720
4,525
2,903
3,025
3,138
3,722
3,802
3,234
4,630
3,596
5,345
3,286
3,476
3,468
2,940
3,774
3,480
3,597
3,195
2,936
2,832
3,192
3,262
3,572
3,395
4,050
2,972
3,971
4,729
U.S. Total
987,930
3,724
Source: U.S. Bureau of the Census.
77
46
1
43
51
13
21
6
7
2
26
30
9
37
19
34
20
22
42
40
31
16
10
18
8
49
44
41
17
14
36
5
24
3
33
28
29
47
15
27
23
38
48
50
39
35
25
32
11
45
12
4
($million)
Total Taxes
Per Capita
7,632
2,301
10,163
4,851
86,215
9,244
12,543
2,046
2,481
33,557
17,309
3,842
2,542
32,660
12,980
6,983
6,373
8,413
8,466
3,231
14,132
19,123
24,828
14,569
5,143
11,687
1,782
4,181
4,266
2,619
27,449
3,877
72,495
16,486
1,441
27,961
6,558
7,238
30,280
2,711
7,328
1,439
9,992
40,705
4,294
1,518
15,627
15,467
3,643
15,205
1,165
1,786
3,791
2,295
1,933
2,705
2,418
3,831
2,822
4,569
2,330
2,354
3,245
2,138
2,757
2,222
2,448
2,478
2,166
1,946
2,600
2,786
3,139
2,588
3,128
1,894
2,181
2,027
2,531
2,661
2,254
3,436
2,263
3,987
2,251
2,238
2,503
1,987
2,259
2,512
2,738
1,981
1,965
1,878
2,128
2,147
2,577
2,341
2,795
1,995
2,947
2,422
689,038
2,597
Rank
51
4
30
48
15
26
3
10
1
29
27
6
40
13
36
24
23
38
47
17
12
7
18
8
49
37
42
20
16
33
5
31
2
34
35
22
44
32
21
14
45
46
50
41
39
19
28
11
43
9
25
Appendix 8
1996 State & Local Revenue as a
Percentage of Personal Income
Tax Burden -- Percentage of Personal Income
Total Own Source Revenue
($million)
% Per. Inc.
Rank
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Dist. of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
12,599
7,211
13,709
7,047
124,281
13,877
15,150
3,285
3,039
51,343
25,477
5,300
3,829
43,596
19,188
10,412
9,266
12,184
13,781
4,296
18,906
25,834
35,688
21,077
7,884
16,208
2,758
6,149
6,095
3,758
36,981
6,160
97,207
24,064
2,238
38,751
9,705
12,093
41,960
3,561
11,820
2,149
15,064
61,059
6,524
2,104
22,663
22,410
5,427
20,488
2,275
15.4
49.8
15.9
15.7
16.3
15.5
14.6
17.4
16.4
15.7
16.3
18.2
17.4
14.6
15.4
17.5
16.5
16.7
16.7
17.2
14.2
15.2
15.6
19.1
17.5
14.0
17.2
17.5
16.3
12.8
15.6
20.1
19.4
15.8
18.7
15.4
15.9
17.8
14.8
15.1
16.9
15.1
13.6
15.4
18.3
16.9
14.3
17.4
16.8
18.0
22.9
U.S Total
987,930
16.2
Source: U.S. Bureau of the Census and Bureau of Economic Analysis.
78
37
1
30
33
26
36
46
14
25
32
28
8
15
45
39
12
24
22
23
17
48
41
34
5
11
49
18
13
27
51
35
3
4
31
6
38
29
10
44
42
20
43
50
40
7
19
47
16
21
9
2
($million)
Total Taxes
% Per. Inc.
7,632
2,301
10,163
4,851
86,215
9,244
12,543
2,046
2,481
33,557
17,309
3,842
2,542
32,660
12,980
6,983
6,373
8,413
8,466
3,231
14,132
19,123
24,828
14,569
5,143
11,687
1,782
4,181
4,266
2,619
27,449
3,877
72,495
16,486
1,441
27,961
6,558
7,238
30,280
2,711
7,328
1,439
9,992
40,705
4,294
1,518
15,627
15,467
3,643
15,205
1,165
9.4
15.9
11.8
10.8
11.3
10.3
12.1
10.9
13.4
10.3
11.1
13.2
11.6
10.9
10.4
11.7
11.4
11.6
10.3
12.9
10.6
11.2
10.9
13.2
11.4
10.1
11.1
11.9
11.4
8.9
11.6
12.6
14.4
10.9
12.1
11.1
10.8
10.7
10.6
11.5
10.5
10.1
9.0
10.3
12.1
12.2
9.8
12.0
11.3
13.3
11.7
689,038
11.3
Rank
49
1
15
35
25
42
12
33
3
43
30
6
20
31
41
16
24
19
44
7
39
27
32
5
23
47
29
14
22
51
18
8
2
34
11
28
36
37
38
21
40
46
50
45
10
9
48
13
26
4
17
Appendix 9
Fiscal Impact of Internet Sales Tax Losses
FY 1997-98 Revenues
Tax Revenue, Fiscal
Year 1998
United States
New England
Connecticut
Maine
Massachusetts
New Hampshire
Rhode Island
Vermont
Mid Atlantic
Delaware
Maryland
New Jersey
New York
Pennsylvania
Great Lakes
Illinois
Indiana
Michigan
Ohio
Wisconsin
Plains
Iowa
Kansas
Minnesota
Missouri
Nebraska
North Dakota
South Dakota
South East
Alabama
Arkansas
Florida
Georgia
Kentucky
Louisiana
Sales Tax
$ 150,609
7,249
2,762
791
2,963
530
202
20,388
2,161
4,766
7,308
6,152
23,616
5,312
3,279
6,713
5,266
3,047
9,962
1,515
1,537
3,697
1,706
804
316
388
36,948
1,584
1,492
4,143
1,981
2,012
Sales
Tax
Rate
%
Low Range
Jupiter
Communications
Impact by
2002
High
Range
Mid
Range
Forrester
Impact by
2002
Impact by
2010
$ 1,609
$ 16,974
$ 13,092
32
7
44
341
72
461
240
69
258
8
3
86
33
46
18
0.00
5.00
6.00
4.00
6.00
33
71
100
85
353
752
1,062
894
188
414
635
535
6.25
5.00
6.00
5.00
5.00
95
31
67
62
29
1,003
328
708
654
302
462
285
583
458
265
5.00
4.90
6.50
4.23
4.50
5.00
4.00
15
14
37
25
8
3
3
160
147
387
261
85
31
30
132
134
321
148
70
27
34
4.00
4.63
16
10
173
110
138
130
4.00
6.00
4.00
33
22
16
346
233
172
360
172
175
6.00
5.50
5.00
0.00
7.00
5.00
79
Mississippi
2,035
7.00
16
167
177
North Carolina
3,255
4.00
31
332
238
South Carolina
*1,742
5.00
18
188
151
Tennessee
4,070
6.00
33
354
354
Virginia
1,919
3.50
28
298
167
West Virginia
878
6.00
9
99
76
Southwest
19,524
Arizona
2,368
5.00
23
242
206
New Mexico
1,121
5.00
8
80
97
Oklahoma
1,328
4.50
14
146
115
Texas
14,706
6.25
131
1,388
1,278
Rocky
3,616
Colorado
1,536
3.00
14
152
134
Idaho
653
5.00
6
60
57
Montana
0.00
Utah
1,252
4.75
9
96
109
Wyoming
175
4.00
2
21
15
Far West
29,306
Alaska
0.00
California
21,260
6.00
232
2,452
1,848
Hawaii
1,425
4,00
6
59
124
Nevada
1,656
6.50
13
140
144
Oregon
0.00
Washington
4,964
6.50
44
465
432
DC
5.75
5
Compiled by Economic and Statistical Unit, Utah State Tax Commission
Sources: Jupiter Communications, Forrester Research, U.S. Department of Commerce,
Federation of Tax Administrators, Center for the Study of States
10/5/99
*Note: "Underestimates S.C.'s sales tax collections; however, high and mid range impacts
'look accurate' based on population and income." (Gordon Shuford)
80
Appendix 10
Principles for the Appropriate Use of User
Charges in State and Local Finance
Principles one through five address user charges and principles six and seven
relate to property-related assessments and impact fees. Each principle is
discussed in greater detail below.
1. User charges may be appropriate when government is performing a service
that narrowly benefits and individual taxpayer, or for certain government
activities that compete directly with private sector providers.
2. User charges may be appropriate to provide market-based incentives to
encourage or discourage the use of public resources.
3. Policymakers need to consider the impact on low- and moderate-income
citizens of shifting reliance form broad-based taxes to user fees.
4. User charges may not be appropriate to fund services when states have a
constitutional or statutory obligation to provide those services to all citizens.
5. User charges should cover the cost of the services provided. They should not
be used to generate excess revenues that are diverted to unrelated programs or
services.
6. Property-related assessments and impact fees may be appropriate to finance
services tied to new development, but should not be used to subsidize new
services for existing residents. IN state where impact fees are deemed
appropriate, state legislatures should adopt enabling legislation that governs
the imposition of such charges.
7. Policymakers should be mindful of how property-related assessments and
impact fees for new school construction are integrated within the state and
local school construction program.
81
1.
User charges may be appropriate when government is performing a service
that narrowly benefits an individual taxpayer, or for certain government
activities that compete directly with private sector providers.
Many state and local government services provide important benefits to society as a
whole. In fact, one of the most important reasons government exists is to undertake tasks
that the private sector is unwilling or unable to because such tasks are unprofitable or
because the financial benefits accrue to society as a whole and not to an individual firm.
However, some government services provide benefits directly to individual taxpayers
instead of the public at large. A sewer connection charge that reflects the direct cost of
labor and materials to connect a new home to a municipal system is one example.
Another is a building permit fee that covers the cost of a city building inspector. In both
instances, the benefits accrue directly to the owner of the property.
In other instances, governments provide services for individual taxpayers that compete
directly with private sector providers. Some examples include health and fitness facilities
and the leasing or rental of government property. It is appropriate for governments to
charge users for the full cost of providing such services. Subsidizing such services with
general government tax revenues may give government service providers an
inappropriate price advantage over the private sector. Although such competition may
reduce prices for consumers, true competition requires that the government’s full cost of
providing the service be reflected in the prices charged to users.
Some services, like mass transit, may fall into gray areas between private and public
benefits. Most policymakers agree that users of public transportation should be charges
for the service. However, gasoline taxes and other revenues sometimes are used to
subsidize public transit because public transportation also provides certain benefits – such
as reduced congestion on freeways and less air pollution – to non-users. In such
instances, a combination of charges and taxes maybe appropriate.
2. User charges may be appropriate to provide market-based incentives to
encourage or discourage the use of public resources.
One of the contributing factors in the increase in state and local reliance on user charges
is the recognition that charges can provide incentives to change behavior. User charges
can be an effective tool to encourage wise use of natural resources. Some economists
argue that the use of these "market-based" incentives is more cost effective than the
traditional regulatory approach.
There are many examples in the field of environmental protections. Environmental
permitting charges based upon the volume and toxicity of emissions can provide
incentives to reduce emissions. Volume-based fees for water usage or solid waste
disposal may encourage recycling and process changes that reduce solid waste volume.
Some states also have tried congestion-based pricing for toll highways to encourage
82
motorists to use highways during off-peak hours. In the 1990 rewrite of the Clean Air
Act, Congress introduced a system of tradable emissions credits in order to provide
market-based incentives for power plants to reduce emissions in the most cost effective
manner possible.
User charges can serve the dual role of providing incentives to minimize pollution while
funding the costs of regulatory agencies. However, some state agencies that rely on user
charges to fund their operations may be concerned that volume-based charges will be too
successful in reducing emissions, and thus also will reduce their operating revenues.
Pohcymakers will want to be careful that this concern does not limit the willingness of
agencies to use or expand fee programs.
3. Policymakers need to consider the effects on low- and moderate-income citizens
of shifting reliance from broad-based taxes to user fees.
User fees are just one component of the overall revenue system that finances state and
local governments. In Principles of a High Quality State Revenue System, the NCSL
Fiscal Partners made a strong case that policymakers should consider the revenue system
as a whole and not just its individual parts. In this context, policymakers need to be
mindful of how changes in reliance on user charges will affect the entire revenue system
and the impacts of such changes on low- and moderate-income households.
Replacing taxes with user charges will have different effects on taxpayers at different
income levels, depending upon the type of service and the type of tax that previously
funded that service. Property taxes are considered by most economists to be regressivethat is, low-income households pay a larger share of their income in property taxes than
high-income households. However, property taxes are not as regressive as most state and
local sales and excise taxes and they may be less regressive than some types of user fees.
For example, shifting the financing of trash collection from the municipal general fund
(financed by property taxes) to a user charge may shift more of the cost to low- and
moderate-income households. This is because wealthier families tend to live in more
expensive houses and pay more in property taxes, so they contribute a proportionally
larger share of general fund services. Under a user fee system, both lower income and
higher income households would pay the same trash collection fees.
Shifting from general fund taxes to user fees will not always impose more costs on lower
income households. If the shift from general taxes to user fees win fund a service that
lower income households tend not to use as much as wealthier families, the shift to user
fees could benefit lower income households.
Another implication of the replacement of property or income taxes with user fees is the
loss of federal income tax deductibility. Income and property taxes are deductible from
the federal income tax, while user charges are not. If user charges replace income or
property taxes, taxpayers who itemize will pay more in federal taxes.
83
4. User charges may not be appropriate to fund services when states have a
constitutional or statutory obligation to provide those services to all citizens.
Some state statutes and constitutions declare that certain services must be provided to all
citizens without regard for their ability to pay. These decisions usually are tied to an
important statewide benefit or goal. For example, most state constitutions either explicitly
or through state Supreme Court interpretations--declare that a fundamental role of the
state is to provide a free public education. Originally, this duty was rooted in the belief
that an educated citizenry was fundamental to a democratic society. More recently, states
have also recognized that education has important statewide economic benefits that go
beyond the economic benefit to the individual-to attract and retain industry and improve
business and individual tax corrections.
5. User charges should cover the cost of the services provided. They should not be
used to generate excess revenues that are diverted to unrelated programs or
services.
User charges should be designed to require the beneficiaries of a specific service to pay
for it. When user charges are set above the cost of service, either to generate excess
revenue for general government expenditures or for other earmarked uses, payers of user
charges are unfairly overcharged for services.
Governments need to make a careful accounting for the costs of services and the user
charge revenues raised to fund the service. If user charges exceed the cost of providing
services, or if separate accounting is not used, governments are vulnerable to court
rulings that such charges are taxes. Taxes are subject to much stricter court scrutiny and,
in the case of local governments, may require explicit state legislative authorization.
Also, a court ruling that a fee is really a tax may subject it to voter approval or
supermajority requirements imposed on tax increases in some states.
6. Property-related assessments and impact fees may be appropriate to finance
services tied to new development, but should not be used to subsidize new services
for existing residents. In states where impact fees are deemed appropriate, state
legislatures should adopt enabling legislation that governs the imposition of such
charges.
Rapid growth in some major metropolitan 'areas has overwhelmed available
infrastructure for transportation, education and natural resources. Impact fees and special
property assessments have become more prevalent as a means of funding infrastructure
development, raising issues of inequities between current and new residents and effects
on housing affordability.
Impact fees, applied appropriately, enable growth to occur in areas where existing
residents are unwilling or unable to pay for new infrastructure costs. 'Mey require
developers to include the full cost of a project's infrastructure needs in calculations of the
cost of a proposed project.
84
Impact fees also provide local governments with a tool to steer development to areas
where infrastructure can accommodate additional growth. Impact fees may be lower or
nonexistent in areas where existing infrastructure can accommodate new development.
These market-based incentives may be an appropriate use of charges (Principle 2).
Impact fees are not appropriate for upgrading the neglected infrastructure needs of
current residents by forcing the costs onto new residents. Neither should they be used to
generate additional general fund revenues for local governments.
In states that have not adopted impact fee enabling legislation, the courts are required to
decide appropriate rules governing impact fees. nese decisions are more appropriately
decided in state legislatures, where elected policymakers can weigh the stateside and
local interests of all interested par-ties and set uniform policies for the state.
7. Policymakers should be mindful of how prop"-related assessments and impact
fees for new school construction are integrated within the state and local school
construction programs.
In the 1980s, state courts began to play an active role in forcing state legislatures to
rewrite school finance formulas to ensure that school districts in poor areas had adequate
resources to provide a quality education for their residents. As the 1990s draw to a close,
some state courts now are looking beyond school operating expenses and considering
whether state and local school construction programs provide adequate resources to
poorer areas.
School districts in high growth states have increased their reliance on impact fees to
finance new schools. However, much as local property tax resources vary between
wealthy and poor regions of states, there are disparities in how much impact fee revenue
is available to finance school construction in high-growth and low-growth regions of a
state. To the extent that local governments rely on impact fees to fund schools, these
impact fees may face additional court scrutiny.
State policymakers should examine how impact fees fit into the overall program for
building, equipping and maintaining schools. Legislatures need to consider whether
statewide guidelines for the use of impact fees for schools should be established to ensure
that such fees do not create disparities that invite court action.
Source: National Conference of State Legislatures. The Appropriate Role of User
Charges in State and Local Finance. Denver, Colorado: NCSL, 1999.
p. 20-21.
85
Appendix 11
Trends in Reliance on Taxes, User
Charges and Other Revenues
State and local revenue systems have changed significantly during the past 25 years.
State and local governments have reduced reliance on taxes – especially property taxes –
and have increased reliance on user charges and miscellaneous revenues. This section
discusses several factors that have contributed to this trend, including:
•
•
•
The property tax revolt of the late 1970s and early 1980s and other
restrictions on state and local taxation;
Policymaker and voter acceptance of fees; and
The effectiveness of fees in influencing behavior.
Tax Constraints
State-imposed limits on property taxes have been a part of the state fiscal landscape for
decades. A 1995 report by the Advisory Commission on Intergovernmental Relations
found that 41 states had some type of limit on local property taxes, and reported that 36
of those 41 state limits were in place before 1978.
The nature of these limits changed dramatically in 1978, however, when California voters
adopted Proposition 13, which rolled back property taxes to 1 percent of market value
and limited annual increases in property values for tax purposes. In general, post-1978
limits were much more restrictive on local revenues than were earlier limits. Arizona,
Massachusetts, New Mexico and Washington adopted very strict limits soon after
passage of Proposition 13. In more recent years, Colorado, Missouri, Montana and
Oregon have added strict limitations, as well.
Many states that do not fall under the “strict limitation” category require voter approval
for mill levies that exceed a certain limit. Local governments in these states face a
political constraint on property taxes that can be every bit as binding as needed public
services at the local level when property taxes are limited or when a property tax increase
requires voter approval; fee increases do not.
The same dynamic may apply at the state level for states that require “supermajority”
approval for tax hikes in state legislatures. Table 1 shows that 13 states now require a
supermajority for tax increases, yet none of these states require more than a simply
majority to pass a fee increase. The recent popularity of supermajority requirements –
seven states have adopted them since 1991 – may provide more impetus for legislatures
to consider fee increases when states need additional revenue.
86
Table 1. Supermajority Requirements and Other Constitutional Restrictions
on Legislative Tax Powers
State
Adopted
Referendum
Legislative
Applies To
(R) or Voter
Majority
Initiative (I)
Required
Arizona
1992
I
2/3
All taxes
Arkansas
1934
R
3/4
All taxes except
sales and
alcohol
California
1979
I
2/3
All taxes
Colorado
1992
I
2/3
All taxes*
Delaware
1980
R
3/5
All taxes
Florida
1971
R
3/5
Corporate
income tax**
Louisiana
1966
R
2/3
All taxes
Michigan
1994
R
3/5
State property
tax
Mississippi
1970
R
3/5
All taxes
Missouri
1996
R
2/3
All taxes***
Nevada
1996
I
2/3
All taxes
Oklahoma
1992
I
3/4
All taxes
Oregon
1996
R
3/5
All taxes
South Dakota
1978
I
2/3
Sales & income
1996
R
2/3
tax
All taxes
Washington
1993
I
2/3
All taxes****
Notes:
* Tax increases automatically sunset unless approved by the voters in the next election.
** The constitution limits the corporate income tax rate to 5 percent; a 3/5 vote is needed
to increase it beyond 5 percent.
*** The constitution requires voter approval for significant tax increases. In
emergencies, the legislature can increase taxes with a 2/3 vote.
**** Tax increases that produce revenues that do not exceed the spending limit must be
approved by a 2/3 legislative vote; tax increases that produce revenue over the limit must
be approved by a 2/3 legislative majority and by the voters.
Source: NCSL, 1998.
In addition to legal constraints on state and local taxes, fees also appear to have gained in
political popularity with both state and local lawmakers and voters. Some taxpayers
perceive taxes as compulsory payments for services from which they do not necessarily
87
benefit. Fees, on the other hand, are perceived as payments for services received by the
payer. Although the reality may not always be clear-cut, perceptions frequently guide
public policy, and fees do not seem to have the political stigma of taxes.
Trends in User Charges
Over the last twenty years, state and local governments reduced reliance on taxes to fund
government programs and services. The tax share of own-source state and local revenues
fell from 79 percent in 1977 to 70 percent in 1996.
Data shows that both user charges and miscellaneous revenues have increased to fill this
gap, wit the user charge share increasing by 4 percentage points and the miscellaneous
revenues share increasing by 5 percentage points.
Table 2 shows that, in relation to personal income, property taxes have fallen
significantly between 1977 and 1996. Income and sales taxes have increased slightly,
while excise and other miscellaneous taxes have fallen. These reductions in taxes have
been more than offset by the growth in charges and other miscellaneous non-tax
revenues.
Trends in Other Miscellaneous Revenues
Miscellaneous state and local government revenue as a share of total revenue also grew
during the last 20 years, from 7 percent in 1977 to more than 12 percent in 1996. Interest
revenue is by far the largest component of the miscellaneous category, providing nearly
half of all such revenue in 1996. The interest share increased from 43 percent in 1977 to
49 percent in 1996. Interest revenue includes interest on deposits and accounts of state
general and trust funds (excluding retirement, unemployment, and workers’
compensation trust funds) and interest on bonds issued held for capital projects.
Interest revenues come from several sources. Alaska and several other western states
have large, interest-earning trust funds that were established with revenues from mining
and mineral companies. Alaska’s “permanent fund” generated nearly $3,500 per capita
in interest and dividend earnings in 1996.
The relative share of interest earnings also has increased due to improved money
management practices by state and local government treasurers. At the end of 1996, for
example, states carried more than $20 billion in rainy day funds and unobligated
balances. Many local governments also carried cash balances. These large balances
allowed governments to generate significant interest earnings.
Another growth area in the miscellaneous category is net lottery revenue. The number of
states with lotteries increased dramatically between 1977 and 1996, from 13 to 38. AS a
result, net lottery revenue as a share of personal income quadrupled, and lottery revenues
as a share of miscellaneous revenues jumped from 5.4 percent to 11.7 percent. Still,
lottery revenues represent only 1.3 percent of total own-source state revenues.
88
Other miscellaneous revenue sources declined in relative importance between 1977 and
1996. Real estate impact fees and special assessments fell from 5.6 percent to 2.7
percent, while the share from court-imposed fine and forfeiture income fell from 4
percent in 1977 to 3 percent in 1996. In real terms, both revenue sources grew.
However, that growth was overshadowed by the much larger interest and lottery revenue
growth.
Table 2. State and Local Revenues per $1,000 of Personal Income
1977
1987
Total Own Source Revenue
$153.45
$157.34
Taxes
$121.22
$111.35
Property
41.58
33.98
Sales
25.96
26.88
Personal and Corporation Income
27.49
28.68
Other
26.19
21.84
Charges
21.48
25.05
Miscellaneous General Revenue
10.75
21.94
1996
$162.01
$112.99
34.34
27.72
29.33
21.60
29.88
19.14
User charges fall into four major categories: education, transportation, environment and
natural resources and other. Education charges are the single largest category, providing
about 27 percent of all sate and local chare revenue. Environment and natural resource
charges are next with about 20 percent, followed by transportation wit 9 percent. The
“other” category represents about 43 percent.
Between 1977 and 1996, education’s share of user charge revenues fell from 33 percent
to 27 percent of user chare revenue. This reduction in the relative share of education
charges reflects two trends. First, K-12 education charges as a share of personal income
fell by 25 percent, and second, even though higher education charge increased in real
terms by more than 30 percent, growth in other user chares reduced the relative share of
user charge revenue from education.
User charges in the environment and natural resource areas showed the largest increase in
relative share of user charge revenues, increasing from 14 percent to 20 percent between
1977 and 1996. Most of the growth came in two areas: local sewage charges and local
solid waster charges. Two factors were largely responsible for the growth in charges in
these areas. First, to provide incentives for waster reduction and conservation, some local
governments shifter financing for these activities from property taxes to user charges.
Second, constraints on landfill space and tougher Clean Water Act standards increased
the cost of disposal so fees were increased.
States and localities reduced their reliance on transportation charges during the last 20
years. Declines in reliance on highway tolls and other transportation user charges were
offset somewhat by increases in air transportation fees. Air transportation charge
increases reflect increased landing fees imposed on commercial aircraft and a federal law
adopted in 1990 that allows government-owned airports to levy “passenger facility
89
charges” on airline tickets. Not surprisingly, cities in states with major airline hubs
showed significant increases in air transportation fee revenues during the period.
Source: National Conference of State Legislatures, The Appropriate Role of
User Charges in State and Local Finance. Denver, Colorado:
NCSL, 1999. p. 14-15.
90
Appendix 12
Defining and Categorizing Taxes,
Charges and Other Revenues
In order to examine changes in state and local reliance on taxes, fees and other
revenues, it is necessary to define these terms and identify the types of revenue
sources they include. This sounds like an easy task, but in diverse state and local
revenue systems, the distinction between taxes, user charges and other
miscellaneous revenues can become blurred. Some revenue sources – like sales,
income and property taxes, for example – clearly fall into the tax category. Park
entrance fees, sewer charges, and highway tolls – payments for government
services used – clearly fall into the user charge category. Lottery revenues, courtimposed fines, and sales of state property are neither taxes nor user charges for
services, so they fall into the miscellaneous revenue category.
There are also numerous examples of revenue sources that are not so easily
categorized. Impact fees on developers are much like user fees, but because they
are used to finance infrastructure and not to pay for current government services,
they are categorized not as user charges but as miscellaneous revenues. Some
local governments charge telecommunications companies a user fee for the use of
public rights-of-way. However, the charge frequently is collected as a percentage
of gross receipts, a method that is virtually indistinguishable from a utility gross
receipts tax. Other examples include special property assessments that are levied
on the basis of property value (just like property taxes) for specific services like
street lighting or fire protection.
These examples are used to highlight the difficulty of trying to neatly categorize
where specific revenue sources fit into the tax, user charge, and other revenue
categories. In fact, courts across the country are asked to make these types of
determinations every day, often with varying and contradictory results. In an
attempt to bring consistency to these classification, this report uses the tax, user
fee, and miscellaneous revenue scheme developed and used by the U.S. Census
Bureau’s Governments division. 2 The Census Bureau has been collecting revenue
data under the methodology for decades, and using the census methodology
allows for the detailed time-series comparisons contained in the appendix of this
report.
The terms “user charges”, “fees,” “current charges,” and “user fees” are used
interchangeably throughout this report and refer to the Census Bureau's “current
charges” category described below. The Census Bureau classification manual
defines taxes, current charges, and miscellaneous revenues as follows.
Taxes are compulsory contributions exacted by a government for public purposes,
other than for employee and employer assessments and contributions to finance
91
retirement and social insurance systems and for special assessments to pay for
capital improvements. These include personal and corporate income taxes,
franchise, gross receipts, sales and use, excise, property, and utility taxes. They
do not include taxes to fund unemployment insurance, workers’ compensation,
worker or employer pension contributions, and Social Security and Medicare
taxes.
Current charges are charges imposed for providing current services or for the
sale of products in connection with general government activities, excluding
utility service charges. This definition, because of its emphasis on current
consumption of services, excludes impact fees that are used to fund capital
projects. Current charges include tuition at state colleges and universities, tolls
and transportation charges, parks and recreation fees, solid waster charges, and
other fees for the use of government services.
Miscellaneous general revenue includes all other general revenue of
governments from their own sources, including interest revenue necessary to pay
the interest expenditure on private activity bonds. Examples include lottery
revenue, funds from sales of state property, royalties from mining or timber
activities on state lands, development impact fees, and interest earning.
General revenue from own sources includes all government revenue except that
classified as intergovernmental, liquor store, utility, or insurance trust revenue. It
is the sum of taxes, current charges, and miscellaneous revenue described above.
This category excludes federal aid.
The use of Census Bureau date allows for time-series comparisons because of the
consistency of the bureau’s classification methodology. It also helps avoid
frequently inconsistent comparisons based upon state classifications of taxes,
charges and other revenues.
Legal Distinctions Between Taxes and User Charges
In some instances, there is very little practical difference between a tax ad a fee.
Legal distinctions between taxes and fees are very important, however, because
many states have constitutional or statutory restrictions on the ability of local
governments to levy taxes – restriction that usually do not apply to fees. Also, tax
limitations on state and local governments sometimes require extraordinary
majorities or other wise restrict taxes, but may not impose similar restrictions on
fees.
The distinction is important because local governments are frequently given broad
authority – either in stature or state constitution – to levy fees and charges as part
of their regulatory authority (also termed “police powers”). Fees frequently are
levied in association with zoning and land use decisions where local governments
are charged with enforcing requirements for adequate infrastructure,
92
environmental protection and mitigation, and local building code enforcement.
Local governments also may charge fees to cover their costs of building and
maintaining public rights-of-way, frequently in connection with cable, telephone
and electric utility corridors. Such fees and charges often do not require the
express statutory authority of a state legislature. Also, these fees do not face the
same level of due process, equal protection and other legal scrutiny as taxes.
Local government taxing authority, on the other hand, must e explicitly granted
by the state legislature or authorized under the home rule provisions of the state
constitution. In home rule states, localities may impose taxes unless explicitly
prohibited from doing so by the constitution or by state statute.
For these reasons, courts in many states have tried to create a clear distinction
between taxes and fees. This is a very difficult task, however, and the result has
been a lack of consistency among the states about the legal distinction between
taxes and fees. In general, state courts have examined the following issues when
making their determinations.
Uses of the Funds
Are revenues placed in the general fund or are they placed in a specific fund
designed to cover regulatory or other costs? For example, some states impose
fees on regulated industries that are intended to cover the cost of the regulatory
agencies that oversee them. Courts generally have considered these to be fees if
revenues are not used to fund other government activities. However, if these fees
generate excess revenues for general government purposes, beyond what is
necessary to cover regulatory costs, they frequently are considered taxes by the
courts.3
Source of the Fee or Tax Authority
Is the authority to levy a fee or tax delegated to a regulatory authority or is it
granted to the department of revenue? What is the legislative history and intent of
the fee or tax legislation and which legislative committee authorized it – the tax
committee or the committee with oversight authority over the agency? A fee that
is imposed by the non-tax legislative committees and that is not part of the
revenue section of the code may be less likely to be considered a tax.
Purpose and Intent of the Governing Body
Is the purpose and intent of the fee or tax to raise revenues to benefit the
community at large, or is it to meet the infrastructure and other needs of the fee or
tax payer? This issue is particularly relevant in court cases that are considering
whether fees charged o developers for new projects are taxes or regulatory impact
fees. (The impact fee section of this report discusses several court cases in
California related to this subject.)
93
Source: National Conference of State Legislatures, The Appropriate Role of
User Charges in State and Local Finance. Denver, Colorado:
NCSL, 1999. p. 3-6.
94
Appendix 13
Tax and Expenditure limitations on Local Governments
Original Dates of Enactment
State
Overall
Property Tax
Rate Limit
Specific
Property Tax Assessment
Property Tax
Revenue
Increase
Rate Limit
Limit
Limit
General
General
Full
Revenue Expenditure Disclosure
Limit
Limit
Alabama
County
1972
1875
Municipality
1972
1875
School District
1972
1916
Alaska
County
Municipality
1972
1972
School District
Arizona
County
1980
1913
1980
1921
Municipality
1980
1913
1980
1921
School District
1980
1980
1974
Arkansas
County
1883
1981
Municipality
1883
1981
School District
1981
California
County
1978
1978
1979
Municipality
1978
1978
1979
School District
1978
1978
1972
1979
Colorado
County
1992
1913
1992
1992
1983
Municipality
1992
1913
1992
1992
1983
School District
1992
1992
1992
1973
1992
Connecticut
(none)
Delaware
County
1972
1976
Municipality
School District
Florida
County
1968
1995
1974
Municipality
1968
1995
1974
School District
1855
1995
1974
Georgia
County
1991
Municipality
School District
1991
1945
1991
95
State
Overall
Property Tax
Rate Limit
Specific
Property Tax Assessment
Property Tax
Revenue
Increase
Rate Limit
Limit
Limit
General
General
Full
Revenue Expenditure Disclosure
Limit
Limit
Hawaii
County
1977
Municipality
School District
Idaho
County
1978
1913
1991
Municipality
1978
1967
1991
School District
1978
1963
1991
Illinois
County
1939
1991*
1981
Municipality
1961
1991
1981
School District
1961
1991
1981
Indiana
County
1973
Municipality
1973
School District
1973
Iowa
County
N/A
1978
Municipality
1972
1978
School District
1989
1978
1983
1971
Kansas
County
1970
Municipality
1970
School District
1973
Kentucky
County
1908
1979
1979
Municipality
1908
1979
1979
School District
1946
1979
1979
County
1974
1978
Municipality
1974
1978
School District
1974
1978
Louisiana
Maine
(none)
Maryland
County
1957
1977
Municipality
1957
1977
School District
1957
Massachusetts
County
Municipality
1980
1980
School District
Michigan
96
State
County
Overall
Property Tax
Rate Limit
Specific
Property Tax Assessment
Property Tax
Revenue
Increase
Rate Limit
Limit
Limit
1933
1978
1994
1982
1978
1994
1982
1978
1994
1982
Municipality
School District
1949
1933
General
General
Full
Revenue Expenditure Disclosure
Limit
Limit
Minnesota
County
1988
Municipality
1988
School District
1971
1988
Mississippi
County
1980
Municipality
1980
School District
1983
Missouri
County
1875
1980
Municipality
1875
1980
School District
1875
1980
County
1931
1987
1974
Municipality
N/A
1987
1974
School District
1971
Montana
1974
Nebraska
County
1903
1990
Municipality
1957
1990
School District
1921
1990
1990
1991
Nevada
County
1936
Municipality
1936
1929
1936
1956
School District
New Hampshire
1983
1985
1983
1985
1985
(none)
New Jersey
County
1980
Municipality
1976
School District
1976
New Mexico
County
1914
1973
1979
1979
Municipality
1914
1973
1979
1979
School District
1914
1973
1979
1979
New York
County
1894
1981**
Municipality
1894
1986***
School District
1894
North Carolina
County
1973
97
State
Overall
Property Tax
Rate Limit
Municipality
Specific
Property Tax Assessment
Property Tax
Revenue
Increase
Rate Limit
Limit
Limit
General
General
Full
Revenue Expenditure Disclosure
Limit
Limit
1973
School District
North Dakota
County
1929
1981
Municipality
1929
1981
School District
1929
Ohio
County
1929
1976
Municipality
1929
1976
School District
1929
1976
Oklahoma
County
1933
1996
Municipality
1933
1996
School District
1933
1996
Oregon
County
1991
1916
1996
Municipality
1991
1916
1996
School District
1991
1991
1916
1996
County
1959
c. 1940
Municipality
1959
School District
1959
Pennsylvania
Rhode Island
County
Municipality
1985
1979
School District
South Carolina
County
1975
Municipality
1975
School District
1975
South Dakota
County
1915
Municipality
1915
School District
1915
Tennessee
County
1979
Municipality
1979
School District
Texas
County
1876
1982
1982
Municipality
1876
1982
1982
School District
1883
1982
1982
98
State
Overall
Property Tax
Rate Limit
Specific
Property Tax Assessment
Property Tax
Revenue
Increase
Rate Limit
Limit
Limit
General
General
Full
Revenue Expenditure Disclosure
Limit
Limit
Utah
County
1898
1986
Municipality
1929
1986
School District
1929
1986
Vermont
(none)
Virginia
County
1976
Municipality
1976
School District
Washington
County
1944
1973
1971
1990
Municipality
1944
1973
1971
1990
School District
1944
1979
1990
West Virginia
County
1939
1939
1990
Municipality
1939
1939
1990
School District
1939
1939
1990
Wisconsin
County
1994
Municipality
School District
1994
Wyoming
County
1890
Municipality
1890
School District
1911
Notes:
* Applies to non-home rule taxing units located in counties contiguous to Cook County.
**Nassau County only.
***New York City only.
Source: Tax and Expenditure Limits on Local Governments. Washington, D.C.: Advisory Commission on Intergovernmental Relations, 1995, pp. 5-10.
[From the National Conference of State Legislatures. The Appropriate Role of User Charges in State and Local Finance. Denver, Colorado: NCSl, 1999.
pp.29-32.]
99