Dire Future for Local Governments If Revenue-Raising Powers Are Not Fixed

Contact: Stu Kantor, (202) 261-5283, skantor@ui.urban.org

WASHINGTON, D.C., December 17, 2007—The existence of local governments will be in jeopardy without a significant change in the way they are financed, David Brunori warns in the new edition of his Urban Institute Press book Local Tax Policy: A Federalist Perspective.

“Without reform to ensure stable tax revenue, local governments could be weakened to the point of irrelevance,” he forecasts. “That stable tax revenue must be within the political and legal control of local government institutions. Without such a revenue source, local governments will be incapable of efficiently and effectively providing services. More important, local governments will continue to cede financial and political control to the states.”

Brunori, a contributing editor for State Tax Notes magazine and a research professor of public policy at The George Washington University, says local governments’ fiscal autonomy has declined over several decades to its lowest point ever. Affected are the nation’s 87,849 local entities: 3,034 counties, 19,431 municipalities, 16,506 townships, 13,522 school districts, and 35,356 special districts.

To wrest control back from the states, which have increasingly centralized local finances and taken over public services traditionally provided by and paid for by localities, says Brunori, local governments must turn to the only revenue source that will ensure a strong and vibrant future: the much-maligned property tax.

The property tax outdistances other revenue sources, he says, for many reasons. Because tax revenues grow as property values move ever upward, local officials can rely on a steady source of increasing revenue without the political costs of raising rates. Since the tax base is immobile, local governments can easily predict annual revenue.

Further, administration and compliance are relatively easy and inexpensive, while evading the tax is virtually impossible. Most important, the connection between the revenue source, the property, and the services provided is strong.

The property tax has taken a beating—bringing in about two-thirds of total local revenues before the Depression and only about 25 percent today—because the public so dislikes the tax. Behind the anger is the tax’s high visibility, difficulties fairly assessing property values, increasing tax burdens, and the severed connection between local school finance and the tax. Today, 44 states restrict property taxation in some way.

Brunori recommends five steps for making the property tax more viable and helping citizens retain the option of governing their affairs locally:

• Citizens need more information about the property tax’s positive attributes.
• Tax experts must encourage a “counterrevolt” to undo the most draconian limitations—on rates and assessments—of the property tax revolts of the late 1970s and 1980s.
• State and local governments must limit the amount of property eligible for exemption—especially for economic development and charitable organizations—because exemptions cost billions of dollars and shift the burden of paying for services to other taxpayers.
• Methods of equalizing school spending that do not include reducing local taxing authority must be found.
• Policymakers and political leaders should consider fundamental local tax reform that emphasizes split-rate taxation—taxing the value of land at a higher rate than the buildings and other improvements on the land.

Richard Pomp, professor of law at the University of Connecticut, praised the first edition of Brunori’s book as “an amazingly accessible commentary on local tax policy that is a ‘must read’ for legislators and their staff. Brunori once again challenges the conventional wisdom and shakes up our thinking with his brilliant and perceptive insights.”

In laying out his thesis for rejuvenating the property tax, Brunori explains how local governments serve American society in a federal system, what political and economic limitations hamper local revenue-raising powers, why the property tax has served local government so well for so long, and why property tax revenues have declined so precipitously. Also, he describes how local governments have increasingly turned to other revenue sources, such as local-option sales and excise taxes, local-option income and business taxes, intergovernmental aid, and user fees and charges. In addition, Brunori discusses how financial constraints on local governments are likely to worsen because of the swiftly changing economy—especially the transition from manufacturing to a service-based economy—and rapidly aging population.

Local Tax Policy: A Federalist Perspective, by David Brunori, is available from the Urban Institute Press (paper, 6" x 9", 180 pages, ISBN 978-0-87766-744-5, $26.50). To purchase the book, go to http://www.uipress.org, call 1-800-537-5487, or e-mail hfscustserv@press.jhu.edu. Brunori is also the author of State Tax Policy: A Political Perspective and editor of The Future of State Taxation, both published by the Urban Institute Press.

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