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US cities adopt highly creative
measures to increase revenue

By Tony Favro, USA Editor*

22 June 2012: Mayor Michael Bloomberg’s highly-publicized proposal to ban the sale of large servings of sugary soft drinks in New York City is an attempt to reign in public health costs associated with obesity. The need to cut expenditures in public budgets has become acute in recent years and American cities have controlled costs by privatizing roads, parking meters, and water systems; outsourcing landscaping and other services that require special equipment; selling parks; demolishing buildings; laying off employees; and instituting many other measures to reduce expenses.

But expenditures are only one side of a municipal budget. Revenues are the other part, and the incomes of city governments are hurting for many reasons. Some of the wounds are self-inflicted like the excessive borrowing which allowed spending to outpace revenues in cities like Harrisburg, Pennsylvania, and Glendale, Arizona; others are beyond cities’ control: the recession, of course, but also the overall decline in the corporate share of taxes collected by governments, among other fiscal pressures.

There are a few bright spots. At least 150 cities have seen a jump in revenues from the sale of advertising space on everything from public dustbins to benches to way-finding signs. As the price of gasoline (petrol) goes up, the sales tax revenues of cities go up proportionally. A jump from $3 per gallon (€0.50 per liter) to $4 means an extra $300,000 each year for the small city of San Dimas, California. Several cities like Rochester, New York look forward to annual revenue gains of a million dollars or more from the installation of red light cameras to fine speeding motorists. And Jacksonville, Texas is enjoying a $350,000 increase in sales tax revenues over last year because it allowed the sale of alcoholic beverages for the first time.

Generally, however, the public’s aversion to taxes of any kind limits the ability of governments at all levels to raise revenues. In the past few months, Republicans in the US Senate blocked the passage of a national Buffet Rule Tax on the super wealthy. The State of Maryland failed to pass a digital download tax on ringtones, e-books, and blogs and chat rooms that charge fees. And, because of public opposition, the City of Tulsa, Oklahoma, backed off an attempt to levy an accident response fee, in which the person at fault in a motor vehicle accident pays for part of the costs associated with emergency response.

These efforts demonstrate the creativity or, depending on your view, desperation of governments to increase their revenue sources. Since local governments are corporations of state governments, mechanisms for raising local revenues are determined primarily by state law.

Let’s look at some of the revenue-raising options in various states that can provide funds to cities:

Massachusetts: palm reader license; Christmas tree license (for seasonal decoration of outdoor trees); domestic water usage tax.
North Carolina: illegal substance excise tax (imposed on individuals who possess illegal controlled substances and illegally manufactured alcohol).
Utah: tax on creative services, such as photography.
New York State: tax on sliced or prepared bagels (not whole bagels).
Missouri: tax on yoga and Pilates classes.
Kentucky: golf green fees; tax on hot air balloon rides.
Michigan: tax on pet grooming and funeral services.
Nebraska: tax on haircuts, personal grooming services, and dating services.
Maine: sales tax on comedians, clowns, jugglers, ventriloquists, petting zoos, and haunted hayrides.

The list is not intended to be inclusive, nor is it intended to be humorous. In a capitalist economy, desperation and creativity are usually linked. As they say, necessity is the mother of invention. The idea behind the adage is that financial pressures provide real opportunities to develop more creative solutions for delivering public services, to deal with inefficiency, and to rid an organization of poor performers.

But do these and similar efforts to develop new revenue sources for states and municipalities represent productive, positive, and qualitative change in government?  City governments, unlike private businesses, can’t choose the problems they want to confront. This would seem to mean that there are limits to the savings local governments can achieve through innovation and more effective performance measurement without drastic cuts to vital services. At the same time, there is popular and political resistance to increasing property and income taxes, the major revenue sources for cities.

Mayor Art Ward of Bristol, Connecticut, recently said there was “no alternative” to various tax and fee increases for his city. The Bristol City Council wasn’t convinced and directed the Mayor to look for alternatives to tax increases. The clear implication in Bristol and elsewhere is that higher taxes are a substitute for effective leadership and that a mayor who proposes higher taxes somehow demonstrates lower competence than those who refuse to raise taxes.

A city administration’s capacity and performance are strictly tied to the deep and long relationships between federal, state, and local governments regarding policies towards new growth, social welfare, and business competition. This tends to get lost in debates over taxes and spending. But these relationships largely determine a mayor’s choices and are ultimately reflected in a city’s revenue and expenditure structure.

This broad context for municipal budgeting suggests a series of questions. How have cities changed since the great suburban expansion began 60 or 70 years ago? Is the way money passes from federal to state to local governments adequate in today’s financial climate? Can we decide on a minimum basket of local services? How much local taxing authority do current and future service needs require? Which level of government — federal, state, or local — is best suited to perform each service?

These questions are not new. And there is a great deal of serious public policy work being conducted in Washington and state capitals to find, or at least consider, bold, systemic solutions. But progress is not at the speed or scale or robustness required to stem the reliance of American cities on desperate, short-term cost-cutting strategies and creative but equally desperate revenue sources.

And so Americans’ frustrations with government will fester as they pay a bewildering and increasing number of fees for anything they use or anything that moves.

*Tony Favro also maintains the blog Planning and Investing in Cities.





...while New York City benefits from a tax on prepared bagels


Also by Tony Favro
US cities lose jobs and revenues as big pharma companies close
R&D facilities

In 2007, Pfizer, the pharmaceutical company, closed its research and development facility in Ann Arbor, Michigan, displacing 2100 workers. In 2009, the University of Michigan purchased the vacant site and expected to create two to three thousand jobs over ten years. At the time of the sale, Ann Arbor Mayor John Hieftje expressed mixed emotions. On the one hand, he said in a statement, “If the University of Michigan is able to greatly expand life sciences research in Ann Arbor it will have far-reaching long-term economic benefits for the whole region.” On the other hand, Mayor Hieftje told Crains’ Detroit Business newspaper, “[The deal] has troubling aspects for local government”. Hieftje was referring to the $14 million in local taxes paid by Pfizer, which will not continue since the University of Michigan is a tax-exempt organization.

The Ann Arbor story is not unique. According to the US Bureau of Labor Statistics, the pharmaceutical industry shed 35,000 in the United States in 2010, the most recent year for which complete data are available. Cities throughout the US were burdened by plant closures. Ann Arbor was luckier than most cities. The University of Michigan employed about 1,700 workers at the former Pfizer site at the end of 2011. These workers are doing much of the research formerly done by Pfizer — and this gets to the heart of the matter. Big pharma companies are abandoning basic drug research, leaving the federal government and universities to pick up the slack. More