Rethinking Revenue report evaluates sustainability, fairness of revenue sources

From smart cars to burritos, just about everything is available these days at the click of a button. The digital era has fundamentally changed society, impacting all sectors including cities, counties and the way municipalities conduct business—except for public revenue structures. Those are more or less the way they’ve been for hundreds of years. 

A collaborative research effort led by the Government Finance Officers Association, Rethinking Revenue, is trying to shake things up. 

“The idea behind Rethinking Revenue is that the revenue system is potentially obsolete in certain ways,” said Shayne Kavanagh, senior manager of research at the finance association, noting, “Property tax is not the wealth tax it once was.” 

The first section of the project—published at the end of last year—defined the problem outdated revenue systems create for local governments, ratepayers and taxpayers. In the study, researchers note that over-reliance on property taxes, which have a ceiling, can force local governments to turn to things like fees and fines, which place an unequal fiscal burden on lower income constituents. It can also turn public services like policing, which are intended to serve people, into organizations that have an earnings quota. The recently released second part sets the stage for further investigation. 

“The criteria we describe in this paper are meant to set the terms for the conversation, not to settle a debate about which sources of revenue or methods of raising revenue are ‘best,’” reads the introduction to part two, “The criteria for evaluating options for a local government revenue system,” which focuses on developing a set of criteria to “help us differentiate between how local governments could raise revenue and how they should raise revenue.” 

The project is a collaborative effort between the Government Finance Officers Association and the American Planning Association, the International City/County Management Association, the National Academy of Public Administration Center for Intergovernmental Partnerships, the National League of Cities, Center of Municipal Finance at the University of Chicago’s Harris School of Public Policy, and the Government Finance Research Center at the University of Illinois at Chicago’s College of Urban Planning and Public Affairs. 

The latest paper sets out six criterion that local governments can use when considering the effectiveness of their revenue structures: Fairness to taxpayers and ratepayers; accountability; adequacy of revenue production; impacts on the behavior of taxpayers and ratepayers; cost of administration; and promotion of intergovernmental dynamics. 

In creating a fair taxation system, the paper notes, “a taxpayer or ratepayer should feel that the benefits produced by public services are relative to the size of the financial contribution they are making to the public services provided.” 

This is not the case when municipalities rely on property taxes as the primary source of revenue. For many, real estate is their major source of wealth, but for others, it might only make up a very small part of a much larger and diversified portfolio of holdings. 

“There is widespread agreement among the public that everyone should pay their fair share of taxes,” the report says. “Hence, an important part of the proportionality principle is that a taxpayer or ratepayer should feel their burden is fair relative to what other taxpayers or ratepayers are paying. Fairness is defined by everyone paying ‘their fair share.’” 

Another notable criterion listed is the adequacy of the revenue source. Can a government continue to operate regardless of larger economic forces at play? 

The paper argues that a sustainable revenue source should be able to “adequately fund services through periods of national and regional economic volatility This mainly refers to economic cycles (e.g., recessions and expansions) and the adequacy of resources to local government through multiyear economic cycles.” 

This principle was on display during the Great Recession, when many local governments were forced to balance budgets by slashing funding to important services including school districts. Heavy reliance on property taxes can also detrimentally impact local governments in other ways, like discouraging investment in real estate or encouraging migration to low tax jurisdictions. 

To help administrators think through some of these aspects of revenue, the initiate includes questions that could be considered and, in future publications, will put forward possible solutions—like offering services and fees to constituents based on their income as opposed to a flat fee, according to Kavanagh. 

“You would get more compliance with the fine or the fee, because if people are leveled with a fine or a fee that’s too much, they won’t pay it,” he said.