Future outlook for local governments budgets Under Current fiscal and political environment at national and state level It is not easy to predict the future for any thing, especially when it comes to economics. The economists differ in their opinions more widely than any other profession. However the ability of of local governments in any metropolitan area to provide basic public services and interrelations between cluster of cities in the metro area is directly related to the tax policy. As we enter the 21st. Century, local governments will face challenges to how they raise revenues. Existing local tax system has over the years, developed inherent problems that raise doubts about their ability to meet the future basic needs.
None of the major sources of local revenues have significant growth potentials. Indeed some local taxes are likely to decrease in importance. Existing local government tax systems were not designed to function in a service-dominated economy dominated by electronic commerce, mobile capital, or rapidly expanding international trade. The problem with the outdated tax system and future economic challenges will likely lead us into an environment in which local taxation will be limited to an extent unseen in the American history. There are three significant consequences of these limitations for metropolitan governments. First they effect each others ability to fund basic services.
Secondly the limitations will effect the relationship between local governments, which will reduce the ability of the local governments to use tax policy as a means of furthering economic development. Finally, limitations will lead local governments to seriously consider an alternative system for collecting revenueland Value Taxation. From a political prospective, there are two imperatives for the local governments in any metropolitan area. First, they must provide basic public services to their residents, like police, fire protection, road repairs etc. When basic public services are not provided consistently and adequately, citizens and businesses eventually leave or decide not to locate in a particular jurisdiction.
Government leaders also often incur the wrath of voters; a fact not lost on local politicians. The second imperative is that local governments must offer economic growth and development, even at the expense of neighboring jurisdictions. The permeability of metropolitan government boundaries and the relative autonomy of local decision making create an environment in which local governments strive to lure and maintain above average tax payers, i.e. those who contribute more tax revenue than they consume in government services. Local governments can also use tax policy in their quest for business, jobs, and residents.
Some governments set their overall tax burdens at level that are competitive with their neighbors. Others use targeted tax incentives aimed at specific firms. Since the other variables like, transportation and labor cost are the same in a metro area, some governments use tax policy to compete. Providing tax incentives is thus a politically effective means of fostering economic growth. But its effectiveness is attributable to the fact that it is expedient.
Local governments use tax policy in this way because they have had flexibility over their fiscal affairs. Despite or perhaps of property tax limitations, local governments had diverse enough sources of revenues to selectively reduce tax burden when the need arose. Intergovernmental aid, the growth of the local sales tax, users fee, and to a lesser extent local income taxes all added to this flexibility. The challenge for local government in the future is that they will have fewer options and less flexibility over their fiscal affairs. Future challenges As we enter the 21st century, the local governments will be faced with the serious challenges to the way they raise revenues. The first and perhaps the most serious, challenge will be that existing tax systems are unlikely to meet the needs of the local governments.
Local governments in any metro area rely on five main sources of revenues: property taxes, income taxes, sales taxes, user’s fees and intergovernmental aid. All five of these sources have economic, structural, or political problems that at best, will reduce their effectiveness in raising future revenues. Property Tax The property tax remains a formidable source of revenue, and the large amount of revenue collected will ensure its viability far into next century. Still publics dissatisfaction with the property tax is unlikely to recede. The accompanying political pressure directly results in large scale limitations of the types recently adopted in Texas, Washington, and Montana (Youngman.1977).
The property tax in its current form- is an unlikely source of revenues for growth in the future. It is almost certain that it will never reach the dominance it enjoyed before tax revolts. Local Income Taxes The local income taxes will not be a significant source of revenue in the future is already becoming evident. Most states do not allow local governments to impose the tax, only 15 states permit local governments to do so (NCSL1997). In those states, most jurisdictions have chosen not to pursue this course of action. Indeed the vast majority of local governments (over 75 percent) levying an income tax are located in one state-Pennsylvania.
Given the perceived competitiveness problems, it is unlikely that local governments in general and those in metropolitan areas in particular will rely more heavily on income taxes in the future. Local sales tax While the sales tax has enjoyed tremendous growth in recent years, its future is not going to be so bright. The continuing shift to a service dominated economy, as well as the proliferation of exemptions, will decrease tax base (Fox, 1998). As noted below the, the electronic commerce will present its own challenges to local sales taxation. Perhaps the most serious threat to local sales tax will come from state governments, which are likely to limit local sales tax autonomy as part of their own economics development policies. The sales tax will not be eliminated, but local reliance on the tax will be decreased.
Users fees and charges Imposing fees and charges tends to be politically attractive means of collecting revenues. If large amount of revenue could be raised from fees, policy makers can avoid raising traditional taxes. Moreover, fees and charges are easier to defend on philosophical grounds. After all government is merely asking residents and businesses to pay for specific service they use. In future local governments will continue to impose users fee. This may even increase in the near term.
But their use and growth are not unlimited. There are, after all, only so many type of services for which government can charge fees. It is likely that governments will eventually run out of activities for which to charge separate fees. Indeed there is already speculation that local governments may have maximized their use of fees and charges (NCSL, 1997). State aid to local governments It is unclear what role states will ply in assisting local governments. From 1957 to 1992, aid to local governments as a percentage of states spending actually declined from 35.8 to 32.3 percent (Gold, 1994).
Shifting of Federal responsibilities along with likely federal preemption of state taxation of electronic commerce will create fiscal challenges for states. Those challenges may lessen the states ability to provide additional revenue to local governments (Ladd, 1998) If state aid remained constant, or declined, the inevitable result will be increased budgetary pressure on local governments. Land Value taxation as an alternative Regardless of whatever paradigm develops, local governments in metropolitan areas, still be faced with the need to fund the public services in a competitive environment. Given the limitations to existing taxes, metro governments will seriously consider the adoption of some form of land, value taxation. First championed by the 19th century reformer Henry George, the concept of land value taxation involves simply taxing the value of land, while exempting improvements. Rather, they will explore split level rate systems, in which land is taxed at a higher rate than the improvements.2.