By Doug Ayres

Public services provided by local governments are in dire financial condition in the aftermath of the Great Recession. Especially threatened are the basics: law enforcement, fire and emergency medical services, and road and street maintenance. Other governmental activities, including parks, libraries, culture, planning, and basic government support, have been forced to the back burner.

The recession set in motion a destructive wave of consequences, including massive losses in the value of taxable real estate, government employee pension funds, and retail sales tax revenues. The setting of fuel taxes per gallon rather than by percentage of cost has also resulted in a significant reduction in the basic component of street and highway maintenance revenues. Most such revenues now must be used for new construction, with maintenance levels significantly reduced, deferred, or actually eliminated.

Additional Revenue Needed

It has become clear that greater diversification must be achieved to resuscitate government revenues. Otherwise, essential services will continue to be reduced and the lesser-valued activities all but eliminated. Old and new revenue streams could be the answer.

First, local governments should significantly broaden the sales tax base to include the full cost of labor-intensive services. Haircuts and other personal care, for example, are services and could be taxed. Business-related computations would be avoided and tax income increased if the entire tax on an auto repair bill included not only parts but labor too, thus taxing the total goods and services provided. National statistics currently indicate that greater than one third of consumer purchases are of services and not just goods.1

Second, implement the Municipal Business System2 and apply the private sector cost and profit/loss regimen to each of the specific services and then identify the distinct beneficiaries for each discreet government service. Thus, the exact true and full costs to match beneficiary-provided revenues would be known.

This lack of municipal-service identification and full-service cost data has allowed a major diversion of general tax revenues to subsidize the consumers receiving each limited client service. Discovery processes and computer programs exist to define and to alleviate such leaky cost recovery knowledge.

Specific services in local jurisdictions have been shown to divert as much as half of general property and sales tax revenues solely to benefit special service recipients. Recovery of those monies by charging specific full-cost recovery service fees not only secures massive amounts of new revenues but also achieves greater equity in the use of tax revenues for community-wide benefit services only.

Governing bodies should have specific knowledge of the full cost versus the special benefit of every service so that open decisions can be made about use of general taxes for general public benefit or for taxes diverted to special services for the limited clientele.

Third, it’s time to return to greater use of local improvement districts, which are also known as special assessment districts. All 50 states have statues allowing specific benefits to specific properties to be paid for by specific amounts of incurred service and/or construction costs.

The majority of local infrastructure historically has been provided by assessment/improvement district levies. But that use declined with the increase of requirements for developers to provide infrastructure and development impact fees. Unfortunately, however, maintenance, improvement, and replacement of these developer-built infrastructure additions have been left to local governments, without adequate revenue sources to provide them.

Return to Basics

Two other major omissions of cost awareness and thus distribution among distinct services are overhead and true fixed-asset replacement cost, not original or historic expense. Through an unfortunate economic confluence, the costs of local infrastructure maintenance and replacement and service operational costs have been doomed to be financed by the Big Two—property taxes and sales taxes. Special service fees and charges as well as special assessments have tended to be forgotten, overlooked, or unused.

It is time to return to basics. All four local government revenue sources—property taxes, full economic transaction taxes including retail sales, specific limited service fees and charges, and local improvement assessments—must be tapped for local government to return to a more stable financial footing.

1   Bureau of Economic Analysis, U.S. Department of Commerce; Table 2.4.5 Personal Consumption Expenditures by Type of Product; 2012.

2   Information found in Consumer Government – via the Art of Full Disclosure by Douglas W. Ayres. 

 

Doug Ayres, Retired Manager, Sedona, Arizona