Robert L. Bland, Ph.D.

Strengthening a community’s economy begins with an assessment of the taxes and fees currently in use. Are they consistent with the community’s economic goals? Do they promote a diverse tax base, encourage the development of countercyclical industries, and bring greater revenue stability to the budget? Are there opportunities for increased use of benefits-based levies and for reducing or even eliminating nuisance taxes? Do certain groups receive unjustified tax favors?

Managers need specific criteria to guide their planning and deliberations toward policies that strengthen the local economy. Public finance research identifies the criteria that should guide local revenue policy making. These criteria fall into the three general categories—the pillars of support for a sound local economy: equity, neutrality, and effective administration.

Not only does a revenue structure reflect a community’s values, but citizen attitudes toward local government are shaped largely by the perceived fairness of the revenue structure. Fairness, or equity—the fair distribution of both the tax burden and the benefits from public services—is the first pillar.

Neutrality of tax policies is the second pillar. Tax neutrality requires placing the long-term economic health of a community above any short-term political advantages. Taxes alter the way markets function by prompting producers, consumers, workers, and investors to find ways to reduce or eliminate their tax liability. The less interference by taxes in the marketplace, the more neutral those policies and, by implication, the more productive the market’s operation—up to a point. No economy operates perfectly—that is, with perfect competition, free flow of information, and freedom of entry or exit by participants. Economists refer to tax avoidance behaviors collectively as dead-weight losses to the economy. The goal is to minimize interference from tax policies while creating a return to the community, in the form of tax revenue, for its investment in public goods and services.

The third pillar is effective administration. Not all revenue options that have economic or political merit are feasible for local use when the cost to government to administer the tax or the cost to taxpayers to comply with the tax is taken into account. For example, charging a fee for the use of municipal parks has economic merit but lacks feasibility, given the high cost of collecting the fee. In fact, municipal parks, like a number of other public services, possess benefits that spill over well beyond individual users, making their financing solely from benefits-based sources less attractive.

Equity, neutrality, and effective administration are principles to guide local managers in formulating revenue policies for their communities. But as will become evident, even with the aid of these principles, local leaders are left with the unsavory task of making tradeoffs. Gains in equity frequently come at the expense of lost neutrality and increased administrative complexity. In the political context in which local managers operate, much of their time is devoted to resolving the conflict among these three competing pillars. The formulation of revenue policy occurs in an imperfect world with incomplete knowledge; the prudent manager takes full advantage of those occasional opportunities for making strides in balancing the tradeoffs among these three pillars of tax policy.

Bob Bland is professor and chair of the department of public administration at the University of North Texas and the author of A Revenue Guide for Local Government, 2nd edition (ICMA, 2005).