Local Taxes: How Much Do we Pay and What’s it for?

Making cross-cutting comparisons of city revenues and expenditures can be complicated. Every person in the United States lives under overlapping boundaries of local governments, all of which have the ability to spend money and many of which have the ability to tax.

For example, I used to live in Chelsea, Massachusetts. local government in Massachusetts centers on the city; so the only local tax I paid was city tax. The city collected the revenues, then distributed the money to various local services, including the schools, garbage collection, and sewerage. But when I moved to Chicago for graduate school, I found myself paying a combination of city taxes, Cook County taxes, and probably a few taxes that I just pay without really knowing or questioning which body collects them! In some places, there are literally dozens of overlapping special districts, each with the ability to tax and spend. How can we compare all these increasingly complicated scenarios?

The Lincoln Institute made a big stride towards enabling these comparisons when they started releasing finance measures based on “FISCs”: Fiscally Standardized Cities. Now we can start comparing apples to apples.

First, let’s look at overall revenue for all 150 FISCs in the United States

This shows the importance of state aid, property taxes, and user charges to local governance; these three compose nearly 3/4 of local government revenues.

Let’s look at this same information in a different way, so we can really see just how big those relative differences are.

How would this compare to just looking at cities? Let’s look at share of revenue for cities rather than FISCs.

For cities, user charges are the largest share of revenue. On the other hand, FISCs derive 10 percentage points less of their revenue from state aid than cities. So, while state aid is the largest source of revenue for FISCs, it is the third largest for cities. Sales taxes make up a somewhat larger share of city revenues than FISC revenues. The other revenue sources are roughly similar between cities and FISCs.

But what is driving these differences? In some cases, it reflects differing budget priorities. But it can also reflect a simple division of labor in fundraising and spending between different levels of government.

For instance, let’s look at how a localities’ decision to have dependent or independent school districts impacts sources of revenue. An “independent” school district is one that has its own special-purpose government with powers that include taxation. In that sense, it is “independent” from the city in which it operates). A “dependent” school district lacks the authority to levy taxes directly, instead relying on its parent city to raise revenues on its behalf.

Cities with independent school districts rely much more on user charges, while cities with dependent school districts are more reliant on property taxes and state aid.

My hypothesis for the difference is that a large chunk of state aid and property taxes are designated for use in primary and secondary schools. In cities with dependent school districts, the city receives this money directly. In independent school districts, the school district collects those funds, so they would not be counted in the city finance variables included in my graph.

But this does not explain the much greater dependence of cities with independent schools on user charges. My theory is that residents of cities with independent school districts might view local public goods more as a-la-carte services rather than as true public goods. They prefer a system where the burden of the service delivery cost is matched to the residents who are most likely to use that service, a model that is compatible with the balkanized service delivery associated with special district governance (e.g. independent school districts). Therefore, residents of these areas prefer user charges that are more targeted at the individuals who use the local public good most rather than broad-based taxes levied on all residents. This might be true not only for school charges, but also for a range of local public goods provided by the city that follow the same logic: services such as parks, sewerage, and health.