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Keeping Up with the Times: Rethinking Local Government Revenues

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Deborah A. Carroll, Shayne Kavanagh and Chris Morrill
January 11, 2022

For local governments to function, and provide services for community residents, they must raise revenues—ideally in the most efficient and fair way possible. Yet, the effort to raise the necessary dollars can be a daunting and complex task. The modern environment of public finance characterized by greater digitization, globalization, demographic shifts and changing political dynamics has created an ongoing cascade of difficult challenges for local government revenue structures.

The necessity of rethinking revenue rests upon the fact that the changing economy has challenged the relevance of the property tax, which has historically comprised a significant portion of local revenues.

But a large part of the value created in the modern economy is not based on bricks and mortar properties. There has been a significant shift in the relative importance of assets that comprise family wealth from houses and factories to financial instruments. In fact, from 1989 to 2019, the top five fastest-growing categories of wealth held by families were various financial instruments. Over time, we’ve seen the proportion of financial assets as a share of the total increase from 31% to 42% while the relative share of wealth derived from primary residences and equity in nonresidential property both decreased.

Other issues that necessitate the need to rethink the means through which local revenues are raised include:

  • The recent application of sales taxes to online sales.
  • The continued exclusion of many services from sales taxes, even though consumer purchasing has dramatically shifted in that direction.
  • Fuel taxes that do not account for the increase in fuel efficiency and electric vehicles.
  • The potential overuse of fines and fees—particularly those related to the court system—that are inherently regressive and do not reflect the ability to pay.

In an effort to take a fresh look at how local revenues are raised and to provide new and innovative ideas to guide state and local policymakers about how local government revenue structures might be modernized to better meet today’s challenges, the Government Finance Officers Association (GFOA) has partnered with several other organizations to launch its Rethinking Revenue project. A major goal of the initiative is to develop new ideas for raising local revenues more effectively within existing revenue structures and without requiring new taxes.

By recognizing that local government revenues are often based upon outdated assumptions and therefore have not remained aligned with modern economic realities, the GFOA and its partners are spearheading the effort to reimagine and improve local government finance. The group released a report in October 2021 as the first of five steps in its efforts to tackle this complex and increasingly critical issue.

Titled Rethinking Local Government Revenue Systems: Why Is It Necessary?, this first report is an important reminder that outdated revenue structures often create misalignment between who pays for essential public services and those who can afford to pay or who benefit most from such services. Frequently, lower income individuals bear a disproportionate share of the local tax burden. That’s because taxes on real property across the United States that are valued in the bottom 10% are levied, on average, at an effective tax rate that is double that of property in the top 10%.

This first step of the Rethinking Revenue initiative helps to lay out the scale of the problem pertaining to local government revenue structures, explains why the solution cannot simply entail less government spending, provides a roadmap of where local government revenues come from in today’s economy and explains the pathway forward for helping to provide innovative and useful solutions. This first step is critical as, “A problem well stated is a problem half-solved.”

Disparities in local revenue structures are made even more complex when the potential sources of revenues fall just outside the reach of the municipal taxing authorities. One example can be found in cities that have regional shopping centers. They get the bulk of the revenues even though people from around the region shop there.

Issues of revenue raising have grown more pressing not just because of economic and demographic factors. New policies, meant to do good, introduce distortions over time. Consider assessment practices granting exemptions for property owners but not renters. Additionally, state-imposed tax and spending limits restrain local governments from leveraging revenue that keeps pace with inflation and increased needs for essential public services. These types of distortions lead to unfairness that perpetuate citizens’ mistrust of government, results in underfunding important government services, alters decisionmaking about the private economy and makes local governments more vulnerable to economic downturns.


Deborah A. Carroll is Director of the University of Illinois Chicago’s Government Finance Research Center. Shayne Kavanagh is Senior Manager of Research in the Government Finance Officers Association (GFOA). Chris Morrill is the Executive Director of the Government Finance Officers Association GFOA.

The Rethinking Revenue Project is a collaborative effort between the Government Finance Officers Association (GFOA) and the following: American Planning Association (APA), International City/County Management Association (ICMA), National Academy of Public Administration (NAPA), Center for Intergovernmental Partnerships, National League of Cities (NLC),Center of Municipal Finance at the University of Chicago’s Harris School of Public Policy, and Government Finance Research Center at the University of Illinois at Chicago’s College of Urban Planning and Public Affairs.

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