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State Governments and City Revenues: The Amount Given by States to Their Cities Varies Greatly from State-to-State

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

By Roger Kemp
August 13, 2018

Most states collect their sales taxes and rebate a portion of them back to their cities (based upon where they were generated from) on a city-by-city basis. When I was in California, the state government rebated one cent of the six-plus cent sales tax back to all of its municipal governments throughout the state on an annual basis.

The state that I live in now, the state of Connecticut, keeps 100 percent of the Sales Taxes generated annually by the citizens that live in all the cities throughout the state.

Ditto for the hotel/motel room tax. Most states collect this tax and rebate it back to their municipal governments based on where it was generated from on a city-by-city basis. Connecticut keeps 100 percent of this tax too, even though it was generated by citizens staying in hotels and motels in cities throughout the state.

This is why cities in the state of Connecticut have a 98 percent reliancy on the Property Tax revenue source to finance their local municipal government’s public services.

When the Connecticut Conference of Municipalities (CCM) did their study a couple of years ago, local governments in Connecticut had the third highest reliancy on the property tax revenue source of any state in the nation (only New Hampshire and Maine were higher).

Also, keep in mind, our state and federal governments are primarily financed from the income tax, which is a tax on realized wealth. Local governments, on the other hand, are financed primarily from the property tax, which is a tax on unrealized wealth. A citizen does not make any substantial amount of money on their residence/house unless they sell it!

Most citizens in our cities and towns do not like their property taxes increasing from year-to-year, and they must pay them even though they are not making any money/revenue from their house, since they are not renting their house or have received any revenue from selling it. Again, the property tax is a tax on unrealized wealth, and is not a fair method of taxation to finance our nation’s local governments.

For about half of the states in our nation, the property tax revenue source is relied upon by cities for up to three-quarters of the revenues to finance their municipal operations – not 98 percent, as in is in the State of Connecticut, as well as two other states in New England, as were noted above (New Hampshire and Maine).

In the states throughout our nation, our state legislators should help the public officials in their local governments to diversify their revenue sources, so they can decrease their reliance on their primary source of revenue, the property tax, a revenue source that is based on unrealized wealth.

Our federal and state governments are not financed from this revenue source, so why should our nation’s municipal governments have to rely on this source of family revenue – a revenue source that is based on unrealized wealth. Our federal and state governments don’t do this, so why should we?

Let’s finance our local municipal governments on taxes based on a realized wealth, like our federal and state governments do (the income tax), and not a tax based on an unrealized wealth (the property tax).

Local public officials throughout our nation, in all our nation’s states, should lobby their elected federal and state public officials to have them provide more revenue source options to America’s local governments. This will help their local elected officials balance their respective budgets using a tax on realized wealth, as opposed to one based on a revenue source that is based on unrealized wealth.

Author: Roger L. Kemp, MPA, MBA, PhD, ICMA-CM, is a Practitioner in Residence, in the Department of Public Management, at the University of New Haven. Roger is also a Distinguished Adjunct Professor in the Executive MPA Program, at Golden Gate University in San Francisco. He was a city manager of the City of Meriden from 1993 to 2005. He also worked in, as well as served as a city manager in the largest council-manager form of government cities in California (the City of Oakland) and New Jersey (the City of Clifton). Dr. Kemp is also a frequent speaker and can be reached at (203) 686-0281, or by e-mail at <[email protected]>.

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