The 7 Main Sources Of Revenue For Local Governments

Your local municipality’s trash and water services aren’t free; so how do they get their money?

State and local governments tend to work hand-in-hand regarding their fiscal responsibilities. However, expectedly, there are a large number of restrictions that local governments face. This has caused local leaders to think of their own ways to create revenue.

Portfolio diversification is crucial for maintaining a healthy personal balance sheet. The same goes for local government. relying too heavily on one source of income creates vulnerability if something like a crash were to happen. For local government, the most reliable source of income revenue is the sales taxes.

Those sales taxes are just the tip of the iceberg. We’ve highlighted the other main sources of revenue for local governments in this article:

  • Sales Tax
  • Lotteries and Casinos
  • Income Tax
  • Property Tax
  • Severance Tax
  • Miscellaneous Tax
  • User Fees

1. Sales taxes in local government

Sales taxes are the go-to tax for state and local municipalities.

A controversial source of revenue, the sales tax doesn’t benefit a large portion of the population – wealthier people don’t have to worry as much about taxes for basic items such as paper products or grocery items.

Company services are included in the sales taxes and because of this, renting, repairs, beauty treatments, and more are a source of revenue. Some local municipalities focus on specific services. For example, Colorado’s tax on marijuana. With most new businesses opening up as services, it makes sense to have them taxed a little more.

The sales tax is a simple tax that many state and local governments miss out on because of loose borders. Cigarettes, for example, are transported from low-taxed areas to places where a pack can increase a significant amount because of the tax implications. On top of that, the inability to tax income streams from the internet provides even more controversy and limitations – leaving municipalities out thousands, even millions of dollars.

As sales taxes continue to be the main source of revenue for a local municipality, it’s the residents who vote to continue that. The diversity of taxes throughout products and services will be beneficial fiscally and as residents continue to develop more businesses, certain areas will thrive. The simplicity of the tax creates many loopholes, which leads leaders to question: where can we create a new or better source of revenue for our municipality?

2. Lotteries/Casinos revenue for local government

The lottery was established in the 1600s as a way to raise money for good causes such as charities, schools, highways, or bridges.

Degenerates caused the downfall of what they called “looteries” because of schemes and pour management. Between 1895 and 1963 there were no lotteries operating legally. New Hampshire was the first state to get the ball rolling again and today, 43 states are home to casinos.

The best part about this tax is that it’s completely voluntary. There’s an opportunity for state and local governments to collect large sums of money through gambling, and every dollar of it is through someone else winning more money on their own! This allows other taxes to have more elasticity and takes the pressure off of them.

The downside of casinos is that they’re expensive to maintain. Prizes, new games, commissions to vendors, and security are just a few of the enormous costs. On top of that, low-income individuals are more likely to play, which could be considered a regressive form of taxation. Casinos encourage gambling.

3. Income tax for local government

In 1911, Wisconsin became the first state to tax personal income.

Both personal and corporate income taxes consist of approximately 32% of state taxes. This is one of the more beneficial taxes for state and local governments because of the versatility of income from all of the residents. Although most states tax based on an income-based filing bracket, there are some states like Pennsylvania and Tennessee that have consistent rates, no matter how much you make.

Rates are also versatile in that the state and local governments can fluctuate the percentage based off of need, such as during a recession or a period of great economic prosperity. With this versatility again comes the need for holding your local government accountable.

4. Property tax revenue in local government

Property taxes within state and local governments don’t contribute much to the overall revenue of the municipality.

Property taxes are a very controversial topic for residents and leaders. For one, the inconsistency in valuations along with the complicated process for appeals is a major pain for property owners. An individual might also think that a raise in property taxes is equitable because if you have the property, you have the money to pay for it and the taxes that come with it. However, renters ultimately pay a portion of those tax raises every month when they pay their rent.

Restrictions proposed in the ’70s have created a better return on investment for property owners. Prior to that date, local governments would double and even triple the taxes, causing people to sell their possessions to pay their taxes. The restrictions that were made in areas such as LA and San Fransisco highlight the value that local residents hold in an area, and why it’s important to hold accountability for the leaders.

With more property and land being acquired by non-profit organizations, these possessions become exempt from local property taxes. However, these places still use the services of the local municipality such as water and sewage, or trash collection. On the other hand, states have created circuit breakers – a limit on a tax applied to a demographic of people – in order to create more balance. The land and property of low-income individuals, for example, are excluded in some states.

5. Severance tax for local government

Some states such as North Dakota, Alaska, and Wyoming collect a large portion of their revenue from selling natural resources like oil. Other states approach it with outside-of-the-box thinking, placing the severance tax on fresh seafood.

Severance taxes work the same way as some of these other smaller sources of revenue; they take the pressure off of the larger percentage taxes.

6. Miscellaneous taxes within local government

Taxes on items such as cigarettes are used as revenue for state and local governments. These are known as “sin taxes”, and are the cause of cigarette smuggling from lower-taxed states to higher. On top of that, e-cigs and other vapes are being taxed as cigarette products because people are kicking the smoking habit or finding alternatives.

Alcohol is also a miscellaneous tax and is one that is used in every state. Tennessee hosts the highest rate, while Wyoming has the lowest.

Gasoline is also considered one of these “sin” taxes. The good news about this tax is because more people are using electric cars and becoming more fuel efficient for higher prices, the taxes are falling. This has resulted in less road construction and maintenance funding; emphasizing yet again the importance of accountability and reassessment.

When a person dies, their assets are taxed before being bequeathed to whomever it goes to. If an individual were to inherit money, that would be taxed as well. Other small taxes include licenses, auto fees, and parking and traffic violations. Some states have a “pole tax” for strippers. Other states have a “jock tax” for professional athletes.

7. User fees generated for local government

When people use services or buy goods, they should be the only ones who pay a tax.

That’s exactly what the user fees are. Tuition, water and sewage, fire services, and inspection fees are examples. These fees bring in a large portion of local government revenue.

The user fees are the most accepted form of tax from the state and local governments. User fees are consistent across in-state and out-of-state residents, which is why many people consider them equitable. Although, some low-income individuals might not be able to purchase the item because of the tax that’s implicated.

The flexibility of these user fees puts a lot of decision-making into the hands of local governments and businesses. Cutting the fee of a ticket to a baseball game on a Tuesday night might encourage more visitors.

Review of the main sources of revenue for local governments

Safe to say that the sales tax is the main source of revenue for local governments. Income taxes on personal and corporate income are rather fruitful. Casinos are fun but not necessarily the most profitable; a relief to say the least. The process behind property taxes needs to be updated but in the meantime, maybe local governments will come out with more miscellaneous taxes, like online gambling. User fees make a lot of sense and severance taxes might soon be more widely adopted.

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Read more in the Bowman and Kearney State and Local Government; 11th Edition.