Augmenting Property and Sales Taxes.

• Author: Barrett, Katherine
• Position: PERSPECTIVE

With billions of dollars flowing from Washington, D.C. to states and localities, it may not feel like this is a time when governments would be on the lookout for new forms of revenue. But the federal dollars are going to run out before long--and fiscally smart places are only using them for one-time expenditures, in any case. So, the hunt is on for new revenues to support services for the long haul.

Right now, most local governments in the United States rely largely on property taxes and sales taxes to pay the bills. But both of these revenue streams are troubled.

"When cities first started to collect sales taxes," said Chris Morrill, GFOA executive director, "goods were two-thirds of what people bought, and the rest was made up by services. Now those numbers have flipped, yet many services aren't taxed."

There's been talk for years about taxing more services, but progress has been slow, and right now, there isn't much action on that front. Janelle Cammenga, policy analyst with the Tax Foundation, said, "The states have lots of revenues, so the base broadening of services isn't on a lot of governors' agendas."

Property taxes, meanwhile, are hugely unpopular among homeowners, and as a result, a number of states have limited communities' ability to raise them. Beyond this, "some jurisdictions allow for several years in between revaluations," said Deborah Carroll, director of the University of Illinois at Chicago's Government Finance Research Center. "That means that real property appreciates in market value faster than its taxable value. In addition, over time, we have seen wealth creation involve fewer tangible things like real property, so property ownership may no longer be the best reflection of taxpayers' ability to pay."

Despite the pressures felt by cities, the job of finding new sources of revenues is a difficult one. As Shayne Kavanagh, GFOA's senior manager for research, observed, "No one wants to be the person who raises taxes. But you can't wave a magic wand and get new revenues. The money is going to have to come from somewhere. At the end of the day, someone is going to have to pay." Those who have to pay the additional taxes may decide to get retribution at the ballot box, though, so elected officials are reticent to move in that direction.

What's more, the very act of finding opportunities and putting them into action is easier said than done, especially for smaller entities. "Maybe less than five percent of cities nationwide...