Priming the revenue pump: Little Rock's business license collection program.

• Author: Biles, Bob

One of the realities of local government finance is that taxpayers are reluctant to increase tax rates to fund government operations. Another is that natural revenue growth often does not generate the resources needed to sustain existing programs or meet new needs. Consequently, policymakers and finance professionals must constantly look for new sources of revenue and find ways to enhance existing sources of revenue. Oftentimes, careful analysis of existing sources of revenue will reveal the potential for greater revenue yields without increasing rates or fees. This proved true in Little Rock after the city took a closer look at business license collections. This article describes how the City of Little Rock boosted business license collections by more than a quarter of a million dollars and enhanced its public image in the process.

A LITTLE BACKGROUND

With a population of 187,000, Little Rock is the largest city in Arkansas. It is also the state capital. General fund departments include police, fire, parks, planning, housing, and general government support operations. A mixture of sales tax (50 percent), franchise fees (20 percent), property tax (11 percent), and various other revenues, including business licenses, supports the general fund. The state constitution limits the general fund property tax levy to five mills, and the city levies the maximum. Larger utility franchises are also set at the highest rates allowed. Sales tax rates can be increased, but voters defeated a proposed rate increase in 1999. Accordingly, the city is highly dependent upon steady growth from these major revenue sources.

As 2001 progressed, these revenues were not growing at the rates anticipated in the 2001 budget. In early September, the Finance Department forecast a $3 million budget shortfall (on a $105 million budget) unless a combination of expenditure cuts, additional revenues, or other measures were made over the last three months of the year. These actions were taken to keep the budget in balance. Meanwhile, estimates for the 2002 budget revealed another significant gap between revenues and expenditures. To close the gap, the city reduced department budgets and increased the rates and fees for every possible revenue source, including a 35 percent increase in business license fees. Although these moves balanced the 2002 budget, there was a sense among city officials that some revenues, including business license fees, needed to be analyzed.

A CLOSER LOOK AT BUSINESS LICENSES

In the summer of 2002, Finance staff gathered historical information on business license collections (see Exhibit 1). Business license revenues and the number of businesses with business licenses had held steady or declined for several years. Economic conditions in Little Rock had improved over that same time period, making it reasonable to conclude that the number of business licenses should have increased. As another check, staff obtained information from nearby cities on the number of business licenses per capita. Little Rock fell below the average. Using the average number of business licenses per capita in nearby cities as the benchmark, Little Rock should have issued around 9,200 business licenses the previous year--far more than the 8,200 the city actually issued. With an average business license fee of about $250, the city concluded that it could potentially increase collections by as much as $250,000 per year.

At this time, two issues started driving the business collection effort. First, the 2003 budget process was well under way and revenue projections were once again flat. To balance the budget, the city was forced to reduce expenditures by 10 percent. For any business license collection program to be considered, positive payback was a must. Second, the city...