The fiscal systems of cities are defined by the states in which they are located. These systems can create an environment that either allows municipalities to fund their share of resident needs (and to thrive economically) or constrains the ability of cities to balance budgets and deliver basic services. The National League of Cities recently released its Cities and State Fiscal Structures report, which examines how the key components of these systems (fiscal authority, revenue reliance/capacity, state aid, and tax and expenditure limitations) are structured across states.
Municipal fiscal authority is a city's access to general taxes on sales, income, and property, the report notes. The authors rate municipalities as having authority if they have an option to levy the tax, local option to control the tax rate (they have some ability to shift the rate incrementally), and if the revenues are for general use (i.e., not earmarked for specific uses).
The report defines municipal revenue reliance as the proportion of revenues that a municipality generates from its own sources for general use--which determines whether a city's fiscal policy decisions can affect fiscal direction. The authors examine the share of general fund revenues derived from local sources, including major taxes (property, sales, and income) and fees and charges (which are usually set locally). On average, U.S. municipalities derive approximately 71 percent of their general fund revenues from own-source revenues: 24 percent from property taxes, 13 percent from sales taxes, 3 percent from income taxes and 32 percent from fees and charges.
State aid is the share of general revenue from state sources, and it comprises an average 17 percent of city general fund revenues.
Voter- or state-imposed (constitutional or statutory) tax and expenditure limitations (TELs) require that local governments tax or spend according to state regulations. The report examines two types of TELs: Those that constrain the property tax in particular and those that constrain overall revenue spending increases. Currently, 41 states impose some form of a TEL on their municipalities.