Tax Structures in American Cities: Levels, Reliance, and Rates

• Author: Susan A. Macmanus
• Published date: 01 June 1977
• Date: 01 June 1977
• DOI: http://doi.org/10.1177/106591297703000208
• Subject Matter: Articles

TAX STRUCTURES IN AMERICAN CITIES:
LEVELS, RELIANCE, AND RATES
SUSAN A. MACMANUS
University of Houston
ECENT
financial catastrophes in several major U.S. cities, particularly New
~-~ York City, have demonstrated the &dquo;costs&dquo; of ignoring the revenue side of
municipal budgets. The purpose of this paper is to describe and explain,
through systematic comparative analysis, variations in the tax structure of the cen-
tral cities of the 243 SMSAs (1970). Specifically, the focus is on three tax struc-
tures : levels (per eapitas) ; reliance; and effective property tax rates.
RESEARCH DESIGN
Within a systems analytic framework, we will examine the linkage between
demographic or environmental characteristics (inputs) and tax policies (outputs)
of 243 central cities located throughout the United States.
The Data
Demographic data were collected for 1960 and 1970 from the U.S. Census of
Population; the U.S. Census of Housing; FBI Uniform Crime Reports; and Vital
Statistics of the U.S. The environmental variables included in this analysis of tax
structures are measures of: population; metropolitanism; land use; housing con-
ditions ; ethnicity; race; income; afliuence; poverty; age; education; occupation;
mobility; familism; life style; social pathology; region; age of city; and total func-
tional responsibility. (See Table 1 for a complete list of the independent variables.)
All of these variables were selected as predictor variables on the basis of previous
research on municipal taxation to be described in a later section entitled &dquo;Previous
Research.&dquo;
Tax revenue data were collected for three time periods (1962, 1967, 1972)
from the Census of Governments and City Finances publications of those years.
Local government tax revenue consists of two types: property and nonproperty.
The property tax is the only major tax source utilized specifically by local govern-
ments. Furthermore, the property tax is the only major tax that all states authorize
their local governments to use. Nonproperty taxes typically include: local personal
income taxes; local retail sales taxes; cigarette taxes; alcoholic beverage taxes; air-
port taxes; occupational license taxes; and business taxes. They are becoming in-
creasingly popular as a revenue source to supplement the property tax. We use
these tax revenue data to construct several tax structure measures.
Tax Level (Per Capita) Measures. Revenue level is defined as the per capita
dollar amount from a particular source. Total tax revenue level is calculated by
dividing a city’s total tax revenue by its total population. Similarly, property and
nonproperty tax levels are figured by dividing property tax revenue by total popu-
lation and nonproperty tax revenue by total population.
Tax Reliance Measures. Revenue reliance is defined as the percent of the total
general revenue received from a particular source. Total tax reliance is thus cal-
culated by figuring total tax revenue as a percent of the total general revenue.
Similar calculations produce property and nonproperty tax reliance figures.
Effective Property Tax Rate Measures. Effective property tax rate is defined
as &dquo;the relationship derived by dividing total tax billed by sales price of the prop-

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264
erty.&dquo;’ Until recently, comparisons of property tax rates across communities was
somewhat futile because the only available comparative rates were nominal rates
(statutory rates) .2 However, we are warned that:
One cannot use the nominal property tax rate because the wide
variation in assessment ratios across communities implies that the actual
rate at which communities tax property is not likely to bear a systematic
relationship to the nominal rates.... Effective rates usually lie substantial-
ly below nominal rates because the market values which condition effective
rates usually are substantially above assessed values.3
In this study, we have included effective property tax rates for: (1) all types of
real property; and (2) fully taxable single-family dwellings (median). Real prop-
erty is defined as &dquo;land plus anything permanently attached to the land, appur-
tenant to the land, or immovable by law.&dquo;4 Residential (nonfarm) single-family
property includes &dquo;all types of single-family houses not on farms, including de-
tached houses; single-family parts of semi-detached and row or town houses if
1
U.S. Bureau of the Census, Census of Government 1972, Vol. 2, Taxable Property Values
and Assessment-Sales Price Ratios and Tax Rates (Washington, D.C.: Government
Printing Office, 1973), p. 16.
2
The Census of Governments began in 1967 to report effective property tax rates because
"rates (nominal) resist comparison just as values do unless the variations in underlying
assessed value levels are overcome first" (p. 16). Unfortunately, 1967 data on effective
tax rates is available for cities of 100,000 or above only. Not until 1972 is this figure
reported for cities of 50,000-100,000.
3

Vol. 2, Taxable Property Values and Assessment-Sales Price Ratios, p. 16.
4
Ibid., p. 26.

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265
separately assessed; rural and suburban estates and residences not primarily used
for farming; and single family units of a condominium.&dquo;5
5
Methodological Techniques
Methodological techniques utilized will include descriptive statistical analysis
(comparison of means) as well as stepwise multivariate regressional analysis. We
will perform our analysis within two different time frames: cross-sectional (three
time points -
1962, 1967, 1972) and lagged (1960 independent variables regressed
on 1962, 1967, and 1972 tax measures -
the dependent variables) . We have also
employed five control groups for our analysis: region; population size; economic
base; governmental character; and functional responsibility.
Dealing With the Problem of State Legal Constraints
The units of analysis in this study are cities. They are treated as whole politi-
cal systems, capable of responding to the demands and resources of their popula-
tions in the determination of taxation policies. However, the fact that municipali-
ties are actually legal subdivisions of state governments cannot be ignored. State
laws limit the range of policy alternatives available to municipalities. Municipal
taxation patterns are indeed affected by the legal constraints placed upon the cities
by their respective state governments.
It is thus important to control for constitutional and statutory constraints upon
municipal taxing powers -
particularly constraints regarding the power to tax
property.&dquo; In the larger study from which this particular study was taken, various
measures of state legal constraints on local government fiscal powers were included
among the explanatory variables (type, scope, and method of limitation; rate
limitation and coverage of rate limitation; flexibility of tax levies for special pur-
poses ; flexibility to exceed general limitations; and legal level of assessment). The
results showed that these legal constraints were not very good predictors of munici-
pal variation in taxation policies.7
7
There are several possible explanations for the failure of these legal constraint
measures to explain variations in municipal taxing policies. First, &dquo;in spite of the
states’ legal power to act separately in devising patterns of government and financ-
ing arrangements, they have actually done a good deal of copying from one
another.&dquo;8 Recent years have seen an increase in the passage of constitutional and
statutory home rule provisions which ultimately have meant less state intervention
in local government fiscal decisions. Secondly, the Bureau of the Census regularly
develops statistics on state and local finances within a framework that groups vari-
ous items according to certain standard definitions, rather than according to their
diverse handling by the governments themselves in their reporting schemes.9
In summary, the problem of handling state legal constraints on municipal
fiscal powers is not as critical as one might expect. While legal constraints do exist
and cannot be simply &dquo;argued away,&dquo; their impact as explanatory variables is
simply not as strong as are measures of demographic and socioeconomic conditions.
Perhaps the explanation for this is the increase in urban political clout in state
5
Ibid.
6
The Advisory Commission on Intergovernmental Relations publishes information on state
constitutional and statutory restrictions on local powers to raise property tax revenue as
well as information on the legal level of property assessment in the various states. See
ACIR, Federal-State-Local Finances 1973-1974 (Washington, D.C.: Government Print-
ing Office, 1974), Tables 124 and 129.
7
Susan A. MacManus, "Revenue Patterns in American Cities and Suburbs: A Comparative
Analysis" (Ph.D. dissertation, Florida State University, 1975).
8
Advisory Commission in Intergovernmental Relations, Measuring the Fiscal Capacity and
Effort of State and Local Areas (Washington, D.C.: Government Printing Office, 1971),
p. 2.
9
Ibid., p. 2.

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266
legislative chambers (especially in light of reapportionment). As demographic and
socioeconomic changes affect large cities, urban political clout has responded to
change state laws and increase the flexibility of municipalities to deal with the fiscal
crises that face them as a result of the changes occurring in the urban environment.
PREVIOUS RESEARCH
The literature to date on local government finances has tended to focus pri....