Promoting Local Autonomy Through Local Revenue Sources

Local governments in the United States are constitutionally subordinate to and creatures of the state governments in which they are located, but have considerable autonomy, nonetheless. There are many types of local governments in the US, including municipalities, counties, townships, school districts, special districts, and various local authorities. Governance and fiscal structures, including allowable taxes and other revenue sources, are determined by state laws, and vary depending on whether the government meets the state criteria for a home rule charter, which provides the locality with considerable autonomy, or whether it is governed by the general local government laws of the state. Revenue sources for local governments must comply with state laws, and allowable sources vary among the fifty states. In the late nineteenth and early twentieth centuries local governments relied mainly on revenues from sales and excise taxes for their budgets. This trend changed during the Prohibition era, and local governments began to use property taxes as a significant revenue source. This tendency toward heavy reliance on property tax revenue in cities, counties, and school districts was affected also by revenue sharing from state and local governments. After the tax and expenditure limitation movement began in the late 1970s, most famously by passage of Proposition 13 in California which reduced property tax collections in California by 50%, and a reduction in intergovernmental financial assistance from state and federal governments, local governments began to rely much more on other local revenue sources including nonproperty taxes, user fees and charges, government enterprise funds, regulatory fees, and income from investments of idle cash. These trends have continued into the early twenty-first century. Local governments generally prefer own-source revenues, both tax and non-tax, over which they exercise considerable control, to tax sources that are limited or restricted by the state government laws or tax and expenditure limitations. Similarly, local governments have found that intergovernmental financial aid tends to decrease their autonomy because of the restrictions for use of the grant funding. For these reasons, local non-tax revenues are increasing in importance. This paper explores the use local non-tax revenues, including theoretical and practical problems with some of these sources, as well as their successes. The paper concludes that the trend toward increasing use of these local revenue sources will increase; with the probable result that local autonomy will increase.