Revenue Diversification: Fiscal Illusion or Flexible Financial Management

This study examines the trends in revenue diversification in approximately 240 suburban municipalities in the Chicago metropolitan region between 1988 and 1997. It then tests a model of revenue diversification's impact on tax effort using data from 1993 to 1997, and separated by home rule and non–home rule municipalities. Trends show that suburbs with higher increases in diversification tend to be home rule, younger, less residential, experiencing more growth, less reliant on property taxes, and more reliant on sales taxes. Model estimates show that communities with more revenue diversification have lower tax effort when controlling for other determinants of tax effort, and this effect is stronger in non–home rule municipalities.     

Diversifying Municipal Government Revenue Structures: Fiscal Illusion or Instability?

This paper examines (1) whether revenue diversification leads to greater instability as represented by revenue volatility, and (2) whether revenue complexity produces fiscal illusion as represented by increased public expenditures. These questions are answered by analyzing panel data on municipal governments between 1970 and 2002. The findings suggest that fiscal illusion does not occur among municipal governments, but revenue diversification does influence levels of volatility. However, the way in which municipalities diversify is important for achieving revenue stability. When diversification is considered in isolation, both tax and nontax diversification reduce revenue volatility. When diversification and complexity are considered simultaneously, the statistical effect of nontax diversification disappears. But, when a tax revenue structure is both diversified and complex, the likely outcome is greater revenue volatility rather than stability.     

Urban Armageddon or Politics as Usual? The Case of Municipal Civil Service Reform

For the better part of the twentieth century, the question of municipal reformism has drawn urban scholarship: Why do some cities change their governing arrangements while others do not? Focusing exclusively on merit systems, in this study I expose the political underpinnings of merit reform in American municipal history. A duration analysis of merit adoptions in a sample of 252 cities in the 1900–1940 period suggests that both state‐ (home rule status, state merit systems) and city‐specific (at‐large elections, term length, city size, percent foreign‐born, regional location) factors largely determined when and where reform occurred.     

Effects of the Form of Government and Property Tax Limits on Local Finance in the Context of Revenue and Expenditure Simultaneity

This paper examines the impact of the form of government and state‐imposed property tax limits on municipal finance. We suggest that municipal revenues and expenditures are determined concurrently and estimate revenue and expenditure functions as simultaneous equations. We use the instrumental variable approach and fixed effects to address revenue and expenditure endogeneity. By testing the model on a cross‐section of rich municipal data for fiscal year 2002, we find evidence that revenues and expenditures are simultaneously determined, that potentially binding state‐imposed property tax limits effectively restrict local revenues and that the form of government is a significant predictor of local expenditures.     

Municipal Communications Tax Revenue Reliance and Fiscal Impact of Possible Federal Preemption

This paper presents empirical evidence of the extent to which municipal governments might be affected by federal preemption in the communications sector in light of the substantial variation in municipal governments' reliance on communications tax revenues. The results suggest that the federal preemption would have a negative fiscal impact on the majority of municipal governments, and the extent of the impact would vary substantially. The analysis also indicates that it would be challenging or legally impossible for some city governments to make up for the magnitude of revenue loss due to the states' constraints on municipal revenue‐raising capacity.     

The Growth and Stability of the Local Tax Revenue in Japan

This paper estimates the elasticity of the local tax revenue in Japan and analyzes the growth and stability of the Japanese local tax system. The main estimated results are as follows. The growth taxes in the long run are the Individual Enterprise Tax and the Fixed Asset Tax. There are no stable taxes in the short run. The total amount of prefectural tax revenue is low growth in the long run and unstable in the short run. The total amount of municipal tax revenue is low growth in the long run and neutral in the short run. The total amount of the local tax revenue in the prefecture and the municipality does not have stability and growth.     

Toward a Theory of Fiscal Slack

Though the fiscal slack literature has advanced over the past decade, more research is needed for a systematic understanding of the determinants and uses of fiscal reserves at the local level. This paper reviews theory and empirical evidence on the determinants of municipal fiscal reserves offers a conceptual framework for analyzing fiscal reserves accumulation and tests a series of hypotheses using a panel of 2007–2012 financial data for 145 U.S. cities from 21 states. Generalized least squares models show that unassigned general fund balances and unrestricted net assets are positively associated with general fund surpluses in the previous year and with local household incomes, while not being related to measures of fiscal risk, revenue effort, and voter characteristics. Overall, the findings suggest a relatively stronger influence of the capacity to save than the need to save on local fiscal reserves.     

The Interest Cost Implications of the Financial Advisor Turned Underwriter

The Municipal Securities Rulemaking Board (MSRB) does not prohibit municipal financial advisors from participating in the bidding process to serve as underwriter on issues for which they provided advisory services. Some municipalities prohibit the practice, viewing such an arrangement as a conflict of interest. Using data from nearly one thousand competitively sold municipal debt issues in the state of Texas from 1991 to 1995, I test whether or not competition alone in the bidding process is sufficient to protect the interests of the issuer. For general obligation debt and state-backed school district debt these data indicate that there are no interest cost implications for the practice. For municipal and special district revenue debt I find weak evidence of some additional interest (about six basis points) when the advisor serves as underwriter, but the effect is not consistent enough throughout the data to reach statistical significance at the p<0.001 level (see note 10). What I do find is that unrated issues are much more likely to be bid on and won by the advisor, indicating that cities should be concerned about the guidance of their advisor when that advice is to take an unrated issue to market.     

Examining Small Town Revenues: To What Extent Are They Diversified?

How diversified are small town revenues? Revenue diversification is analyzed among towns governed by town meetings. Using previously developed diversification measures, the findings confirm that these localities draw from less diverse revenue streams than other state and local governments. The reasons for these variations include differences in home rule status as well as tax and expenditure limitations imposed by states. The authors suggest that revenue allocation in these jurisdictions is substantively different from other forms of local government because these communities rely much less on sales taxation than states and municipalities. Their essay proposes possible options for improvement, along with other criteria by which small towns can assess their revenue diversification.     

Do housing bubbles generate fiscal bubbles?

This paper examines the effects of the most recent U.S. housing bubble on the fiscal policy of California cities. We use an instrumental variables approach that helps isolate the fiscal consequences of house price appreciation by taking advantage of the influence of local topological constraints on the elasticity of house prices with respect to interest rates. Our analysis generates three main findings. First, despite Prop 13 fiscal constraints, rapid house price appreciation has a strong effect on property tax revenue. Second, the resulting increase in property tax revenue was largely offset by a reduction in other local tax revenue. This offsetting response leaves total city expenditure unrelated to local house prices. In that sense the housing bubble did not produce local fiscal bubbles. Third, we find that fiscal adjustments to house price appreciation depend on local political institutions.     

Revenue Diversification in Arkansas Cities: The Budgetary and Tax Effort Impacts

The consequences of revenue shortfalls for cities are particularly dramatic due to the balanced‐budget requirement. Revenue diversification is one method of stabilizing revenue streams because diversified revenue structures can mitigate the revenue fluctuations often associated with single source revenue. Using audited financial reports, this study examines the impact of revenue diversification in Arkansas cities over 10 years. To address the issue of revenue adequacy, this study examines diversification's impact on current year budget changes in revenue and expenditures as well as its impact on tax effort.     

An analysis of asymmetric effect of federal transfers across Indian states

This study empirically examines the asymmetric effect of federal transfers in India using a panel dataset of 18 states from 2000–2001 to 2019–2020. In mapping the asymmetric effect of federal transfers on subnational spending across the Indian states, we test it in the extended ‘flypaper effect’ framework, examining whether subnational expenditures respond in the same way to changes in federal transfers. To quantify the extent of the asymmetric effect on the subnational expenditure, we employed the panel non-linear ARDL model. The results suggest that subnational spending has a greater asymmetric response to the increase in federal transfers than to a decrease. At the disaggregate level, ten out of 18 states have a fiscal replacement kind of asymmetric effect in any spending specifications. But only three validate it in the capital and development spending, and seven states validating in the non-development expenditure on the revenue accounts. Replacing the cut in federal transfers with other revenue sources that prioritise non-development spending over development spending is problematic.     

How Municipal Property Tax Responded to State Aid Cuts: The Case of Massachusetts Municipalities in the Post‐2001 Fiscal Crisis

This empirical study examines municipal property tax responses to state aid cuts during the post‐2001 fiscal crisis. Using panel econometric techniques on annual changes in property tax levy by 351 incorporated Massachusetts municipalities in the period of 2002–2006, the results suggest that municipal governments offset about 9 cents of each dollar of net state aid cut through the increase of their property tax rates. It contributes to public finance literature on the extent to which local property tax can be used to stabilize municipal revenues when the intergovernmental revenue shrinks.     

The Fiscal Consequences of Changing Federal and State Revenue Policies: The Case of Small Oregon Cities

This article examines the fiscal consequences for twelve, smallOregon cities of recent changes in federal and state intergovernmentalrevenue policies. Many small local governments have experienceddouble revenue reverses in recent years—reductions inown-source revenues because of economic decline as well as decreasesin intergovernmental revenues, especially federal aid. The twelvesmall cities are compared with all 241 cities in Oregon andthe 136 Oregon cities in the 1,000 to 49,999 population range.Using aggregate and interview data, a major finding is thatalthough stabilization and/or decline in federal-state revenuesharing and entitlement program funds have accentuated difficultlocal revenue situations, economic decline has been the moreimportant contributor to the fiscal stress of the twelve smallmunicipalities. Most of the twelve cities had limited fiscalcapacity—as indicated by low assessed property valuations—makingit difficult to produce sufficient revenue to meet basic publicservice needs. These cities were also unable to get citizenapproval of increases in property taxes.     

Estimating property tax base elasticity over time: Evidence on the revenue maximizing politician

The Laffer curve analysis suggests a possible policy conflict between short-run revenue maximization and long-run fiscal health. This paper estimates short-run and long-run property tax base elasticity in order to test whether such a conflict exists for the property tax in central cities. A stock adjustment model is used and separate time-series estimates for four New York State central cities lend empirical support to such a conflict. The results show that while disincentive effects associated with property tax rate increases are not strong enough to reduce proeprty tax revenue in the short-run, they are substantial enough to reduce long-run revenue in all but one city. The paper also tests for asymmetric response to property tax rate changes and finds significant results for only one city.     

Do parties matter for local revenue policies? A comparison of Denmark and Norway

Abstract.  This article investigates the impact of party ideology on revenue politics. Theoretically, claims can be made that party ideology should matter for revenue policies. First, leftist governments are more favourable towards government intervention and a large public sector. To accomplish this, leftist governments need more revenue than bourgeois governments. Second, revenue policy is a redistributive policy area well suited for ideological positioning. However, the claim that party ideology does not matter can also be made since raising revenue is unpopular and politicians may shy away from new initiatives. Empirically, the question is unsettled. The article investigates the problem by looking at three revenue policy areas (income and property taxation, and user charges) in two countries (Denmark and Norway). The data used is from the municipal level, providing several hundreds of units to compare. The evidence favours the 'parties matter' argument, particularly in the Danish case.     

Constitutional Tax and Expenditure Limitation in Colorado: The Impact on Municipal Governments

Tax and expenditure limitations (TELs) have become a pervasive influence on local government fiscal affairs. Explanations for the spread of TELs suggest that voters thought local government was growing more than needed. Thus, TELs were intended to constrain growth and reduce the size of local governments. This article's purpose was to determine the impact of two separate kinds of TELs, one a property tax measure, and the other a comprehensive revenue and expenditure limit, upon the growth of municipal governments in Colorado. Using a panel data set on municipal budgets (1975–1996), the article demonstrates three major points: 1) the effectiveness of a TEL in achieving reductions in local government revenue and spending growth depends upon the nature of the TEL; 2) the comprehensive TEL did effectively constrain growth and reduce local government reliance on the property tax, despite the local options for exemption; and 3) TELs do not have uniform impacts among governments of different population.     

Fiscal Crisis and Community Development: The Great Recession,Support Networks,and Community Development Corporation Capacity

Community development corporations (CDC) are a cornerstone of neighborhood improvement in legacy cities. Yet they face challenges that threaten their financial sustainability, challenges that grew exponentially with the Great Recession. This article examines the impact of the Great Recession on the revenue and survival of CDC in Baltimore, Maryland; Cleveland, Ohio; and Detroit, Michigan. An analysis of financial data from the National Center for Charitable Statistics from 2004 to 2011 highlights issues of industry contraction, revenue concentration and loss, and CDC survival. Interviews and examination of multiple secondary sources of information on CDC activity and support networks in each city further our understanding of the financial results. We find that the CDC industry in all three cities was severely impacted by the Great Recession and that the CDC support networks in each city had a significant intervening effect on the ability of CDC to adapt to the fiscal and service pressures created by the recession. We discuss the implications of the shared trends and the city-specific dynamics for the role of CDC in neighborhood improvement in legacy cities.     

Tax and Spending Effects of Municipal Enterprises: The Case of Florida Electric Utilities

This study tests the appropriateness of two competing hypotheses drawn from the public finance literature about the impact of municipal utility profits on local tax and spending patterns. By comparing data from cities that own their electric utilities to nonelectric cities, this research finds that neither city expenditures nor property tax rates are significantly affected by the transfer of profits. The evidence suggests that the profits are used by cities with relatively weak tax bases to obtain revenues from tax-exempt institutions, homeowners, and nonresidents.     

Organising for mutual advantage: municipal associations in Bulgaria

Networks of local government support organisations (LGSOs) are critical to successful intergovernmental relations and effective local governance in democratic societies. Bulgaria had no such network of municipal associations when it began the transition from communist rule in the early 1990s. Using US and other external technical assistance, Bulgaria over the next decade overcame the impediments to collective action and established what appears to be an effective and sustainable system to back up its cities and towns. Important factors in mobilising support included a long‐term focus on institutional development, non‐partisanship, flexibility in implementation and a pragmatic orientation that focused on learning by doing. Copyright © 2006 John Wiley & Sons, Ltd.