A brief comment on local government finance: Fairfax County, Virginia

In "The real lesson from Flint Michigan is about municipal finance," and other writings, I make the point that the system in the US for financing local governments was created during the time when the country was growing furiously, and since it was based on property taxes, local governments could rely on growing revenues.

Being dependent on property taxes is increasing risky.

Now, being reliant on property taxes puts many governments at financial risk, even if they are still successful and growing, because legacy programs cost more to maintain over time, and new programs cost more money, etc.

Earlier this week, the Washington Post had a story ("Fairfax, Va.’s largest county, again trims budget requests as revenues stay tepid") about financial issues in Fairfax County, Virginia. 

Fairfax County is economically successful, with more than one million residents.

According to the World Atlas ("Richest Counties In The United States") Fairfax is the second wealthiest counties nationally when rated by median household income (interestingly, Loudoun County is first, Howard County in Maryland is third, and Arlington County in Virginia is fifth).

But Fairfax's checkbook is not unlimited. From the article:

Long’s proposed $4.1 billion budget reflects a local economy still feeling the effects of the 2008 recession and 2013 federal sequestration cuts and a county bracing for the possibility of further reductions in government spending by the Trump administration.

County revenue — generated mostly by real estate taxes — increased by $88.2 million last year, not enough to cover rising pension costs, a growing public school student population and more elderly and low-income residents seeking government aid in a county of 1.1 million residents.

“Slow economic growth is, I think, here to stay,” Long told the county’s Board of Supervisors during a bleak presentation that also fell $13 million short of what agencies requested for disability services, public safety, maintenance of county trails and raises for nonschool county employees. ...

Long’s budget also leaves about $21.7 million in planned police department improvements unfunded, including $5.3 million for a “Diversion First” program that steers people with mental illnesses to counseling instead of jail.

It does not cover about $6.7 million in services for people with disabilities, and defers maintenance of county sidewalks and trails.

According to the article, property taxes make up 65% of the county's revenue stream. Even though parts of the county are booming, primarily those areas served by transit, other parts are not, and commercial property values are dropping in those areas that are more automobile-dependent.

When the nation's second richest county has problems financing local government, there is no question that the system of local government finance that we have created isn't working for today's conditions.

The article on Flint covers other potential revenue streams, including income taxes.

Cities with low property tax capacity.

=======
Toronto.  Note that this is a problem in other countries.  Toronto Star columnist Edward Keenan wrote about that city's budget travails despite being a world city ("What happens to Toronto when things get tough?")  From the article:

Toronto is a fantastically prosperous city: growing faster than almost any other place on the planet, enjoying a period of sustained economic boom, able to brag of being home to “12 key business sectors” (it is the most tax-competitive city in the world according to KPMG) that keep the city “resilient” and its population relatively wealthy.

And for all that, Toronto is a city that expects to shutter 7,500 units of social housing in the near future because it will not spend the money to keep it from falling apart.

Furthermore, after giving signs of agreement, in January, the Provincial Government refused to give Toronto authority to charge tolls on the city's two locally-controlled expressways, instead giving cities more gasoline tax revenues ("No tolls? Tory wants provincial money for DVP, Gardiner," Toronto Globe & Mail).  This was done to placate suburban jurisdictions, whose residents would pay the bulk of tolls were they to be assessed.

But Toronto countered that this will raise less money than tolls, and that unlike locally-controlled tolls, they will not be able to do debt financing against monies handed down and controlled by the Province, thereby reducing the city's ability to finance transit infrastructure.

The UK.  And cities in the UK are totally screwed by the central government's austerity program. There, the national government provides most of the funding for local government, and mandates, and by contrast to property tax collection in North America, local governments don't have similar revenue streams.  Local governments are finding their budgets cut by 50% ("Britain's local councils face financial crisis," Economist).

Medicine Hat.  Interestingly, Medicine Hat, Alberta, which through a fluke of history maintained ownership of the natural gas resources underneath the city, is planning on creating the equivalent of a sovereign wealth fund to better reap the benefits of this revenue stream going forward ("A Canadian City Thrives on Gas, Like a 'Wealthy Little Country'" New York Times).

Over the decades, the city has used the revenues to keep taxes low, and to recruit industry, including providing free or reduced price natural gas.

Now, with industrial decline and a fall in the price of gas and oil, the city needs to be more judicious about the use of this revenue stream.  Hence the proposal to create a wealth fund.

Oklahoma.  The Governor, Mary Fallin, proposes adding a variety of services categories to the sales tax, which would raise almost $800 million for cities and counties, and $900+ million for the state ("Gov. Mary Fallin's tax plan clarifies choices in Oklahoma," Daily Oklahoman). From the article:

The proposal is based, in part, on a desire to overhaul Oklahoma's tax code so it reflects the modern economy. Fallin's budget plan notes that, according to Bureau of Labor statistics, in 1939 service industries employed more people than manufacturing by a ratio of 2-to-1. Today that ratio has grown to around 5-to-1.

This means a sales tax applied primarily to goods reaps far less money than in decades past. Yet the impact of addressing that discrepancy in a single year is jarring to many citizens.

The master list.  Expanding the activities eligible for sales taxes is another item that should be added to what I thought of as the master list in the Flint blog entry.  

Yet another item would be dealing with "payments in lieu of taxes" for properties held by certain nonprofits, such as colleges and universities (past blog entry, "Changing the structure of local government revenue generation," 2013).