A correction (and update) to a March post on municipal finance: addition of land transfer tax to the list

The piece "The real lesson from Flint Michigan is about municipal finance" from March listed seven solutions for better harmonizing tax revenues with the financial needs of local governments and to provide more stable funding for local governments in spite of economic conditions.

1. Local income taxes.
2. Sales tax sharing.
3. Metropolitan tax base sharing.
4. Creating a consolidated "state/local" income tax.
5. State revenue sharing.
6. Multi-jurisdictional special service (tax) districts.
7. Sin taxes for the arts.

The point of the article is that the system for funding local governments in the US was created when most places were growing, and it turns out the methods don't work well when communities aren't growing and/or face financial problems such as loss of local industry.

For example, it's tiresome to read about how Democrats ran Flint into the ground when the reality is that Flint's economy was destroyed by the shrinkage of the manufacturing operations of General Motors--which now has fewer than 1/10 the number of employees in the city than it did at its peak.

With loss of manufacturing plants comes loss of jobs and loss of personal and corporate income, and declining tax revenues from residential and commercial property as economic prospects wither.

That's not about "the Democrats" on the City Council, that's about economic depression at the local and metropolitan scale.

What about the land transfer tax? Royson James' column, Eventually, we'll all have to pay for this," in the Toronto Star about Toronto's coming financial predicament as the city has big demands on its finances and the lowest property taxes in the Toronto region mentions in passing how Toronto's land transfer tax, authorized in the 1990s, has boosted the city's revenues, allowing it to coast somewhat, especially because of the burgeoning residential property market, which generates a lot of revenue from this tax. (Like SF, Toronto also raids the transit agency revenues for monies for other purposes.)

DC is one of many jurisdictions that has this tax, assessing 1.1% of the sale price on both the buyer and seller for properties under $400,000 and 1.45% for properties over $400,000 and for commercial property.  Technically, the tax on the seller is the land transfer tax and the tax on the buyer is a Deed Recordation Fee.  There are variations in the tax when certain ownership conditions change.  The tax is not triggered on mortgage refinancings when the property owners do not change.

-- Real Estate Transfer Taxes assessed in the US, National Council of State Legislatures

Adding the land transfer tax to the list.

1. Local income taxes. (local jurisdiction)
2. Land transfer taxes.  (local jurisdiction)
3. Sales tax sharing. (county)
4. Metropolitan tax base sharing. (metropolitan)
5. Creating a consolidated "state/local" income tax. (state)
6. State revenue sharing. (state)
7. Multi-jurisdictional special service (tax) districts. (metropolitan)
8. Sin taxes for the arts. (metropolitan)

Issues with a land transfer tax. It made me realize that I forgot to include that tax in the list, but at the same time, it's a problematic tax.  Regardless of the situation, real estate interests complain about it as a disincentive.  And in order to be able to assess the tax, while not encouraging people and business to locate elsewhere where such a tax isn't charged, your community has to be highly desirable.

In terms of generating revenues, it's great in a booming economy, revenues crash in a falling economy when new construction declines, and in declining communities, like Flint, Detroit, or small towns, it can be seen as a disincentive to new development, when new development is desired but hard to "pencil out" financially--and were such a tax in place, waiving it as part of a package of incentives means that it isn't all that reliable a source of revenue.

Reordering into a more logical and hierarchical framework.  From a hierarchical standpoint, the list should be reordered, depending on what level of government or government cooperation is required to be able to assess, collect, and distribute the revenues.  Note that all the taxation forms have to be authorized by the state.

Changes have to be made at the local, metropolitan, or state level to effectuate any of these taxing methods.  Also I would argue that land transfer taxes could be assessed at the metropolitan scale and added to the monies shared through metropolitan tax base sharing systems, as discussed in the original post, which could be added to item 4.

1. Local income taxes. (local jurisdiction)
2. Land transfer taxes.  (local jurisdiction)
3. Sales tax sharing. (county)
4. Metropolitan tax base sharing. (metropolitan)
5. Multi-jurisdictional special service (tax) districts. (metropolitan)
6. Sin taxes for the arts. (metropolitan)
7. Creating a consolidated "state/local" income tax. (state)
8. State revenue sharing. (state)

Update: Kansas City-St. Louis earnings tax.  As an example of how state action is required to authorize the ability to tax at the local level, the State of Missouri authorized St. Louis and Kansas City to have earning taxes on residents and nonresidents.  As discussed in the earlier post, this can be a problem in terms of spurring some businesses to relocate out of the city.

In KC, the 1% tax on earnings generates 40% of the city's revenue and half the revenues come from nonresidents working in the city.

But it can be a problem because of outside forces focused on an anti-tax agenda.  In Missouri, St. Louis billionaire businessman Rex Sinquefield ("King Rex" POLITICO) argues that the tax is bad, and has successfully got the Missouri Legislature to pass legislation requiring that the tax be re-authorized every five years, and he helps to fund local campaigns seeking to overturn the tax.

But in the most recent vote in Kansas City last month, the tax was supported by voters overwhelmingly ("Kansas City voters overwhelmingly approve earnings tax renewal," Kansas City Star). After all, why wouldn't residents be supportive of a tax that generates a fair amount of revenue from non-residents?)  In April, the tax was reapproved in St. Louis.

In spite of failures to overturn the tax in local elections, anti-tax interests continue to lobby the Missouri Legislation to de-authorize the local earnings tax.