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Revenue Sources for County Governments

As providers of a wide array of public services, counties must maintain a steady flow of revenue to support the continuous and uninterrupted provision of these services. Counties operate and finance their activities within the boundaries established by state and federal laws, rules, and regulations. For the most part, county budgeting is revenue driven because most states require counties to balance their budgets. As a result, available revenues determine the level of spending for any given fiscal year. Counties are often faced with choosing between painful alternatives: reduce expenditures and therefore cutback the level of services provided to their citizens, raise tax rates on currently available revenue sources and accept the possibility of political repercussions, and/or find new sources of revenue.

There are numerous reasons why counties may wish to seek new or alternative revenue sources. Consider the following:

• The need for increased revenue to provide for growing service needs, finance capital improvement or close the gap of unfunded mandates.
• The need to adjust/diversify the revenue mix to reflect the changing county economic base or national economic trends.
• The need to substitute a new revenue for an existing revenue that is unpopular with county taxpayers or is producing declining revenues.

There are a wide variety of alternative sources of revenue that counties can consider. However, it is important to select the most appropriate revenue source for your particular county. Answering the following questions can help your county analyze the feasibility of new revenue sources:

• Legal Authority
  • Does your state provide counties the necessary legal authority to utilize this new source?
  • If you don't have legal authority, how can you obtain it?

• Political Acceptability
  • Is utilization of this new source equitable to all citizens?
  • Do county residents understand how the new revenue will help ensure a continuing quality of service delivery?

• Revenue Potential and Stability
  • Has your county considered elasticity of demand (lower use of service when fees are instituted) or other negative impacts on revenue collections?

  • How will various economic circumstances, such as a recession, impact collections?

• Administrative Burden
  • Are administrative costs reasonable?

• Consistency with County Goals
  • Is this revenue source consistent with county policies and priorities?

Tax Revenue

There are several traditional criteria used to determine whether to impose a new tax. According to the International City/County Management Association (ICMA), these criteria include:

• Fairness. A tax should reflect the ability to pay of those who bear its burden, or the tax burden should be matched by the benefits taxpayers receive. In general, taxes that take a higher percentage of the income of the poor (regressive taxes) are considered unfair.

• Certainty. The rules of taxation should be clearly stated and evenly applied.

• Convenience. A tax should be convenient to pay with billing dates that coincide with the income streams of taxpayers.

• Efficiency. Administration should be feasible and efficient. The administration and collection costs should not be out of proportion to the realized revenues.

• Productivity. A tax should produce sufficient, stable revenue.

• Neutrality. A tax should not distort the way a community would otherwise use its resources - unless it is clear that such a change is socially desirable.

Types of Tax Revenues

Property Tax - The property tax has not only been the most important county tax, but also the mainstay of county government finance throughout our history. When most people think of real estate property taxes, they think of residential property. However, residential property only accounted for 43 percent of real property taxes collected in 1996 by local governments. Commercial property accounted for the remaining 57 percent.

For many counties, exemptions (i.e. homestead and senior) made by state governments have limited the usefulness of the property tax by reducing the property tax base. Some counties find that 60 percent or more of the property tax base has been exempted by the state.

Property taxes accounted for 74.2 percent of all taxes, 44.3 percent of own-source general revenue, and 27.8 percent of all general funds for counties in FY 1991-1992. On average, property tax made up 21 percent of the revenue generated in FY 1993-1994 by the 25 largest counties.

Although the most immediate source of revenue on real estate that comes to mind is property tax, many other revenues are generated by real property. Income taxes and sales taxes on real estate owners represent about 23 percent of the total taxes collected by local governments.

Sales Tax - Barely half the states allow counties to impose a sales tax. A 1997 NACo survey of 167 counties found that 54 percent of counties surveyed had received authority from their state to impose a local-option sales tax. A local-option sales tax, which often requires state authorization and voter approval in some cases, applies an additional tax on top of the existing state sales tax. The tax is usually collected by the state and then distributed to the county. Sixty-five counties that responded to the survey have the authority to impose a general purpose tax, 45 have the authority to impose a special purpose tax, 23 can impose a time-limited tax, and 22 can impose a permanent tax. The range for these taxes was from one half cent (.005 percent) to 3 percent.

Income Tax - Only in Indiana and Maryland is a tax on income a significant revenue source for county governments. These taxes are typically collected by the state and redistributed to the counties.

Alcoholic Beverage Excise Tax - This excise tax is levied on wine, beer, and/or distilled spirits based upon quantity.

Franchise Tax - This tax can be levied on a variety of companies within the county, including electric, gas, and cable television companies.

Life Insurance Premium Tax - This tax is usually levied on life insurance companies based on gross direct premiums on policies of persons residing in the county.

Real Estate Transfer Tax - This tax is imposed on any conveyance of real property when the value of the interest transferred exceeds a certain dollar amount. For example, a tax of one dollar is levied on the first $1,000 and 10 cents on each additional $100.

Non-Tax Revenue

The ICMA criteria used to determine whether to impose a new tax can also be used to determine whether to institute non-tax revenue sources, including the following additional criteria:

• Legal and Political Acceptance. A revenue source must be legally and politically acceptable. Many revenues are reserved by states; others are simply not acceptable in a jurisdiction because of previous history, tradition, past experience, etc.

• Relationship to Other Policies. A revenue source should not conflict with other local policies.

State Aid - Financial aid from states to counties consists of grants and shared taxes. Grants are usually designated for certain program areas such as education or transportation. In the case of shared taxes, states act as tax collectors, returning all or a portion of the yield back to the counties. State aid, which provided 33.4 percent of general fund dollars, was the leading revenue source for counties in FY 1991-1992.

State aid is clearly the largest source of revenue for the nation's 25 largest counties, as defined by population. On average, the nation's 25 largest counties received approximately 36 percent of their revenue from state aid in FY 1993-1994. Although state aid is the leading revenue source for the 25 largest counties, county dependence on this revenue source varies. State aid made up 61 percent of Los Angeles County's (CA) total revenue, but only 9 percent of Metro Dade County's (FL) total revenue.

User Fees and Charges - These nontax revenue sources, which are payments for voluntarily purchased, publicly provided services that benefit specific individuals, are playing a prominent role as an alternative to property taxes. Charges and fees come in a variety of different forms, including water and sewer services, solid-waste collection and disposal, developer charges, airports, hospitals, ambulance and rescue services, water transport and terminals, parks and recreation, and parking facilities.

Between 1977 and 1987, local government user charges and fees nearly tripled, from $34 billion in 1977 to $101 billion in 1987. User charges and fees accounted for 16.5 percent of county revenue in FY 1991-1992. For the 25 largest counties, charges and fees were the second largest source of revenue behind state aid in FY 1993-1994.

Government Enterprise Funds

 The following is a checklist of questions used by Metro Dade County, Florida to analyze the feasibility of a government enterprise:

• Do I have top management support to embark on a government enterprise business?

• Are there any state laws or local ordinances that may restrict revenue generation?

• Do I have a departmental sponsor who understands and is committed to the public enterprise venture?

• Do I have (can I develop) a business plan, identify costs, prices, competition, and potential market?

• Are the products already developed for the business, or do I need time and resources for development?

• Should I take the low-risk route by starting with a pilot project?

• Do I have the resources and internal support needed to build and operate the service?

• Will I need partners (another jurisdiction or private sector company) to share the risks and participate in the gain?

• Will my public enterprise business support our central mission to serve the county?

Public enterprise ventures can also utilize nontraditional assets controlled by the county to generate new revenue. Some nontraditional assets include the following:

• Renting public facilities - such as recreational halls and training facilities

• Surplus county equipment - such as park benches and street signs

• Staff expertise for hire - as consultants to private firms

• County information - GIS, land records, and court data

• Environmental assets - recyclables, composted materials, and methane recovery from landfills

Please contact Jacqueline Byers for more information.