The tax structure of metropolitan counties in the United States is increasingly complex. First, local governments are expected to provide tax relief to attract and maintain businesses and not over-burden homeowners while also delivering high quality services. Second, metropolitan counties operate in an environment of overlapping taxing jurisdictions in which the state, cities, and various authorities are all in a position to make disparate decisions about the tax base. Finally, these overlapping jurisdictions are sometimes competing against each other for purposes of capturing revenue as well as being the site of business development. Local governments are under increasing pressure to offer tax incentives in the name of economic development even though they erode the property and sales tax base.
In 2015, for example, estimates of local and state economic development incentives ranged from $45 billion to $90 billion per year. Because the main source of revenue for most local governments is the property tax, followed closely by a sales tax, the most valuable business incentives are given through property tax relief and sales tax exemptions. In fact, in fiscal year (FY) 2016, local property and sales taxes represented 87 percent of all local taxes paid by business and 25 percent of total state and local business taxes.
This environment of overlapping and intertwined jurisdictional boundaries means that the actions of one government have revenue impacts on other jurisdictions. For example, when state and local governments share a sales tax base, exemptions passed at the state level may also be imposed at the local level. Similarly, when a local government authorizes a property tax abatement, this can and often does include the property taxes for special-purpose districts that also rely on the tax base. In addition to reducing tax revenues and affecting the level of service provision, such actions reduce the level of autonomy of the affected governments as the government officials may not be in control of their own resources.
This research highlights several common local government tax expenditures and attempts to characterize the range in their scope and use through case studies of four large metropolitan U.S. counties: Ramsey County, Minnesota; Cook County, Illinois; Maricopa County, Arizona; and Fulton County, Georgia.
The purpose of this research is twofold:
- To highlight how common tax expenditures by local governments impact the tax revenue of other local governments, and
- To emphasize the benefits of local tax expenditure reporting as a tool to quantify fiscal policy decisions.
Using this knowledge, we believe local governments will be able to improve the alignment of tax expenditures with broader fiscal policy and strengthen their short- and long-term strategic planning.
In an effort to support and enhance the fiscal management of local governments, this report is part of a three-part initiative to develop a model local tax expenditure report. It will be followed by a local tax expenditure report of a metropolitan county in Georgia in which the types of tax preferences discussed in this report will be identified and valued. In addition, the project will also include a “how to” guide to assist local governments in producing their own tax expenditure reports.
Read the full report:
Laura Wheeler and Per Johnson. 2018.
Local Tax Incentives: Examples from Metropolitan Counties. The Center for State and Local Finance. Atlanta: Andrew Young School of Policy Studies, Georgia State University.