Tax-Base Composition and Long-Run Growth in City Taxes

Abstract

Growth in per-capita taxes between 1970 and 1980 is analyzed for a group of 28 large cities. Investigating the effect of tax-base composition on long-run growth reveals higher rates of tax growth for low-property-tax cities, which is partly explained by recession-induced tax increases. Such increases are not rescinded during subsequent periods of economic expansion, and the net effect is a ratcheting phenomenon in local tax growth similar to that observed for state governments. Policy considerations support the need for better financial management practice, further consideration of a countercyclical revenue sharing program, and more careful attention to variations in local tax structures in modeling local government fiscal behavior.