A while back I wrote a little bit about how a municipality, as an example of volatile income, must manage it's expenses over time. I concluded with "either you cut expenses, or you take on debt". Chatting with a friend today it came to me that I missed one: find alternative income sources.
That should have been obvious - what's the first thing a public body in trouble tries to do? Raise taxes. I did list taxation among the various sources of income for a municipality, but neglected to touch on this point. More on that in a moment. The other way to increase revenues is to get the economy moving or appeal to the community to do so, or in some way chip in. Driving up tourism with an advertising campaign or attracting large businesses with huge pools of employees by offering a tax break to the firm for relocating, closing a few streets for a new festival (think permits, taxes, parking tickets and passes that all can generate revenue.)
I seem to remember as a kid there being local, volunteer "friends of the fire department" or "neighbors of mytown PD". Maybe I'm imagining it, but it seems like there used to be a quasi-grass roots approach to fund raising for public services in lieu of raising taxes or cutting services and jobs. The Policeman's Ball, the Fire Department Chili Cook-off, bake sales, pancake breakfasts, ice cream socials, benefits, community yard sales, and so on. Granted, in a city of 750,000 people, with 300 officers on your police force, making up a shortfall that may cost you 1/3rd of your force with bake sales is a bit of a stretch. But turning over the city park for a music festival where proceeds go to the PD, and having a "support your local police" donation box at every community service event attended by a police officer would be a start.
So, the point is, sometimes a mayor has to get creative, especially if the turnips are already looking pretty dry. Which is my way of segueing to tax increases. As many economists and historians have noted, taxation has the effect of retarding the activity that is taxed. For one, people have a natural aversion to paying taxes. This is increased when there are myriad available deductions that have been carved out for special groups of people by their elected representatives. If you offer loopholes, people will try their best to slip through them. It's human nature and only makes sense because it has the legitimacy of law. Of course I'm referring mainly to income tax here. Business tax isn't much different.
Taxes on commerce and trade are a suitable thing. Trade and commerce benefit from things like roads and crime reduction. More broadly, infrastructure and services. Really, they benefit everyone, but so goes the rational when politicians cast their gaze upon one constituency or another. So lets go back to the scenario outlined in the first article where local revenue has taken a sudden dip due to a down turn in the economy. If I elect to raise taxes, what is the likelihood that it will have a positive affect on this trend?
Some numbers to consider:
I own a shoe store that grosses $75,000 annually and nets me, the sole employee about $30,000 in profit after all expenses. I pay my personal income tax on that and probably wind up with about $26,000 at the end of the year. Part of my expenses is the local 3% commercial tax, or $2,250. Business takes a bit of a down turn due to a sagging economy and my revenues this year only see me gross $60,000. My commercial contribution to the city government is going to go down to $1,800. Lets just pretend this is typical for all businesses in my city. This means the city has taken a whopping 20% hit to its revenues from the commercial tax alone. In an attempt to balance the budget, the mayor and city council after much deliberation and impassioned pleas from businesses and the police and fireman's unions decide to raise the local commercial tax by 1%. This will give them $2,400 on my $60,000, which is a lot better than the $2,250. It will allow the city to pay some debt, build the rainy day fund and keep services at current levels. The police, fire and residents are happy. But business just took a pretty hefty hit. When my revenues went down to $60,000, my take home went from $30,000 to $15,000. When the tax rate went up, it further dug in to me for another $150, reducing my total take home to $14,850. Now, if I've been planning well all along, I can weather the storm for a while, but you can see how the tax increase has just made things a bit tighter for me. With the increased burden on business, the long term survivability of businesses decreases. If a down economic cycle is protracted, I may have to close up shop, which means the city will get $0 next time around.
Now, we can say that it's the down economy and not the tax increase that has put me out of business, but the tax increase certainly hastens that eventuality. If this kind of balancing goes on for a long time and becomes the new normal, I may likely look afield to friendlier tax terms in other cities. Then the city loses my commercial income, my personal income, my local economic impact through the buying of my services and goods... and gains an empty hole in the strip mall where my store used to be which sends a disheartening message to everyone who sees it.
So - balancing the books on a large and volatile scale... no easy task. But I think there's one thing we can conclude - a positive community spirit and attitude can make things a lot better. Especially a willingness by an administration to be creative and appeal to the population for support rather than legislate it.
A good historical example of this goes back to WWII. The US ran up the biggest debt in its history to fund war efforts. To finance this debt, the government SOLD war bonds. Advertisements encouraging people to do their part to win the war touted the war savings bond as a way to do it. This is an interesting approach vs borrowing from another country or raising taxes. A purpose specific bond offers many benefits to the public. First, the chance to invest money with the promise of a return. Second, the positive feeling of buying into something voluntarily rather than being coerced into funding it against your principles. Third, by keeping the debt "in house", the influence the ownership of that debt would command if owned in aggregate by a foreign power is neutered. As a citizen of spare means, I don't have to buy a bond. As a citizen of extravagant means, I can buy a bunch and earn a good return. This is a free, open and positive way to finance a debt. Bonds typically have more favorable terms for the borrower, vs. loans, as well.
Getting a municipal budget to balance is tricky when so many factors play into the equation, but creative governance and engaged public can pull through tough times, given the chance to collaborate.
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