Progressive Municipal Tax Policy
Local governments need revenue to provide basic services to their constituents, and to deal with issues like infrastructure crises, extreme weather, the increased need for housing and social services, and the like. It is unrealistic to think that state or federal governments are going to increase aid to cities. City taxes will therefore be an important part of the equation for municipal budgets.
Local property tax is a major source of revenue for most municipalities and is an important mechanism for funding education and other local services. Many local governments have responded to the recent budgetary crisis by raising property tax rates across the board. Property taxes are regressive, though, since home values tend to represent a much larger share of income for middle- and lower-income families than for the wealthy. So rather than, or in addition to, simply raising rates across the board, cities should generally make the property tax less regressive and consider changes and targeted exemptions (for lower-income families, and removing those for businesses) to the tax that will soften the blow of such an increase to working families.
Where possible, localities should minimize regressive user fees on public services such as roads, public transit, and libraries, and avoid out-and-out regressive taxes such as the sales tax. Sales taxes should be applied as broadly as possible, including taxing internet sales to the extent permitted under federal and state law. Sin taxes are an excise tax on certain disfavored goods and activities, usually alcohol, tobacco, and gambling. Because they are regressive by nature, cities should carefully consider taxes on specific goods, and target them where there is a legitimate public health concern. Other revenue sources cities should consider, where permitted by state law, are instituting a progressive city income tax, enacting a business income tax, and encouraging large non-profit institutions to adopt a payment-in-lieu-of-taxes (PILOT) arrangement.
Progressive Policies for Raising Municipal Revenue, Shawn Sebastian and Karl Kumodzi, Local Progress, April 8th, 2015. Read more.
The Municipal Fiscal Crisis and Payments in Lieu of Taxes by Nonprofits, Daphne A. Kenyon and Adam H. Langley, April 1st, 2011. Read more.
The ITEP Guide for Fair State and Local Taxes: Property Taxes, Institute on Taxation and Economic Policy (ITEP). Read more.
The ITEP Guide to Fair State and Local Taxes: Sales and Excise Taxes, The Institute on Taxation and Economic Policy (ITEP). Read more.
User Fees, Richard M. Hetzer, Illinois Municipal Treasurer's Association. Read more.
There are a variety of structures that cities use to make property tax rates more equitable. Homestead exemptions, which reduce property taxes for homeowners by sheltering a certain amount of a home’s value from taxation. More than 40 states currently allow some form of homestead exemption. Flat dollar exemptions, the more common approach, are preferable to percentage exemptions, which for obvious reasons benefit higher-value homes and homeowners more.
Monroe, CT and a number of other Connecticut towns use a “circuit breaker” credit to offset property taxes for residents below a certain income threshold; the City matches the state’s circuit breaker credit and offers more generous income limits. The limit on the Monroe program is $60,000 for both single and married residents, while the state program caps benefits at $32,300 and $39,500, respectively.
Boston, MA’s building stock is comprised of 52 percent tax-exempt buildings, including 30 colleges and universities, 25 nonprofit hospitals, and more than 20 cultural facilities. In 2011 the city revised its long-standing PILOT program and set a standard level of payment for all tax-exempt institutions owning property valued at more than $15 million. The payment is based on 25 percent of the property’s value, from which 50 percent may be deducted for community benefits. In the first half of FY 2012, the program generated $9.9 million, 92 percent, of the requested $10.8 million.
In Montana, communities of under 5,500 that meet specific resort qualifications, including Whitefish, Big Sky, and West Yellowstone, charge resort taxes—a type of local option sales tax—to manage wear and tear on local infrastructure without overburdening citizens.
Berkeley, CA, began charging one cent per ounce on sugary drinks in 2014, which recently was recently shown to reduce consumption in low-income neighborhoods by 21 percent.
Seventeen states and the District of Columbia currently allow cities, counties, and municipalities to levy their own separate individual income taxes in addition to state income taxes.
Washington, D.C. increased the marginal income tax rate on those making over $350,000 a year from 8.5 percent to 8.95 percent,
San Francisco’s working families credit, or WFC, launched in 2005 and provides a local match—10 percent in 2005—to the federal EITC for families with children. The WFC is funded through a public-private partnership that draws on corporate dollars and philanthropic contributions, as well as public funds. In 2005 the WFC provided an extra $220 on average to the city’s working families.
Multnomah County, Oregon, where Portland is located, imposes a corporate income tax of 1.45 percent but exempts businesses grossing less than $50,000.
|Read more about local tax policy in our report Cities at Work: Progressive Local Policies to Rebuild the Middle Class.|