The Impact of Temporary Tax Hikes To Fill City Budget Gaps

In a study by the Lincoln Institute of Land Policy called 'The Nuts and Bolts of Development Finance' Jack R. Huddleston states "Ultimately, it is the characteristics of new development that will determine financial impacts for a municipal government." (Huddleston, p.10) 

What Huddleston is saying is that the impact of city budgets, be they comprised of debt, services revenue, municipal tax or a combination of all three, is determined by how well planned development takes into account future financial costs, and municipal revenue growth. Three areas to consider when ascertaining the financial impact of temporary tax hikes to fill city budget gaps are 1) proper implementation, 2) accurate assessment and 3) quality decision making.

• Proper implementation of tax hike

The impact of temporary tax hikes to fill city budget gaps depends on what or who is being taxed. For example, if a business development area is being subsidized, but that subsidy is being paid for by taxpayers, what are the effects on the business revenue stream and thereafter government wealth.

This depends on if the businesses stay in the area or not; if the businesses rely on a municipal revenue stream and the temporary tax policy is prohibitive to consumer spending local employment may rise temporarily, but if the tax isn't lowered shortly thereafter, the revenue base for those companies may not allow sustainable business leading to unemployment once again.

• Accurate assessment of tax benefit

This is clarified by Huddleston where he states "Property tax reductions for economic activities may simply shift the burden of paying property taxes to other land and property owners (e.g. residents), without producing an overall decrease in the amount of property taxes collection."(p.21) So in the short run, if business development needs to be financed by a temporary rise in taxes, it should have controlled impact on the municipal tax base if incrementally or realistically applied.

By 'realistically applied', one means the tax increase should be measured based on a combination of trends that include the tax hikes impact on business activity, population, employment, and revenue utilization. If these factors are ascertained to be related to the tax hike in a statistically significant way, then past tax hikes and their affects can be used as a measuring instrument by which to forecast the impact of future tax hikes used to fill city budget gaps.

• Quality of tax decision

Another factor to consider is what the budget gap actually is and how well the existing city budget is managed. If the budget gap is a shortcoming or inhibitor of economic development rather than city maintenance then the use of temporary tax revenue as stimulus for economic growth is financially healthier. Moreover, it is financially healthier to solicit temporary taxes for this purpose than say an installation of upgraded utility equipment when the need for the upgrade is minimal.  In the latter case, the financial affects will not be optimized for best use or return on investment.

The impact of temporary tax hikes used to fill city budget gaps is also a matter of decision making capacity within a seeming enigma of financial input from multiple analyses, assessments and objectives. Huddleston states "The important point for planners attempting to increase their understanding of local government finance is that seemingly complex financial mechanisms and concepts can usually be broken into more simple and understandable basic concepts." (p.23)

In other words, if the time is taken to properly understand the impact of temporary tax hikes used to fill city budgets, then the resulting decisions made in light of such, are at least more likely to be inline with a shorter term tax policy's impact in terms of demographic, economic and municipal sustainability.

Source:

http://www.lincolninst.edu/subcenters/teaching-fiscal-dimensions-of-planning/materials/huddleston-plan-budget.pdf Huddleston, Jack R. 'Lincoln Institute of Land Policy: 'The Intersection Between Planning and the Municipal Budget', 2005.