Cash-strapped local governments overwhelmingly turned to fees instead of raising taxes in recent years. And they like them.
The U.S. Presidential campaign has generated a lot of heat (and, arguably, not much light) around issues related to the size of government and our ever-increasing national debt. If anything, however, the budget crises facing local governments across the country are as urgent and as potentially destructive to the economy and to future generations as the federal crisis.
As the nation’s cities attract an ever-growing share of the U.S. population, their capacity to honor service commitments, build and maintain necessary infrastructure, and meet their financial obligations will have a profound effect on local and regional economies, public safety, education, and overall quality of life for hundreds of millions of Americans. But U.S. cities are in a bind. Faced with a requirement that they balance their budgets every year, they have borrowed a page from the airline industry: increase fares (i.e., taxes) just a little if at all, and start charging big time for the “extras” that passengers (i.e., taxpayers) want. In the airlines’ case, it’s bag fees and the like that are going up. For cities, it’s charges for little things like, say, putting out fires.
Take a small upper-Midwest community called Mondovi, Wisconsin, population 2,634, located on the Buffalo River in the western part of the state, about 40 miles from the Minnesota border. The mayor’s message on the city's website advertises Mondovi’s "friendly, small-town charm" and highlights "all of the benefits that make living here terrific."
One thing that’s not so terrific in Mondovi, however, is the budget crunch facing town leaders. In a none-too-subtle sign of the city’s fiscal stress, Mondovi last year started charging residents for a service that Americans in other cities and towns across the country tend to take for granted. When someone in the city calls the Mondovi fire department to come to their home, they now are charged $300 an hour for the firefighters' time.
Professional fire departments are paid to put out fires, with cities' general funds (into which a variety of general taxes, fees and state aid are deposited) covering the costs. City residents expect the service. It’s part of the social compact that generations of citizens have made with their city governments. Citizens contribute resources, cities provide services. In the face of the worst recession since the Great Depression, however, cities have been reconsidering this creaky compact, especially as residents have grown more and more wary of seeing their hard-earned tax dollars go to government entities that regularly are portrayed (rightly or wrongly) as inefficient, inept, and worse.
"We need to find ways to charge fees to people who use different services instead of having to raise taxes," says Mondovi City Manager Dan Lauersdorf.
Mondovi had already been charging neighboring townships for fire calls, Lauersdorf explains, so extending the fees to city residents seemed like the fiscally responsible thing to do. And, according to Lauersdorf, the move didn’t provoke much controversy or opposition because the costs generally are covered by homeowners or renters insurance.
Mondovi, of course, is not the only U.S. city facing these types of fiscal pressures and choices. Across the country, cities and towns of all sizes are struggling to meet the wants and needs of local residents and businesses in creative ways. Since the recession, the struggle has become even tougher as the economic downturn has taken a drastic toll on city finances. Property tax receipts, as one indicator of stress, have declined in the last two years and are expected to continue to fall as the housing market remains soft. Even as housing picks up steam, the impact on city coffers will be delayed by two to three years because assessments and property taxes do not register immediately with changes in the housing sector.
In an annual survey [PDF] administered by the National League of Cities, more than four out of ten cities (41 percent) reported last year that they were increasing service fees in an effort to stanch the bleeding in city budgets. For the last two decades, when asked to identify a revenue action that their city had adopted in the previous year, city finance officers overwhelmingly selected "increase the level/rate of user fees or charges" and "impose new user fees or charges."
Much like Newton’s Third Law, as cities raise fees, they decrease their reliance on taxes to support general municipal services. Back at the start of World War II, city taxes on sales, income, and property amounted to some 89 percent of all revenues cities raised (excluding aid from state and federal governments and borrowing or debt), with property tax generating 78 percent of "own-source" revenues. Fees amounted to some 11 percent. Today, nearly 40 percent of "own-source" revenues are derived from fees on services, and 60 percent from all other taxes (and less than 30 percent from the property tax). In other words, we have seen a sea shift over the last three generations from a city fiscal system that collected taxes—almost all of which were property taxes—to pay for the bulk of municipal services to one that identifies individual beneficiaries or users of services who can then be assessed a fee (e.g., fire suppression in Mondovi).
One key reason for this shift is that cities find raising fees and identifying new activities for which to charge fees a politically acceptable fiscal strategy. Since 1987, nearly half of all responding cities in NLC surveys have increased fees and charges each year, and another one-quarter have identified new activities for which to charge fees. In contrast, just one in four cities has raised the property tax rate in each of the last 20 years.
Is Mondovi, Wisconsin, an extreme case of the lengths to which cities are willing to go to increase fees and charges? Hardly. Fire subscriptions—that is, charging homeowners for fire protection—is growing. Firefighters in South Fulton, Tennessee, made news when they watched a house burn down in late 2010 (and then again in 2011) because the owner hadn’t paid the requisite fee.
Fees, of course, are just one tool cities can exploit to try and address the budget crises they face, even when doing so might upend any quaint ideas we hold about the relationship between people and their government. Yes, the social compact has changed. And, given the deteriorating state of municipal finances, it will continue to do so as citizen-taxpayers confront choices—like, who receives services, at what level, and at what price—that they haven’t had to seriously address for generations.