US municipal finances: When tax increases work

By:
Helen Avery
Published on:

In 1989, Tangipahoa parish in Louisiana found itself $8 million in debt for roads that had never been completed.

The parish’s bills sat in a cardboard box and were blindly picked out for payment when revenues did come in, and 27 bridges in the area were closed. There had been an appeal to Louisiana State for bankruptcy, but that was not an option, it had been told. Newly elected parish president Gordon Burgess found himself actually turning the lights out in the courthouse. But after the third time of turning to the parish’s residents to approve a temporary one cent increase in sales tax, they finally agreed. "People thought we were being greedy and had the money. And then they realized we didn’t," says Burgess. It took Tangipahoa parish 15 years to pay off the debt, and it still has one of the highest levels of poverty in Louisiana. But the tax paid for much-needed infrastructure investment that Burgess, still president of the parish, says has steadily increased jobs and expanded the local economy. Voters keep deciding to retain the one cent tax increase.

Municipalities are having to fend for themselves in order to balance budgets and invest in their economies. Mayor Julian Castro of San Antonio, tipped to be governor of Texas one day, has introduced reforms in his city to ensure that children under the age of four receive an education that brings them up to a proficient level of English and maths. And he did it by getting approval from voters for a 1/8 cent increase on sales tax last November. "In the end cities have been left to pick up the slack from the states, which have tightened their belts," he says. "It is causing cities to stretch their resources even further, but we have to keep investing in education or we won’t increase wages and future job opportunities."

States, too, are turning to sales taxes as a means to increase revenues. Indiana’s governor, Mitch Daniels, raised taxes on liquor, beverages and rental cars to help reduce the state debt. And in California last November voters approved Proposition 30, which, in addition to introducing more income-tax brackets, increases the state sales tax from 7.25% to 7.5% with the aim of investing in education and providing local governments with money for public safety.

Sales taxes seem more palatable to voters than income-tax increases and easier to justify – consumers are spending less of their income on taxable goods. A report released by California’s legislative analyst’s office in August showed that over the past 30 years spending on goods such as cars and electronics that provide sales tax has declined annually as a proportion of income, while spending on nontaxable services has increased.