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MUNICIPAL REVENUE-RAISING ABILITY, 1977-1984
The 1981-82 recession caused substantial changes in the economies of many cities in Illinois. Those cities heavily dependent on manufacturing experienced high unemployment rates and business losses. Other municipalities more dependent on retail trade and services survived the recessionary effects in much better condition. A consequence of the economic changes in these municipalities was a shift in revenue-raising abilities of the governments involved. Major losses in manufacturing, for example, can mean significant decreases in revenues generated by property taxes. A substantial decline in retail business means that sales taxes no longer provide the same level of revenues. Much interest has been expressed by policymakers in comparing the abilities of state and local governments to raise revenues.1 The research efforts range from sophisticated programs examining all revenue sources to comparisons of a single revenue source. The interest in revenue-raising ability of cities arises from a need to compare the amounts of revenue that could be collected if all municipalities employed similar revenue sources. A comparison of revenues that would be generated by Illinois municipalities was conducted in 1986 and this article provides an update.2
Method of Comparison While there are alternative ways to compare amounts of revenue that could be collected by cities with essentially similar taxes and revenue sources, the most commonly reported method is the Representative Tax Approach (RTA). This system, employed by the Advisory Commission on Intergovernmental Relations, assumes that all governments use the same revenue instruments with average tax rates to compare the revenues that would be collected under these conditions. *The authors are chairman and graduate student in the Department of Economics at Western Illinois University. The revenue-raising index can be constructed using many types of revenues. Because property taxes are of interest to most governments, they receive most attention. The importance of property taxes, however, has declined in many cities in recent years as other revenue sources have grown in importance. Property taxes may not be the largest single revenue source in some large communities. In the revenue-raising indices presented below, 13 property tax categories are included. These are corporate, bond and interest, IMRF, fire protection, fire pension, police protection, police pension, library, garbage disposal, audit, streets and bridges, street lighting, and public benefits. In each index the average tax rate used by Illinois municipalities larger than 25,000 has been applied to the property tax base in each municipality, providing a comparison of the amount of property taxes collected at average tax rates. The comparisons in this paper are relative to other cities and do not imply that specific cities are collecting at their potential. The two indices presented in Table 1 differ in the way intergovernmental assistance is included. The first index uses the average intergovernmental revenues received by all municipalities. The second index is calculated using the actual intergovernmental revenues received by the cities. Thus, the first index portrays the relative position of the cities if each had received the average intergovernmental revenues. This approach emphasizes the importance of property taxes in city comparisons. The second index illustrates how cities compare when actual intergovernmental revenues received are considered. Thus, Index 2 incorporates the actual intergovernmental receipts rather than estimating the
1. Measuring State Fiscal Capacity: Alternative Methods and Their Uses:
2. Norman Walzer and Mary Edwards, Revenue-Raising Capacity of Illinois Municipalities, Illinois Municipal Review (April 1986) pp. 17-19. July 1987 / Illinois Municipal Review / Page 5
Page 6 / Illinois Municipal Review / July 1987
Source: Calculated from Illinois Office of the Comptroller, unpublished information, 1977 and 1984. July 1987 / Illinois Municipal Review / Page 7 revenue-raising potential based on the average receipts of the statewide sample.
Findings The comparisons of relative standing for cities in 1977 and 1984 are included in Table 1 and incorporate and effects of the 1981-82 recession. One might expect municipalities with concentrations in manufacturing or heavy industry to have experienced greater relative declines than cities specializing in services or retail. These trends are evident in Table 1. Illinois municipalities conveniently fit into two groups — Chicago suburbs and central cities in down-state areas. Residents in many Chicago suburbs depend on the central city for employment opportunities whereas independent, free-standing cities downstate provide employment and shopping for residents in surrounding areas. Suburbs tend to be wealthier, economically more prosperous, and responsible for a smaller share of public services than independent downstate cities. A suburb and independent city classification is used in Table 1. In light of the greater employment opportunities in the Chicago area, one might expect the suburbs to have fared better during the recession and post-recessionary years. This finding is generally supported by the data. Cities, such as Danville, Decatur, Peoria, and Rockford, with a heavy manufacturing emphasis, tended to experience greater relative declines. Table 1 also contains the percentage unemployment during September 1982, which is a reasonable indication of the severity of the recession in each of these cities. A casual comparison of unemployment rates and changes in the revenue-raising capabilities bears out the expected relationships. Municipalities such as Chicago Heights, Harvey, and Park Forest which were high in unemployment also lost in revenue-raising ability relative to other communities. Similar comparisons exist with independent cities. Kankakee, Pekin, Peoria, and Rockford are prime examples of industrial cities particularly hard-hit by the recession and which also lost relative to other cities in revenue-raising ability.
Use of Results Municipal officials continually seek indicators of Page 8 / Illinois Municipal Review / July 1987 performance for comparisons with other cities. State policymakers working with intergovernmental aid programs need to understand the ability of municipalities to finance services. The revenue-raising indices presented in Table 1 are useful for several reasons. First, usually it is difficult to determine the impact of economic declines on revenue-raising ability until a relatively long period of time after the decline has occurred. There is often a delay between changes in property tax base and when revenues are received. Sales tax receipts are affected early when unemployment increases but, even then, a delay may occur before residents reduce purchases. Second, not all municipalities respond to a recession in the same way or to the same extent. It may be difficult for municipal officials to understand the impact on their city and how it differs from others in the region or in the state. The comparisons in Table 1 yield insights into the relative changes in revenue-raising power compared with cities of similar size in Illinois.
Summary Local governments have undergone many important fiscal changes in recent years. Losses in employment and businesses can cause significant changes in the property tax base at the same time that unemployment and economic distress can increase the costs of providing services. In January 1987, Federal general revenue sharing was discontinued. Flat revenue projections combined with cost increases mean greater difficulties in financing desired services. The revenue-raising indices presented in this article can at least assist local officials in determining how their city has fared in recent years. • July 1987 / Illinois Municipal Review / Page 9
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