Revenue Diversification and the Financing of Large American Central Cities

Abstract

The housing crisis and the Great Recession have placed tremendous fiscal pressure on the nation's central cities. Cuts in state government fiscal assistance to their local governments, plus shrinking property tax bases are challenging the ability of local governments to continue their current levels of public services. Although the property tax remains the single most important own source of municipal government revenues, the decline in property values and the rising tide of foreclosures suggests that the reliance on more diversified local tax bases may strengthen the ability of cities to provide a range of public services for their residents. In this paper, we use a panel of data on the financing of the nation's largest central cities from 1997 to 2008 to explore the role of revenue diversification in determining the level of general revenues of the nation's largest central cities. Because expenditure responsibilities vary among city governments and because overlying governments play different roles, we develop the concept of constructed governments in order to allow us to compare across time and space the revenue-raising policies of large central cities. Our empirical results provide strong support for the hypothesis that a more diversified revenue structure generates more revenues than one which relies primarily on the property tax.