Local fiscal issues: alternative sources of revenue

The property tax used to be THE tax for local governments in the US. However, the property tax reliance of local governments has decreased due to "property tax revolts" starting from the late 1970s -- many states have passed public referenda that place significant restrictions on local governments' property tax levy.

At the outset, some were hoping to use these restrictions to prevent those "greedy" governments from growing too large over time. Nevertheless, despite for the best hope of "getting something for nothing," it is unlikely that governments can absolve the revenue shock simply by improving efficiencies. To make up the lost revenue, local governments have struggled to find alternative sources of revenue to fund their services.

One major alternative is to levy local option taxes on either general sales or income. To levy these taxes, it should first be authorized by state governments and then passed through public referenda as special elections. Many of local option taxes have special requirements attached to the levy, such as term limits (to be expired in five years, for instance) or earmarked purposes (for education, transportation, or other capital improvements). In general, local option taxes may reduce the property tax burden (or pressure) for local governments, but may
increase the overall tax burden due to fiscal illusions.

Another major alternative is to increase user fees or charges, either by adopting new fee schemes or raise fees that are already existing. (There are subtle differences between "fees" or "charges" which will not be discussed here.) Ideally, using fees/charges may increase the benefit equity, meaning that people pay in accordance with benefits that they receive. However, in most cases the benefits are hard to measured and qualified and the fees/charges are not truly optional. This has led to legal issues in some Michigan cities in which the court ruled that some user fees/charges are in fact compulsory taxes and had to be withdrawn.