Urban Finance:
The Politics of Revenue and
Spending Policies
WESTCHESTER ALLIANCE
IONA COLLEGE
BY TIMOTHY O’DWYER AND JAMES MURPHY
Introduction
 The Constitution does not mention cities, towns or any other kind of local
governments.
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States were given the right to create, regulate, and, if necessary, eliminate local
governments.
 States heavily regulate scope, content, and means by which a city fulfills policy
demands of their citizens.
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As such, local politics, which represent the local demands, are muted on terms of
taxation and spending for local governments.
 Local governments do have legal authority to tax their residents and to make
decisions legally binding on them.
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Limit on amount of revenue a local government can raise through taxation Obviously,
everyone wants to pay less in taxes
 Local residents preferences on taxation and spending are diverse and subject to
change.
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Without local government’s legal authority to make binding policy decisions, competing
interests would cause political instability.
Revenue Sources
 Municipal governments draw upon sources such as property and income
taxes, sales of goods and services and fees.
 Largest single source of revenue for all municipal governments 
residential and property tax.
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Local governments prefer property tax over income tax because it does not fluctuate frequently
and can be easily assessed. In 1962, property tax accounted for ½ of all revenue raised by
municipal governments in US.
 2nd largest source for revenue  fees and charges.
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Includes water, garbage, and sewerage services and charges for parks and public facilities.
Sales tax and other taxes (personal and corporate income tax) make up a smaller portion of
revenue.
 External source of funding is federal and state aid.
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Federal assistance to local and city governments focused on social services that addressed issue
between those living in the city and those in the suburbs.
Federal Assistance was at its highest point during the 1960s Johnson Administration, but
declined afterwards.
 Today, federal assistance for local governments is given to state
governments, which would then be distributed to localities.
Revenue Sources
 State aid to localities comes from funds raised by states on own authority
to tax. States generally levy tax on sale of goods and services and collect
taxes from local merchants and return a portion of sales tax receipts to
localities where they were made.
 Ability to incur debt is regulated by state law and cities incur debt by
means of general obligation bonds.
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General Obligation Bond – allow municipality to borrow in commercial credit market; amount
lent and interest paid to lender are repaid by city’s authority to tax its residents – “Full faith and
credit of the city”.
Problem with G.O.B. – is need for voter approval through public referendum and these
referenda put limits on amount of money that can be borrowed and how it is used.
 Alternative is the revenue bond, which does not require voter approval.

Revenue bonds raise money for specific projects and are issued to pay for capital projects such
as construction of roads , buildings and other large projects and is repaid with the revenue
produced by the facility or project.
Regressive Tax
 First reason why US localities reduced reliance on property
tax  regressive tax.
 Regressive Tax – poor and middle class pay higher percentage
of personal income on property and residential tax than
wealthier citizens.
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Result: property tax is extremely unpopular form of tax.
Problematic for low-income and property poor communities.
 Community’s tax base is sum of all values taxed by a locality
 Two communities of equal size with different tax bases show the
disparity and unequal access to basic goods and services – if the
community that pays less, they might lose essential services provided by
the state.
 Efforts to reduce/eliminate regressiveness of property tax – provide
exemptions for poor and elderly have succeeded in equalizing
percentage of personal income paid in property taxes.
Property tax
 Second reason  property tax is inefficient form of taxation
 Citizens protest what they see as arbitrary and unfair tax assessments.
 Resulted in establishment of assessment boards to oversee process and
appeal procedures to ensure citizens are heard.

Problem with boards is increased cost of levying property tax.
 Bond indebtedness – amount of principal and interest that
localities owe to lenders.
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Repaid over fixed period of time from taxes and other revenues raised by
locality. Indebtedness allows municipal borrower to obtain immediate
benefits w/o immediate expenditure by taxpayers.
Bonds enable cities to pay at later time for what they can receive
immediately.
Bonds are paid with future revenue and by future taxpayers and voters.
Functional Spending
 Two important observation can be made about scope
and content of municipal functional responsibility.
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1st – cities responsible for narrow range of functions –
confinement to basic of “housekeeping” activities and essential
services: Public security (police and fire), roads and utilities.
2nd – limited scope of municipal responsibility and level of
spending for many social services including health programs,
welfare and hospitals.
Although property tax remains main source of revenue, it has
declined over past decades.
 Locality spending constrained to a narrow range of basic goods
and services and responsibilities for social services.

Theories of Municipal Fiscal Policies
 Elitist Theory
 Pluralist Theory
 Market Theory
 Institutional Determinants
Elitist Theory
 Helen and Robert Lynd (1929) – local decision making emphasized the
importance of elites whose powerful positions in community enable them
to influence or determine policy decisions.

Focused on economic elites, because control over capital and labor is important
to the public sector.
 Mills (1956) – the elite consist of those that are above ordinary men and
women and whose decisions have larger consequences; power elite
“creates” demands and causes others to meet them.
 Elite theory provided explanation for disparity in distribution of wealth
and public services.
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Elite-influenced taxing and spending decisions are expected to produce policies favoring
wealthy and their interests and Elitists have found strong bias against spending for
redistributive social services that help poor.
Problem: The existence of the powerful elite does not mean that the elites have power over
government ‘s taxing and spending decisions.

Increased citizen participation in local government, was hard to sustain and did not always accomplish its
objectives and greater citizen participation did not always result in policies congruent with newly
empowered groups nor sustain political power.
Pluralist Theory
 Belief that decision making in communities reside in larger, diverse section of the
community.
 Dahl – contested positive relationship between distribution of political resources
and that of community influence. Decision-making is distributed to a wide range of
groups across different policy areas.
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Argued that numerous types of political resources are not evenly distributed among residents of
a community – with industrialization and increased immigration to the US, the number of new
voters and more diverse social and economic interests displaced the power of preindustrial
elites.
Pluralists do not discredit the idea that elites influence public policy, but not to exclude other
groups and interests.
 Pluralists assume that the preferences of those that have power would mirror
policy preferences of the public.
 Problem: Unable to answer the question of the link between urban policy and the
preferences of urban residents and facilitates the relationship.

Fall short of explaining why greater representation of these constituencies has not produced taxing and
spending policies that approximate the preferences of newly empowered groups.
Market Theory
 Question: what do governments do and why?
 Market theorists expand explanation of municipal taxation and spending
decisions within and outside the community.

National level – gov’t role is limited to activities and responsibilities that the
private market cannot handle. Scope of government’s functional responsibilities
identified by goods and services that private-sector are unable to produce. Due
to inefficiencies or external factors.

Ex: Inability to exclude individuals from obtaining certain goods and services limits
role of private markets in providing goods and services and so national government
assumes a large responsibility in supplying them.
 Tiebout’s model (1956) – maintains that individuals select communities
with preferences for publicly provided goods and services – “vote with
their feet”. Content and level of municipal service packages defined by
preferences of average voter. Efficient market mechanism for production
of goods and services exists because:
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1. Number and diversity of states and communities
2. mobility of voters to choose among the communities the one that best approximates their
preferences for goods and services.
Market Theory
 Dowding, John, and Biggs (1994) propositions on Tiebout’s hypothesis:
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Larger the number of competing jurisdictions, greater the satisfaction level of
consumer voters.
Larger the number of jurisdictions in same metropolitan area, greater the
competition between them for consumer voters.
Large the number of competing jurisdictions, more homogenous each
jurisdiction will be.
Taxes and services influence residential mobility.
Higher the quality of services (tax levels), higher (or lower) the property values
in jurisdiction.
 Tiebout does not identify a set of services such as public safety,
utilities and roads as being essential to operation of municipal
government.
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Tiebout states that the market is the engine for assisting service responsibilities
and thereby relating this engine to decisions on taxation and spending.
Market Theory
 Buchanan (1971), Peterson (1981), and Miller (1981) added the point that
mobility of residents in metropolitan area produces significant bias for
retention of wealthier residents.
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Buchanan – municipal governance under majority rule will advantage lowincome citizens at expense of high-income residents.

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Result is income redistribution – cost for middle and high income persons.
Peterson – “local politics is not like national politics”, “there are crucial kinds of
public policies that local governments simply cannot execute” – some policies
only the national government can efficiently perform.
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Scope and level of community’s functional responsibilities are constrained by inability
of cities to control mobility of capital and labor across their respective borders. States
and cities are less effective at preventing citizens, businesses and capital base from
migrating to other locales where tax to benefit ratios are superior.
Cities, states, and other subnational units of gov’t pursue developmental policies that
generate economic resources that can in turn be used for community’s collective
welfare.
Market Theory
 Buchanan, Miller and Peterson created hypotheses derived from Tiebout’s
work:
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Expenditure’s on redistributive services are function of fiscal capacity (wealth),
not demand and public preferences in community.
Expenditures on developmental services are function of demand (population
size).
Tax rates and burden (local taxes as percentage of personal income) will tend
toward uniformity among communities competing in same market (for
consumer voters (that is, metropolitan area).
 Implications of these hypotheses:
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1st. Politics (subnational level) is marginalized due to demand and public
preferences do not drive spending policies for redistributive social services.
2nd. Redistributive policy spending at subnational level largely a function of
wealth.
3rd. Subnational units of government are more efficacious when engage in
developmental policies and less efficacious when pursuing redistributive social
policies.
Market Theory
 Peterson: Municipalities spend more on developmental
and allocation functions (roads, water, infrastructure)
than on redistributive services and goods (health
welfare).

Peterson (1981) reported that municipal spending for array of
social services, including: housing, public hospitals and health
services are unrelated to indicators of poverty, minorities and
other directories of need and demand.
 Stein (1990) – considerable variation in range of
municipal spending on redistributive social services.
Institutional Determinants
 Rules of governing how to make decisions, process of representation and
nature of executive office have direct connection of the influence on the
content of urban public policies.
 Banfield and Wilson (1963) – 1st to argue certain institutional
arrangements promote interests and preferences of different groups and
translate preferences into policy outputs.
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Public-regarding policies focus on needs and interests of entire community;
narrower private-regarding policy outputs distribute benefits to specific
geographic areas and ethnic and partisan interests, independent of need for
policies.
 Lineberry and Fowler (1967) – confirmed Banfield and Wilson’s
hypothesis showing that there are differences in taxing and
spending decisions of local gov’ts with reformed & unreformed
institutional arrangements.
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Conclusion: “In the long run, government structure may matter very little-at least when it comes
to city taking and spending policies”

Conclusion may overlook important rules and procedures governing urban policymaking process.
Institutional Determinants
 Stein (1990) – “the way in which gov’ts organize themselves to perform
policy functions has a significant effect on the scope and content of
municipal policy performance.”
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Conventional view of municipal public policy is urban gov’ts are solely
responsible for all phases of service provisions, including: choice of services,
funding means and producing/delivering goods and services – this idea is
“naïve and wrong”.
 The dilemma of localities and cities providing redistributive social services
provides partly answered by the use of alternative institutional
arrangements.
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Stein and others demonstrated that these alternative arrangements produced significant savings
to cities that mitigate potentially harmful consequences associated w/ municipal provision of
social services.
Paradox in the Taxing and Spending of
Municipalities
 Cities pursue service responsibilities that run
counter to their interests
 These spending policies affect:
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Social
Economic
Political
Options in Providing Services
Option 1
•
Produce the service with
their own resources,
public employees, and
equipment
Option 2
 Purchase services from
adjacent governments
 Purchase Services from
a private company
Option 1
 Available to larger communities
 Example:
 Houston, TX sells water and sewage treatment services to
surrounding suburbs
 Westchester Example:
 City of Yonkers has its own Sewer Department that controls
the sewage system
Option 2
 Ideal for smaller municipalities
 Westchester Example:
 Empress Ambulance is a privately owned ambulatory service
that works with the City of Yonkers emergency services
departments
Costs of Public Services
 Cost of labor is the most expensive part of providing
these services
 Other costs include
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Facilities
Equipment
Why Contract Public Services to Private Firms
 Cities save significantly more and employees of these
firms are better compensated
 Cities that outsource these services use the savings to
meet the demands of needier constituents:
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The elderly
The poor
The infirm
Conclusion
 Cities are institutionally and physically weak
 Open borders make it relatively easy for productive
capital and labor to move from city to city
 State home-rules laws restrict municipal taxation
and urban finance policies
 Despite limits, cities succeed at providing
redistributive social services
Work Cited
 Cities, Politics, & Policy: A Comparative Analysis.
John P. Pelissero, ed., CQ Press, 2003

Chapter 9: The Politics of Revenue and Spending Policies by
Robert M. Stein. pp. 217-236