Part 1: Rethinking Local Government Revenue Systems

Why is rethinking necessary?

We contend that rethinking is necessary because local government revenues have not remained aligned with modern economic realities. We will show that this contributes to distortions in the economy and unfairness in how taxpayers are treated. Let’s consider the quintessential local government revenue: the property tax. The changing economy has challenged the relevance of the property tax. Most fundamentally, a large part of the value created in the modern economy does not involve property—it often involves less tangible things, like financial instruments or bits and bytes. For example, from 1989 to 2019, the top five fastest-growing categories of wealth held by families were types of financial instruments. This has changed the relative importance of assets in the composition of family wealth. Financial assets increased as share of total assets, from 31% to 42%. The relative share of wealth derived from primary residences and equity in nonresidential property both decreased. In short, wealth has become less connected with real property ownership and therefore does not represent the taxpayer’s ability to pay in the same way it used to.

• Publication date: October 2021