Governments Embrace More and More Revenue Schemes

The combination of a limping economy and tight federal budgets has led many state and local governments to ever more imaginative -- and risky -- revenue sources like violence and buzzkill taxes.
August 2013

When I was growing up, summer vacation meant a trip to my grandparents’ house by way of the Pennsylvania Turnpike. We always tried to talk my dad into stopping underneath one of Howard Johnson’s trademark orange roofs, whose 28 ice cream flavors were a huge treat in the days when the usual choices were vanilla, chocolate and strawberry.

The HoJo magic was the product of an early public-private partnership with Standard Oil, which had negotiated a monopoly of the turnpike’s rest stops. In the 73 years since the turnpike opened, HoJo has disappeared, Standard Oil has been transformed beyond recognition into Exxon and the turnpike has struggled financially, forcing cash-strapped state and local budget experts to look for new -- and sometimes controversial -- revenue sources.

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In 2007, for example, then-Gov. Ed Rendell proposed a 75-year lease of the turnpike to private companies, which would take over operation and maintenance in exchange for a one-time $12.8 billion payment. The 2008 financial collapse scuttled the plan, but the idea lives on and similar plans are percolating across the country. Sixteen investors made their pitch to the city of Chicago, which is considering a 40-year multibillion-dollar lease for Midway Airport. Maryland is talking to investors about raising private capital to fund an expansion of the region’s rail service. Pennsylvania has debated closing down its state-run liquor stores and putting alcohol-sale permits up for auction, which some state officials believe could raise $1 billion. New Jersey, Oklahoma, Pennsylvania and South Carolina have considered selling off their state lotteries.

These are bellwether deals for state and local governments at a time of rough and colliding trends. As they look along the Potomac to Sequesterville, state and local officials have concluded that they can’t count on Washington for new cash -- and that more tough times, especially for Medicaid, might be coming. State tax collections have finally recovered to the pre-Great Recession level, but investment firm RBC Capital Markets analyst Chris Mauro warns that “a lot of it’s temporary.”

The combination of a limping economy and tight federal budgets has led many state and local governments to ever more imaginative revenue plans. Consider:

  • Violence tax. Since April 1, Cook County, Ill., has taxed gun purchasers $25 on each firearm they buy. Proceeds from the tax go to Cook County Hospital, which treats 800 gun violence victims a year. California is considering a nickel-a-bullet tax to fund a program for early childhood mental health. Nevada is thinking about both. Gun control advocates figured they should tax what they can’t ban.
  • Event tax. Big athletic events create big bills in New York City due to street closings and the need for extra police support. Since 2011, the city has taxed event sponsors to cover the costs. But in April, a state Supreme Court justice ruled that the city had to return almost $1 million in fees for a “Five Boro Bike Tour” event held last year. The city said it was a non-charitable athletic parade. The sponsors, which were the first to challenge the city’s new tax policy, countered that they were a nonprofit organization running a for-charity event and should be exempt. The justices agreed.
  • Buzzkill tax. No sooner did the state of Washington legalize recreational marijuana than some state legislators latched onto a plan to tax marijuana sales. State analysts concluded that “a fully functioning marijuana market” could bring the state as much as $1.9 billion in new revenue over five years. Then there’s the ever-growing cigarette tax. An analysis for Virginia’s legislative reference bureau pointed to the huge difference in state excise taxes per carton of cigarettes between Virginia ($3) and New York City ($58.50). Smugglers could pocket $100,000 on a single run carrying 2,000 cartons of cigarettes in a car. A truckload could produce a profit of millions of dollars. That, in turn, has “proven irresistible to organized crime,” with profit margins greater than trade in cocaine, heroin and illegal firearms.

Behind so many of these revenue raising deals are some tough players and risky choices. The revenue schemes can mean tangling with do-good nonprofits or organized crime syndicates. The big privatization deals risk doing business with firms whose high-priced talent swoop in, make a deal, collect a fee and then get out before the ongoing management challenges surface. In these deals, many state and local governments risk settling too fast for too little, because they are outgunned at the bargaining tables. Then they face the challenge of making sure that the privatized operations run well and are not wrung dry before they’re returned to the government decades from now.

But even more important, these new revenue plans don’t begin to get at the basic problem: the growing strains of a 20th-century state-local revenue system adapting to the 21st-century economy. A recent U.S. Government Accountability Office (GAO) report predicts a growing gap between state and local spending and the revenues to support it. As the GAO’s Stan Czerwinski concluded, “The longer we wait, the bigger the problem becomes and the harder it will be to solve.” That’s the key ongoing puzzle that even a couple of scoops of HoJo’s fudge ripple (my personal favorite) can’t begin to solve.

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