Making the Case for Regional Taxes

For some time now, Americans have been blurring the lines between cities and suburbs. We sleep in one place, work in another, and shop and socialize in still other locales. Local tax structures don’t reflect this shift: Regions have supplanted cities as the nation’s economic centers. That disconnect is making it harder for cities to recover from the recent recession. "It’s not just that the economy is in a downturn," says Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago. "Our fiscal architecture no longer matches the economic growth engines of regions."

It’s time to re-examine the way people fund municipal services, Pagano says. "This is one of those rare opportunities that regional local governments are confronted with -- the chance to step back and think about whether they should restructure the way we pay for public-sector services."

As an example, Pagano points to his own city, Chicago, where thousands of workers stream downtown every day, consuming services such as road maintenance and fire and police protection. Indeed, according to census estimates, Chicago’s population swells by about 5 percent during the workday. In other cities, that disparity is greater. San Diego’s daytime population jumps nearly 12 percent, and Dallas and Houston each see their populations rise by about 20 percent during the day. That added population benefits from city services, but other than local sales taxes, they don’t really pay for them.

The idea of regional tax-base sharing isn’t exactly new. The Twin Cities metropolitan area in Minnesota has had a seven-county agreement in place since 1971. Under that statute, each community contributes 40 percent of the growth of its commercial and industrial property tax base into a regional pool. Those funds are then redistributed based on a formula that looks at a jurisdiction’s population and fiscal needs. For decades in Ohio, local communities have had the home-rule right to tax income based on citizens’ place of residence as well as their place of employment.

More recently, small communities across the country have become more amenable to the idea of shared government services, in which a handful of towns may contract to "buy" services, like police and fire protection, from a neighboring city. Although shared services agreements are gaining in popularity, according to Pagano, it’s hard to get a handle on just how many places are engaged in them. "We’re limited to anecdotal, place-specific information," he says. "We know it’s pervasive; we don’t know how pervasive."

What communities need to think about now, Pagano says, is taking all of those disparate ideas -- regional tax-base pools, shared services and more flexible income-tax structures -- and combining them into a truly unified, regional approach for taxing and providing services. "Local governments need to engage in a broader conversation about rethinking the way we price the services that government provides. We have the opportunity for a new social compact to be worked out."