As state and local governments grapple with extraordinary fiscal turmoil triggered by the economic downturn—California leading the way, but other states and cities facing staggering budget shortfalls—political leaders are turning to new sources of revenue and capital financing. Earlier this month, the Lincoln Institute hosted its fourth Land Policy Conference, "The Changing Landscape of Local Public Revenues," to review cutting-edge trends in public finance. The gathering of experts examined an alphabet soup of revenue instruments old and new, including:
-- Community Facility Districts or CFDs, issue debt (also known as "dirt bonds") for funding infrastructure for new development financed by a special tax on households and businesses in these districts.
-- Certificates of Participation or COPs, a type of a lease-back plan, where local governments enter into agreements with non-profit entities that issue tax-exempt bonds to finance facilities or projects that are sometimes leased back by the local government.
-- Tax Credit Bonds, where the federal government pays interest in the form of credits against income tax liabilities, used in the American Recovery and Reinvestment Act for school construction, clean energy projects, recovery zone economic development bonds, and Build America bonds; their origins are in the Qualified Zone Academy Bond or QZAB, dating back to the late 1990s.
-- Business improvement districts (BIDs), of which there are currently some 700 in 46 states, which can either complement or increase public expenditures.
-- Impact fees, although widely used to fund capital investments, have little evidence indicating they correspond to actual community expenditures; theory suggests they can lower property taxes, though empirical support for this is scarce.
-- Homeowner associations, estimated to provide services to some 50 million Americans for such services as road and sidewalk maintenance, street lighting, trash collection, and recreation facilities, encompass about half the residences constructed in the U.S. in the past two decades.
-- CEPACs, or certificates of additional building rights potential, an innovative instrument of value capture used since 2004 in Sao Paulo, Brazil. These are rights purchased from the city government by developers that allow construction of larger buildings.
-- Tax increment financing or TIF districts, now widely used—there are 789 such districts in Wisconsin alone—raising concern that they may increase the volatility of local property tax bases and revenues.
-- A VMT (vehicles miles traveled) tax, where a GPS device in cars allows the charge of 1.2 cents per mile, as the equivalent of a 24 cents per gallon gas tax.
-- Tolling strategies for highways, which have moved to a new phase after privatization and leasing deals in Chicago and Indiana; more sophisticated pricing structures can take into account time of day or allow solo drivers to use high-occupancy toll lanes (so-called "HOT" lanes).
The experts at the conference were wary that many of these instruments do not require voter approval and are unknown to most residents. "Voters might not approve of these instruments if they knew about them," said Tracy Gordon, assistant professor at the University of Maryland's School of Public Policy. In addition, as cities in particular adopt various new revenue instruments—a meals tax, a lodging tax, sales taxes on new items, a local income tax, and additional user fees—researchers will have their hands full keeping up with the analysis of the fiscal impact.
The proceedings of "The Changing Landscape of Local Public Revenues" will appear in book form by May 2010, as the fourth volume in the ongoing series.