CA town: the public will help determine how a one penny sales tax increase is spent

Amidst other changes in Vallejo, California, the community is trying something innovative involving a recent one cent sales tax increase:

And the city council struck an unusual deal with residents — if they agreed to a one-penny sales tax increase, projected to generate an additional $9.5 million in revenue, they could vote on how the money would be used. The experiment in participatory budgeting, which began in April, is the first in a North American city.

The approach was pioneered in Port Alegre, Brazil, as a way to get citizens involved in bridging the large gap between the city’s middle-class residents and those living in slums on the outskirts. Individual districts in New York and Chicago are also experimenting with the process, and residents there have expressed interest in spending money on things such as more security cameras and lighting, public murals, and Meals on Wheels for seniors.

Here is more information on Measure B the city provided before the vote over the tax. Measure B itself passed in a very close vote and it looks like the city opened up the approved sales tax to the process of “participatory budgeting” (with some disagreement) in April 2012:

A bid to draw significant public participation in the city’s budget planning was approved Tuesday night by the Vallejo City Council.

The council voted 4-3 to launch a process known as “participatory budgeting,” setting aside 30 percent of revenue collected from a sales tax hike initiative voters passed in November.

Under City Charter provisions, public-proposed uses for the estimated $9.5 million a year ultimately will require council approval.

Duly noted: this is a measure with some controversy. It will be interesting to see how this works out: how much input will the public get? Will a good number of people in the city participate in the process? How much money will the public be able to control? What happens if the public wants to use the money for other purposes than the city council?

Could this work beyond the local level?

h/t Instapundit, Via Meadia

The widespread (yet sometimes controversial) use of tax rebates for development in Illinois

It is common practice in Illinois for communities to give tax rebates to firms and companies to locate within their community. The primary reason: it ends up bringing in more sales tax revenue.

Communities throughout the region and the state share sales tax revenues to woo retailers — and they are within their rights to do so under Illinois law. In fact, rebate researcher Geoffrey Propheter found the rebate programs to be more heavily used in Illinois than elsewhere around the country.

For the most part, these programs have flown under the radar until this summer, when the Regional Transportation Authority, the city of Chicago and Cook County legally challenged a variation on their use. In lawsuits, they alleged Channahon and Kankakee used sales tax rebate agreements to divert sales tax collections unfairly from metro Chicago to small “sham offices” in their lower-tax towns — allegations denied by both communities.

With a spotlight now directed at sales-tax rebate programs, some observers are quick to say they stand behind the more common use of rebate programs to attract big-box stores and auto dealers…

But other observers say the programs can skew economic development efforts toward retail. This can be effective in filling city coffers but may not produce as much regional economic growth as office or manufacturing developments, which tend to have higher-paying jobs and an ability to sell products over a much wider geographic range.

The rebate programs also tend to foster bidding wars between towns, with taxpayers picking up the tab. Propheter, a research assistant at the George Washington Institute of Public Policy, found the rebate offers have been used in border skirmishes around the state, from Belleville, outside St. Louis, to southwest suburban Joliet.

This is not a new story: states and communities across the United States have been engaging in such battles for years. In most places, governments are looking out for themselves and have little incentive to participate in regional planning or cooperation. Particularly today, in an era when many municipalities are desperate to find some extra money, providing incentives for developments likely looks attractive.

It would be interesting to know why this has become such a popular tool in Illinois.

Critics of sprawl argue that this helps feed sprawl. Communities look for ways to bring in easy money and big box stores and strip malls are relatively cheap to build. It is also interesting to see what happens when sprawl moves past these communities and the big box stores become less attractive and the new ones are even further out from the city. Shopping malls and big box stores tend not to age well.

Several examples of this come to mind:

1. Some of the verbal back-and-forth between Illinois and several other states, including Wisconsin, Indiana, and New Jersey, over the increasing tax rate in Illinois and casino revenues.

2. The story of how the Fox Valley Mall came to be in Aurora. The story is that the developer played Aurora and Naperville off each other in order to get a better deal for developing land on either the east or west side of Illinois Route 59. Naperville was not as willing to negotiate – and things were looking relatively good for them with the relocation of Bell Labs and a Amoco research facility along I-88 in the 1960s – and the developer picked Aurora. Naperville knew that it had lost a significant source of revenue. To compensate, city leaders turned quickly to drawing up plans to revitalize their downtown, putting into action a plan that suggested building a park along the river (put together a few years later as the Riverwalk), grouping municipal buildings in the downtown (new City Hall, new downtown library), and beautifying some of the streets (see Jefferson Avenue and Jackson Avenue between Main Street and Washington Street). I wonder how the story would be told today in Naperville if their downtown hadn’t become a destination.

Don’t romanticize the loss of bookstores: rue the loss of tax dollars and jobs

One response to the closing of bookstores is to lament the loss of a place to browse for books and drink coffee. But another reason to rue the loss of these stores is the loss of tax dollars and jobs. Here is how this plays out in Wheaton:

The eventual closure of Borders books will have an impact on Wheaton in terms of lost sales tax revenue and jobs, said Jim Kozik, the director of planning for the city. And replacing a large retailer isn’t easy in times like these…

Locally he said Borders absence will mean a loss of jobs, a loss of tax revenue for the city and a loss of lease income for the management company that runs the shopping plaza at Butterfield and Naperville roads. But he said the amount of revenue the city will lose is hard to quantify because it is not spelled out by state government…

Kozik said the city has had discussions with Anderson’s Bookshop, an independent seller with locations in Downers Grove and Naperville. But ultimately the talks didn’t produce.

With liquidation plans announced for Borders books, Wheaton could face having two large vacant former bookstores – the other being a space in the Town Square shopping plaza formerly occupied by Barnes and Noble. That store closed a few years ago, said Kerry O’Brien of the Wheaton chamber of commerce.

It is little wonder that more states are looking to gather sales taxes off internet sales. The loss of bookstores has an economic impact that is perhaps more important than the cultural and social implications of the loss of a potential “third place.”

This story is also a little more intriguing because it is Wheaton, a community that is fairly educated and yet has lost two big chain bookstores. If they can’t survive in Wheaton, where else can they survive? (I wonder how the Barnes & Noble in downtown Naperville is viewed.) In general, the Chicago suburbs are lacking in independent bookstores, a type of business that might mark a more educated demographic.

The possible shifts in the foundations of tax bases

Governments are dependent on tax bases for revenue. Hopefully, the tax base meets financial expectations and if things are going well, the taxes bring increased revenues, leading to more spending (and saving?) possibilities. But what happens when tax bases decrease?

This is an issue facing a number of government bodies and a number of taxes are affected:

-I was reminded of this again by this piece (h/t Instapundit) which suggests that increasing income taxes on the rich may not work out in the long run as economic troubles can greatly affect the incomes of the rich.

-Property taxes are affected by the assessed value of properties. If property values are down, such as in this economic crisis where it appears housing prices will be depressed for quite a while, then tax revenue may go down. (Or they may not – can local communities really afford to have less money coming in through property taxes?)

-So called “vice taxes,” on things like cigarettes, may be self-defeating: as people smoke less, the revenue will slowly dry up.

-The gas tax will be interesting to watch in future years: as the government pushes for more electric vehicles and with higher gas prices, this could mean that less gasoline is purchased. Money to pay for new roads and maintenance will have to come from somewhere.

A couple of questions about these different taxes:

1. Is the uncertainty about tax revenues in the last few years really that different from other points in history? If not, what have people done in the past?

2. Might we expect to see some major changes in taxation in the coming years as governments look for different (perhaps more stable?) or more sources of revenue?

3. How are sales taxes or VATs affected by economic crises?

(The realm of taxes is not my area of expertise but I do know the importance of some of this to communities: limited or decreasing property and sales taxes lead to big issues with budgets which then affect services which then angers residents.)

A few comments by Joel (3/31/2011):

One way that cities and states are seeking to increase collection revenues is through enhanced sales tax enforcement.  As Amazon is finding out, for example, governments have their ways of pressuring online retailers.

Of course, to a certain extent, this is simply turning into an arms race, with businesses increasing their lobbying budgets and hiring more tax attorneys.

Another proposal for Internet sales taxes

Many American consumers can purchase goods online without paying a state sales tax. That may change in the future. While this article specifically references a proposed bill from a Massachusetts House member, it has some interesting background on the legal issues behind gathering state sales taxes from Internet purchases.