Local units of government, such as cities, counties and public school systems, provide a wide range of services to their citizens. These include police and fire protection, public education, water and sewer service, public libraries and parks, street and road construction and maintenance, and garbage collection, among others. These services cost money, which local governments fund through methods such as taxes and even user fees. Local government finance studies the methods and processes by which local governments fund their services and activities.
Local government finance refers to the methods by which local governments fund the range of services they provide. It examines how local authorities collect revenues and allocate budgeted expenditures among various functions or types of services.
University of Wisconsin Professor Andrew Reschovsky writes that local governments depend on a combination of taxes, fees and miscellaneous revenue sources for about two-thirds of their total revenues. The remaining one-third comes as grants or fund transfers from state and federal government sources. Reschovsky, who teaches at Wisconsin’s Robert M. La Follette School of Public Affairs, identified the property tax as the most important revenue source for local governments. Other revenues come from hotel occupancy taxes and automobile registration fees. Some local governments, including many Texas cities, assess a local sales tax in addition to the state sales tax.
A paper for The World Bank identified user fees as an increasingly important revenue source for local governments. An example includes fares for public transportation systems, such as city buses and trains. The paper’s author, economist Richard M. Bird, pointed out that user fees not only fund government services but give information on what services should be provided, to whom and in what quantity. Taxes, in contrast, only provide revenues for local governments. Charging fees to users of government services discourages citizens from viewing the services as free.
Services and Expenditures
A primer on local government finance in the state of Wisconsin found that public safety, including police and fire protection, accounted for about one-third of local government expenditures. Public works, which includes road maintenance and garbage collection, was the second-largest spending category. Public works accounted for 24 percent of spending by Wisconsin local governments. Other expenditures included general government administration, culture and recreation, economic development activities, and health and human services.
Increasingly, local governments raise money for new facilities by issuing bonds. Public school systems issue bonds to finance the construction of new campuses, while cities issue bonds for the construction of new roads, bridges and municipal facilities. They often issue revenue bonds to construct new museums, civic centers and other facilities that generate revenue, with which the local government pays its bond debts.