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Promoting Economic Growth with a Well-Balanced Revenue Structure

by Bob Bland

Economic development effort cannot compensate for poor budget decisions, according to Bob Bland, University of North Texas.

Occasionally local leaders mistakenly assume that all that is needed to achieve economic prosperity is new business investment in their community. But no amount of economic development effort can compensate for poor budget decisions. A city can "give away the farm" in tax incentives and never reap the benefits if its tax structure has remained unchanged since the 19th century, and in reality a good many tax structures have not been overhauled since then.

A well-designed revenue structure—one that promotes fairness and market neutrality and is administratively cost-effective—is a city or county's most effective tool for attracting and retaining business investment. In fact, tax incentives may be unnecessary if a community's leadership has focused its efforts on building a sound tax structure. Businesses, like citizens, are not averse to paying taxes if they see that local government operates efficiently and that there is a clear connection between the taxes they pay and the quality of public services they and their employees receive.

It is axiomatic that the stronger the local economy, the stronger the local government's revenue base. Investment in prudent budget choices leads to a stronger economy, which leads to more stable, sustainable revenue yields and thus to less budget volatility. Good tax policy is good economics and provides long-term benefits to the manager willing to invest time and political capital in tackling the sacred cows. Conversely, an inefficient, cluttered tax structure creates a drag on local economic growth. In a real sense, economic prosperity begins with carefully crafted budget choices.

Budget discussions are politically costly because they realign winners and losers in the distribution of who benefits and who pays for public services. Yet such discussions cannot be avoided, at least not indefinitely. Delaying difficult decisions pushes local leaders into a crisis mode in which decisions focus on finding ad hoc resolutions rather than long-term, comprehensive solutions. It narrows the choices leaders are willing to consider because their attention is focused on the crisis. Local government leaders' inability to take timely action leads to more drastic actions later, further affirming a cynical citizenry's perception of ineffective government. One distinct, although unexplored, advantage of the council-manager form of government is the appointed career executive's greater political capacity to bring to the table a timely discussion of difficult budget choices.

Allowing a dysfunctional budget process to struggle along heightens citizen cynicism. Everyone knows the process is broken, yet no one has the political courage to engage citizens in a meaningful dialogue on solutions. Unfortunately, the important discussions emerge only in the crisis that is precipitated by a court ruling or a significant bond downgrading. The most productive reforms in local finance (1) occur in small increments over a long period of time, (2) are guided by a clear set of criteria that are widely shared by the community, and (3) choose economic prudence over political expediency on the general assumption that a strong economy will benefit all stakeholders rather than just the well-connected—and then only temporarily.

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Bob Bland is professor and chair of the Department of Public Administration at the University of North Texas and the author of two ICMA books, A Revenue Guide for Local Government (2005) and A Budgeting Guide for Local Government (2007). He is currently chairing NASPAA’s Local Government Management Education Committee.

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