Understanding a City’s Fiscal Base

Once rooted in the value of land and structures, municipal revenue systems have gradually changed. In most cases, the change has disconnected the fiscal system from the economic base. Unfortunately, use of the now conventional indicators are not a good measure of a city’s revenue capacity because no city’s economic base is fully accessible to the municipal government for revenue-generating purpose. The ability to transform its economic base into government revenue depends on the types of legal taxing authority and the impact of state-imposed constraints on revenue. Therefore, we propose the concept of fiscal base, defined as the economic base that is tax accessible to a city government. This definition not only reflects the connection of economic condition to revenue-raising potential, but also incorporates the restrictive nature of relevant state laws on municipal access to various revenue sources. The fiscal base concept sheds light on how to reform state-imposed legal and institutional constraints to allow a better alignment between municipal revenue structure and the economic base that is necessary to modernize city finances in the face of changing economic conditions.