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ABSTRACT. Local governments are expanding their revenue portfolios and becoming less dependent on property taxes. It should not be assumed, however, that this diversification is increasing the stability of local governments' own source revenue, as previous research suggests. It is thus important for local government officials to know how this process will affect the stability of their own source revenue, as they are almost certainly diversifying away from a stable tax, the property tax (Groves and Kahn, 1952; McCubbins and Moule, 2010), and moving toward a more volatile tax, such as the sales tax. Using county-level data in thirty-five states, I examine the effect of local option sales taxes (LOSTs) on the volatility of own source revenue and find that greater use of LOSTs increases revenue volatility.
INTRODUCTION
Challenging economic times have led local governments to become more strategic in building their revenue portfolios and are considering less traditional financing options to pay for public services. Policy makers are facing more difficulties than in previous generations, including limitations on the types of taxation they are permitted to use; the rates and total revenue collections they may institute; economic downturns; and increased demand for services. Many local governments now find themselves on a perpetual search for additional and broader revenue streams. One revenue source that these governments have pursued with more frequency since the 1970s is local option sales taxes (LOSTs).
LOSTs have become increasingly popular sources of revenue for local governments in the wake of numerous so-called tax revolts within the states and the subsequent adoption of tax and expenditure limitations (TELs). Currently, thirty-six states permit local governments to institute a local sales tax, and approximately eleven thousand local governments have LOSTs in place (Tax Policy Center, 2006). The widespread use of LOSTs can be explained in part by increased need for revenue; this uptick in need, in turn, is attributable to, among other things, TELs. Forty-six states have a TEL in place (Mullins & Wallin, 2004), a situation that may force local governments to retool their revenue portfolios and/or reduce the public services they provide (Preston & Ichniowski, 1991; Shadbegian, 1998).
However, increased need may not be the only reason local governments are choosing to diversify their revenues; doing so may also be...