3 Ways to Reduce Costs to Residents WHILE Maintaining (and possibly even improving) Public Services

Sounds contradictory right?

We've heard it said that in order to provide more and better local public services, taxes must be raised on local residents. After all, the money has to come from SOMEWHERE. And, in some ways, that's true.

But it's not an ABSOLUTE truth.

For, in the final analysis, it is a false choice (like the notion that protecting the environment AND growing the economy AT THE SAME TIME was seen as a binary choice until it, too, was proven to be a false choice ... see Resources for the Future for countless nonpartisan research examples).

That same black and white thinking will most certainly NOT solve the problems we've created for ourselves in our ever complex, rapidly changing, cost increasing world. We must, therefore, think outside of the box and find "third ways" to solve our problems if we are to make our communities safe and economically resilient, sustainable, and vibrant.

So, to start the conversation, what ARE the general sources of revenue that don't increase the costs to the general population of tax payer residents but at the same time CAN generate revenue to cover the delivery costs of community services/necessities like public safety, fire protection and prevention ... water and energy planning, distribution, and resiliency ... infrastructure, land use, and disaster planning and management recovery ... economic development ... environment protections ... third places, etc?

1. Occupancy

An occupancy tax, also known as hotel tax, lodging tax, or transient occupancy tax, is a fee imposed on guests staying at hotels, motels, and other short-term lodging facilities.

Definition and Purpose

An occupancy tax is a tax levied on each night's stay at a lodging facility. It is typically calculated as a percentage of the room rate and is collected by the hotel or accommodation provider at the time of payment.

Types of occupancy taxes

Occupancy taxes are a significant source of revenue for local governments, supporting various initiatives such as infrastructure projects, tourism promotion, and community development.

However, there are different types of occupancy taxes:

1. Occupancy Tax:

A common type applied to the cost of a hotel room, typically a percentage of the room rate.

2. Resort Tax: Applied in tourist-heavy areas, funding local amenities and services that enhance the visitor experience.

3. Tourism Tax: Designed to promote tourism within a region, used for marketing initiatives and tourism development projects.

4. Hospitality Tax: Encompasses lodging, dining, entertainment, and other services related to the hospitality industry. These taxes are collected by the property on behalf of local or state governments and are typically added to the base room rate. Occupancy tax rates vary by location and type of accommodation.

Here are some key points:

State Rate: The state hotel occupancy tax rate is 6% of the cost of a room.

Local Rate: Local jurisdictions may impose additional taxes, which can lead to combined rates exceeding 17% in some areas.

Austin, Texas: The Hotel Occupancy Tax (HOT) rate is 11%, which includes a 9% occupancy tax and a 2% venue project tax.

Exemptions: Certain groups, such as government employees and long-term stays, may be exempt from this tax.

The primary purpose of this tax is to generate revenue for local and state governments, which can be used to fund various initiatives, including:

1. Tourism Promotion: Revenue from occupancy taxes often supports marketing campaigns aimed at attracting tourists to the area.

2. Infrastructure Development: Funds may be allocated to maintain and improve local infrastructure, such as roads and public transportation, which benefits both residents and visitors.

3. Community Projects: The tax can also finance community development projects, parks, and cultural events, enhancing the overall quality of life in the area. Variability and Collection Occupancy tax rates can vary significantly depending on the location, with some areas imposing rates as high as 20%.

Different jurisdictions (state, city, county) may have their own rates, and in some cases, multiple taxes may apply to a single stay. For example, in New York City, the occupancy tax is 5.875% of the room rate, plus a flat fee of $2 per room per Lodging providers are responsible for collecting this tax from guests and remitting it to the appropriate tax authorities. This responsibility includes ensuring accurate calculations and timely payments to avoid penalties.

The benefit of this source of revenue is that residents don't pay it, but they DO reap the benefits.

In other words, people come to your town, spend their money and leave (and don't need the services that residents do for the most part ).

IMPORTANT NOTE: Of course, for these to be effective, policies must be correlated to attracting demand (ie without a reason for people to come to your jurisdiction, there won't be any occupancy taxes to collect). Round Rock, for example, uses the revenue collected from occupancy taxes (which is why the city markets itself as a destination attraction ... "Sports Capital of Texas" ... think multipurpose complex, Kalahari Resorts and Convention Center, Dell Diamond etc to keep its downtown so clean and attractive by taking that money and paying for daily cleaners to sweep, pick up garbage etc ... every day. In other words, crews of city staff clean downtown every day funded by hotels, NOT local residents/tax payers. Cedar Park has the HEB Center etc ...

2. Impact Fees

What is an impact fee? An impact fee is a fee imposed by a local government within the United States on a new or proposed development project to pay for all or a share of the costs of providing public services. Such fees help to reduce the economic burden on the local jurisdiction that will see population growth as the result of the new development.

How do impact fees work?

An impact fee is usually a one-time payment that is imposed by a local government on a property developer. They’re often a popular alternative to raising property taxes as a way to pay for new infrastructure. Although new public services can be paid for with a special assessment tax, people who already own property in the area would often rather see a developer pay a fee than have their tax rate increase. In this case, the developer, not the existing taxpayers, would be forced to cover the cost of the new infrastructure necessitated by their development. This would include things like the cost of adding power lines, sewer lines, water lines, curbs, wastewater costs, and other utilities needed for new development ("growth pays for growth").  

Other Fees (Fines and Forfeitures)

States and local jurisdictions can charge various fees to cover costs and protect taxpayers, including:

- Fines and Fees: These include parking tickets, speeding tickets, and court-imposed fees for administrative costs and criminal justice-related charges.

- Benchmarking Fees: Establishing individual fees with comparable jurisdictions can guide setting rates and differentiating service levels.

- Shift in Financial Costs: Many jurisdictions charge fees to shift the financial burden of the justice system from taxpayers to those who incur costs.

How do state and local revenues from fines, fees, and forfeitures work?

Fines and fees include parking tickets and speeding tickets (including those from traffic cameras), court-imposed fees used to cover administrative costs and other criminal justice-related charges and penalties. A forfeiture is when the police seize property that is believed to be connected to a crime. (The US Census Bureau excludes library fines, sales of confiscated property, and any penalties relating to tax delinquency from these totals.)

Although fines, fees, and forfeitures typically constitute a small share of the overall revenue that states, cities, and townships collect, these financial penalties can have disproportionate impacts on communities.

Which localities are most reliant on revenues from fines, fees, and forfeitures? In general, smaller cities and townships tend to rely more heavily on fines, fees, and forfeitures than larger cities. On average, cities with populations under 100,000 raised 2.6 percent of general revenue from fines, fees, and forfeitures in the last decade, while cities with populations over 100,000 collected 1.6 percent from fines, fees, and forfeitures.

3. Consumption Tax

A consumption tax is a tax imposed on the purchase of goods and services, essentially taxing individuals and businesses when they spend money rather than when they earn it.

Here's how consumption taxes work and what forms they take:

Tax Base: The tax base for a consumption tax is the amount of money spent on goods and services.

Collection: Consumption taxes are typically collected by the seller at the point of sale and then remitted to the appropriate government agency.

Types of Consumption Taxes:

Sales Tax: A percentage added to the sale price of goods or services at checkout, commonly seen at state and local levels in the United States. Texas sales tax is 6.25% and Round Rock, for example, is 2% (projecting to account for $112M in Round Rock revenues in 2026). Dell is the largest sales tax revenue provider as the sales of its products all over the world are considered Rock Rock revenues as the headquarters is in Round Rock. This amount also includes online shopping of items shipped to Round Rock (Kalahari, Walmart, HEB, and IKEA are also major contributors of sales tax to Round Rock).

Value-Added Tax (VAT): A multi-stage tax applied at each step in the supply chain of a good or service, collected on the value added at each stage. Businesses can often claim credits for VAT paid on their inputs, with the final consumer ultimately bearing the cost. VATs are common in over 170 countries but not at the federal level in the U.S.

Excise Tax: Taxes imposed on specific goods, services, or activities, such as alcohol, tobacco, or gasoline. These may be included in the product's price and sometimes aim to discourage consumption of certain items, according to Bankrate.

Use Tax: Applies when a consumer buys goods from out-of-state without paying local sales tax and then uses, stores, or consumes the goods in the state where the use tax is levied.

Tariffs/Import Taxes: Taxes levied on goods imported from other countries, typically passed on to the consumer and intended to encourage support for domestic manufacturing.

Sales Taxes on Non-Essentials

These kinds of sales taxes are levied on products or services that are considered non-essential or could even be considered harmful, such as tobacco, alcohol, drugs and gambling. These taxes can be imposed at both the federal and state level as excise taxes. These taxes may be applied at the point of sale, or they can be levied on manufacturers, wholesalers or retailers who then generally pass along the cost to consumers. The legalization of marijuana in many states in recent years is a clear example of how state governments can use selective non-essential taxes to generate new revenue streams. Washington, for example, levies a 37 percent tax on retail sales of marijuana. By imposing steep taxes on marijuana purchases, states can use this money to fund public services.

Fun side note: The concept of this kind of tax was actually introduced by Adam Smith, author of “The Wealth of Nations,” way back in 1776. Smith believed that cigarettes, sugar and rum should be taxed, as these goods are not essential products for life but are widely consumed. None other than Alexander Hamilton proposed the first excise tax on whiskey in 1790. During the Civil War, the federal government first implemented a tax on tobacco products.

Other examples of 'nonessential' goods / services that consumption taxes can be applied to that pays for services not necessarily as a burden on those receiving/needing those services: - vaping - cannabis - hemp - and other non-necessities, such as luxury goods etc.

4. Big Bonus: Public/Private Partnerships (PPP or P3)  

According to the National Council for Public-Private Partnerships, a P3 is defined as: “A contractual agreement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility."

In other words, a public-private partnership (PPP or P3) is a collaboration between a government agency and a private-sector company to finance, build, and possibly operate public benefit projects. Financing a project through a public-private partnership can allow a project to be completed sooner or make it a possibility in the first place. It could also leverage subject matter experts in operating a public benefit more effectively and possibly even more cost efficiently.

Key Takeaways

Public-private partnerships allow large-scale government projects, such as roads, bridges, or hospitals, to be completed with private funding and therefore does not put the burden on the tax payer. These partnerships work well when private-sector technology and innovation combine with public-sector incentives to complete work on time and within budget. Despite their advantages, public-private partnerships are often criticized for blurring the lines between legitimate public purposes and private for-profit activity, and for perceived exploitation of the public due to self-dealing and rent-seeking that may occur. This is why the funding and operations oversight and monitoring MUST be as transparent to the public as any other (government funded) project ... with open meetings on proposals, project statuses, open accounting books and practices, etc ...

So the private partner participates in designing, completing, implementing, and sometimes funding and operating part of the project, while the public partner focuses on defining and monitoring compliance with the objectives and public transparency. Infrastructure is a common PPP example.

However, there are many others (another blog for another time).

A VERY important note about PPPs: The PPP model can be a valuable tool for the public sector, as long as government officials understand the complexities and risks involved. Allocating risk and responsibility to a private-sector partner is just as complex as directly running every aspect of a project. In many cases, it is more complex. Every PPP is different, as is every market environment; properly assessing the risks and getting each contract right matter.

Final Side note: All these tax examples are pointed out here because they do not tax earned income directly which many Americans are against. In fact, there has been a lot of research done beyond just the taxes above as ways to leverage tax revenues not collected through earned income that can, however, pay for services needed by taxpayers. Some examples below ...

A better way to tax unearned income

Therefore, if municipal (and state) tax policy focuses on the above, enough revenue could be generated to not have to raise property taxes, sales taxes on necessities like fuel and groceries, and/or income taxes to improve essential public services even if your area is growing.

Better yet, there may come a time (if managed properly) that the overall tax burden to Williamson County citizens COULD be responsibly lowered ... such as repealing the regressive payroll tax etc which is more of a federal responsibility (so that is another blog for another time).

So, what do you think? Can you think of any other types/examples? Please let me know! I'd LOVE to hear what you think?