Cities Refill Coffers With 'Stealth' Taxes

In Little Rock, Ark., residents now pay a surcharge on long-distance calls.

In Westbrook, Maine, vendors who sell tobacco must pay a fee to the city.

In Oakland, Calif., residents have to pay taxes on their cable TV service.

As politicians at the national level woo voters with the promise of tax cuts, cities around the country are quietly imposing new levies in hopes of raising much-needed revenue.

By targeting visitors, who hold no political threat, and previously exempt groups, city leaders are trying to fill coffers without kicking up a firestorm of opposition.

The moves are being driven in part by pricey projects and federal budget cuts that have left local governments with bigger bills for housing, health care, and social services.

A slowdown in revenue growth is also pushing cities to find new funds. A recent study by the National League of Cities found that municipal revenues are growing at just 0.7 percent a year. A decade ago, revenues were growing at nearly four times that rate.

Meanwhile, dozens of cities are adding expensive new sports venues. To pay for the new stadiums and other costly projects, local officials are relying on a spate of new taxes on things like admissions, restaurants, and parking, as well as increasing fees on everything from solid waste removal to ambulance rides.

"Cities don't want to hike property taxes because they are one of the least popular taxes, and they are considered to be regressive," says Anita White of David M. Griffith & Associates, a Northbrook, Ill.-based consulting firm. Ms. White adds that many cities are already at or near their legal limits for sales taxes.

Tariffs for travelers

A common solution has been to raise taxes on visitors, particularly those who rent cars. According to a study released in January by the Travel and Tourism Government Affairs Council, the 50 largest cities in the US charge an average of 8.24 percent on car rentals. In June 1994, the average rate was 7.23 percent - a jump of 13 percent in 18 months.

Rental cars are getting the brunt of the new taxes because rental tariffs are relatively low when compared to other segments of the tourism industry, says Rick Webster, the director of governmental affairs for the Washington-based travel group.

"Most cities have maxed out their hotel rates," says Mr. Webster. "The highest cities are charging 14 and 15 percent, and they know they can't go any higher. So they see the growth potential in rental car taxes, which are generally lower." According to a study by Webster's group, the cities with the highest car rental tax rates are Chicago (18 percent), New York (13.2 percent), and Las Vegas (13 percent).

Seattle, Atlanta, and Tucson have hiked car rental taxes to pay for new stadiums, a move that angers Webster. He says politicians see auto rental taxes as "an easy way to pay for projects that their own citizens won't pay for. Why risk turning away visitors who provide jobs and billions of dollars in spending? It's an abuse."

Abusive or not, cities often must get state approval before they can hike local taxes. Small cities in North Carolina are hoping to push a bill through their state legislature that will allow them to implement a menu of taxes, including local income taxes.

In Texas, Dallas, Houston, and San Antonio will soon begin lobbying the legislature for permission to implement parking, admissions, and sales taxes. The three cities need new revenues to build new sports venues.

Targeting outsiders

Michael Pagano, a political scientist who analyzes fiscal trends for the League of Cities, says cities will try to get more revenues from nonresidents and nonprofits. Colorado residents, for instance, vote today on Amendment 11, a controversial proposal to lift property tax exemption given to churches and nonprofit groups.

Pagano says many cities now have a "head" tax, which allows them to collect taxes from suburbanites. "When people come in to work from the suburbs, they expect police and fire protection." With a head tax, he says, city residents don't have to subsidize protection for non-residents.

Tax-exempt entities that use city services but don't pay property taxes are also being targeted. Pagano points to McKeesport, Penn., which levied a fee on tax-exempt property in 1991 and now generates about $120,000 a year. The idea, he says, is to ensure that nonprofits pay their fair share of city services. "Nonprofits are important because they are an untapped revenue source," says Pagano. "We will see a lot of that in the future, particularly in cities with a high concentration of hospitals, universities, and state government property."

In Little Rock, Ark., the search for new revenue sources will continue. The city now takes in more than $1 million a year from the fee it charges on long-distance calls and doesn't expect to do away with it anytime soon.

"That's a million dollars we'd have to find somewhere else," says city comptroller Jim Chandler. "We are always looking for more money."