Municipal User Charges in the Era of Tax and Expenditure Limitations

Abstract

User charges have emerged as one of the major revenue sources for municipal governments in the United States since the late 1970s. Meanwhile, a majority of states have adopted tax and expenditure limitations (TELs) in an attempt to constrain the revenue and spending levels of local governments including municipalities. In the era of TELs, how user charges perform their multiple roles in promoting local autonomy, political accountability, allocative efficiency, horizontal equity, and responsive government deserves considerable attention in the field of public finance. This dissertation explores the causes and consequences of the increased use of user charges by American municipalities.

First, I provide an overview of fiscal trends in American municipalities. Chapter 1 discusses the context in which municipal revenue policy is made, the definitions of user charges, the salience of the issue, and the aims and organization of the dissertation.

Chapter 2 investigates the effect of TELs on municipal reliance on user charges. The analysis is based on a sample of 724 cities for the period of 1970 to 2004. I employ fixed effects regression techniques to help control for the unobserved city-level characteristics that vary across cities but are time invariant. Results indicate that the implementation of TELs leads to a substantial increase in per capita user charges. The effect becomes even more pronounced when the endogoneity of TELs is taken into account using a two-stage least squares model. This finding implies that TELs may have unintended consequences and lead to a bigger government. Results also suggest that the restrictiveness and the number of TELs make a difference and different types of TELs generate varying effects on user charge reliance.

Chapter 3 examines the impact of user charge financing on municipal expenditure levels. Using a panel of 686 cities for the sewer service and 715 cities for the parks and recreation service between 1972 and 2004, I find strong evidence that a greater reliance on user charges to finance government services leads to a reduction in municipal expenditures. Finally, I conclude with a discussion of policy implications in Chapter 4.