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Chapter Summary

Frug, Gerald E. and David Barron. 2008. City Bound: How States Stifle Urban Innovation. Ithaca, NY: Cornell Univ Press. (Chapter 4)

States govern the way that cities are able to raise funds by legislating property taxes, tax diversity, fees, various forms of state aid, and expenditure procedures. In Chapter 4, Frug and Barron explain how these fiscal measures help states limit the autonomy of cities.

Once again turning to the case of Boston, our authors indicate that the state of Massachusetts places strict controls on the amount of property tax that a city can collect, the maximum rate of annual allowable tax increase, and the tax scales between different classes of property. Similarly, roughly one quarter of Boston is comprised of state-owned land, which is tax exempt. These regulations are especially important in Boston because the city relies on property taxes for the vast majority of its revenue. Yet, such restraints on the freedom to tax are hardly limited to Boston.

State control is present in other tax mechanisms as well. Because Boston lacks home-rule taxing authority, it cannot levy taxes against non-residents who utilize city services. Although some cities can generate a separate income tax, states often place strict limits on city-based targeted taxes. These taxes are levied on specific activities and usually require authorization from the states by statues.

Similarly, Frug and Barron illustrate that fee controls are another way that states exercise power over cities. In Boston, the city government has the authority to collect fees for select city services, but state enabling legislation dictates that these fees must be purely compensatory in nature; they cannot be used to raise excess revenue. Even if a fee meets this standard, it can be invalidated if it conflicts with a state statute.

Since its revenue-generating procedures are so constrained, Bostons reliance on state aid has become a critical component of its budget and thus demonstrates the power states have over cities. Our authors argue that such a reliance presents an accountability issue. If the state reduces aid to the city, Boston only has two options: decrease services or increase taxes. Both options hurt Boston politically and economically.

Finally, states also control how cities spend the funds that are generated or received. Massachusetts, by placing limits on Bostons borrowing ability, has spared it from the high cost of debt payments, but has limited its fiscal flexibility. Massachusetts state law also governs the level of retirement and healthcare benefits available to city employments. Some cities, like Denver, have control have control over employee pensions and benefits through home rule authority. In sum, each of these instances demonstrates how local government decisions and abilities to act are greatly impacted by the control that their respective state governments exert. This control can be used to compliment the agenda of the city, but in most cases it is seen as a constricting framework that forces city officials to find creative solutions to solve their fiscal issues.