City governments rely heavily on property taxes to fund a variety of services. In addition to being a major source of revenue, property tax also provides the local government entities to have some degree of control on changing it to levels that become necessary, adhering to state mandated codes. Cities that have a robust property tax base usually tend to be in good financial condition and those that have limited property tax base are restricted in their ability to provide services and make long term capital improvements. While other revenue sources like local option sales tax, user charges and fees are available, they are not as reliable and steady as property tax as a source of revenue.
In an effort to track fiscal health of Iowa municipalities, through the Iowa Government Finance Initiative, we have created two indexes – fiscal capacity and fiscal effort. These indexes were first used by the United States federal government in the 1960’s to make comparison between states on their overall fiscal health. Using the same concept, we have adapted it to help understand the fiscal health of Iowa municipalities.
In developing the two indexes, we have used city-level data on total property valuation, population and city-levy rates. The 945 cities in the state have been divided into following groups: > 50,000; 25K-49, 999; 10K-24,999; 2.5K-9,999; 500-2,499; and < 500.
Fiscal Capacity Index
For each of the subgroups, we have estimated the per capita valuation for each city by taking the ratio of its total property valuation and the population for the same year. Based on the sum of the total valuation of all the cities and the total population of all the cities, per capita valuation is then calculated for each subgroup.
To arrive at the fiscal capacity index, we use the ratio of the per capita property valuation for each city to the per capita valuation of the corresponding subgroup. To create the index, the ratio is multiplied by 100.
The fiscal capacity for each subgroup is 100. If a city has a fiscal capacity value greater than 100, it simply indicates that relative to the group, that particular city has a relatively higher per capita valuation. If the index for a city is less than 100, it indicates that relative to the group, that city has a lower per capita valuation.
Fiscal Effort Index
Fiscal effort is he ratio of each individual city’s per capita levy to the levy it would generate by using the group levy rate. Per capita levy is the ratio of the total property tax revenue in a particular year and its population. The group levy rate is determined by taking he ratio of the sum of all the property tax revenue to the taxable base of that group.
The fiscal effort index for each group is 100. If a city has an effort index of greater than 100, it indicates that the levy rate in that city is relatively higher than the group average levy rate and vice versa.
We use a combination of the capacity and index to define fiscal health. Four scenarios are possible based on he two indexes.
(1) represents a case of fiscal comfort.
(2) represents a case of fiscal stress
(3) represents a case of over reliance on property tax revenue (lack of adequate alternate revenue sources)
(4) under-reliance on property tax revenue (higher level of local option sales tax might allow a city to keep property tax rate low)
Use the link below to access the fiscal capacity and effort index for all 945 cities in Iowa, FYE 2014.
Questions can be directed to Biswa Das at email@example.com