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Keeping Up with Inflation: Strategies for Increasing Revenue to Keep Up with Cost Increases

Keeping Up with Inflation: Strategies for Increasing Revenue to Keep Up with Cost Increases

One of the strategies cities can use to maximize revenue potential is to ensure they are getting all the revenue they can from their existing revenue sources. For cities in Washington the three largest revenue sources are property tax, sales tax, and utility taxes. For the most part, cities have very little influence on the amount of revenue that is generated from these three sources to cover current and future costs.

Property Tax

Property taxes are limited to 1% increases each year if the levy is already at its maximum. Unused property tax levy capacity should be “banked” for future use if council decides to not levy the full 1% increase in any given year. Cities will also receive an increase in assessed value due to new construction. New construction can have a significant impact on the property tax revenues to be received, therefore it is important that the city’s permitting activity be transmitted to the county in a timely manner. Communication with the county assessor’s office about how and when they would like to receive the permitting data will benefit the city in terms of capturing the value of new construction in ensuing fiscal periods.

Retail Sales Tax

Retail sales tax has its own unique set of challenges. Cities that have the technical ability and staffing will benefit from auditing sales tax data received each month from the Washington Department of Revenue (DOR). If the budget will allow, securing the services of a third party company to audit sales tax data can be very beneficial. Cities that share a zip code with unincorporated areas, or that have a zip code shared with another neighboring city, might occasionally find vendors who use an incorrect location code when reporting and remitting sales and other taxes to DOR. DOR will work with vendors and, if necessary, process corrections to the location codes used by vendors for taxes reported incorrectly. Utilizing technology to combine sales tax data with GIS functionality might make it easier and more efficient for cities to visually audit vendor reporting to DOR.

Utility Taxes

Utility taxes have statutory limits on some of the tax rates. The city has the ability to increase taxes on its own utilities and to exceed the statutory limits on the other utilities with voter approval. One thing cities can do to make sure they are receiving the correct revenue is to conduct an audit of third party utility providers. Utility tax ordinances typically give cities the ability to audit the records and accounts of the utility providers. There are consultants available that specialize in auditing these utility providers. Some have been known to perform the audit on a revenue recovery basis, meaning they get paid out of, and only if, they identify additional utility tax revenue that the city should have been receiving. Conducting such an audit every few years is suggested and represents due diligence on the part of the city to collect all of the revenues that are due.

An additional factor associated with utility tax is the timely notification of annexations. This will ensure that the city receives utility taxes for the area annexed. MRSC has an excellent publication, Annexation by Washington Cities and Towns, which outlines many aspects of the annexation process and implications of annexations. It also details revenue impacts of annexations and timelines for notification of the state and others.

Other Sources

Other sources of income can be realized as a result of cost analysis. Use of a cost allocation plan can be very beneficial and allow for the sharing of indirect costs such as administrative overhead. Fees that are tied to cost recovery, like development-related permitting, plan review, inspections, etc., can be supported to the council, auditors, and others if a formal cost allocation plan exists. RCW 43.09.210 requires funds and departments receiving service from another fund or department to pay the “true and full value” of the service being provided. Insuring that cost-based fees are recovering the full cost of the services provided is another way for cities to maximize revenue potential. Not only should direct costs, such as labor and benefits, supplies, and professional services, be included in the fee calculation, an allocation of other overhead costs should occur as well. For instance, the cost of payroll services provided, human resources, city clerk costs, etc., can be allocated to the planning department and included in the fee calculation for inspection services charged to developers. This cost allocation must be developed using a fair and rational basis for allocation. A formal “cost allocation plan” is one of those ways to support these costs.

Another method cities can use to increase revenue to keep up with cost increases is to index revenue, typically expressed in terms of rates charged to customers or citizens, according to changes in the Consumer Price Index (CPI). Cities that charge a flat fee or sliding scale for services provided, rather than charging based on actual costs, could index these fees to CPI to capture at least a portion of the associated cost increases for the services provided. Having a floor and ceiling for the changes, such as a minimum of 1% up to a maximum of 5%, would insure that there would be some kind of revenue increase. While the council can link future fee increases to changes in CPI, they still retain the ability to make, amend, or repeal the ordinance at any time in the future if needed.

While the opportunities for making changes to revenue are limited, there are steps cities can take to ensure they are receiving all the revenue they should be and that they are receiving it in a timely manner. These steps are part of being good stewards of the public’s resources, particularly when done prior to going to the voters to request additional or new taxing authority. 

MRSC is a private nonprofit organization serving local governments in Washington State. Eligible government agencies in Washington State may use our free, one-on-one Ask MRSC service to get answers to legal, policy, or financial questions.

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About Shawn Hunstock

Shawn Hunstock writes for MRSC as a Finance Advisor.

Shawn Hunstock, CPA is the Finance Director for the city of Maple Valley. Prior to joining Maple Valley in 2013, he worked as the Finance Director for the cities of Edmonds and Tukwila, as well as the Assistant Finance Director for the city of Auburn. Shawn is the President of the Puget Sound Finance Officers Association and represents WFOA on the State Auditors Office Local Government Advisory Committee. Shawn also serves on the WFOA Legislative & Professional Standards Committee and Education Committee. Shawn is one of a handful of Finance Directors who services on the Association of Washington Cities Ad-Hoc Committee on Municipal Finance, which advises the AWC Board of Directors on legislative priorities. Shawn's previous experience includes over 22 years of public sector financial management in state and local government, as well as higher education, and public accounting experience at an international CPA firm.

The views expressed in Advisor columns represent the opinions of the author and do not necessarily reflect those of MRSC.