The nation’s 50 largest cities have more diverse revenue streams than other local governments and can be a model for more equitable tax collection in smaller communities, according to a report the nonprofit Institute on Taxation and Economic Policy released last month.
The work is a follow-up to ITEP’s 2024 analysis, which found that most local governments rely primarily on property taxes for funding.
“Smaller cities and municipalities often look to big cities for policy ideas, tax policy included,” the new report notes. “This analysis shows that larger cities already have more flexibility in the taxes they levy than is commonly recognized — a flexibility that local officials should utilize to design fairer tax systems.”
Property taxes are the No. 1 source of city funding in about half of the nation’s 50 largest cities, the report finds, with the median big city funding 53% of its budget through that mechanism. On the high end are Boston, Milwaukee and Minneapolis, which each get at least three-quarters of their revenue from property taxes.
Consumption taxes, which the report defines as sales taxes plus gross-receipts taxes and excise taxes on things like alcohol and tobacco, provide the majority of revenue for 15 of the 50 biggest cities, the report finds.
That’s good news, ITEP Senior Analyst Rita Jefferson, the report’s co-author, told Smart Cities Dive. “Sales taxes on necessities can make up a larger portion of lower-income people’s incomes, even if higher-income households are spending more dollars on sales taxes,” she said.
Property taxes have traditionally been considered more equitable than consumption taxes, Jefferson said, but as property taxes rise faster than household incomes, “it seems like the housing market is becoming more disconnected from how people make money. Property taxes are theoretically proportional, but in practice property taxes are fairly regressive.”
Cities and states increasingly are considering legislation to reduce or eliminate property taxes, Jefferson said, which might result in a pivot more to sales taxes.
But to be truly fair and progressive, the report concludes that cities should rely more on income taxes than either property or sales taxes. The report found that only three cities — Philadelphia; Columbus, Ohio; and Louisville, Kentucky — get the largest share of their revenue from income taxes and only five others — Baltimore, New York, Indianapolis, Detroit and Kansas City, Missouri — get any revenue from income tax.
“Many of the largest cities in the U.S. are precluded from having as progressive a tax system as their residents would prefer, often due to state law restrictions that limit the opportunities to tax high-income and wealthy residents and businesses,” the report notes. “If states allowed more cities to collect income taxes, they would likely do so.”
