Little Leviathans Everywhere

Little Leviathans Everywhere

Why you probably weren’t aware of the fastest growing type of government in America
Stephen Slivinski
By

If you ever wanted to create a government that could tax people but didn’t want to fuss with the hassle of taxpayer accountability and voter-approved limits on budget growth, you’d probably create something that looks a lot like what we know today as a “special taxing district.”

Dating back to the New Deal – when the federal government enticed local politicians to create these mini-governments on top of traditional existing municipal and county governments, all for the sake of pulling down more federal swag – these government entities would by the 1970s take on a life of their own. In 1952, there were a little over 12,000 of these mini-governments – about 10% of the total number of local government units in the U.S. By 2012, there were over 38,000, comprising over 40% of local government units. Or, to put it another way, during a 60-year period when the total number of governmental units was actually shrinking – there are fewer school districts today due to consolidation, for instance – these little shadow Leviathans reproduced and grew with very little notice by most taxpayers.

Usually created by a county or city to levy a new tax – often a property tax or sales tax – these districts provide a specific service that most taxpayers probably assumed their local government was already providing, or might even be more efficiently provided by a private company. (In some cases, these services were indeed provided by a local government before they were spun-off to one of these mini-governments for political reasons as we’ll see later). Fire departments, libraries, parks and utility services are the most common examples. But there are thousands of districts that have been created to fund projects that don’t have a broad public purpose and instead mainly benefit private interests, like the building of shopping malls, parking lots, and sports stadiums.

And special district tax burdens were the fastest growing real per capita tax burden – faster than all other levels of government, federal, state, and local – between 1952 and 2007, the most recent year for which we have complete data. Today, the average special districts costs an average household nearly $800 each year.

What explains the growth of these shadow Leviathans? Political factors. These governments are not usually subject to the constitutional spending and debt limits municipal government often face. Not surprisingly, this has encouraged local governments to circumvent those limits by creating more special districts.

To see why, consider how the budget process works in a state with a spending limit. In those places, local governments would have to weigh the spending trade-offs every year: Do we increase spending on fire services in exchange for lower spending elsewhere? But if special districts are exempt, you’d expect that local policymakers could avoid this painful discussion simply by spinning off government functions to these new mini-governments (many of which have appointed non-elected boards alongside a government-granted power to tax).

And that’s exactly what they’ve done. The average number of special districts per 100,000 people in states without constitutional budget limits is 12.9. For states in which there is at least one type of expenditure or property tax limit, the average is almost twice as high (25).

That’s not to say that spending limits are bad. What it means is that many local spending limits are poorly designed and porous. And when local politicians discover they can expand government spending off the books – often without the notice of a large number of constituents – they get very creative and eager to create many new quasi-governments to feast off the same tax base without most voters realizing it. Doing so also frees up space under existing budget caps to expand government further in the remaining on-budget categories. Big government begets more big government.

Less accountability and transparency to taxpayers and voters is also a common attribute of special districts – a feature, not a bug, as supporters of these districts view it. Sometimes the only inkling taxpayer have of their existence are vague descriptions on their property tax bill. And good luck to those brave enough to seek out a balance sheet or financial audit of these districts. In many states, the transparency requirements that apply to traditional governments have failed to reach these shadow Leviathans.

Their bond and tax hike elections are often purposely timed for non-traditional periods, such as odd-numbered years or during the summer, when special interests – mainly unions – can rally their supporters to control the outcome. National studies of special district elections show that voter turnout rarely exceeds 20 percent. When the elections are held in November, on the same ballot as traditional government elections, the numbers change. For example, when Sacramento County, California required its special districts to hold elections in even-year general elections after decades of odd-year elections, voter turnout increased to an average of 45 percent of registered voters from the prior average of 17 percent. As a general rule, bond referendum and tax hikes tend to pass more frequently on low turnout, non-traditional election dates. This fact is not lost on those who create and run these special districts.

The opaque nature of special districts has given cover to oversized government salaries, generous and unsustainable pension guarantees, and less efficient provision of services. To name just a few:

  •  Fire fighter salaries and benefits in California are much higher than they likely would be if they were subject to the fiscal checks and balances of other municipal government services during a normal budget process. The California State Controller’s office recently released information that indicates the special fire districts in at least Santa Barbara County, Contra Costa County, and San Mateo County paid out what the Sacramento Bee described as “extravagant pay.” Over 70 percent of the fire fighters surveyed made well over $100,000 a year including benefits, over twice the median income for their respective service areas. This is consistent with other academic studies conducted of fire districts that found, even after adjusting for capital costs of building a fire station and purchase fire trucks, these districts were more expensive in per capita terms than the services provided by traditional general-purpose municipal governments.
  • Library districts are notorious for having large budgets but lower levels of service when compared to other municipal libraries or private collections. Analysis of over 100,000 library districts across the nation by two University of Chicago professors that library districts spend significantly more than other types of libraries and yet they actually have fewer books. In fact, library districts spend more per patron visit than comparable municipal libraries. Where does the extra money go? Salaries and benefits most likely.
  •  A study of park districts in 10 midwestern states found that, in per capita terms, they spent nearly three times the amount on average than was spent by conventional municipal parks and recreation departments. Yet the average park district provides fewer park facilities, recreational programs, and a smaller acreage of overall parkland.
  • Water districts provide an interest comparison, too. A study of 26 rural Nevada water districts concluded that the utility services offered by these special districts were less efficient than those offered both by comparable municipality-operated water utilities and significantly less efficient than private ones.

Luckily, there are a number of policy reforms that local leaders can make to remedy these problems – assuming they have the courage to do so, particularly when pursuing such reforms can run afoul of powerful union interests.

The most obvious reform is privatization of many of these special district services. This would shift them to a fee-based system instead of a tax-based one, and would also encourage more competition between providers or, at the very least, encourage more efficient provision of services than government provisioning. An outright ceasing of new special taxing districts that are set up to subsidize the costs of private projects – like the construction of sports stadiums or shopping malls – would also be prudent.

But even if special district operations are kept intact, there is no compelling reason to treat them differently than other governmental units – and that means applying all the same rules about transparency and accountability to them:

• States that have a fiscal transparency database in which taxpayers can track every dollar taxed and spent by every layer of government should also include special districts.

• Special district elections should occur on the same ballot and the same day as traditional government elections in November.

Some of the most effective controls would be those that directly influence how these districts operate and even whether they should exist at all. One idea would be to create a standing rule – perhaps a state constitutional provision – that limits the number of governmental units with taxing power within a particular jurisdiction, like a city or town. This limit on the total number of “masters” lording the tax sickle would give municipal officials reason to re-assess the number of special districts that exist, determine whether they should exist, and consider options to reform, terminate, or privatize those services.

Finally, perhaps the most direct positive influence on how any remaining special taxing districts operate would come from applying a simple and effective check on government growth: change the constitutional limits that apply to traditional government taxing and spending to explicitly include special taxing districts as well. (And, it should go without saying, that if a state doesn’t have such a limit, they should create one.) Not only would this limit the overall growth in the tax burden – which we’ve already seen are multiple times the growth rates of other levels of governments – but it would force special taxing districts to function the way other governments with the power to tax are required to operate.

Surveying in retrospect the victories of the taxpayer revolt that began in the 1970s and was aimed at controlling the growth in state and local government, the constitutional limits put in place have been quite successful at restraining the tax burdens at which they were targeted. But one target has escaped – special taxing districts. Putting our eye back on these little Leviathans can be a next step in the quest to place government back within suitable boundaries.

Stephen Slivinski is senior economist at the Goldwater Institute. This piece is adapted from his January 2014 study, “Out of Sight: How Special Taxing Districts Circumvent Spending Limits and Decrease Accountability in Government.” You can follow him on Twitter at @sslivinski

Stephen Slivinski is senior research fellow at the Center for the Study of Economic Liberty at Arizona State University and contributor to The No Water Economists blog.
Photo Zack Warburg
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