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Cities Dig for Profit by Penalizing the Poor

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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During last summer's riots in Ferguson, Missouri, reporters began to highlight one reason that relations between the town's police and its citizens are so fraught: heavy reliance on tickets and fines to cover the town's budget. The city gets more than $3 million of its $20 million budget from "fines and public safety," with almost $2 million more coming from various other user fees.

The problem with using your police force as a stealth tax-collection agency is that this functions as a highly regressive tax on people who are already having a hard time of things. Financially marginal people who can't afford to, say, renew their auto registration get caught up in a cascading nightmare of fees piled upon fees that often ends in bench warrants and nights spent in jail ... not for posing a threat to the public order, but for lacking the ready funds to legally operate a motor vehicle in our car-dependent society.

So why do municipalities go this route? The glib answer is "racism and hatred of the poor." And, quite possibly, that plays a large part, if only in the sense that voters tend to discount costs that fall on other people. But having spent some time plowing through town budgets and reading up on the subject this afternoon, I don't think that's the only reason. I suspect that Ferguson is leaning so heavily on fines because it doesn't have a lot of other terrific options.

Leaving aside sundry sources of revenue that the city doesn't have that much control over, like grants and interdepartmental fines, Ferguson gets most of its revenue from the following sources, with the richest revenue sources at the top and the smallest at the bottom:

  • Sales taxes;
  • Fines and public safety;
  • Franchise taxes;
  • Property taxes; and
  • Licenses and service fees.

Basically every major category of tax revenue has fallen since the recession, with the exception of a new property tax levy that was passed by proposition and earmarked for the creation of a community center. They could increase it again, of course. But Ferguson is not exactly a thriving property market; a look at the listings reveals an ocean of foreclosures, at least a couple of which were listed for less than the price they fetched in the 1990s.

Towns like Ferguson are caught in a bind. The state often regulates how they can collect things such as sales taxes; their property market is notso hotso; and ratcheting up things such as franchise taxes may encourage local businesses to move across the town line, taking their franchise taxes and their landlord's property tax assessment with them. Even if it were feasible, an income tax on the not-so-wealthy population would be expensive to administer and unlikely to yield vast revenues. 

People who have expressed outrage about these sorts of financing arrangements generally seem to be imagining that there's a simple alternative: Raise taxes instead. But the tax base in these towns looks none too robust, so the alternative to fines might not be higher taxes on the wealthy, but rather sharp cuts in services.

Let me be clear: Using the court system as a revenue source is a terrible way for a town to make money. But it's not surprising that towns turn there when they are out of all the good ways to do so. Public order violations have a lot of attractive features for a desperate town council, including the fact that you can collect them from people who don't live there.

To reiterate, I'm not saying that this is OK. I don't think that court fees should be assessed in criminal cases, unless maybe in the case of egregious repeat offenders who clearly aren't trying to avoid a day in court. Law is the price of a decent and orderly society, and therefore that price should be paid collectively. If Ferguson cannot balance its budget without a Kafkaesque system of fines and penalties, then it should cut spending. For example, it would probably need fewer police (half their personnel expenditure and a quarter of the total budget) if it weren't writing so many tickets.

But looking at the mess of tiny, far-from-affluent municipalities in St. Louis, I'm not surprised that many are leaning so heavily on this revenue stream -- in fact, I'm surprised that the numbers are so modest.

Missouri state lawmakers are considering a law that would limit the percentage of a town's budget that can be collected from these sorts of fines. That's a good start. But unless it's accompanied by broader fiscal reform that shrinks budgets and gives towns like Ferguson alternative sources of revenue, the end result will be a kinder, gentler city government ... in bankruptcy.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net