Local revenue structure under economic hardship: reliance on alternative revenue sources in California counties

Abstract

This article investigates how a worsening economy affects local revenue structure, and whether the impact is moderated by the fiscal relationship within higher levels of government. The revenue potential of nontax sources – fees/charges and fines/forfeitures – is considerable for local governments under economic hardship. With the panel data from California counties over a period of 11 years (2000–2010), this article shows that reliance on nontax revenue largely depends on the economic and fiscal factors that vary across counties, and the effect of economy is contingent on local dependence on intergovernmental transfers. Counties are likely to raise nontax revenue when the economy worsens and their transfer-dependence increases, while the marginal effect of the economic indicators changes from negative to positive as transfer dependence increases. This article illuminates the characteristics of the two types of nontax sources in terms of the mechanisms of incentivising human behaviour and concludes with policy implications for researchers and practitioners.