An optimal mix of revenue sources

5.3 An optimal mix of revenue sources

There is no optimal mix of revenue sources that applies to all metropolitan areas. Not only do conditions in different metropolitan areas vary hugely, but expenditure and revenue assignments differ across metropolitan areas. This implies different financing needs and different possibilities to introduce fiscal incentives. The challenge is to identify which mix of revenue sources suits which set of conditions in cities. In general, metropolitan areas can most easily influence fees and grants; have some influence over tax rates, but less on tax design; and have hardly any influence on grants from higher levels of government.

Metropolitan areas could make more use of fees and charges as instruments to influence behaviour. As they confront users with the real costs of their choices, they could reduce inefficient use of resources and limit sprawl. Fees and charges will be most effective when they cover all costs of the service provided to individual users, and less effective when costs are equalised among all users. Development charges and value capture taxes could finance the construction of new infrastructure needed to serve new suburban developments, whereas transport-related revenue sources (fuel taxes, congestion charges, parking fees) could charge for the use of the infrastructure. Fees and charges could be considered appropriate fiscal instruments regardless of specific conditions, although they are not always easy to introduce, with total or area-specific cost coverage often politically sensitive.

Transport-related revenue sources, such as parking charges and congestion charges, are inter-related and would need coherent planning. Local fuel taxes or parking charges have effects that are somewhat similar to a congestion charge, taxing car use rather than car ownership, but they are less refined

instruments because they cannot be used to regulate congestion or be adjusted to vehicle emissions. Elasticities of parking charges are in many cases similar to those found for congestion charges, especially when parking charges are smartly designed. Taxes of this kind are however easier to implement than a congestion charge, because they require no investment in a charging system. Congestion charges will arguably be more appropriate for those cities whose parking fees are already high. Fiscal disincentives for car use will be more effective when alternative traffic solutions, such as public transport, are in place, which is why some metropolitan areas use these types of revenues to finance public transit.

National governments could play a role in greening urban finance, by re-designing sub-national taxes and grants to sub-national governments. Re-design of sub-national taxation could include property tax reform, in order to correct for biases towards unsustainable behaviour. In addition, governments could National governments could play a role in greening urban finance, by re-designing sub-national taxes and grants to sub-national governments. Re-design of sub-national taxation could include property tax reform, in order to correct for biases towards unsustainable behaviour. In addition, governments could

New revenue sources such as carbon offsets have so far been unconnected from more traditional revenue sources. These revenue sources, currently marginally used by cities due to a variety of constraints, provide an interesting potential revenue source for cities. These constraints should be dealt with, and the possibility of city involvement in current climate change negotiations could also be secured. There is a need to make sure that future use of these instruments by cities will be integrated within urban planning and financial frameworks, in order to avoid a situation in which these instruments finance isolated projects without connection to the larger urban sustainability agenda.