Revenue Diversity
The degree to which a city's revenue comes from multiple sources (property tax, sales tax, fees, grants) rather than being concentrated in a single stream.
How It Works
Revenue diversity is a key indicator of fiscal resilience because cities that rely on a single dominant revenue source are vulnerable to sector-specific shocks. A city that draws 70% of revenue from sales tax suffered disproportionately during the 2020 pandemic when consumer spending collapsed, while a city with 50% property tax dependence was insulated because property values continued to appreciate. CitySpend measures revenue diversity using an adapted Herfindahl-Hirschman Index (HHI) across major revenue categories reported in the Census Annual Survey of State and Local Government Finances: property tax, sales tax, income tax, charges and fees, intergovernmental revenue, and "other" (fines, licenses, interest). The HHI is calculated as the sum of squared revenue shares, multiplied by 10,000. A perfectly diversified city distributing revenue equally across six sources would score HHI = 1,667; a city getting all revenue from one source would score HHI = 10,000. CitySpend transforms the HHI into a 0-100 diversity score where 100 = most diversified. Houston, which derives roughly 30% of general fund revenue from property tax, 30% from sales tax, and the balance from a mix of fees, franchise taxes, and intergovernmental sources, scores well on diversity. Chicago's heavy property tax reliance (especially for pension contributions) reduces its diversity score. Revenue diversity is one of the six factors in the CitySpend Fiscal Health Score, weighted at 10%, and serves as an early-warning indicator for cities vulnerable to economic cycles.
Related Terms
- Property Tax, A tax levied on real estate (land and buildings) based on assessed value. Property taxes are the single largest revenue source for most U.S. city governments.
- Sales Tax, A consumption tax collected on retail purchases. Many cities levy a local sales tax on top of state and county rates.
- Intergovernmental Revenue, Money a city receives from federal or state government through grants, shared taxes, or direct transfers.
- Fiscal Health Score, CitySpend's proprietary 0-100 composite score (graded A through F) measuring a city's overall financial health across six weighted factors.
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About This Definition
This definition is part of the CitySpend Municipal Finance Glossary, 59 terms explaining how city governments fund and manage public services. All definitions are written in plain language for taxpayers, journalists, students, and municipal bond investors.