Association for Public Policy Analysis & Management

Panel: Responding to the Challenges of Financing Local Governments in the U.S.

(Public and Non-Profit Management and Finance)

During the past decade, local governments in the United States have faced severe revenue challenges. The Great Recession and the collapse of housing prices in many parts of the country resulted in reductions in property tax revenues--local governments’ major source of tax revenue. In response to recession-related declines in state government revenues, most state governments reduced grants to their local governments, which in many states remain below pre-recession levels. Since 2011, after an infusion of federal stimulus funding, federal aid to local governments has been steadily declining. 

The initial Trump administration budget calls for large reductions in federal direct grants to local governments and sharp cuts in many federal government programs assisting low-income individuals and communities.  If they occur, the proposed cuts are likely to intensify fiscal stress in cities, since cities are the providers of last resort for the needy 

The proposed papers in the panel utilize unique datasets to address different issues facing local governments. The Chernick-Reschovsky paper develops a methodology that allows them to calculate the fiscal health of 150 large central cities, using a Fiscally Standardized Cities data base that accounts for the impact of overlying governments, and allows accurate comparisons across cities. They use their fiscal health measures to assess the impacts of reductions in state and federal grants on the fiscal health of cities, and to explore policies that could improve fiscal health.

The Merriman et al. paper focuses on the Chicago metropolitan area, and explores the role that local government property tax incentives in attracting new business development. The authors use GIS techniques to match community income and demographics to property tax rates and other information about the type of governments operating in each of the 2,800 unique sets of overlapping local government jurisdictions that exist within Cook County, IL. They find that higher nominal property tax rates go hand in hand with the degree of utilization of business tax incentives.   

A recurrent theme in local government fiscal history in the U.S. has been efforts by state legislatures to curtail the use of property taxation by local governments. However, there has been little research on public attitudes towards the property tax versus alternative sources of local government revenues. The Fisher-Wassmer paper reports on the results of a recent survey of California residents   that explores knowledge of and attitudes towards the property tax, California’s property tax limitation, Proposition 13, and alternatives sources of local government revenue, with particular attention paid to the sales tax and user fees.

Starting from the presumption that taxation creates distortions that may affect locational choices, John Anderson and colleagues explore whether household mobility in and out of cities is influenced by the degree of reliance on current taxation versus debt and future taxation to finance local government activities. Using the Fiscally Standardized Cities database, preliminary results for out-migration reveal that households react to changes in local government tax policy, but not to changes in debt policy.