City Revenue Growth Is Slowing Down

City fiscal health in the U.S. is generally good, but tax revenues are showing continued signs of a slowdown, the National League of Cities said on Thursday.

Three major sources of city revenue—property, sales and income taxes—grew at a more sluggish pace in the 2017 fiscal year compared to the previous budget cycle, according to findings presented in NLC’s 33rd annual City Fiscal Conditions report.

Property tax revenues grew at 2.6 percent in 2017, compared to 4.3 percent in 2016, sales tax growth slowed to 1.8 percent, from 3.7 percent, and income tax 1.3 percent from 2.4 percent.

The report incorporates findings from an online survey of city finance officers around the U.S., which this year included information from 341 cities with populations of 10,000, to over 300,000.

Overall, revenues did grow in fiscal 2017, but only at a rate of 1.25 percent and growth is expected to be closer to zero in fiscal 2018. Fiscal 2017 is the second year in a row revenue growth slowed.

Even so, 73 percent of city finance officers voiced optimism in this year’s survey about the fiscal positions their cities are in. That’s up slightly from last year when the figure was 69 percent.

Christiana McFarland, director of research at the National League of Cities, said that overall the survey indicates that “city fiscal conditions are on solid footing” and finance officers are mostly voicing confidence. But she added: “we’re also starting to see decelerating growth.”

McFarland explained that national figures for economic output and employment, which are strong right now, can tell an incomplete story about the economy. Digging deeper, she said, reveals signs of a cooling housing market and slowing income growth even though there have been gains in the nation’s median income level.

Natalie Cohen, managing director of municipal research with Wells Fargo, cautioned that people shouldn’t conflate macroeconomic trends with what’s happening with city budgets.

She noted the closed shopping malls that now pepper communities around the U.S. as an example of a factor that is affecting property values and, in turn, local government revenues. She also pointed out that first time homebuyers are lagging compared to historic levels.

The report indicates that finance officers in cities with fewer than 50,000 residents were less likely to be upbeat about their jurisdiction’s ability to meet its financial needs. Larger cities, by comparison, have seen stronger growth in their economies and tax bases.

Survey respondents generally said it’s still too early to know how key parts of last year’s sweeping federal tax overhaul will affect their local government’s finances.

But 35 percent of finance officers did say that their cities are experiencing negative fallout from one element in the tax code rewrite: the elimination of tax-exempt advance refunding bonds.

The bonds had been a popular way for state and local governments to refinance debt at lower interest rates and save money. But they are banned under the new tax law. Figures cited in the NLC report say the bonds saved taxpayers over $2.5 billion in 2017 alone.

NLC president, Mayor Mark Stodola, of Little Rock, Arkansas, said that city officials visiting Capitol Hill on Thursday would press their case with lawmakers to restore the tax exemption.

“We’re going to be pushing very, very hard for that,” he said.

Republicans on the House Ways & Means Committee kicked off a legislative effort dubbed “Tax Reform 2.0” this week. 

It is aimed at, among other things, locking in individual tax cuts in the new tax law beyond 2025, and making permanent a $10,000 cap on the state and local tax, or SALT, deductions that individual taxpayers can claim on their federal tax returns.

NLC was one of the groups that unsuccessfully opposed the inclusion of the SALT cap in the tax law. In the fiscal survey, 83 percent of respondents said they hadn’t yet seen effects from the cap on their city budgets. But 28 percent said they thought it would have future negative effects.

Another recent development at the federal level was a U.S. Supreme Court ruling in June that clears the way for states to collect additional sales tax revenues from online retailers. Here again, there’s some uncertainty about what the decision will mean for city budgets.

“We anticipate in the years to come,” McFarland said, “that we will see some bumps in sales tax collections potentially from that.”

Cohen highlighted some other issues that could marginally affect state and local revenues going forward, like newly legalized sports betting, the growing number of states allowing for regulated marijuana sales and possible one-time effects from federal tax and trade policies.

Hanging in the backdrop for city budgets are questions about when the next recession will hit and how bad it will be.

Matt Paulin, chief finance officer for Stockton, California, a city that exited a Chapter 9 municipal bankruptcy in 2015, said there had been a recent article in the local newspaper about whether the city's “rainy day” reserve fund policy was fiscally prudent or “miserly.”

The tension here rests on whether the city is saving too much, at the expense of current city services.

Paulin says excess optimism about the city’s financial future during the booming economic years in the early 2000s, prior to the Great Recession, is part of what led it into bankruptcy.

“We’re overdue for the next recession historically,” he said, adding that the city is trying to avoid painful cuts in city spending during the next downturn, like those it had to make when it went through its financial crisis. “We’re just trying to kind of hold on to what we have.”