How Will COVID-19 Impact Local Government Revenues?
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Ian Hutcheson
April 15, 2020
As catastrophic as the spread of COVID-19 will be to the health of those directly impacted by the virus, the economic ramifications of the pandemic will spread farther and linger long after the biological threat. Local governments tasked with responding to the crisis will do so reluctantly knowing that shuttered storefronts and social distancing will precipitate severe revenue shortfalls. The net effect of the pandemic on local government revenues will be decisively negative. There is, however, likely to be variation in the impact on the top three sources of revenue for local governments. Remaining cognizant of the disparate impact of the coronavirus crisis across revenue sources will aid local governments in dampening the impact from the ensuing economic shockwave.
Transfers, Taxes and Tolls
At their lowest point after the Great Recession, municipal general fund revenues declined by 4.68% in 2010, according to the National League of Cities’ 2019 City Fiscal Conditions report. Some preliminary estimates on the revenue impact from COVID-19 indicate a financial calamity perhaps worse than the last one. Baltimore estimates a drop in revenue worth around 3.5% of its general fund revenue for the current fiscal year. New York City could lose out on billions in tax revenue equivalent to as much as 15% of the City’s current revenue budget.
The three largest sources of local government revenue are intergovernmental transfers, property taxes and charges and fees, constituting roughly 35%, 30% and 20% of general fund revenues. Each of these revenue streams will be impacted differently by the measures enacted in response to the coronavirus outbreak.
Hand Over the Help
Frustratingly for many local governments, their most important source of revenue is the one which they have the least control over. Transfers from other governments make up a greater share of revenue for the average locality than any single own-source revenue. The majority of transfers come from states, with a small portion coming directly from federal entities.
While fluctuations in tax proceeds are determined by local economic activity, changes in transfer revenue are driven by broader political and societal shifts. During a global pandemic that has severely disrupted local economies, transfers will become even more vital for local governments. The $150 billion Coronavirus Relief Fund included in the federal CARES Act is an early example of what is likely to be a continuing series of funding programs. Such efforts will increase the share of local government revenue from transfers, and ultimately local leaders will welcome a decrease in this revenue once the economy begins to normalize.
Property Insurance
The traditional foundation of own-source revenues for local governments are property taxes, which comprise 30% of local revenues in the United States. Assessment income is reliable because it is less volatile and subject to extreme year-over year changes. The model used in most jurisdictions for assessing property values and collecting the tax effectively delays this revenue stream’s ability to quickly reflect economic changes, making it more stable.
The conventional wisdom in local government finance that operational costs are best funded through stable revenue sources like property tax to minimize the risk of service disruption will appear prudent in the fallout from COVID-19. Although property tax revenues will eventually suffer from the impact of high unemployment on the demand for real estate, local governments will have time to prepare for this shallower decline in income spread over a longer period. Local authorities which depend upon property tax to fund day-to-day expenses will not suffer the sharp and immediate blow to their revenue streams from the pandemic that governments which rely on sales or income tax will.
Always in Demand
Unlike transfers and property taxes, the third most vital revenue source for local governments is less distinctive to public sector organizations and more akin to the businesslike activities of private sector companies. Charges and fees represent over a fifth of local revenues and cover the cost of providing specific services, such as water, sewer and public transportation fare. These revenues are then typically budgeted by governments to provide the service itself.
Since many of the services governments charge for are public goods, demand is unlikely to rapidly decline amid the pandemic. A more serious issue for local utilities will be the inefficient allocation of resources resulting from widespread moratoriums on disconnects. Demand for other charged services, notably public transportation, has declined rapidly under social distancing guidelines. The forecast for this third pillar of local revenues is decidedly sorrier than the previous two, yet steady demand for many of these public goods will prevent a precipitous collapse in these revenues on the whole.
* * *
A brief survey of the top three revenue sources for local governments in the United States reveals a decidedly less pessimistic picture of the impact of COVID-19 on public purses. While sources that are dependent on local economic activity will suffer, revenue streams that make up larger shares of the typical government’s income will offset these shortfalls. Knowing how different revenue streams will be affected by the public health crisis will aid decisionmakers in remaining prudent amidst the pandemic.
Author: Ian Hutcheson, MPA, is a Revenue Auditor for the City of Oklahoma City and the President-Elect of the ASPA Oklahoma Chapter. He is a 2018 graduate of the Master of Public Administration program at the University of Kansas. Ian’s professional areas of interest include city management, finance and budget, economic development and urban design. Contact: [email protected]. Twitter: ihutch01
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How Will COVID-19 Impact Local Government Revenues?
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Ian Hutcheson
April 15, 2020
As catastrophic as the spread of COVID-19 will be to the health of those directly impacted by the virus, the economic ramifications of the pandemic will spread farther and linger long after the biological threat. Local governments tasked with responding to the crisis will do so reluctantly knowing that shuttered storefronts and social distancing will precipitate severe revenue shortfalls. The net effect of the pandemic on local government revenues will be decisively negative. There is, however, likely to be variation in the impact on the top three sources of revenue for local governments. Remaining cognizant of the disparate impact of the coronavirus crisis across revenue sources will aid local governments in dampening the impact from the ensuing economic shockwave.
Transfers, Taxes and Tolls
At their lowest point after the Great Recession, municipal general fund revenues declined by 4.68% in 2010, according to the National League of Cities’ 2019 City Fiscal Conditions report. Some preliminary estimates on the revenue impact from COVID-19 indicate a financial calamity perhaps worse than the last one. Baltimore estimates a drop in revenue worth around 3.5% of its general fund revenue for the current fiscal year. New York City could lose out on billions in tax revenue equivalent to as much as 15% of the City’s current revenue budget.
The three largest sources of local government revenue are intergovernmental transfers, property taxes and charges and fees, constituting roughly 35%, 30% and 20% of general fund revenues. Each of these revenue streams will be impacted differently by the measures enacted in response to the coronavirus outbreak.
Hand Over the Help
Frustratingly for many local governments, their most important source of revenue is the one which they have the least control over. Transfers from other governments make up a greater share of revenue for the average locality than any single own-source revenue. The majority of transfers come from states, with a small portion coming directly from federal entities.
While fluctuations in tax proceeds are determined by local economic activity, changes in transfer revenue are driven by broader political and societal shifts. During a global pandemic that has severely disrupted local economies, transfers will become even more vital for local governments. The $150 billion Coronavirus Relief Fund included in the federal CARES Act is an early example of what is likely to be a continuing series of funding programs. Such efforts will increase the share of local government revenue from transfers, and ultimately local leaders will welcome a decrease in this revenue once the economy begins to normalize.
Property Insurance
The traditional foundation of own-source revenues for local governments are property taxes, which comprise 30% of local revenues in the United States. Assessment income is reliable because it is less volatile and subject to extreme year-over year changes. The model used in most jurisdictions for assessing property values and collecting the tax effectively delays this revenue stream’s ability to quickly reflect economic changes, making it more stable.
The conventional wisdom in local government finance that operational costs are best funded through stable revenue sources like property tax to minimize the risk of service disruption will appear prudent in the fallout from COVID-19. Although property tax revenues will eventually suffer from the impact of high unemployment on the demand for real estate, local governments will have time to prepare for this shallower decline in income spread over a longer period. Local authorities which depend upon property tax to fund day-to-day expenses will not suffer the sharp and immediate blow to their revenue streams from the pandemic that governments which rely on sales or income tax will.
Always in Demand
Unlike transfers and property taxes, the third most vital revenue source for local governments is less distinctive to public sector organizations and more akin to the businesslike activities of private sector companies. Charges and fees represent over a fifth of local revenues and cover the cost of providing specific services, such as water, sewer and public transportation fare. These revenues are then typically budgeted by governments to provide the service itself.
Since many of the services governments charge for are public goods, demand is unlikely to rapidly decline amid the pandemic. A more serious issue for local utilities will be the inefficient allocation of resources resulting from widespread moratoriums on disconnects. Demand for other charged services, notably public transportation, has declined rapidly under social distancing guidelines. The forecast for this third pillar of local revenues is decidedly sorrier than the previous two, yet steady demand for many of these public goods will prevent a precipitous collapse in these revenues on the whole.
* * *
A brief survey of the top three revenue sources for local governments in the United States reveals a decidedly less pessimistic picture of the impact of COVID-19 on public purses. While sources that are dependent on local economic activity will suffer, revenue streams that make up larger shares of the typical government’s income will offset these shortfalls. Knowing how different revenue streams will be affected by the public health crisis will aid decisionmakers in remaining prudent amidst the pandemic.
Author: Ian Hutcheson, MPA, is a Revenue Auditor for the City of Oklahoma City and the President-Elect of the ASPA Oklahoma Chapter. He is a 2018 graduate of the Master of Public Administration program at the University of Kansas. Ian’s professional areas of interest include city management, finance and budget, economic development and urban design. Contact: [email protected]. Twitter: ihutch01
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