The Long Term Local Budget Crisis: No Rebound in Sight

Or as Fed Chairman Ben Bernanke likes to call it, “fiscal consolidation.” Despite all of the money spent at the federal level in the U.S. (~$800 billion), this has largely been offset by cuts at the state and local level (~$600). This is why the recovery, well, isn’t.

This wasn’t hard to predict–I did so three years ago. It’s not rocket science (or even microbial genomics). But what worries me is that I don’t think local spending will rebound very much. Why? Because property values won’t rise anytime soon (they’ll probably drop a little more). In 2008, before housing price assessments were recalculated, property taxes accounted for 30% of tax revenues and 22% of overall revenues at the state and local level nationally. Property values are much lower now, and it’s unrealistic to think property taxes are coming any time soon. Local budgets are already cut to the bone–even a five or ten percent decrease in revenue is devastating at this point.

Without help from the federal level, I’m not sure how we fix this.

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3 Responses to The Long Term Local Budget Crisis: No Rebound in Sight

  1. dr2chase says:

    You do understand that in Massachusetts Prop 2.5 cuts both ways; when values go up, rates go down against a +2.5% per year baseline. But when values go down, rates go up. Overall, municipalities can rely on a steady +2.5% increase in their tax revenues. It is, as a former governor once said, “a stable source of revenue”, but that is because it was mathematically defined to be stable.

    We could do the same with the income tax, but for some reason, we don’t. It would be somewhat counter-cyclical to do this, but it would not be as bad as what we do now, which is cuts in government spending (which is to say, if you look at the CBO estimates for “stimulus multipliers”, the multiplier for a tax cut is low, and the multiplier for “spending” is high. This means if you insist on a revenue-neutral stimulus, you can do it by taxing more and spending more. Tax increases will depress the economy somewhat, but the spending will boost it by more — all within reason, of course. Marginal rates exceeding 70% on the super-rich are problem not productive, or so I have read.)

  2. The way to fix it is 10 years of 5% inflation. Trouble is, that’s good for everyone but the bankers, and they are the ones who control the money supply.

  3. Min says:

    Local currencies, anyone? States can’t do it, but cities can, right? 🙂

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