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City budgets in an era of increased uncertainty

Published: July 20, 2018

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Understanding the fiscal policy space of cities

A new report authored by Michael A. Pagano and Christopher W. Hoene for the Brookings Institution provides insight into changes that city governments may be facing as the federal government seeks to lessen regulatory authority in Washington. It is very likely that city governments will be faced with a new period of federal austerity and greater devolution or decentralization to states and localities. The report surveys 100 large cities, using a framework the authors call the “fiscal policy space,” and analyzes the fiscal policy environment based on state-local policy, economic and fiscal tax base alignment, and the local demand for services. This reflects the areas in which the different cities will face struggles, as well as the cities’ capability to respond and take on greater fiscal responsibility, and what their fiscal outlooks show.

Cities revenue sources and budgetary constraints vary considerably, which shapes their ability to raise revenue. Some City governments raise revenue primarily through property taxes, while some use sales and income tax as well. Some cities face no limits on property tax or expenditure, while some must contend with severe limitations. Because of this, the authors contend that cities will not respond uniformly to these shifts that may come with the federal austerity and decentralization that could be on the horizon.

This analysis brings several important implications for leaders at all levels of government. Federal leaders must recognize that municipalities face different fiscal constraints and will have different capacities to respond. State leaders should consider how regulatory constraints affect cities’ abilities to make economic and social advancements. For city leaders in particular, the focus should be finding how their fiscal infrastructure fulfills the need of the city and its constituents. City leaders will need to think critically about their fiscal condition and situate their cities accordingly.

The paper concludes by noting that the possible fixes to the changes will not come easily. Many of the proposed solutions run counter to existing trends, but for cities to adapt successfully to the changing environment they will need to demonstrate flexibility and careful management of their fiscal policy space.

Source: Brookings Institution