National League of Cities (posted April 2015)
The fiscal systems of cities are defined by the states in which they are located. These systems can create an environment that either allows municipalities to fund their share of resident needs and to thrive economically or constrains the ability of cities to balance budgets and deliver basic services.
Cities and State Fiscal Structures examines how the key components of these systems (fiscal authority, revenue reliance/capacity, state aid and tax and expenditure limitations) are structured across states.
With these criteria in mind, several states stand out as “ahead of the pack," or provide their cities with a greater degree of local authority than other states.
Alabama and Missouri both provide some municipalities with a higher level of local authority, namely by allowing Alabama municipalities and Missouri’s two largest municipalities authorization to levy an income tax in addition to the local property and sales tax. More local authority is, however, offset by low levels of state aid relative to other states and, for Missouri, a potentially binding TEL also figures into the mix.
New York and Pennsylvania also appear to be ahead of the pack. Although New York has a potentially binding TEL, the state does provide additional local authority to a significant sector of the state’s population through granting New York City and Yonkers the authority to levy income taxes. Similarly, Pennsylvania provides some additional local authority through the sales tax provided to Philadelphia (no other municipality in the state is permitted to levy a sales tax), its state aid level is particularly high, but it has a potentially binding TEL.
Due to their broad-based tax bases, municipalities in Ohio, Kentucky and Washington are placed in the “ahead of the pack” category as well. Moreover, even though all three operate under “potentially binding” property tax limitations, the effect is in large part mitigated by the broad tax base. In this regard, municipalities in these states are less likely to adjust tax or assessment issues because the tax bases are flexible and broad. Municipalities in states whose tax bases are narrow might be inclined to adjust their revenues by tinkering with the property tax system; the municipalities in these three states have more options. Hence, we place them in the “ahead of the pack” group.
Our assessment of “behind the pack” municipalities places considerable weight on local authority and reliance in combination with low ratings on one of the other factors. For example, a group of states are characterized by low authority and reliance in combination with a potentially binding TEL (Idaho, Maine, Massachusetts, New Jersey, and Rhode Island). Another set of states are characterized by low levels of authority, reliance, and state aid (North Carolina, Oregon) or low levels of authority, reliance, and capacity (Connecticut and New Hampshire). West Virginia perhaps has the most constrained combination, with low levels of authority, reliance, state aid, and the presence of a potentially binding TEL.
Compared with the 2008 analysis of cities and state fiscal structures, the lack of change in each of the four structure components is striking given radical economic shifts that have ensued, but not wholly unexpected. Local fiscal health remains below pre-recession levels despite burgeoning broader economic recovery in part because authorization of more local revenue authority and other enhanced capacity measures to allow cities to leverage local economic vitality are rare.
The information above is for general awareness only and does not necessarily reflect the views of the Office of Economic Adjustment or the Department of Defense as a whole.