Declining Tax Revenue Leaves Half of U.S. Cities Strapped for Cash

The weak economy has had a major impact on property and sales tax revenue, leaving half of U.S. cities strapped for cash. A new study released on Tuesday by the National League of Cities says U.S. cities are left with few options, forcing them to freeze hiring, lay off workers and delay infrastructure projects.

Tax Revenue Declines as City Officials Adjust

The National League of Cities polled finance officers in cities with populations of at least 10,000 people during the spring-summer period of 2011.

The report revealed property-tax collections, which are especially important to Northeastern cities, were projected to decline 3.7 percent in 2011 after a 2-percent decline in 2010. They are expected to decline further in 2012 and 2013 as city property tax assessments and collections catch up with the market.

Sales tax revenues, which are vital to cities in Colorado, Louisiana, New Mexico and Oklahoma, are projected to remain flat in 2011 after an 8.4-percent decline in 2010. Income-tax receipts are projected to drop to an estimated 1.6 percent with job losses reducing or eliminating incomes for many workers.

To manage the losses, 41 percent of city finance officers plan to increase fees for city services this year, while 23 percent will be increasing the number of fees applied to city services. Nearly 75 percent said they will have to lay off workers, freeze hiring and wages or reduce pensions and health care benefits, while 60 percent said they will have to cancel or delay capital infrastructure projects.

U.S. Cities May Have to Face a ”New Normal”

In the report, city finance managers said the loss of tax revenue is having a significant impact on city funding. General-fund revenues will decline 2.3 percent this year, the fifth straight decline. As a result, spending is expected to decline 1.9 percent this year, marking the consecutive year for declines.

The report explained that the declines in taxes are largely the blame of the weakened economy. Unfortunately, the impact is likely to last for some time. ”The effects of depressed real estate markets, low levels of consumer confidence and high levels of unemployment will continue to play out in cities through 2011, 2012 and beyond,” the report noted.

Ultimately, the study suggests the struggles many cities are facing may be something we all have to grow accustomed to with the slim likelihood that we will see improvements in the near future. “Lower property values and declining sales may portend something entirely new, a ‘new normal.’ “