What type of revenue makes a local government most resilient to the pandemic recession?
Updated: Mar 8
It is now well established that local governments have been hit very hard by the pandemic-driven economic crisis. In our previous report based on a May 2020 survey of U.S. local elected officials, we had found that 91% of local governments expected a decline in revenue, with an average expected annual decline of 21.9%.
But it is important to note that this decline in revenue refers to the average local government. Different local governments rely on different revenue streams. So we decided to look back at our survey findings to see whether the source of a local government’s revenue may have affected their predictions. To do so, we merged our survey data with financial data from the 2017 Census of Governments Local Finance Component.
Local governments primarily rely on a combination of “own-source” revenue and intergovernmental transfers. Own-source revenue is composed of taxes, fees, and other charges that a local government collects. Intergovernmental transfers may come from the federal government, state government, or other local governments.
We categorized the local governments of responding policymakers into three equally-sized groups based on the share of their total revenue that came from intergovernmental transfers: one third of local governments have between 0 and 10% of their total revenue from transfers, another third is between 11 and 23%, and the final third that is most reliant on transfers is between 24 and 100%. Using these groups, we estimated the average expected change in annual revenue from our May 2020 survey.
Policymakers from governments from all three ranges expected a decline in revenue, but those from governments that had the smallest share of revenue from transfers predicted the smallest decline. The governments least dependent on outside sources for revenue predicted an average decline of 20.6%, while governments most dependent on outside sources predicted an average decline of 24.2%. In other words, the more a local government could depend on its own revenue generation, the less severe of a decline they expected.
Next, we dug deeper into own-source revenue generation itself. Are there specific sources of revenue that may be particularly resilient to the pandemic? One of the most common forms of own-source revenue generation for local governments is property taxes. Property taxes can sometimes be robust to short-term economic downturns but may eventually decline if recessions persist over time.
We looked at whether there was a relationship between the share of a local government’s revenue generated from property taxes related and the severity of the expected decline in revenue. Again, we divided the governments into three equal bins based on the share of a government’s total revenue generated from property taxes.
As expected, we found that the predicted decline in revenue was less severe the larger the share of a local government's revenue comes from property taxes. However, these differences are modest: policymakers from governments that generated the largest percentage of their revenue from property taxes predicted an average decline of 21%, while those from governments that generated the smallest percentage of revenue from property taxes predicted an average decline of 23%.
What can we conclude from this? When asked to predict revenue, policymakers from governments with a higher share of revenue generated from one’s own sources and a higher share of revenue generated from property taxes predicted lower declines in revenue than policymakers from other local governments. This might be because governments feel more secure in sources like property taxes rather than transfers from higher-level governments.
Despite these differences, across the board, local governments predicted falls in revenue due to the pandemic and the accompanying recession. While the CARES Act spending deadline was extended, many are still concerned that the initial round of funding will not be enough to ward off deeper spending cuts. There has been talk of new funding coming from the federal government, but the likelihood and timeline for that is still uncertain.
Until additional aid is passed, local governments will have to find ways to continue meeting the increased needs of their communities with uncertain, but likely drastically lower, levels of revenue for the foreseeable future.