By Michael A. Pagano, Nonresident Senior Fellow—Metropolitan Policy Program, and Christopher W. Hoene, Executive Director—California Budget & Policy Center, for the Brookings Institution
Editor’s Note: Figure 4 of this report was edited on July 19, 2018, to reflect a correction in the tax and expenditure limitations by state.
Cities in the United States are likely to shoulder additional responsibilities during the Trump administration, as federal leaders seek to cut the federal budget and workforce and reduce regulatory authority in Washington. Yet cities’ revenue sources and budgetary constraints vary greatly, shaping their ability to carry out new mandates or raise additional revenues. Some, like Atlanta and Miami, primarily raise revenues through property taxes, while others, like Kansas City and Philadelphia, are authorized by their state governments to collect sales and income taxes as well. Cities in Virginia and Vermont face no property tax or expenditure limitations, while cities in Colorado and California face severe limitations on both tax collections and expenditures. And state funding comprises more than a quarter of municipal budgets in states like Nebraska and New York, but less than seven percent of municipal budgets in Oklahoma and Texas. In other words, given their unique fiscal positions, cities will not respond uniformly to structural shifts—and potential devolution—within American federalism.
To better understand the variation in cities’ fiscal outlooks, this report defines and assesses cities’ fiscal policy space, surveying 100 large cities across four factors:
- Tax authority, the number of general taxes (property, sales, or income taxes) a city is authorized by its state to use;
- Taxation and expenditure constraints, measured by the difference between a city’s legal maximum property tax rate and its actual rate;
- Fiscal base alignment, which measures how aligned a city’s economic base is with its tax structure; and
- Demand for services, measured by partisanship, housing affordability, and union density within a city, which correlate with higher demand for municipal expenditures and lower fiscal flexibility.
Key findings are as follows:
Most states authorize cities to levy one or two general taxes. Some states, particularly concentrated in the Northeast, South, and Mountain West, authorize cities to levy only property taxes to raise revenue, as seen in the map below. Many others authorize cities to levy both property and sales taxes. A number of states in the Great Lakes region authorize cities to levy property and income taxes, but not sales. And a handful of large cities, as well as cities within Alabama, can levy all three general taxes. Generally, more than half of cities within the United States rely primarily on a blend of property and sales tax, in addition to non-tax fees, for revenue.