The fiscal condition of individual cities varies greatly depending on differences in local tax structure and reliance. While an overwhelming majority of cities have access to a local property tax, many are also reliant upon local sales taxes, and some cities (fewer than 10% nationally) are reliant upon local income or wage taxes.
- Property tax collections continue to register the downturn in real estate values and are projected to decline for the third year-over-year in a row.
- City sales tax collections have increased over the previous year for the second year in the row as the national economy started to recover and consumer confidence returned.
- City income tax collections are protected to decline as wages and salaries continue to reflect local job losses and a national unemployment rate hovering around 8%.
- Looking to 2013, all indications point to continuing challenges for city budgets, with national economic indicators pointing to slow growth and the possibility of federal budget cuts that may further dampen economic recovery.
Tax Revenue Sources
Understanding the differing performance of these tax sources and the connections to broader economic conditions helps explain the forces behind declining city revenues (see Cities and State Fiscal Structure for additional information).
Local property tax revenues are driven primarily by the value of residential and commercial property, with property tax bills determined by local governments’ assessment of the value of property. Property tax collections lag the real estate market
, because local assessment practices take time to catch up with changes. As a result, current property tax bills and property tax collections typically reflect values of property from anywhere from 18 months to several years prior.
The effects of the downturn in the real estate market in recent years are increasingly evident in city property tax revenues in 2012.
- Property tax revenues in 2011 dropped by -3.9% compared with 2010 levels, in constant dollars.
- Property tax collections for 2012 continue to register the downturn in real estate values, projected to decline in constant dollars by -2.1%, the third year in a row of year-over-year property tax revenue declines.
- Property tax revenues will likely decline further in 2013 as city property tax assessments and collections continue to catch up with the market
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Changes in economic conditions are also evident in terms of city sales tax collections. When consumer confidence is high, people spend more on taxable goods and services, and city governments with sales-tax authority reap the benefits through increases in sales tax collections. The struggling economy and the declining real estate market reduced consumer confidence, resulting in less consumer spending and declining sales tax revenues.
- In 2011 and 2012, as the national economy started to recover and consumer confidence returned, city sales tax receipts increased over previous year receipts by 1.6% and 2.4%, respectively.
City income tax receipts have been fairly flat, or have declined, for most of the past decade in constant dollars. Local income tax revenues are driven primarily by income and wages (not by capital gains). The lack of growth in these revenues suggests that economic recovery following the 2001 recession was, as many economists have noted, characterized by a lack of growth in jobs, salaries and wages.
- Projections for 2012 city income tax collections are for a decrease of -0.8% in constant dollars, as wages and salaries continue to reflect local job losses and a national unemployment rate hovering around 8%.