National League of Cities Needs Basic Economics Lesson
Cities Hurt by Economic Downturn, Forecast Bleak Budgets
Here is a strange, biased news release from the National League of Cities.
We have had to insert a number of rejoinders along the way.
Cities predict a bleak future for their budgets, which have been hurt by the economic downturn and the surge in local "homeland security" spending, according to the annual survey of city finance officers conducted by the National League of Cities (NLC).
The Progress Report asks -- is "homeland security" spending a waste? If not, then who gets the economic benefit of that spending? (For example, if I own a piece of land on which a tall building could be constructed, and now that neighborhood is going to have extra patrols, surveillance, etc., then the market price of my land is going to rise significantly.) Those beneficiaries should be reimbursing the government -- otherwise it's simply a new kind of welfare handout.
"Cities have been hit by lower sales and tourism tax revenues as well as higher security spending, and that means tight budgets," said Karen Anderson, NLC president and mayor of Minnetonka, Minn. "In some cities, residents won't get the services they deserve because city budgets have been squeezed too tight."
The Progress Report notes -- no responsible city levies a Jim Crow sales tax. That simply hurts local merchants and drives away shoppers. Besides, such taxes are notoriously expensive to collect and have a huge tendency toward corruption and "special exceptions" for those who lobby the legislators. For Fred Foldvary's classic editorial on sales taxes, click here.
For the first time since 1993, a majority (55 percent) of the surveyed finance officers said that their cities are less able to meet their city's financial needs compared to the previous year (2001). The increased pessimism is based on slower-than-expected growth in revenue from sales, income, and tourist-related taxes combined with new responsibilities on homeland security, rising healthcare costs, and increased spending on infrastructure. Also, state budget woes have exacerbated cities' fiscal plight as states withhold funds from municipalities.
Finance officers reported that sales, tourist, and income tax collections fell below budgeted levels in the two quarters following September 11, 2001 (October-December 2001 and January-March 2002). Sales tax collections were 8 percent lower than expected. Tourist-related tax receipts were hardest hit, falling 18 percent below projections. Income tax revenues fell 11 percent below projections in October-December 2001.
The Progress Report apparently needs to point out the obvious -- If a city levies taxes against tourists, and taxes against the incomes of local residents, what message is it sending? A message of welcome, or one of "as soon as you set foot in this city, we are going to start charging you"? There is no justification for a tax against income or tourism or sales -- those are good things and should not be discouraged or penalized.
The finance officers were also asked about the factors making it most difficult for them to balance city budgets. Rising health care costs were cited by 88 percent of city officials. Increased spending on public safety and security needs was reported by two-thirds (69 percent), as was much-needed infrastructure investment (67 percent).
Two-thirds (67 percent) of the surveyed city officials think the problem will only worsen, saying they will be less able to meet city financial needs in 2003.
Despite the bleak forecast, cities' ending balances (reserves) remained steady at the close of fiscal year 2001- a testament to their responsible financial management. The ending balances in 2001 were 19 percent, compared to 18.3 percent in 2000. One bright spot was property tax revenue, which rose by more than 5 percent over the previous year.
The Progress Report says -- So after all this whining and moaning, it turns out that cities have had a way of raising revenue that went up during the past year. Attention, National League of Cities! You dummies seem to be the last ones to find out -- property taxes are much more stable revenue sources than taxes against tourism, against incomes, or Jim Crow sales taxes. An even more stable, and more fair, variation of the property tax is the two-rate tax, which is levied mostly on site values and so does not penalize urban development, housing or entrepreneurs.
A summary of the survey findings is available on the National League of Cities website at http://www.nlc.org.
The National League of Cities seems to think of cities as hopeless, inept weaklings. We know better. Cities can be strong and vibrant but they need tax systems based on justice and stability. What's your opinion? Tell your views to The Progress Report:
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