State & Local Tax Reforms May Cripple Municipal Development

Implications: July 1 marked the beginning of a new fiscal year for most states and about one third of local governments, and, as a result of declining economic conditions, ushered in a period of cutback management and difficult decision making for many state and local leaders. Reduce taxes,reduce spending is the hue and cry from John Q. Public and understandably so.  However,we as voters sometimes shoot ourselves in the foot when it comes to government reform predicated solely on the idea "not if it impacts me".   Reductions in infrastructure funding,cutbacks in nonessentials such as public parks, street festivals,art appreciation events can spell doom for commercial developers and retailers who had earlier held plans to locate within municipal boundaries.

Analysis:  To date, the scope of the problem is most evident at the state level, but it will become more evident for cities, particularly when the remaining municipalities turn over new fiscal years October 1 and January 1, 2009. The Center on Budget and Policy Priorities in Washington, D.C., reports that 29 states are facing a combined $48 billion shortfall in fiscal year 2009.  Subprime defaults and the subsequent foreclosures have stripped citites and counties across the nation of much needed tax revenue.  The center’s report points to declining state sales tax revenues, increased pressures stemming from local property tax-housing revenue declines and the prospect of income tax revenue decreases if the economy continues to weaken. Since states, like cities,can’t run annual budget deficits, the gaps will have to be closed by cutting spending, raising taxes, drawing down reserves, or some combination of the three.  Raising taxes is really unthinkable given the severity of today's downturn.  To escalate ad valorem tax rates on the backs of families already hurting from foreclosure woes will most certainly escalate the loss of properties through tax foreclosure sales and auctions.

In Indiana, where local governments had been leading efforts to provide homeowners with property tax relief while providing local governments with additional revenue authority through the sales tax, the state response essentially took the easy road by cutting local property taxes, but leaving local governments with a large hole in their budgets and no tools with which to respond. Declining and decaying cities destroy new development.  So,what is the answer?

Webster's defines conundrum as an intricate and difficult problem.   That it is and maybe all we can do is wait and see how bad it gets before constructing any real and lasting solutions.