Although the economy is not yet in a recession, half the states in the union are already facing the prospect of budget shortfalls, totaling over $35 billion, for the 2009 fiscal year. Balancing state budgets will probably force states to reduce aid to their local governments. At the same time, governors in many states - Florida, Georgia, Indiana, Massachusetts, and New Jersey to name a few - are pushing for reductions in local property taxes, through revenue limits and assessment caps.
These two developments are likely to lead to a crisis in the funding of local governments, according to visiting fellow Andrew Reschovsky, who based a Lincoln Lecture at Lincoln House Feb. 6 on a working paper co-authored with Richard Dye, Property Tax Responses to State Aid Cuts in the Recent Fiscal Crisis.
Reschovsky began by asking "How will local governments cope? We wanted to see if we could learn anything from recent history." Looking at data from the severe fiscal crisis at the beginning of this decade, Dye and Reschovsky found that in most states, property taxes were increased as state funding for local governments decreased. Based on a statistical analysis, they found that on average school districts increased property taxes by 23 cents for each dollar cut in state aid. Overall, Reschovsky says, the property tax is a reliable and stable source of revenue that can make up for big swings in state aid - but reliance on the property tax continues to incite a backlash. Some states are considering replacing the property tax with a sales tax, which, Reschovsky says, "is a much less stable source of revenue - especially in a downturn."