Pew Research Center
How states can help localities improve budget flexibility. Alexandria Zhang, a Research Officer at the Pew Research Center, joined the podcast to talk about her research on local tax limitations. She shared how limits on local government revenue imposed by state governments affect localities. She also makes the case that state governments need to reevaluate limitations they currently have in place.
Host: Kirsten Wyatt
Kirsten Wyatt 00:12
Coming to you from Portland, Oregon, this is Gov Love, a podcast about local government. Gov Love is produced by ELGL, the Engaging Local Government Leaders network, we engage the brightest minds in local government. I’m Kirsten Wyatt, the ELGL co founder and executive director, and today I’m joined by Alexandria Zhang, a research officer at the Pew Charitable Trusts. Alex, welcome to Gov Love.
Alexandria Zhang 00:38
Thanks Kirsten, I’m glad to be here.
Kirsten Wyatt 00:39
Today we’re talking about Alex’s research report for Pew titled, local tax limitations can hamper fiscal stability of cities and counties. We’ll learn more about this research and the ways that states can help localities improve budget flexibility and resiliency. But first, let’s get started with a lightning round. So Alex, what is something that your hometown is famous for?
Alexandria Zhang 01:04
I really had to think about this. My hometown is Rockville, Maryland. And apparently Spike Jones grew up in Rockville. And for those of you who don’t know who he is, he directed, Being John Malkovich and most recently Her.
Kirsten Wyatt 01:21
Oh, okay. There you go. And then what is your most controversial non political opinion?
Alexandria Zhang 01:29
I probably have quite a few. But the one, the first thing that popped into my head was I’m very anti scooter. So scooters for kids, you know, those are very cute. But adult scooters or scooter sharing, I just don’t understand.
Kirsten Wyatt 01:46
What about e-bikes? Do you, do you like those?
Alexandria Zhang 01:49
E-bikes? I’ve never tried and they seem, I think I’d be on board for E bikes. I think scooters, you know, people don’t seem to drive them very safely. There’s there seems to be absolutely no regulations around scooters either. Which maybe makes me sound very old, saying that but I just don’t get it.
Kirsten Wyatt 02:14
No, I appreciate that. I thought that you were gonna go for like the the everybody no matter how cool you are looks dorky on a scooter. So I appreciate that you’re also bringing in safety. All right, and then what do you believe in the most aliens, ghosts, or Sasquatch?
Alexandria Zhang 02:32
I have go with aliens. We’ve explored such a small part of the universe. But there has to be far more intelligent life forms out there.
Kirsten Wyatt 02:43
I agree with you. 100%. It’s always interesting to hear the responses to this question. So So I appreciate you sharing. And then lastly, if you could have coffee with any character from a book, who would you invite?
Alexandria Zhang 02:59
I’m usually terrible with these types of questions. Especially, you know, what’s your favorite book? What’s your favorite movie? But I have to go with Joe March from Little Women.
Kirsten Wyatt 03:08
I named my daughter after Joe March!
Alexandria Zhang 03:10
Oh, that’s amazing. Yeah, she’s so ahead of her time. And I would love to talk to her about you know, how feminism has evolved and get her thoughts on that.
Kirsten Wyatt 03:20
Oh, my gosh, what a wonderful pick, like you have endeared yourself to me for life after that.
Alexandria Zhang 03:25
Excellent. That was my plan.
Kirsten Wyatt 03:28
Alright, so let’s jump into the interview. If you can please share with our listeners a little bit about your career path and how did you make your way to Pew?
Alexandria Zhang 03:36
Yeah, I’ve honestly spent the majority of my life so far in school, I finished my PhD in economics in 2016. And since then, I’ve been at Pew with the state fiscal health team, which was actually completely unexpected. I studied something else entirely in graduate school. You know, that’s, that’s where life leads you.
Kirsten Wyatt 04:03
And let’s talk about this report, in particular, to get our listeners hooked, give us the elevator speech about what you research and what the report is about.
Alexandria Zhang 04:13
Yeah, I think the pandemic really set the stage for this research. We saw not only the impacts of the pandemic on cities and counties, but also that local governments have played such a critical role in our country’s response to the pandemic. And often, you know, they were using limited resources to aid in that response. And, of course, state policies, to a large degree affect the amount of resources that local governments have. And so our specific focus in the report is how states limit local taxes and specifically the challenges that those tax limits can create for local governments after a recession, during the recovery period, but also in the long term when it comes to fiscal stability. And so, since you know, these, this discussion is about state policies, we equally importantly, make specific recommendations to state lawmakers so that they can further support local fiscal health, especially during this recovery period. and mitigate or eliminate some of those challenges that their tax cuts create.
Kirsten Wyatt 05:36
So my guess is that many of our listeners right now are nodding their head, they have likely their own examples of tax limitations imposed by state government. But why don’t you share with us please, some of those, some of those limitations that have created the biggest challenges or amplified, amplified existing budget challenges. Share with us more about the scenarios that you’ve researched, imposed by states that affect localities budgets.
Alexandria Zhang 06:06
Yeah, our report focuses on some of the common challenges that we think local governments face when it comes to tax limits as well as the tax limits that generate especially bad outcomes for local communities. one specific example is that certain limits we found create a so called ratchet down effect on local revenue, and impede local recovery after a recession, such as this one where we’re just coming out of, you know, typically a tax one that constrains the long term growth of revenue, while allowing that revenue to fully recover after an economic shock. But there are certain limits that impede that recovery. So for example, in Michigan, there are two distinct property tax limits that work together to restrict the growth of assessed values, as well as increasing the property tax rate to create that depressed effect on revenue to keep it artificially low, even as the broader economy is recovering. And actually inch data shows in 2019, some communities in Michigan still had not seen property tax revenue, recovered to pre Great Recession levels, even though the housing market had already bounced back. And I think, you know, in a longer term concern is that over multiple business cycles, this ratchet down effect, can erode can continually erode a local tax base over time.
Kirsten Wyatt 07:57
And can you tell us more about the landscape of other types of tax limitations? You know, we’ve talked about a little bit about property taxes, but what else did you find related to income or sales taxes, and how, you know, state interference can affect localities?
Alexandria Zhang 08:13
Yeah, states, of course, have a long history of restricting local taxes. And even now, states typically only allow local government to levy at most one or two of the three major taxes, property tax, sales tax, and income tax. The like property taxes, limits on sales and income taxes include caps on the tax rate, constraints around the tax base, and also sometimes how local governments can use the revenue. So for example, states, including California and North Carolina require their local governments to use their sales tax revenue, only for expenditure, I’m sorry, only for infrastructure purposes. And of course, localities often face multiple constraints, sometimes on the same tax source. Like I said, with Michigan, there are multiple limits on their property tax. And then also, when it comes to excise taxes, you know, we know about the typical state excise taxes like alcohol tax or the gas tax, many localities do not have that option.
Kirsten Wyatt 09:28
And, clearly, you know, Gov love is primarily about local government. our listeners love local government. I mean, so clearly, we’re biased. But one thing that struck me as I was reading through the report was, you know, one thing that local government often I think, you know, almost brags about is, you know, where the level of government closest to the community and local governments, you know, really take an active role in community engagement, you know, community listening. Do you get the sense that that same kind of attention to a community’s needs are part of the state level decision to limit some of these fiscal choices? Or does that concept of kind of community engagement citizen engagement, like even cross their radar?
Alexandria Zhang 10:16
That’s an interesting question. I think one thought I have in response to that is the tax limits we’ve seen can be quite arbitrary, and do not, tend to not reflect the reality that local leaders and local communities face from day to day, you know, because it’s at the state level, these tax limits are essentially a one size fits all approach, where, as you said, local community’s needs really vary, even you know, within a single state. And, you know, I’m sure we can talk a lot more about differences between urban and rural communities. And so so it does, so regardless of the intention of state tax limits, they definitely seem to be designed with, Let me think about this. So
Kirsten Wyatt 11:34
I like your one size fits all, you know, kind of idea that, you know, you’re not taking into account, you know, local community preferences or, or even, you know, I know another thing in the report that you address are long term liabilities, and how these tax limitations can affect those. If you could share more about that as well, that’d be that’d be fascinating.
Alexandria Zhang 11:56
Yeah, well, so it comes down to the fact that tax limits constrain local fiscal flexibility and limit the amount of resources that local governments have to devote to their various priorities. And that includes, you know, pension obligations, and infrastructure projects that that would, that would also need funding. And so for example, you know, especially in a fiscal crisis, a local government may have to decide to either you know, cut services or reduce pensions contributions. And when it comes to debt, there’s the concern that tax limits also reduce local government’s ability to use cash for infrastructure projects, and so may lead them to rely more on debt, and that debt may become unaffordable in the long term. And it’s also important to note that credit rating agencies do care about this stuff. They obviously care whether localities are able to meet their long term obligations, and seriously consider tax limits when they make their ratings decisions.
Kirsten Wyatt 13:15
And as we think about the idea of scope of authority, anything that you found any differences between Dillon’s rule versus home rule states, and what our listeners could expect, you know, based on which, which form they have in the state they live in?
Alexandria Zhang 13:35
Yeah, certainly, you know, we hear sort of at a high level that Home Rule localities do have more autonomy generally than Dillon’s rule, local governments, however, we found a couple of caveats to that. One is that states may make it really hard for localities to get home real status. For example, in Illinois, the state sets a population threshold and so the only county that actually qualifies and has home rule status is Cook County. And the other the other caveat is that we have seen that home rule localities may still have less freedom around fiscal decisions than they do around other governing decisions..
Kirsten Wyatt 14:27
And so share with us, you know, from your research, did you did you ever, like hear or learn more about kind of the why behind states do this, knowing that research like you like yours shows that there’s a significant impact on local governments, but but what tends to be the why or the reason that states pursue these policies?
Alexandria Zhang 14:52
Yeah, I think the intention varies. I think there’s a lot of discussion about how states want to reduce the tax burden for residents. They want to prevent mismanagement of local finances, you know, restrain the growth of local government generally, or make the state more appealing for individuals and businesses to move into. And we, you know, one specific recommended recommendation we have in the report is, if the primary goal of tax limits is to reduce taxpayer burden, then, you know, might make a lot more sense to pursue homestead exemptions, or targeted relief measures rather than restricting local government revenue as a whole. And and does it occur? And I don’t know if your research showed this. But does it occur that when, you know, state preemption happens that it ever is rolled back? Or does it tend to be the sort of thing where once it’s enacted, it’s never going anywhere? We have not seen, so our research did not cover the sort of related issue of preemption. We do offer a few state examples that are tied to our recommendations where states have, for example, allowed a temporary lift of some of their tax limits during a period of fiscal crisis.
Kirsten Wyatt 16:33
Okay and can you tell us more about how kind of how did that play out? Or how did that affect the localities?
Alexandria Zhang 16:42
So, let’s see. Yeah, so we talked a little bit about Pennsylvania’s act 47, which supports local governments that the state identifies as fiscally distressed and and when local governments are in that program, they are able to raise revenue beyond the state’s caps. And that program has certainly been successful for supporting those localities and getting them out of fiscal distress. Of course, you know, one important thing to know is, states should really take some of these steps to increase local flexibility before a locality, locality gets into trouble.
Kirsten Wyatt 17:32
And what are some of the other ways that that you recommend or that you found that states could increase local budget flexibility?
Alexandria Zhang 17:43
The first main strategy that we recommend is something that experts have been talking about ad nauseum, which is that states should continue to take steps to update their sales tax base to reflect changes in the economy since a lot of local governments that levy a sales tax, are required to use the state sales tax base. Most states now tax online retail, which has already proven to be a huge benefit during the pandemic for states and local governments. But very few states comprehensively tax services, even though we know that the consumption of services has outpaced the consumption of goods for quite some time. And, for example, in 2020, Florida estimated that adding personal services alone to their sales tax base would generate $277 million for fiscal year 2021, which is actually an increase from their 2010 estimate of $168 million. Yeah, and another interesting strategy, perhaps a, an innovative strategy that states can pursue is to simply support and facilitate local service sharing. And so you know, that might not only generate potential cost savings, but also increase the quality of service delivery, especially for communities that are struggling to provide those services. In 2007, New Jersey passed legislation to support local service sharing explicitly to try to reduce local expenses and the property tax burden on residents and there’s actually there has been some success stories. Gloucester County, for example, started sharing services with some of its smaller communities when they were struggling to provide those services on their own, and that generated millions of dollars of cost savings, to the point where now every municipality in the county participates in the program. And the county also helped reallocate the workers who ended up losing their jobs because of the consolidations.
Kirsten Wyatt 20:11
And is that is it different than like creating a special district? Or is that a situation where one entity is absorbing the other? Or is it, do they still remain two separate entities that are just working together for like economies of scale?
Alexandria Zhang 20:26
Yeah, it’s essentially just they’re working together in terms of, you know, services that are very similar across districts, or municipalities. For example, the Government Finance Officers Association surveyed 200, local government officials to ask them, you know, which services they’re able to share it with other jurisdictions, and one major category was maintenance services. So it’s something that that local jurisdictions can collaborate on.
Kirsten Wyatt 21:15
And so, you know, overall, we kind of in conducting this research, and and looking more into this, are there any states that have kind of gotten this right, or that you think are maybe, you know, maybe national leaders or models of, of how states can, you know, recognize that these limitations exist? And then, you know, take some steps to, to remedy that?
Alexandria Zhang 21:37
Yeah, I’m trying to think there definitely is an exemplary, you know, example of a state realizing that there are these challenges, but I think I mean, an interesting, so I guess, going back to your question about community engagement, is, there are examples where, so some of these tax limits can be overridden by, by referendum, you know, by a vote of the community. And so, you do see that voters do recognize, to some degree the challenges that these state tax limits create for their communities. In Colorado, there’s been a lot of initiatives where voters have allowed their local government to override Colorado’s tax limits, which are some of the most stringent tax limits in the country. So that, you know, the local governments can at least temporarily raise additional revenue and dedicate that revenue to specific community priorities. Another common challenge is that limitations, I think I mentioned before, fail to reflect the economic reality that local leaders face from day to day. And specifically, there are limits that constrain revenue growth, so that localities really struggle to meet basic service demands, or hinder the revenue from even keeping up with the pace of inflation. Wisconsin, for example, has a fairly stringent limit on their local property tax, where it is only allowed to grow from year to year at the rate of new construction. The Wisconsin Policy Forum found that in the years following the Great Recession, some communities experienced very sluggish growth to the point where that allowable rate of growth for property tax revenue was less than 1%, which was lower than inflation in many of those years, and caused a lot of problems.
Kirsten Wyatt 24:13
Right. Well, it seems like it’s, you know, policies like that are like the result of like, one point in time decision making, and maybe not reflective of, you know, how the world is changing, you know, future, you know, future economic impacts are coming and coming down the coming down the road. And so, you know, is that a topic that that states are open to talking about? Or does it tend to be something that’s kind of off limits, because it’s already like, maybe in place, or it’s something that’s been around for a while?
Alexandria Zhang 24:47
We haven’t worked with specific states on this since it’s such new research, but I think our hope is that states at least reevaluate the tax limits that they impose on local governments because sometimes it is, the reality is that state policymakers haven’t looked at these limitations in a very long time, or, you know, there’s turnover in legislatures. And so these limits stay in place, even though like you said, it may not make sense in as economic conditions change over time.
Kirsten Wyatt 25:27
Well, and I appreciated that, that, you know, one of your recommendations is really to have states, you know, reassess, you know, again, what, why is this happening? Where did this come from? And how do we evaluate now, if something that was put in place 10, 15, 20 years ago, is still relevant for what, you know, our localities need today?
Alexandria Zhang 25:51
Yeah, absolutely. And I, and we think it’s, again, especially timely now, just to re engage states on this issue because even though, you know, we know that the there’s some generous federal aid coming in for short term assistance to state local governments, and we are on a recovery path, there’s still, there’s still a lot of uncertainty around the pandemic’s longer term impacts on the economy, you know, on how we work and how we do business. And so that may translate into, you know, challenging conditions or revenue risks for local governments down the road.
Kirsten Wyatt 26:33
And if you could please tell our listeners where they can find a copy of this report and some of the resources and sources that you used for the report.
Alexandria Zhang 26:43
Yeah, so listeners can find the report on our website at pewtrusts.org. And it’s under the state fiscal health project. And we were really appreciative of the expertise that we gained from both state and local officials that we spoke to, you know, local elected leaders, but also leaders of municipal leagues and county associations that, you know, have certainly studied this issue for a very long time. As well as some state folks that dedicate their time to, to keeping an eye on the fiscal health of their local government, and working with those local governments to to improve their budget.
Kirsten Wyatt 27:52
As I was reading through the report, I couldn’t help but think that some of those groups that you’re recognizing and thanking, this is going to be a powerful piece of research to be able to share and to kind of continue to tell those stories about you know, when local governments struggle, you know, it affects the state as well. And, and, you know, the need for this to kind of be part of a constant conversation between localities between state government, and so I think you’ve created a really valuable research, research research tool here to, you know, help aid, you know, those state and county associations, and city associations that are doing this important lobbying work.
Alexandria Zhang 28:31
We really hope so, thank you for saying that.
Kirsten Wyatt 28:34
So is there anything else that you’d like to share with our listeners, anything else you’d encourage them to do if they’d like to learn more about this topic? So Pew’s goal with this research is also to engage directly with state and local officials and talk about these challenges and ways to to mitigate them and improve and improve the situation for local governments who are going through these, these issues. So we are definitely happy to continue the conversation offline. Wonderful. And for our listeners, we will link to the report in the show notes for this episode. And we encourage you to share some of your thoughts on today’s episode. You can tag us @GovLovePodcast. We can make sure that we get Alex and her team looped into any conversations that you’d like to start or share based on your own reading of this report. But Alex, I have one last important question for you. If you could be the Gov love, DJ, what song would you pick as our exit music for this episode?
Alexandria Zhang 29:39
Yeah, this is maybe the most important question. And I thought about it for a while. I think I would have to go with The Room Where it Happens from Hamilton.
Kirsten Wyatt 29:48
Oh, that’s a great choice. Because think about it, like if these localities were in the room when the state was, you know, passing down these limitations, things could change right?
Alexandria Zhang 29:59
Exactly my thinking.
Kirsten Wyatt 30:02
Well, thank you so much for coming on and joining us today on Gov Love.
Alexandria Zhang 30:05
Thank you for Kirsten.
Kirsten Wyatt 30:06
This ends our episode for today. And again, thank you for coming on and talking with me and everyone can listen or everyone can visit the Show Notes for this episode and read a copy of Local Tax Limitations Can Hamper Fiscal Stabilities of Cities and Counties. Gov Love is produced by a rotating cast of ELGL volunteers. ELGL is the Engaging Local Government Leaders network. You can reach us at ELGL.org/GovLove or on Twitter @GovLovePodcast. Thank you for listening. This has been Gov Love, a podcast about local government.