Telework and Local Taxes: A Tenuous Relationship.

• Author: Marlowe, Justin
• Position: PERSPECTIVE

It's often said that pandemics don't start trends but rather that they accelerate the trends that were already in motion. Telecommuting is an excellent example. Work from home was slowly on the rise before the pandemic, but since COVID-19, it's become the default mode for many workers. A recent report from the Rockefeller Institute of Government--led by my colleague Liz Farmer--makes this point well. It shows that as of August 2022, nearly 30 percent of households in the largest U.S. cities have an individual working from home. For households earning $100,000 a year or more, it was more than half.

It's clear that telework, temporarily borne out of necessity during the pandemic, is now a permanent component of the U.S. labor force.

This could mean many things for state and local finance. It's easy to speculate that as a result of telework, many well-paid professionals who used to commute to central cities are no longer a reliable source of sales taxes, income taxes, transit farebox revenues, and other revenues that follow traditional downtown economic activity. That's a major challenge for state and local fiscal policy going forward. But at the same time, telework might keep sales and income tax revenues closer to home as workers stay closer to home. We won't know for sure until those data arrive throughout the next several months.

What is clear is that investors appear to have already taken stock of these trends. The message they're sending is worth hearing.

It's always a challenge to measure investors' views on specific municipalities, Municipal bonds don't trade enough to produce the kind of strong signal sent by stock prices, U.S. Treasury yields, or other traditional market indicators. But fortunately, some new data tools can help the United States bridge that gap. A bond index developed and recently launched by the Center for Municipal Finance at the University of Chicago--known as the CMF Muni index--tracks the prices and yields of general obligation bonds from the largest U.S. cities, counties, and school districts [see munifinance.uchicago.edu].

The Index goes up when investors are willing to pay higher prices for an issuer's bonds, and vice versa. In other words, it's a real-time indicator of investor sentiment toward particular jurisdictions.

Values across the CMF index have fallen precipitously. From October 2021 to October 2022 the index overall declined more than 50 percent. That reflects the brutal market conditions in the...