The Economy Is Booming. So Why Are Cities' Revenues Still Lagging?

• Author: Pagano, Michael A.
• Position: Commentary

The structure of their tax systems doesn't align with their evolving economies.

She nation has become giddy about the second longest bull market in history, extending now --the turmoil of the past week notwithstanding --some 95 months after the trough of the Great Recession. Though there may have been times over the last nine years or so when the economic future seemed to be in peril, right now most parts of the economy look reasonably strong.

But the good fortune is not shared by many city governments. Cities, which are arguably our great engines of economic growth (and the major contributor to the gross domestic product), have been slow to see their general funds return to pre-recessionary levels. The fault lies not in their stars but in the structure of their tax systems.

Data that I and my colleagues collected for the National League of Cities shows that more than a decade after the Great Recession constant-dollar general fund revenues are only now beginning to reach the levels they enjoyed prior to 2007. By contrast, states' general funds, according to data from the National Association of State Budget Officers' Fiscal Survey of the States, rebounded to pre-recessionary levels by 2013. Almost exactly the same phenomenon was experienced by the federal government.

Why haven't the cities enjoyed the same kind of revival of their general funds as have the states and federal government? It's because cities' fiscal architecture is not well aligned with the underlying economy. For example, the more progressive nature of the federal income tax and the inclusion of capital gains as a taxable item in most states has meant that record-breaking stock markets have buoyed their general funds. Not so with cities.

Approximately three-fourths of total municipal revenues are raised directly by cities. Of that amount, approximately one-third is derived from the property tax. Sales taxes account for 18 percent and user charges contribute 37 percent. The remainder, or one-fourth of total municipal revenues, consists of transfers, mostly from state and federal governments, that are largely earmarked for specific programs.

New York City is the one significant exception among the nation's large cities. While it does have a property tax, like other municipalities, it also relies on a progressive income tax and a tax on capital gains.

Property taxes do not automatically respond to a booming stock market. On the positive side, they can remain stable even when...