Study Explores Local Government Response to Recessions

Recessions can be trying times for city and county governments. They typically experience a fall in revenue from two primary sources:  1) a shrinking property tax base because of falling property values and 2) lower intergovernmental transfers—grants and other payments received from the state and federal governments—because of cutbacks made at these higher levels of government. To stabilize their budgets, local jurisdictions can increase revenue, lower spending, or do both.

To determine which strategies were most likely to be used, the DeVoe Moore Center’s Keith Ihlanfeldt and Erich Cromwell examined the budget decisions made by local officials in Florida cities and counties following the 2007 recession, and published in the National Tax Journal.

When the property tax base decreases, a government may opt to raise its millage rate. This rate is the factor by which a property’s assessed value is multiplied to arrive at the tax due from the owner. Rates are usually expressed as the amount levied per $1,000 in property value. Thus, a mileage rate of 20 would imply $20 per $1,000 in property value.  Increasing the millage rate can act to maintain property tax payments at near-constant levels even as property values decline, thus steadying revenue.

Local officials may also make across-the-board spending cuts to lower expenditures. Public officials may be reluctant to raise the millage rate when transfer payments decrease because this will hike property tax rates. Instead they may cut spending in areas for which the transfers had been earmarked.

Ihlanfeldt and Cromwell further proposed a local government that fosters economic development will have considerable latitude in the actions it takes. A jurisdiction with low taxes, high quality services, and a large population relative to its neighbors, for example, may have greater latitude in making compensatory adjustments in its millage rate and spending without diminishing its attractiveness to business.

To test their ideas, the researchers obtained 1995–2011 data on the budgets and property appraisals for 274 Florida cities and all 67 counties. These figures showed increasing property taxes, transfer payments and expenditures and mostly decreasing millage rates in the years leading up to 2007, and opposite trends afterwards. Ihlanfeldt and Cromwell estimated a series of regression equations to uncover the strength of the associations among these variables.

Their findings were consistent with expectations that local officials will increase millage rates in response to reduced property tax revenue. They will also decrease expenditures in response to reductions in tax revenue and in transfer payments although cuts were more targeted to particular spending categories. Also, as expected, the increases made in millage rates are larger in cities and counties with lower rates and bigger populations compared to neighboring jurisdictions, while spending decreases are larger in those localities with higher spending levels than their counterparts. Among the recommendations for follow up study, Ihlanfeldt and Cromwell call for similar analysis of budget decision making in school districts, a third unit of local government.

The complete articles appears in the National Tax Journal (June 2015), accessible at https://www.ntanet.org/NTJ/68/2/ntj-v68n02p339-376-local-responses-shocks-revenue.html.

About DeVoe Moore Center

The DeVoe L. Moore Center is conducts economic research and policy analysis focused on state and local policy issues and is located in the College of Social Sciences and Public Policy at Florida State University in Tallahassee. As an educational institution the DMC provides professional research experience to undergraduate and master’s students through an extensive program of internships and independent study, preparing them for a future in public policy, economic development, public sector accountability and entrepreneurship.
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