Cities prepare for a recession that will bring in less tax revenue and smaller budgets

It’s not just Wall Street’s warning of a recession. Even the local city governments are getting nervous.

Economists and business leaders have been talking of a recession for months as inflation remains stubborn and the Fed continues to raise interest rates in an attempt to lower them. Former Treasury Secretary Larry Summers recently said it is “more than likely” that the US will enter a recession within the year, while JPMorgan Chase CEO Jamie Dimon said this week that the US economy will be “six to nine months from now” will be in recession. ”

Businesses and CEOs are already preparing for an economic downturn, and many are considering pre-emptive layoffs.

But recession fears are also beginning to have an impact on local politics, as a growing number of U.S. local governments worry about their finances and plan more conservative budgets for the coming year, according to a new poll released by the National League of Cities on Wednesday. an advocacy group.

When planning their budgets for fiscal 2023, according to the survey, only 70% of city-level tax officials are optimistic that their local financial needs can be met. This is a sharp drop from last year when 90% of city governments felt comfortable with their finances, as a growing number of cities are concerned an economic slowdown will hit their budgets.

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The “looming fear” of a recession has forced many cities to downgrade their income and sales tax revenue forecasts for next year and adopt more conservative budgets.

According to the report, sales tax revenue is expected to fall by 2.5% this year, while income tax is expected to remain flat. And while property tax revenues tend to be a much smaller portion of most cities’ budgets, they too are forecast to fall 4% this year in response to a historic housing market correction caused by higher mortgage rates.

“We have some challenging months ahead of us,” wrote Clarence Anthony, CEO and executive director of the National League of Cities, in the report.

“While the fiscal impact of unusually high inflation remains to be seen, American cities are bracing for stagflation and a possible economic downturn.”

Cities are preparing for the recession

City governments are increasingly factoring in the likelihood of a recession by downgrading their expectations for expected tax revenues for fiscal years 2022 and 2023, the lifeblood of local budgets.

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That’s because households come from tax revenues, and most municipalities are bracing for a sharp fall in their income and sales tax revenues this year as a recession threatens to raise unemployment and slash consumer spending.

It’s a far cry from what cities have seen over the past year. The gradual lifting of pandemic-era restrictions, combined with significant federal stimulus flowing through the economy, boosted consumer spending and reduced unemployment in 2021. This prompted a “strong recovery in city revenue streams” in the form of higher sales and income taxes revenue, according to the report.

Cities also benefited directly from federal stimulus programs, including last year’s American Rescue Plan and Biden’s big infrastructure bill, the report said.

But the economy is now showing warning signs, and cities are already beginning to suffer. Annual inflation in the US has now hit a new 40-year high, quickly eating away at larger city budgets.

“Our towns and villages still face an uphill battle as unusually high rates of inflation nearly wiped out tax revenues from these governments in 2021,” the report said.

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And the pain might just begin. GDP growth has declined over the past two quarters – usually a clear sign of a recession. And while unemployment is still low and consumers continue to spend, that situation could change quickly.

Last week, ex-Secretary Summers said the unemployment rate would need to rise to 6% from 3.5% today to offset current levels of inflation. And while most Americans have been able to use their large pandemic-era savings over the past year, those savings could be dwindling.

Last July, Moody’s Analytics predicted that low-income Americans would run out of savings by the end of 2022. And last month, the Bureau of Labor Statistics revised its estimates of how much cash Americans still have saved, revealing that the personal savings rate in the US is now at its lowest since the early days of the financial crash of 2007

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