Cities and towns expect spending to drop nearly 3% in fiscal year 2022 from a year earlier, in anticipation of an economic downturn in the near future, according to annual fiscal conditions report of the cities of the National League of Cities.
Municipalities expect a 4% decline in revenue for fiscal year 2022 after adjusting for inflation, according to the report released Wednesday.
Abnormally high rates of inflation nearly wiped out the tax revenue these governments earned in 2021.
Now, property tax revenue is expected to decline by more than 4% in fiscal 2022 due to the slowdown in the housing market triggered by multiple interest rate hikes by the Federal Reserve. Sales tax revenue is expected to fall 2.5% after an “extraordinarily strong” fiscal year 2021. And almost no income tax revenue growth is expected.
The share of cities that report being less able to meet their budget needs in 2023 has almost tripled to 31% from the previous year.
Municipalities were more optimistic in fiscal year 2021, when they benefited from a strong rebound in revenues, especially income taxes and sales, as well as a massive injection of federal funding into the American Rescue Plan Act, which Congress passed in March 2021, according to the report.
Meanwhile, states are also grappling with a slowdown in tax revenue, after adjusting for inflation. In June and July, total tax revenue rose just 0.3% from the same period a year earlier, according to the Urban Institute.
Personal income tax fell nearly 5% in the two months, while sales tax revenues fell 3.3%. But corporate tax jumped 28%.
Slowdown comes at a time when several states have instituted tax cuts or holidays. California, for example, began sending $9.5 billion in tax refunds to 23 million residents last week. Eligible Californians will receive up to $1,050 to help offset rising costs for groceries, gas and other items, said Governor Gavin Newsom.