Local governments are responsible for providing police, fire and primary education. Maintaining these services is important in the short term for the quality of life of local residents and the ability of parents to work, but they also lay the foundation for longer-term economic growth and stability.
But funding these services in a recession is a challenge. As sales, income and real property tax bases shrink, most municipalities are hamstrung because they have only those taxing powers granted to them by the state, and most states restrict local governments’ ability to raise revenue using the real property tax, the single-most-important tax for local governments. Without the freedom to raise revenue from the real property tax, localities may turn to the aggressive collection of local fees and penalties to bridge the budget gap.
Specifically, states and localities should consider:
- Expanding the use of property taxes in ways that are sensitive to the fact that many homeowners are much more liquidity-constrained than is generally appreciated. [Gamage, Hayashi, Jurow Kleiman, Shanske, Shobe]
- Targeted property tax relief for low-income households (e.g. direct cuts, circuit breakers, pause property tax foreclosures). [Hayashi, Jurow Kleiman, Shanske]
- Combining property tax withholding with circuit breakers – this could be done at the state level or at the federal level, though there would need to be state support. [Shanske]