Reprinted from EconLib
Many cities across the nation are facing a fiscal crisis. While pandemic-related problems that were self-induced or otherwise play a part, many of these issues have plagued cities for a long time. A serious cultural shift concerning finances among local governments is critical if people want to flourish in cities.
I recently interviewed Mark Moses who is a municipal government expert and author of the recently published book The Municipal Financial Crisis: A Framework for Understanding and Fixing Government Budgeting. He contends that “many local governments are on track for bankruptcy.” And this downward trajectory can be expected to continue as municipalities fail to restrain their spending and overreach, crowding out opportunities for the private sector to work.
We’re seeing this play out in places like New York City, where city-funded expenses have been asked to be cut by 3% and on track to be slashed more in response to their recently reported $10 billion deficit.
Moses says that “there’s a lack of economic understanding in lots of municipalities.” This absence of understanding often results in collecting more taxes to fund more “solutions” as a band-aid to the broken system and struggling local finances. As he puts it, “local governments give up trying to balance budget sheets.”
But failing to assess and address the tangled economic approach that’s led them to a place where more taxes and regulations seem like the only answer leads to long-term issues and a path that’s difficult to leave.
Local governments must limit their scope and focus on core issues. That means letting new initiatives and departments take a back seat while they get spending under control.
This is difficult, however, especially after the 2021 American Rescue Plan Act that gave $45.6 billion to municipalities, which temporarily and artificially inflated local finances. More money under lousy management is a weak fix. And now, with rising inflation and energy costs, these municipalities are ill-equipped to thrive in a recession that wasn’t helped by the huge bailout package.
A good start to overcoming these challenges would be to get government out of the way in most cases so that the the private sector can solve key issues, which has proven to be the best antidote for most problems throughout history.
Overinflating their role instead of sticking to limited governing, such as property rights and a few public goods, is a trap that many cities fall into and that comes at a huge cost. But philanthropic and other private-led solutions tend to be crowded out through higher taxes and regulations when city hall makes promises they can’t fulfill.
Moses describes this as municipalities “seeing themselves as an end to themselves,” which is why many local governments resist spending limits or find ways around them.
This is an ongoing issue in Texas which is contributing to an affordability crisis.
Texas is blessed to have constitutional amendments against state-controlled personal income taxes or property taxes, so all property taxes are local in Texas. While there have been attempts recently by the state to limit their growth, property taxes have increased by 169% in the past 20 years compared with an increase of 104% in the rate of population growth plus inflation. This indicates that property taxes are growing well above the average taxpayer’s ability to pay for them.
Some argue that Texas has high property taxes because it has no personal income taxes. But the reality is that it is really from excessive local government spending.
For example, Texas has the 6th most burdensome residential property tax according to the Tax Foundation but other states without a personal income tax like Florida and Tennessee rank 26th and 36th, respectively. This is because the latter two states do a better job restraining spending.
The best way to get budgets and taxes back on a fiscally conservative track is through a strict spending limit that covers the entire budget and grows no more than the rate of population growth plus inflation. This would help cities, and all local governments, stick to just addressing what’s in their purview.
A city’s scope shouldn’t be evaluated from one council meeting to the next but should be assessed in the long term if its local government hopes to see future success and a prosperous economy.
The same principles of economic success apply to all government institutions; people flourish where liberty is preserved, and that’s best achieved under limited government whereby politicians’ interventions remain inside their limited scope so that free markets and free people can innovate and thrive.
Just as we’re witnessing with this recession, there’s always a trade-off to overspending and unbalanced budgets. The sooner local governments realize that and reel in their spending, which is the ultimate burden of government, the sooner financial crises will be averted.