While many state and local governments have weathered the COVID-19 pandemic in good financial shape, they face a variety of major uncertainties and challenges going forward — including a rapidly approaching federal funding cliff.

This set of circumstances provides governments with a unique opportunity in 2024 to step back and comprehensively evaluate their fiscal resources, needs and risks. An A&M fiscal health assessment can provide valuable insight into a government's fiscal condition and inform a financial sustainability plan that funds major service priorities and financial obligations on a long-term basis.

A Shifting Economic Environment

The latest employment and inflation data have increased the odds of a "soft landing" for the U.S economy, but recent economic volatility means the outlook remains uncertain, particularly with regards to consumer demand. A downturn in employment and other taxable economic activity, either now or in the future, could quickly sap the financial reserves that governments have been able to build up in recent years.

State and local revenues surged during the pandemic as a result of one-time federal stimulus spending, rapid increases in housing prices and a temporary shift in consumer spending from nontaxable services to taxable goods. The major revenue sources that state and local governments rely on, however, are now flattening out or declining:

  • Income tax revenues have fallen significantly across the country. In many cases, this is a result of policy decisions by states to cut taxes, but investment market losses have also been a contributing factor. In urban areas, local income taxes have declined as a result of the shift from traditional office environments to remote and hybrid work.
  • Sales tax revenue growth has flattened out as the shift from purchases of nontaxable services to taxable goods during the pandemic reverses itself.
  • Property taxes, the largest revenue source for most local governments, are stable in most areas but are a lagging indicator of real estate market activity and may decline if higher mortgage interest rates persist and eventually cause housing prices to weaken or if the shift to remote and hybrid work causes commercial office space valuations to fall.

On the expenditure side of the ledger, state and local governments also face an array of short- and long-term pressures that have been impacted by the pandemic and its economic effects.


Originally published by 6 February, 2024

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