The Week in Public Finance: Troubling Economic Update, Major Online Tax Ruling and More

A roundup of money (and other) news governments can use.
by | September 15, 2017
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City Economies May Already Be in a Downturn

A new report should be on everybody's radar.

Released by the National League of Cities (NLC), the report says municipal finance officers are expecting minimal growth this year -- less than 1 percent -- after dealing with slower revenue growth last year.

City finance officers also reported a significant decline in their confidence about their cities’ financial security. This year, 69 percent said they are better able to meet the financial needs of their communities -- down from at least 80 percent in each of the last three years.

The Takeaway: Cities still haven't recovered from the recession -- their revenues last year (accounting for inflation) reached just under 98 percent of what they were in 2006, the year before the recession started -- and if the expectations in this report bear out, they might never fully recover before the next downturn.

Although municipal finances are slow to recover, the national economy has seen relatively steady improvement. This divergence, says the report, is a signal that city fiscal structures need to be modernized.

Noting that cities have limited taxing power compared to states, the report says “cities are stuck between a rock (property tax caps) and a hard place (limited online sales tax authority), often resulting in the increase of fees for services.” Such a “patchwork approach,” therefore, isn’t likely to capture the full value of the current economic expansion. (More on the report here.)

 

Next Stop, SCOTUS

A ruling in South Dakota could have nationwide implications.

The state’s Supreme Court ruled on Thursday that a law requiring retailers to collect a sales tax for all online purchases by South Dakotans is unconstitutional. The rejection means the case will likely be appealed to the U.S. Supreme Court.

South Dakota’s law, passed a year ago, is part of a national effort among states to push the online sales tax debate into the courts after more than a decade of waiting for Congress to let them collect online sales taxes.

By some estimates, states are collectively missing out on more than $23 billion a year in potential online sales tax revenue.

The Takeaway: If the high court takes the case, it would give the justices a chance to reconsider a 1992 Supreme Court decision that barred states from collecting sales taxes from retailers without a physical presence in the state. Many, including Justice Anthony M. Kennedy, believe that the 1992 case concerning catalogue retailers is out of date in today’s online shopping world.

“A case questionable even when decided,” Kennedy wrote in 2015, “Quill now harms states to a degree far greater than could have been anticipated earlier.”

But now that the South Dakota case has reached the last stop in the U.S. appellate system, some are urging Congress to take action. The National Retail Federation called upon Congress to pass the Remote Transactions Parity Act, an online sales tax bill in the House that provides protection for small businesses from any potential compliance burden.

Given the current political climate, and that tax reform is the next big agenda item on Capitol Hill, it just might have a chance.

 

Failing Suburb? Merge It With a City.

If you can’t beat ‘em, join ‘em. That’s the rally call of a report this week that suggests struggling inner-ring suburbs solve their economic problems by merging with their nearby city.

The Manhattan Institute report notes that some suburbs lack the kind of housing stock and business and public asset diversity that are necessary to jump-start a revitalization. Both the city and suburb could benefit from the expanded tax base and consolidation of services, the report notes.

“As these municipalities become progressively poorer, they are less able to finance public services without tax increases, which drives away people and business, which further reduces the tax base,” the report says. “If these fiscal conditions are paired with poor governance and corruption, a turnaround can be especially difficult.”

The report outlined 10 suburbs with declining population and rising poverty as good candidates for such mergers: Lackawanna outside Buffalo, N.Y.; Calumet and Dolton outside Chicago; Elmwood Place and Norwood outside Cincinnati; Newburgh Heights and East Cleveland outside Cleveland; Ferrelview outside Kansas City, Mo.; Wilkinsburg outside Pittsburgh; and Pine Lawn outside St. Louis.

The Takeaway: Acknowledging that a “merger is a fraught undertaking,” the report recommends states take the lead. States could, for example, absorb some of the suburbs' legacy costs like pensions and debt to ensure cities participate. In some cases, states would have to pass legislation to allow municipalities to voluntarily plan and execute mergers. States could also finance capital improvement projects after the merger. 

Mediating -- or mandating -- a merger would be an extreme version of state intervention. No state wants to see a city fail on its watch. But they generally look to other, less controversial methods for intervention than mergers like giving a struggling municipality a tax break or installing an emergency manager or control board with broad authority to fix a city's finances.

Another important factor, however, is out of anyone’s control: how well a suburb and its neighboring city can assimilate to one another.

In Indiana, which allows mergers, research has shown that communities with similar demographics to one another are more likely to support consolidation efforts than places with diverse communities.

“Perhaps the more homogeneous demographics in the town-township consolidations led to more willingness for residents to trust that post-consolidation issues could be resolved,” Ball State University researchers concluded.