In Brief:
- A summer 2025 survey found that many finance officers expect tariffs to drive up costs. Officials are less confident about meeting financial needs next year.
- Cities’ revenue streams are tightening, with income tax revenue expected to decline and American Rescue Plan Act money ending late next year.
- The bright spots: property tax revenues still show some growth and a much-feared elimination of municipal bonds’ tax-exempt status didn’t come to pass.
Municipalities are already spending more cautiously this year, and they expect that trend to hold in 2026 as cities grapple with rising costs, lower revenue, and the wind-down of federal aid, per a new report from the National League of Cities.
Cities’ fiscal year 2025 spending grew by less than 1 percent over the prior year — a big difference from the nearly 8 percent spending growth seen in FY2024.
Finance officers have steadily become more nervous about the future, according to National League of Cities surveys. The majority of finance officers were more confident they'd be able to meet financial needs in FY2024 than they had been in FY2023. But such optimism is dwindling. This year’s survey found just over half of financial officers felt the same confidence about FY2025, and fewer than half think they'll better meet budget needs in FY2026.
And they have some reason to be wary. Cities saw general fund revenues grow almost 4 percent year-over-year in fiscal year 2024; in FY2025, city revenues are projected to decline nearly 2 percent.
They’re also preparing for the end of American Rescue Plan Act (ARPA) money. Cities must spend any remaining obligated APRA funds by the end of December 2026.
Surveys showed some cities are also worried about tariffs, with over 40 percent saying tariffs affect their ability to procure some items. Among those impacted municipalities, over a third expected they’d respond by simply spending more money, while others said they were canceling or delaying projects or seeking alternative domestic sources for the items.
Alongside higher procurement costs, finance officers expected to lose some spending power thanks to inflation, as well as to spend more on employee wages and salaries. At the same time, they’re seeing some of their tax revenues grow more slowly or even decline.
Sales tax collections had soared post-pandemic in a burst of consumer spending, but are now flattening out, returning to pre-pandemic norms, per the report. Sales tax revenue plummeted in 2020, then climbed, with 2022 seeing dramatic 11 percent growth over the prior year. Collections held flat in 2024, however, and are expected to rise just 2 percent this year. And while a strong job market drove a nearly 9 percent year-over-year rise in income tax collections in 2024, this revenue stream is expected to drop nearly 2 percent in 2025.
Still, cities are seeing a reprieve in other ways. The National League of Cities surveyed municipal finance officers during summer 2025, when many feared the White House would end the federal income tax exemption for municipal bonds, an idea proposed by House Republicans.
Those fears, which did not come to pass, may have dampened their overall outlook. Many cities rely on borrowing to finance infrastructure maintenance. Over 40 percent expected they’d need to delay or reduce infrastructure projects if the tax exemption were ended, while nearly 30 percent would seek other financing methods. Almost 20 percent would have raised local taxes.
Plus, cities still have some tax revenue growth. While commercial office values are declining, the housing market is driving an estimated 3.4 percent increase in property tax collections this year. Changes in the broader economy have a delayed effect on property taxes, because value assessments happen only periodically and so taxes tend to reflect a property’s value from several years ago.
As cities consider how to juggle these pressures, they’ve been maintaining certain priorities. Like in the prior two fiscal years, FY2025 saw cities continue to designate roughly 10 percent of their general fund spending to recreation and culture and more than half to public safety.
