Robert M. La Follette School of Public Affairs
Monday, August 17, 2020

Large revenue shortfalls likely in central cities due to COVID-19

Andrew Reschovsky Andrew Reschovsky

Without an infusion of new federal assistance, the nation’s largest central cities will experience large drops in revenue due to the COVID-19 pandemic according to a research paper by La Follette School Professor Emeritus Andrew Reschovsky and two colleagues.

Congress remains deadlocked over the appropriate role of the federal government in helping state and local governments deal with the revenue losses and extra spending resulting from COVID-19. The political debate is contentious, with Democrats proposing almost a trillion dollars in additional aid to state and local governments, while President Donald Trump argues that a new round of stimulus legislation will only serve to provide “bailout money for Democrat run states and cities that are failing badly.”   

In “The Fiscal Effects of the COVID-19 Pandemic on Cities: An Initial Assessment,” Howard Chernick from the City University of New York, David Copeland from Georgia State University, and Reschovsky estimate fiscal year 2021 revenue shortfalls for 150 U.S. central cities. The paper is forthcoming in the September issue of the National Tax Journal.

The authors project that revenue losses in the hardest-hit cities will exceed 15 percent, while the average city will face revenue shortfalls between 5.5 percent and 9 percent. Cities with large revenue losses are found throughout the country, with big losses in Democratic and Republican states.

Unlike the federal government, state and local governments must balance their budgets annually, so revenue declines will lead directly to cuts in public safety, education, sanitation, public health, and other services provided by local governments. The authors argue that these cuts will inevitably have serious consequences for city residents and for local economies. 

Reschovsky and his colleagues used a unique dataset of fiscally standardized cities that combines data from a central city municipal government with data from overlying school districts, counties, and special districts, to reflect the total revenue raised on behalf of central city residents and businesses.

For Madison, the authors predict a 2021 revenue shortfall of between $55 million and $86 million. Although, in percentage terms, these revenue losses are somewhat below average for the 150 central cities, without a substantial infusion of federal aid, public services in Madison will suffer. 

“Madison’s projected revenue shortfalls are below average because it relies on the property tax for nearly one-half of its total revenue,” Reschovsky said. “As we discuss in the paper, even if property values decline as a result of the pandemic, it will take two or three years before lower market values are reflected in lower property tax revenues.”

In the short run, the relative stability of the property tax helps Madison – and to a somewhat lesser degree, Milwaukee. “The flip side is that if property values decline, local governments in Wisconsin may suffer pandemic-related revenue shortfalls in the longer run – 2023 and beyond,” Reschovsky said.

For Milwaukee, the researchers predict revenue shortfalls between $178 million and $273 million, close to the average percentage revenue shortfall for all 150 cities studied. “This result reflects the fact that Milwaukee relies much more heavily on state aid than Madison does, and we project state aid cuts in Wisconsin to be about average across all cities,” Reschovsky said.