Cities on Their Own : Local Revenue When Federalism Fails

The pandemic has been especially harsh on the economies of large urban areas. However, even smaller urban communities face significant shortfalls. Meanwhile, a meaningful federal response was slow to materialize. In a functioning federalist system, one might expect the central state to quickly address state and local fiscal challenges that are national in scope. Not only would such funds ensure state and local governments had the money to invest in their responses to the pandemic, but they would also prevent public sector cuts that would otherwise deepen the economic recession. While Washington managed to pass one round of stimulus for U.S. workers and businesses, local governments began making cuts almost immediately. At least some political leaders in Washington seemed to believe that the current fiscal crisis confronting local governments is of their own making. This kind of talk is obviously not grounded in reality, though budget decisions made prior to the pandemic limit local options to respond prudently. The American Rescue Plan passed in March of 2021 provides meaningful federal dollars to assist local governments with revenue shortfalls, but delays in this assistance complicated local governments’ response to the pandemic. Though this unique crisis is the result of public health measures, and recovery depends on the success of such measures, it has also exposed the fragility of local revenue and highlighted the fissures in the U.S. body politic. The problem of local revenue sufficiency is not new, nor is the tendency of state and national leaders to blame local fiscal problems on local choices alone rather than understand them to be the result of decisions made at the local, state, and national levels.This Essay proceeds in three parts. Part I describes the brokenness of U.S. fiscal federalism, which has both devolved significant responsibility to local governments and left them without the fiscal tools commensurate with this responsibility. Part II discusses the ways that local governments have sought to secure own-source revenue in the context of declining state aid and state-imposed revenue restrictions, including the choices cities have made or are considering in their fiscal year budgets for 2021. Part III argues that if localities are really on their own, they should be given the fiscal tools necessary to respond to local problems, including significantly more taxing authority