November 2021

Whenever Washington passes a law it is usually so many pages that very few people ever know all that is in it.  A prime example is the American Rescue Plan Act which was passed in March 2021 and authorized spending of nearly $200 Billion.  $130 Billion of that money went to cities and counties.

The economic downturn did not bankrupt local government.  In fact, local government actually saw an increase in tax revenue in 2020 thanks to growing property taxes.  A bumper tax year is anticipated in 2021.

The stimulus legislation forbade states to use the money to cut taxes.  It made no mention of local government tax cuts but did say funds should be used for the relief of households and for spurring local economies.  This could be achieved by cutting property and sales taxes which are the two biggest sources of local tax revenue.  

In typical Washington D.C. fashion, the money was distributed in the usual political manner. The act gave money to counties and small cities based solely on their population and to large cities based on an antiquated formula from the 1970’s that benefits bluer cities in the Northeast and Midwest.  Congress did not consider the tremendous diversity of local governments when it crafted the bill.  Some areas will get less than 5% of their annual property tax revenue while other areas will get over 100%.  The disparity is due to the fact that Congress didn’t bother to look at what local governments in the United States actually do.

Economists have a term for the unfortunate result of local windfalls – the flypaper effect.  The idea is that money tends to stick wherever it is thrown regardless of what voters want.  When a city doubles its revenue it will find ways to double its budget.  For example, Walnut Creek, CA wants to spend $500,000 a year on “Diversity, Equity and Inclusion and Mental Health Response” training for staff.  It is likely when stimulus money is spent, there will be a great deal of pressure to continue to fund the Diversity, Equity and Inclusion and Mental Health Response program.

The stimulus will have to be spent in the next four years and taxpayers will pick up the tab for any new programs when the federal money runs out. 

Local governments can issue refunds.  Wouldn’t that be a wonderful thing?

THOUGHT FOR THE DAY:​

Life has no remote.  You have to get up and change it.