How Can City, County and State Governments Become Fiscally Sound Again?
Question/Comment: Allowing for the current reduction in home valuations and thus reduced property tax revenues generated to local governments in general, what combination of revenue(s) would most likely restore city, county and state governments to fiscal solvency? I understand the unique circumstances each have, but are there any models going forward?
Paul Solman: The new stimulus package includes a healthy infusion of money for local governments. But “restoring solvency” means spending no more than you earn.
Government “earnings” are taxes. If they’re PROPERTY taxes and the property drops in value, you either raise the tax RATE or cut spending. Or borrow by issuing bonds. Or deplete your “rainy day fund,” if you have one.
Unfortunately, the story of this crisis is that governments (and companies and individuals) were borrowing and depleting in the GOOD times. Indeed, that’s part of the reason they SEEMED “good.” Everyone acknowledged: “We’re living beyond our means.”
I hate to sound like a Calvinist fuddy duddy (or your mother), but this is what happens when you do.