While the budgetary struggles of the state and the city of Denver have made large headlines recently, there has been less attention to the financial challenges facing other metro area municipalities. Those challenges have potentially draconian implications for the services that cities and towns normally provide. In addition, because of a variety of national and local trends, few people think the financial situation for cities is likely to get better soon.
The need to understand these trends led the Colorado Municipal League to begin a study in 2008 of the long-term fiscal sustainability of its 264 member cities.
Part of the problem, the league has learned, is that cities in Colorado depend heavily on sales taxes to fund services. Indeed, sales taxes make up 75 percent to 80 percent of municipal revenues, and those revenues are either declining or not increasing as fast as the costs of employee health insurance, utilities, materials for street maintenance, etc.
In addition, people are spending larger proportions of their income on services rather than on material goods. According to Phyllis Resnick of R2 Analysis, most Colorado cities don’t apply sales taxes on services, so as people spend on services instead of buying goods, cities’ sales-tax bases shrink.
Another significant trend involves the looming retirement of large numbers of baby boomers. With the population over 65 years of age expected to be three times in 2030 what it was in 2000, seniors’ spending patterns are of prime concern. Previous generations of retirees spent less of their income on goods that generate sales taxes, Resnick said, and there’s no reason to think retiring boomers will act any differently.
Instead, she predicts that retirees who are healthy will spend their discretionary income on experiences, such as travel. Retirees who are unhealthy will spend a large proportion of their income on medical care. Neither group is expected to spend heavily on taxable goods. As a result, Resnick anticipates that the per-household contribution to sales taxes (adjusted for inflation) will decline between 5 percent and 10 percent from 2005 to 2030.
Most cities have already cut their budgets, and some have also reduced services. But that may not be enough to allow cities to provide the roads, police and emergency response, libraries and other services that citizens demand.
Should services be taxed? Will municipalities increasingly turn to a “head tax” on each worker that businesses employ? (Denver already has such a tax.) Is it reasonable to tax Internet sales, as some have suggested? Should there be a “seat tax” on movies, artistic performances and athletic events? Should homeowners be charged for street lights, or for use of parks and trails?
It seems likely that cities will be forced to adopt a variety of new taxes and fees to maintain services.
With the national economy in disarray and a tsunami of older people headed Colorado’s way, it’s clear that hard choices are ahead. Local government leaders and taxpaying citizens alike must embrace change that may range from fewer services to higher taxes and fees.
If ever there was a time for us all to face reality and plan ahead, it is now.
