Municipal leaders face tough challenges when the economy shifts. They must balance giving relief to residents and businesses with funding essential services. In these times, working together and planning strategically is more important than ever. By partnering with experts, cities can analyze financial trends, explore new economic opportunities, and create relief measures that suit their community’s unique needs.
Smart financial planning is key. Using data to forecast economic changes helps leaders decide how much to save and how to allocate budgets. Building a strong reserve isn’t quick—it can take years to create a buffer that can weather economic downturns. And when hard times hit, it’s crucial to avoid the temptation to spend reserves too quickly.
In Massachusetts, municipal revenue mainly comes from four sources:
- Local revenue from fees and local taxes
- Federal funds from annual entitlement programs
- State revenue sharing
- Local property taxes
For many communities, property taxes are the largest revenue source—averaging about 68% of the General Fund revenue. However, during economic slowdowns, other local revenues like room and meals taxes or motor vehicle excise taxes also drop because people travel less, dine out less, and hold onto their cars longer. Since vehicle values decline over time, excise tax revenue can shrink unless new, higher-value cars are sold.
State revenue sharing is similarly affected. As state collections from income, sales, and user fees contract, municipal and education aid may not keep pace with rising needs. Meanwhile, education budgets—often making up around 50% of municipal spending—face costs that typically outpace state aid increases. This means local governments must rely on property taxes even more.
Property tax in Massachusetts is regulated by Proposition 2½, which limits the overall growth of the tax levy to 2.5% of the previous year’s levy. However, inflation—especially in education costs—often pushes expenses much higher than this cap. Additionally, there’s a secondary cap: the total amount a municipality can tax property is limited to 2.5% of the total value of taxable property (the tax levy ceiling). When property values fall, as they did in 2008, this ceiling drops and can restrict the community’s revenue.
Since FY21, taxable property values have risen on average 44% statewide, though growth rates vary widely. This increase helps communities with high tax levy ceilings, but slowing residential growth or declining commercial/industrial values could lower the ceiling in the future. While a cooling residential market might make housing more affordable, it also means less tax revenue potential. That’s why expanding new development—not just relying on rising values—is so important for long-term financial stability.
Many communities adjust how the tax burden is split between residential and commercial/industrial properties. For example, in FY25, 110 communities have shifted more of the tax burden to commercial and industrial properties, and almost half of those are at or close to the maximum shift. This adjustment helps provide relief for residents; especially as residential property values have grown faster than commercial ones. However, once at the maximum shift additional relief cannot be provided to residential taxpayers. Therefore, these adjustments need to be managed carefully over time. As property values change, the balance of who pays the tax should be revisited to ensure fairness and sustainability.
In a fluctuating financial environment, effective revenue management is critical—especially as municipalities transition away from pandemic aid and return to relying on traditional revenue sources.
About Capital Strategic Solutions
Capital Strategic Solutions specializes in providing financial planning and management services tailored for municipalities and local governments. With a deep understanding of public finance challenges, our team offers expert advice on budgeting, revenue management, and long-term financial strategies. We help communities navigate economic uncertainties by developing innovative solutions that balance fiscal responsibility with the need to support essential services. For more information on how we can support your financial planning needs, visit www.capital-strategic-solutions.com or email us at [email protected].