Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How One City Taxed Itself Into a Recession and Back Out Again
Transcript
- Lucas: Let me tell you about the year a mid-sized American city accidentally put itself into a recession by raising taxes. And then it raised them again — but in a completely different way — and pulled itself back out. Luna: Okay, you have my attention. Which city, and when? Lucas: Allegheny County, Pennsylvania — that's the county that contains Pittsburgh — in 2023. They were staring at a projected $90 million budget gap, and the county executive decided the cleanest fix was a property tax hike. So they raised the millage rate by 22 percent. Luna: Twenty-two percent is a big jump. What was the reaction? Lucas: At first, nothing. Budget passes, life goes on. But within six months, something weird started showing up in the data. The county's own assessor's office began flagging a surge in appeals — property owners challenging their assessed values. Normally they get maybe a couple hundred a quarter. In the first quarter after the hike, they got over 1,400. Luna: So people basically said, 'If you're going to charge me more, I'm going to argue my house is worth less.' Lucas: Exactly. And many of those appeals succeeded. The county had been using outdated assessment data — some properties hadn't been re-evaluated since the early 2000s. So owners could point to recent sales data and say, 'Look, comparable homes in my neighborhood sold for 15 percent less than your assessed value.' And the board would lower the assessment. Luna: Which means the county's tax base started shrinking just as they were counting on it to grow. Lucas: Right. By the end of 2023, the total assessed value in the county had dropped by roughly 8 percent. So the 22 percent rate hike was generating only about 13 percent more revenue than the old rate. But the bigger problem was what happened next. Luna: There's more? Lucas: Business licenses. The county also levies a per-employee business privilege tax tied to the property tax rate. When the millage went up, the cost of doing business in the county jumped. And a lot of small businesses — restaurants, retail shops, service providers — started either closing or moving their official address to the suburbs. Business license renewals dropped 14 percent year-over-year in 2024. Luna: Fourteen percent? That's not marginal. That's a structural shift. Lucas: It is. And then sales tax revenue — which the county gets a cut of via the state — started falling too. Because fewer people were shopping in the county, and the ones who stayed were spending less. By mid-2024, Allegheny County was in what local economists started calling a 'policy-induced contraction.' The county's GDP — yes, they measure that at the county level — shrank by 1.2 percent over twelve months. Fastest local economic decline since the steel collapse in the 1970s. Luna: So the revenue the county was trying to capture basically evaporated from other sources. That's a textbook case of what economists call a 'static scoring' fallacy. Lucas: Exactly. The county's budget office assumed the tax base would stay fixed. They ran a static model: rate up 22 percent, revenue up 22 percent. They didn't model behavioral feedback — that people would appeal assessments, that businesses would leave, that consumer spending would drop. They treated the economy as a fixed pie. Luna: And it's not just them. A lot of municipal budgets are still built on static assumptions. I remember reading a study from the Lincoln Institute that found fewer than 15 percent of U.S. cities use any kind of dynamic revenue forecasting. Lucas: Right. So by late 2024, the county executive was in a bind. Revenue was flat, the economy was shrinking, and the public was furious. They had to do something. And the thing they did was — counterintuitive — they cut the property tax rate. Luna: They cut it? After all that? Lucas: They cut the millage rate by 9 percent. But here's the twist: they simultaneously introduced a small local services tax — $52 per employee per year — on all businesses operating in the county. The idea was to shift some of the burden from property owners to employers, who are harder to drive away because they need access to Pittsburgh's labor pool. Luna: So they lowered the rate that was causing the behavioral damage and replaced it with a tax that's harder to avoid. That's smart fiscal design. Lucas: It is. And the early results are promising. Assessment appeals dropped by 60 percent in the first quarter after the cut. Business license renewals have stabilized. And sales tax revenue is starting to tick up again. The county's budget office now projects that the combined revenue from the lower property tax and the new services tax will actually exceed what the old 22-percent-higher rate was bringing in. Luna: So the Laffer curve — at the local level — turned out to be real. They had pushed the rate past the revenue-maximizing point, and cutting it brought them back toward the peak. Lucas: Exactly. And the thing is, the Laffer curve is usually talked about in the context of federal income taxes — what's the optimal top marginal rate? But it applies just as much to property taxes, especially when the tax base is mobile and the assessment system is responsive. Allegheny County found that their revenue-maximizing millage rate was actually lower than the one they'd been using. Luna: It's a good reminder that fiscal policy isn't just arithmetic. It's behavioral economics. Lucas: Speaking of which — if you enjoy walking through the economy with us and seeing how these mechanics actually play out, it's worth mentioning that listener support is what keeps this show ad-free and independent. We don't have a corporate sponsor or a network telling us what to cover. It's just the two of us and a microphone, and people like you who find value in it. If that resonates, you can throw a few bucks into the tip jar at buy me a coffee dot com slash fexingo. No pressure ever — but it genuinely helps us keep doing this. Luna: Yeah, it really does. And it means we can spend time on deep dives like this one instead of chasing clicky headlines. Lucas: Alright, back to Allegheny County. So the question now is: does this model scale? Could other cities learn from this and avoid the same mistake? Luna: I think the lesson is pretty universal. If you're a city manager and you're looking at a budget gap, the first thing you should do is model how the tax base will respond to a rate change. Not just the mechanical revenue, but the behavioral response. Lucas: Right. And there are some cities that are starting to do this. I saw that King County in Washington — that's Seattle — recently commissioned a dynamic model before their last property tax adjustment. They ran simulations with different rate scenarios and included assumptions about assessment appeals, business migration, and consumer spending. Luna: How did it turn out? Lucas: They ended up choosing a rate increase that was smaller than the static model would have suggested — about 11 percent instead of 15 percent — because the dynamic model showed that the higher rate would trigger enough appeals and out-migration to offset the extra revenue. So far, actual revenue is tracking within 2 percent of the dynamic forecast. Luna: That's a huge win for evidence-based fiscal policy. Two percent error is basically perfect for a municipal forecast. Lucas: It is. And it shows that the Allegheny County story isn't just a cautionary tale. It's also a proof of concept. If you take the time to model behavioral feedback, you can set rates that actually maximize long-run revenue without tanking the local economy. Luna: So the key takeaway for me is: static scoring is lazy. Dynamic scoring is hard, but it pays for itself. Lucas: Exactly. And the next time a mayor says, 'We have to raise taxes by X percent to close the gap,' the right response is: 'Show me the dynamic model.' Luna: I like that. I might actually use that line at a city council meeting someday. Lucas: If you do, let us know how it goes. For now, that's the story of how one county taxed itself into a recession and then taxed its way back out — just differently.