Municipalities in the intergovernmental revenue system: the federal government’s stabilization function?

The fiscal relationship between U.S. cities and the federal government has been shaped by variable political, economic and social contexts over time. This chapter details this relationship, starting with 20th century changes in federal transfers to cities. Since the 1980s, cities have shouldered the burden of generating the majority of their revenues with limited fiscal powers. Four decades later, with the emergence of the COVID-19 pandemic, an unprecedented amount of flexible federal aid was allocated to cities, effectively shifting the fiscal relationship between cities and the federal government and solidifying the importance of countercyclical federal aid. The pandemic and accompanying structural economic and social changes also prompted many city officials to reimagine revenue raising in ways that better align with drivers of the economy and ensure a fair and equitable tax burden. The pandemic accelerated changes to city finances, both in terms of federal support and local fiscal structures. The question remains whether these changes signal a true shift in the fiscal policy making environment for cities.