An Analysis on the Impact of Economic Downturn on Municipal Fines and Forfeitures Revenue

Abstract

Unlike the federal and state governments, municipal governments have limited revenue generating authority. Typically, municipalities generate revenue in five ways: sales tax, income tax, property tax, charges and miscellaneous fees, and state and federal funding. Municipal budgets were devastated as tax revenue declined during and following the 2008 recession, leaving cash-strapped municipalities with large budget deficits. Evidence suggests that in times of economic hardship certain municipalities have increased their fines and forfeitures collection, which turns what is supposed to be a mechanism to protect public health and safety into a regressive revenue collection scheme. This study, which aims to discover if this phenomenon happens on a mass scale, uses the U.S. Census Bureau’s Annual Survey of State and Local Government Finances to examine the relationship between economic conditions and municipal governments’ collection of fines and forfeitures. This paper hypothesizes that as economic conditions worsen, fines and forfeits revenue collection will increase as governments attempt to make up funding from the decrease in expected intergovernmental transfers and tax revenue. The results of this paper do not find a meaningful relationship between economic conditions on the collection of fines and forfeitures, but further research is warranted due to the limitations of this study. Given that over-reliance on fines and forfeitures has the potential to adversely impact municipalities’ most vulnerable residents, researchers and policy makers should continue to address this important public policy issue.