WHILE INTERGOVERNMENTAL REVENUE may partially free a recipient government from the need to directly tap its tax base, it nevertheless subjects municipalities to fiscal shifts beyond their control. There are three primary risks associated with intergovernmental revenue: It exposes recipient public budgets to unexpected interruptions in funding; increases in intergovernmental funding often do not keep pace with cost inflation; and policy shifts can impose changes in how the money must be used.
New York City levies taxes on real property, personal income, sales and use, corporate and unincorporated business income, real property transfers, and mortgages. In 2020, more than 90 percent of the city’s own-source revenues were derived from such taxes, while the remainder came from charges, nongovernmental grants, and other types of aid. Importantly, the state constitution limits local governments (including New York City) from changing the rates levied on most tax bases without the state’s approval; the sole exception is the real property tax. New York City can impose fees and charges to offset public costs imposed by private behavior, but these cannot be imposed or increased simply to raise general revenues.5 On average, only about 26 percent of New York City’s total annual revenues from 1980 through 2020 fell under its direct control through the property tax; the remaining 74 percent was largely outside the direct control of municipal decision makers.
As figure 1 shows, transfers from New York State and the federal government make up a significant portion of New York City’s annual operating budget. In 1980, more than one-third of the city’s annual operating funds came from intergovernmental revenues; the remainder came from own-source revenues—largely property, income, and sales taxes, and fees.
Over time, the city’s own-source revenues have risen significantly compared with state or federal aid and make up a greater share of its overall funds (figure 2). Increases in own-source revenue have also resulted from higher tax rates (such as property taxes) and growth in specific bases (such as property valuations, income, and mortgages) that benefited the city’s budget in the long recovery from the 2007–09 recession. In 2020, for example, about three-quarters of revenues were derived from own-sources and the remaining one-quarter from intergovernmental funds. Even so, intergovernmental revenue consistently makes up a substantial portion of New York City’s budget.
New York City’s dependence on intergovernmental revenue has also declined because of a shrinkage in federal revenues. While federal intergovernmental revenue made up about 17 percent of the city’s revenues in 1980, it had fallen to just 10 percent in 2020. Over the same period, state intergovernmental revenue’s share of the budget has fluctuated at 15 percent-20 percent of the budget.
On a per capita basis (figure 3), total intergovernmental revenues to New York City increased about 7 percent in 2007–17, while own-source revenues rose about 14 percent. Accounting for inflation, intergovernmental revenues fell about 10 percent during the period, while own-source revenues have declined about 4 percent.
As shown in figure 4 and table 1, the two largest components of New York City’s budget financed by intergovernmental revenue are education and social services, principally Medicaid. These categories represent almost 73 percent of intergovernmental revenue outlays. The percentage is the lowest in decades, largely because of the expansion of education spending financed with municipal rather than intergovernmental dollars. Since 1980, these two intergovernmental revenue sources have accounted for over 90 percent of all transfers to the city.
The remaining significant sources of intergovernmental revenue include transportation, housing (largely public housing programs), higher education (primarily for City University of New York and community colleges), public safety, and health programs other than Medicaid. These services consumed less than 10 percent of intergovernmental revenue in 2020, although this is an increase over historical trends.