After a year that brought unprecedented disruption due to the persistent COVID-19 pandemic, millions continue to work from home. While much has been said about the challenges faced by individuals who have been forced to adapt to this new way of working, there is one area where the ramifications will be especially acute: the mass exodus from cities and the impact this will have on their ability to serve their citizens.
Pre-COVID, many high paying white-collar jobs in sectors like finance, legal or tech, tended to be concentrated in high cost metropolitan areas in the Northeast corridor and West coast. The resulting taxation of workers and corporations from these professions has long been a major contribution source to state and local governments. For instance, according to the state of California’s initial 2019-20 revenue estimates, personal income tax was expected to be the state's largest revenue source, comprising approximately 68 percent of all general fund revenues for that period.
With new work from home policies in place, and some potentially becoming permanent, we can expect the financial incentives for remote employees to move to lower cost tax districts to grow. This will have real impacts on revenue sources for local and state governments and, in turn, on service delivery for taxpayers – all at a time when the public sector has never been relied upon more heavily.
So how significant is this issue, and how can governments adapt to decreased revenues? Let’s start by looking at the data, beginning with which sectors are most likely to be implementing work from home models.
According to a study that analyzed the “ability to telework” across various industries, on average roughly 45 percent of workers are in occupations where a work from home model is feasible. This ranges from 80 percent in industries like Financial Services and Information Technology, to less than 10 percent in industries like agriculture and forestry.
Furthermore, during some of the peak months of the pandemic in the early summer of 2020, statistics from Stanford Institute for Economic Policy Research showed that 42 percent of the US labor force was working from home. Meanwhile, data from the Global Workplace Analytics survey showed that remote work increased 68 percent from pre-pandemic levels.
Finally, there are survey predictions for the future. For instance, a that 90 percent of respondents felt that many or most workers would work remotely at least one day per week in jobs that were suitable for work from home.
Now let’s examine the numbers with respect to moving. Since the office is now the home for many, workers are no longer physically constrained by geographic proximity to the office, potentially triggering a mass exodus from cities. These higher density metropolitan areas tend to be the hot spots for higher-paid workers in industries most likely to move to a remote work model.
So if higher paid workers in job functions that tend to be congregated in high cost cities are also the most likely candidates for full time work from home, why would they continue to stay in these high cost locations when they will likely have flexibility to move elsewhere as a result of permanent or partial work from home policies?
The answer is that there is a good chance many more will move. According to UBS, the inventory of cities of all stripes is showing 5-15% increase in inventory for single family homes and 20-40% inventory increase in condo/townhomes. These figures are consistent with the notion of an exodus of workers from city living.
While it is still early to extrapolate on this because permanent moving decisions for families tend to be much more complicated processes, we can forecast the continuation of this trend as work from home policies are expected to become more mainstream and permanent post-COVID for many jobs.
With these trends in mind, the table is being set for a significant decrease in tax dollars for state and local governments where these industries were previously based. For example, authorities in San Francisco projected a $115.9 million budget shortfall in 2020, owing to slow rebound in hotel and business tax revenues. Furthermore, San Francisco’s chief economist Ted Egan noted a 43% decline in sales tax revenues between April and June of 2020, which he attributed to this outflow, and notably not due to a decline in economic activity due to the pandemic.
If the high wage workers, who also happen to be the highest tax paying citizens, are the ones who relocate, then how will this impact city municipalities and their ability to deliver services to their constituents? Local governments are already under tremendous revenue pressures, and when faced with lower tax rolls, these municipalities don’t have many options. That is one of the reasons why there is a material uptick in technology modernization projects in local governments looking to modernize their infrastructure and processes.
These new pressures highlight an already urgent need to modernize public sector operations to allow them to do more with less. Delivering high-value, personalized experiences for citizens will require more effort and attention from the public sector workforce, and these organizations will need to improve workforce efficiency and streamline operations to do so, especially state and local governments that will feel the pinch of this shift most acutely.
The new realities of a hybrid workforce, who work from the office and from home, are forcing state and local governments to pivot investments to internal systems to ensure the workers can continue to deliver services to citizens. For example, the right workforce technology can help drive productivity for public sector organizations, starting with leveraging data to make informed decisions about workforce planning and management. Automation is also essential to allow organizations to shift the workforce from repetitive, low-value tasks to improving outcomes for citizens. And finally, this kind of intelligent technology is crucial in helping public sector agencies better manage compliance to safeguard data and minimize risk – especially in the current climate where change is fast and unrelenting.
As digital transformation reshapes the world around us, the public sector cannot afford to fall further behind, especially as demand for services increases, and funding to deliver them shrinks.
Gianluca Cairo has over 15 years of senior leadership experience in operations, strategic planning, and public affairs. Patrick Luther has spent more than a decade in product management and marketing of enterprise software, as well as consulting for the financial services sector. Both are Industry Principals at Ceridian, a global human capital management (HCM) software company.