Insights From the Latest Economic Outlook: AI, Energy Prices, and Shifting Revenue Trends for Local Governments

Quarterly forecasts tend to produce headlines. This one offered something more practical: a clearer picture of the structural forces shaping local government revenue and a few timely developments worth acting on now.

During the Q2 UCLA Anderson Forecast Economic Outlook webinar, Dr. William Yu and a panel of government finance and policy experts discussed topics affecting municipalities nationwide. Below are the findings most relevant to local government leaders planning for the rest of 2026 and beyond.

The “Gray-Shaped” Economy Is a Structural Revenue Problem

Sales tax forecasting models built on historical consumer behavior are running into a demographic wall. Baby boomers, a cohort with significant accumulated wealth, are in retirement and spending. The problem is what they’re spending on: healthcare, services, and experiences, not the taxable goods that anchor most states’ sales tax bases.

Meanwhile, millennials and Gen Z are entering their prime buying years, but housing costs have compressed their discretionary budgets. The result is a double effect: two large consumer cohorts both spending less on taxable goods, for different reasons.

Tom Adams, Sales and Use Tax Director at Neumo, drew a direct parallel to Japan’s experience roughly 20 years ago, when a similar demographic shift produced a prolonged drag on consumption-based tax revenue. For U.S. cities reliant on goods-based sales tax, this is a long-term planning issue, not a cycle to wait out.

The Utility Users Tax Streaming Ruling Is Close to Final—and It Matters

For California cities with a utility users tax (UUT), the Disney v. City of Santa Barbara case is the most consequential local revenue development in years.

The California Supreme Court recently declined to hear Disney’s appeal, leaving the lower court’s ruling, which upheld Santa Barbara’s authority to apply its UUT to streaming services, effectively intact. A 90-150-day federal appeal window remains open, but courts have ruled in favor of Santa Barbara at every stage of this litigation.

The implications extend well beyond Santa Barbara. Approximately 25% of California cities have a UUT. Of those, roughly a quarter have modernized ordinances that allow application to streaming. For cities that haven’t modernized, the ruling is a strong signal to revisit the language of their ordinances.

As Tom Adams noted during the webinar, the economy has been moving from goods to services to digital for decades, and the tax structures built to fund local government have largely not kept pace. UUT modernization is one of the clearest levers available.

Oil Prices Are Elevated, but the Shock Is Manageable

Crude oil prices rose approximately 45% following escalating conflict in the Middle East. That increase is meaningful, but it’s still roughly half the magnitude of the Gulf War shock in 1990-91 and well below the shocks of the 1970s, suggesting a more contained economic impact.

Dr. William Yu’s analysis points to two mitigating factors. First, the U.S. is now the world’s largest oil producer, meaning domestic supply can increase when prices rise—a natural stabilizer. Second, most major oil-producing nations in the region remain aligned with U.S. interests, so a reversal of the price spike is likely once the conflict stabilizes.

The near-term effect on inflation is real—the Consumer Price Index (CPI) ticked up to 3.3% in March—but the underlying trend in services inflation remains downward. The Federal Reserve is expected to hold rates steady for now rather than resume cuts.

Tourism Revenue Hasn’t Fully Recovered

International tourism to the U.S. remains about 14% below its 2018 peak. The primary driver isn’t political sentiment—it’s the strength of the dollar, which has appreciated roughly 14% over the same period, making the U.S. materially more expensive for international visitors in real purchasing power terms.

For communities where hotel tax, sales tax, and restaurant activity are meaningful revenue sources, the shortfall is ongoing. Fran Mancia, Advisory Board Member at Neumo, highlighted specific impacts in the Southeast and desert Southwest, where seasonal international visitors—and the short-term rental and hotel inventory built to serve them—are operating below historical norms.

AI Infrastructure Is Reshaping Local Land Use Decisions

Data center buildout continues to accelerate, and it’s no longer confined to rural areas with cheap land and power. Local government leaders in smaller cities are increasingly being approached by AI infrastructure developers, and the decisions being made now about siting, water use, and energy agreements will have long-term consequences for those communities.

The broader narrative around AI and the economy is also shifting. Where AI was previously framed almost exclusively as a growth driver, concerns about energy costs, job displacement, and environmental footprint are gaining traction. Communities with leverage in siting conversations are starting to use it.

The Bottom Line

Dr. William Yu’s economic forecast remains constructive: strong GDP growth driven by AI capital investment, stabilizing inflation, and a labor market that looks weaker on the surface than it is, given demographic and immigration shifts. However, the structural pressures on local government revenue—demographic changes in consumer spending, the shift to a digital economy, and the uneven recovery in tourism—are real and compounding.

The takeaway for local leaders: economic conditions remain stable, but revenue assumptions need to evolve. Structural shifts, not short-term cycles, will define fiscal resilience over the next decade.

Watch the full recording of the webinar for more detailed forecasts and local implications.