Slowdown in State, Local Investment Dents U.S. Economy Cities and states have slashed spending on infrastructure—from highways to sewage systems to police stations By Eric Morath and Ben Leubsdorf • Oct. 26, 2016 11:29 a.m. ET Drivers head north on U.S. 69 in Overland Park, Kan., in July. Kansas officials this spring delayed 24 road-construction projects to help balance the state budget. Photo: Orlin Wagner/Associated Press A sharp pullback in spending by cities and states on infrastructure—from highways to sewage systems to police stations—is weighing on U.S. economic growth. Such government austerity is unusual in the eighth year of an economic expansion, and it is acting as a headwind just as the worst effects of the energy-industry bust, a strong dollar and inventory drawdown are fading. State and local governments spent an annualized $248.47 billion on construction in August—the least since March 2014 and down nearly 11% from its recent peak in mid-2015. The decline depressed gross domestic product growth this spring and was on track to weigh on growth again in the third quarter. “We’re seeing anemic [government] revenue growth and consistent austerity-oriented budgets,” said Gabe Petek, managing director for state ratings at S&P Global Ratings. States are trimming investments in infrastructure and higher education, “areas of the budget helpful for generating economic growth going forward,” he said. In Kansas, officials this spring delayed 24 road-construction projects to help balance the state budget. The more than $500 million in work had been slated to start between this year and the end of 2018, including expanding U.S. 50 into a four-lane expressway near Dodge City. Instead, the state will spend money to maintain existing roads. “We want to make sure the roadways we currently have are in the best condition as possible,” said Joel Skelley, director of policy at the Kansas Department of Transportation. Total state and local government spending last year accounted for roughly 11% of U.S. economic output, four times as large as federal nondefense spending, and swings in public investment can have outsize effects on the growth rate. The Commerce Department will release its first estimate for third-quarter GDP on Friday. ENLARGE Many state governments have yet to fully recover from the recession and associated steep declines in tax revenue. In late 2015, inflation-adjusted tax revenue was lower in 21 states compared with the peak before or during the recession, according to Pew Charitable Trusts. The situation doesn’t seem to be improving. Preliminary data indicate that state tax revenue fell 2.1% in the second quarter from a year earlier after advancing just 1.6% in the first quarter, according to the Rockefeller Institute of Government. The recent drop reflected mixed stock-market returns and slowing growth in sales-tax collection and paycheck withholding. Revenue declines restrain the ability of state and local government.