One argument made by a lot of municipal finance bears is that the big source of local tax revenue, property taxes, hadn’t even begun to reflect the housing collapse, since new assessments of home prices aren’t taken that often.
Well, we we’re here on that
In a note out last night, Goldman warns of a slowdown in state and local tax revenue, and it included this chart, which shows that finally, in 2011, property tax receipts are negative YOY.
Between this, and other tax trends, it would appear that the state & local bloodletting — a drag on growth and jobs — will continue longer than you’d hope.
While the combination of these trends implies that activity at the state and local level might become a renewed source of weakness, there are mitigating factors. Most importantly, the state and local sectors are of similar sizes (state governments make up about 45% of state and local expenditures, local governments make up about 55%) but the weakening in local government finances from the unwinding of inflated property tax revenues is likely to be more gradual than the sharp decline in income and sales tax revenues that states experienced in late 2008 and 2009. In order to preserve municipal services, many localities are also considering property tax increases that could put a floor under tax receipts. However, while this might maintain spending at a higher level than it would otherwise be, it would nevertheless constitute fiscal restraint in another form. Property taxes account for only about one-third of total state and local revenue, so it would take quite a large decline to offset revenue growth from other sources, even if property taxes did decline sharply. That said, as shown in the bottom chart below, property taxes have just started to unwind the increase of the last several years.