Fitch Ratings said Friday that the outlook for state and local governments was “deteriorating” and an expected recession could put pressure on state and local governments to raise property taxes.
“Local governments may face slowed growth or possibly contraction in tax revenues associated with real property valuations, which may trigger expenditure controls or revenue-raising measures to preserve budgetary stability,” Fitch Ratings Senior Director Michael Rinaldi said.
Many U.S. states and local governments have been able to build up a financial cushion that could help them withstand an expected mild recession by the second quarter of 2023, according to the report.
“Robust reserves, in many cases exceeding pre-pandemic levels ... leave states and local governments well-positioned to face this economic weakness,” Fitch Senior Director Eric Kim said in a statement.
But if the recession hits harder than expected, state and local governments could face difficult decisions.
“A significantly deeper and prolonged recession could lead governments towards credit negative budget choices such as sustained pension funding deferrals or payment delays,” Kim said.
The report noted that “both state and local governments rely on tax revenues including income and sales taxes, which respond quickly to changes in the economy.” But property taxes also could come into play.
“Property taxes are another key revenue source for local governments and tend to be slower in their economic responsiveness,” according to the report. “But the twin dynamics of a rapidly cooling housing market and a commercial real estate market adjusting to the pandemic shift away from office-based work could pressure property taxes more quickly than in the past.”
Fitch Ratings is one of three major credit rating agencies that rate a borrower’s ability to pay back debt.
