Credit rating agency warns recession could cause property tax hikes

By Brett Rowland (The Center Square)

Fitch Ratings said Friday that the outlook for state and local governments is “worsening” and that an expected recession could put pressure on state and local governments to raise property taxes.

“Local governments could face slowing growth or possibly a contraction in tax revenue related to property valuations, which could lead to spending controls or revenue-boosting measures to maintain fiscal stability,” said Fitch Ratings Senior Director Michael Rinaldi. .

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Several factors “could put real estate taxes under pressure faster than in the past,” according to a 2023 outlook from US states and local governments report from the credit rating agency.

According to the report, many U.S. states and local governments have been able to build a financial buffer that could help them weather an expected mild recession by the second quarter of 2023.

“Robust reserves, in many cases exceeding pre-pandemic levels… ensure that states and local governments are well positioned to deal with 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 tough decisions.

“A significantly deeper and prolonged recession could lead governments to take credit-negative fiscal choices, such as continued delays in pension financing or payment arrears,” 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 can also play a role.

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“Property taxes are another major source of revenue for local governments and tend to be slower to respond to the economy,” the report said. “But the dual dynamics of a rapidly cooling housing market and a commercial real estate market adapting to the pandemic away from office work could put real estate taxes under pressure faster than in the past.”

Fitch Ratings is one of three major credit rating agencies that rate a borrower’s ability to repay debt.

Syndicated with permission from The Center Square.