Local Taxes Down

One problem we have in the United States is that so much of public revenue and spending is in the hands of state and local governments who are set up to run strongly pro-cyclical fiscal policies. When times get tough, revenues go down. Thus, instead of increasing spending to help tide people over during the downturn, balanced budget rules force spending to go down which tends to deepen the downcycle. With the downturn in the housing market, we’re seeing a somewhat different spin on this as the mortgage collapse leads to declining property tax revenues. It’s not clear yet to what extent these housing issues are going to spill over into the jobs and income picture — so far a well-timed uptick in exports seems to be keeping people employed — but the tax side is one of several mechanisms by which it threatens to do so, undermining local budgets even in the absence of a recession.

Photo by Flickr user jffmrk used under a Creative Commons license