Suppose we have a housing price bubble as everyone (OK, well at least the Economist) seems to suggest. Normally, one thinks of the loss of wealth in a person’s portfolio which is akin to the loss of paper profits in the dotcom bubble. We all recognize the loss in paper income lead to a modest recession and the states tax revenues were hit quite hard. Georgia, for example, had its first decline in state tax revenues since
The Civil War World War II. As a supplicant of the state, this meant no salary increases and all the wailing and gnashing of teeth that go with that. It also meant tremendous cuts in other state programs that grew during the heady 1990s.
Well, if we have a bursting housing bubble, the state’s problems will come once again as sales tax revenues, corporate and personal income tax revenues take a hit. However, the local governments throughout the US rely upon property taxes. As property values decline, so do local property taxes which fund all sorts of services including schools. I wonder how many local governments have tax revenue hedging plans put in place. I don’t even know what one would look like exactly, but I suspect that we could count the number of local government revenue risk management plans using only the fingers on the right hand.