In 2007 the housing market slump impacted general revenue streams in 24 states, prompting 18 state budget offices to announce that they will experience budgetary deficits in 2008. This triples the number of states that had similar concerns last year. When combining this with what have become annual budgetary shortfalls in such vital areas as transportation projects, education and Medicare, NAA is predicting a gloomy financial situation in most states. While lawmakers traditionally do not like to raise taxes – as it is politically unpopular – it is unlikely that this fiscal situation can be resolved without some form of tax increase or restructuring.

As home values climbed during the housing market boom, state and local governments leaned more on property taxes to compensate for other revenue shortcomings. However, as some areas now are experiencing cooling economies, in particular in the real estate market, high property tax bills combined with artificially high property tax assessments have caused voters to pressure legislative leaders to enact tax reform. As a result, in 2007, five states cut their property tax rates and 21 others provided some relief from higher bills, such as ''homestead exemptions." NAA has seen this trend in property tax relief for single-family homes continuing in 2008; however, this lost revenue will need to be replaced through other revenue streams. States and localities may choose to follow the examples of Ohio, Michigan and others who have increased or implemented new sales taxes, in particular on previously untaxed services such as rent. In perhaps the most extreme example of this type of ''tax swapping," a bill has been introduced in the Georgia legislature which would eliminate most property taxes and replace them with a statewide 7 percent sales tax on virtually all services. States considering sales taxes on services are divided as to whether or not the business of renting housing is a service that should be taxed. Homestead exemptions and taxes on the practice of renting homes unfairly shift more of the tax burden to renters, treating them disparately compared to their home-owning counterparts.

In addition to the problems caused by the housing bust, states are also trying to find funding sources for infrastructure and transportation costs. Local governments could be looking for more taxing authority from the state governments to pay for things like rehabilitation of roads and increased numbers of bridge inspections. Additionally, states will continue looking at opportunities for more public-private partnerships to pay for infrastructure, a trend identified by NAA last year.
The Financial Times reports that a ''collapse in confidence in a $330 billion corner of the debt market has left U.S. municipalities and student loan providers facing spiraling interest rate costs." The Times goes on to report that the affected market is for ''auction-rate securities," and the problem is caused by ''worries that bond insurers guaranteeing much of this debt could face credit rating downgrades." This economic crisis is the latest result of the collapse of the subprime mortgage sector last fall and its aftershocks in the market. As previously reported by NAA, the collapse of the subprime mortgage sector and the resulting housing market slump has had a deep impact on the general revenue streams of many state and local governments. This concern has caused bond-rating agencies to start questioning whether the municipal and/or state bond insurers deserved the highest credit rating distinction of AAA. The result, as the Times points out, is that the ''sudden slump" has increased interest rates ''as high as 20 percent for entities from the Port Authority of New York and New Jersey to a hospital." The result is that ''municipal borrowers are scrambling to seek letters of credit from banks and other fresh sources of finance."

NAA will continue to track this important trend as it is another complicating factor for state and local governments seeking revenue to pay for priority programs such as Medicaid and transportation infrastructure. As always, if state and local budget concerns worsen, these governments may turn to increasing current or implementing new taxes to make up for their monetary shortfalls.