State and local tax receipts have continued a slowdown that began in the middle of 2015 and has extended into the second quarter of 2016. As shown in the table, state and local government revenue from major taxes tracked by the Census Bureau grew by 3.0 percent in the first quarter of 2016, the most recent quarter available with full details. This is a substantial slowing from the 5.4 percent average for the four previous quarters.
Total state tax revenue from all sources grew by only 1.6 percent in the first quarter and preliminary data for the second quarter of 2016 obtained by the Rockefeller Institute indicate declines of 2.1 percent. The declines in state government tax revenues in the second quarter appear to be driven by the meaningful slowdown in sales tax and personal income tax. Local governments, which rely heavily on more stable property taxes, have been less impacted by the challenges facing sales and personal income taxes.
In addition to the diminished outlook for state revenues, the unfunded pension issue remains an overhang for states as returns have been lackluster leading to reduced funding levels. In spite of this, municipal issuance has continued at a record pace, mainly to fund infrastructure spending which has been met with strong demand. In fact, with negative yields across the globe, recent Federal Reserve data shows an increase in holdings of municipal bonds by foreign investors even though they do not benefit from the tax advantages. The global rate environment has created a technical backdrop for risk like we have never seen before.Key Takeaway:
As the growth in state and local tax revenues slows and appears poised to mildly contract, the technical support driven by the global rate backdrop has led to increased issuance by municipal entities and solid performance. While the revenue trend bears watching along with pension headwinds, we see municipal credit challenges isolated in select issuers and do not view them as a precursor to systemic stress.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
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