*The views in this paper do not necessarily reflect those of the Federal Reserve Board or its staff. Preliminary Draft Please Do Not Cite The Housing Crisis and State and Local Government Tax Revenue: Five Channels

State and local government tax revenues dropped steeply following the most severe housing market contraction since the Great Depression. We identify five main channels through which the housing market affects state and local tax revenues: property tax revenues, transfer tax revenues, personal income tax revenues, direct sales tax revenues (through construction materials) and indirect sales tax revenues (through the link between housing wealth and consumption). We find that historically property tax revenues do not tend to decrease following house price declines. Similarly, property tax collections have yet to fall on average during the current housing market contraction. On the basis of state-level case studies we conclude that the current resilience of property tax receipts is due to significant lags between market and assessed values and the tendency of policy makers offset declines in the tax base with higher tax rates. The other four channels have had a relatively modest effect on state tax revenues. We calculate that the combined channels reduced tax revenues by $14 billion from 2005 to 2009, which is less than 2 percent of total state own-source revenues in 2005. We conclude that the recent contraction in state and local tax revenues has been driven primarily by the general economic recession, rather than the housing market per-se. I