President Trump's promise of enacting import tariffs has come to fruition as market analysts try to predict the cascading effects on several sectors including state and local governments counting on sales tax revenue in a potentially weakened economy.
"We do expect some credit pressure on the margin, especially for local governments with weaker management teams," said Sarah Sullivant, managing director, sector lead, public finance credit rating at S&P Global Ratings.
"We expect the fiscal buffers that were there at the beginning of the year will start to erode, so less room on the margin for prolonged exposure or uncertainty this year and going into next year."
The comments came during an outlook presentation from S&P to The Bond Buyer editorial staff on Wednesday. On the same day the President announced an across the board 10% base tariff on all countries, while hitting the European Union with 20% and China with 34%.
S&P currently has the local government sector rated as stable, partially based on many financial positions that feature fattened reserve funds.
The on and off threats of tariffs combined with promises of reprisals from other countries has injected a double dose of uncertainty into issuers interlaced with the federal government including the states.
"States are driving their revenues primarily from economically sourced sources that include income tax, sales tax, and corporate tax," said Geoffrey E. Buswick, managing director and sector leader for the U.S. Public Finance Group at S&P.
"As the economy slows, those could be affected if they can't curtail their budget and spending. If they can't replace monies that are taken back from the feds, credit could be impacted."
The transportation sector is expected to take some hits, relative to mode.
"At the beginning of year, we moved the transit sector back to stable," said Kurt Forsgren, managing director, transportation sector, for S&P. "What we're watching closely now is the whole tariff situation, obviously covering the port sector."
The Tax Foundation, a non-partisan think tank, is tracking all the tariffs and projecting outcomes. Per their research, "If imposed on a permanent basis, the tariffs would increase tax revenue for the federal government."
"Revenue is lower on a dynamic basis, a reflection of the negative effect tariffs have on U.S. economic output, reducing incomes and resulting tax revenues. Revenue would fall more when factoring in foreign retaliation, as retaliation would cause U.S. output and incomes to shrink further."
Trump's tariffs are designed to restore American manufacturing jobs and pay for other items on the President's wish list.
The tax-exempt status of municipal bonds has also been teed up as a way to keep campaign promises that include no tax on social security wages and no tax on tips. Analysts point out the threat remains and contributes to more uncertainty.
"The threat to private activity bonds may not have a direct credit impact, but our Housing Finance Agency issuers would need to adjust their financing strategies if that were to happen," said Hannah Blitzer, managing director housing, for S&P.
"We are watching that closely as well tariffs and a tighter labor market. Both of these could increase construction costs and slow the development of affordable housing overall."
