Abolishing property taxes: Risks and opportunities for the municipal bond market
At the crossroads of reform, a look at how dismantling the backbone of local funding could fundamentally reshape the muni market.
Duration: 2 Mins
Date: May 20, 2026
The growing momentum behind property tax reform could represent a structural inflection point for the municipal bond (muni) market. Property taxes are the largest and most stable source of local government revenue, underpinning credit quality and enabling low borrowing costs. Thirteen states have actively contemplated some form of property tax reform in the last year.1 Their removal could weaken credit fundamentals, increase revenue volatility, and drive a repricing of risk across the asset class.
The foundation of local credit
Property taxes account for a significant share of local government funding (Chart 1) and provide a stable revenue base across economic cycles. They are central to general obligation bonds, which rely on an issuer’s full taxing authority. Removing this foundation shifts the entire credit framework.
Chart 1. Local government’s reliance on property taxes
Market repricing in motion
Credit deterioration, increased revenue volatility, higher borrowing costs, and a shift toward state-controlled funding are the primary transmission channels. There are several ways municipalities can engage in property tax reform including assessment limitations, levy caps, homestead exemptions, tax credits, and tax swaps. Each method has the potential for different outcomes. Investors should expect greater dispersion across issuers and reduced predictability in tax-backed credits.
Education in transition
Property taxes fund a large share of public K–12 education (Figure 1). Traditional districts depend heavily on these revenues, while charter schools rely more on state allocations. On a national basis in 2020–21, local property taxes averaged 36% of total revenues for public schools, with variation state to state.
Figure 1. Property tax revenues to public elementary and secondary schools as a percentage of total public school revenue – by state or jurisdiction – for the 2020–21 school year
Although charter schools may appear less exposed, a shift toward centralized funding could increase volatility and competition across the entire education system.
Where we believe opportunities emerge
Despite these risks, areas of resilience remain. Essential-service revenue bonds – such as water, sewer, and utilities – benefit from stable user-fee structures. Larger, diversified issuers with multiple revenue streams are better positioned to absorb disruption. State-level credits may also benefit from increased centralization. In this environment, active credit selection becomes more critical, while new financing structures and public-private partnerships may present additional opportunities.
Positioning for a changing landscape
Risks are likely to concentrate in local bonds and school district issuers most reliant on property taxes. At the same time, opportunities could emerge in more resilient revenue sectors and among diversified entities. As dispersion increases, a more selective and active investment approach will be essential.
Final thoughts
Eliminating property taxes would not remove risk from the municipal system – it would redistribute and reprice it. Active management and careful credit selection will be critical in navigating the transition.
