In the days following the US midterm elections, the Democrats’ sweep of Congress dominated the media narrative. While the outcome might suggest deep partisan divides, the themes that prevailed on the campaign trail point to common concerns across the electorate. Key among them were affordability and the state of the economy. As states and local governments finalize election results, we consider these themes within a municipal context given their implications for both issuance and credit quality.
Targeted Taxes in a K-Shaped Economy
We have previously discussed the bifurcated approach to tax policy to address affordability concerns. Voters across the country were faced with a range of proposals, from the reduction of taxes to lower the cost of living on the one hand, to progressive taxes that would fund services on the other. What emerged was an openness to both approaches coupled with an opposition to broad-based taxes that spanned the political spectrum.
Voters in Tennessee and North Carolina approved constitutional amendments limiting future tax increases, with a permanent ban on statewide property taxes in the former and a cap on personal income taxes in the latter. A separate initiative will require North Carolina’s legislature to pass laws limiting the rate of the growth for property taxes. In California, the so-called billionaire’s tax was not only defeated, but an opposing constitutional amendment that would prohibit future taxes on personal assets looks set to pass as of November 12, 2026. Florida’s property tax amendment garnered 62% support; it will increase the property tax exemption for owner-occupied residences to $250,000 and cap the rate of growth for commercial and industrial property values, in effect cutting non-school district property taxes.
By contrast, progressive taxes fared well. Californians approved the permanent extension of personal income tax increases for high earners that were originally enacted in 2012 to fund education and early childhood programs. Coloradans passed a constitutional amendment instituting a graduated personal tax in lieu of the current flat tax regime with similar funding objectives that will result in material 12% increase in revenue by our estimates. Washingtonians rejected the initiative that would have repealed the 9.9% tax on personal incomes above $1 million, which was legislatively approved earlier this year in a first for the state previously without an income tax.
Credit Implications Range from Positive to Mildly Negative
From a state funding perspective, the clearest winner in last week’s elections is the K-14 education sector. School districts and community colleges stand to benefit from permanently higher levels of funding (California), new dedicated funding sources (Colorado’s graduated income tax is estimated to generate an additional $2 billion of annual revenue for education), or exemptions from tax cuts (Florida).
Conversely, local governments, particularly cities and counties in Florida, are most exposed to property tax reform initiatives. Here we take comfort in a number of factors, including the extended timeline to implementation (exemptions phased in over two years), appreciating home values, and the strong fund balances prevalent in the state. In our analysis, we found most cities and counties could absorb the revenue loss in the first year with reserves alone. More importantly, we expect local governments to cut spending and increase revenues, either by adjusting property tax rates or by charging other fees for service.
The implications for state credit quality are mixed. They range from reduced revenue raising flexibility (Tennessee, North Carolina), which we view a modest credit negative over the long term, to new dedicated revenues (Colorado, Washington) that support budgetary balance. California’s billionaire tax would have increased the risk of capital flight and reduced its recurring revenue base so its failure is a net positive.
Issuance and Demand Set to Increase
A preliminary estimate from the Bond Buyer indicates that 89% of the $134 billion in state and local bond measures passed. Bond authorizations are generally spent down over multiple years, so this figure should not be construed as a surge of issuance for 2027. However, it does support our view that supply should remain structurally elevated over the medium term due to aging infrastructure, higher construction costs, and population growth.
We also highlight the mixed results among local tax and bond referenda with notable variability by region that will affect the geographic breakdown of future issuance. Consider Texas, a fast-growing state with a young population. Yet only 9% of school district bond measures passed with 98% counted and total bond authorization for 2026 (including measures passed in the May election) is down 35% year-over-year. In Colorado, voters approved approximately half of the proposed property tax increases for school districts. And perhaps most surprisingly, in Florida, where voters overwhelmingly approved a constitutional amendment to reduce property taxes, almost every single school tax measure on the ballot met with success. Over 40% of the state’s school districts had property tax proposals.
On the demand side, personal income tax changes in Colorado and Washington should make in-state municipal bonds more attractive on an after-tax basis, particularly for taxpayers in the highest brackets. While spreads in these states remain unchanged, we have seen increased demand for state-focused strategies.
Bottom Line
Taken together, the midterm results point to common voter concerns, differentiated credit outcomes, and elevated issuance. While affordability was the thread connecting voters' priorities, it did not result in a single mandate on taxes. Voters favored targeted measures over broad-based ones. Credit implications are mixed but largely manageable in the context of healthy post-pandemic reserves and strong governance. The relative success of state and local bond measures coupled with new progressive income taxes will support both supply and demand. We will continue to monitor these measures and their implementation as their effects on credit quality and relative value are only beginning to take shape and will increasingly require active, bottom-up credit selection.