The Hurricane Effect: How Extreme Weather Events Are Shaping State Tax Policy

Why Extreme Weather Is Driving Tax Policy Volatility

Keeping pace with indirect tax rule and rate changes remains a top tax compliance challenge. While the volume of U.S. sales tax rate changes hovers near all-time highs, it’s important to recognize the factors driving this policymaking volatility.

Property tax reform efforts mark one factor. Other influences include hurricanes, droughts, floods, wildfires, and severe storms. The frequency and cost of weather disasters that cause at least $1 billion in damage have increased markedly from 2000 to 2024, according to data provided by the National Centers for Environmental Information. From 1980 to 2024, the U.S. experienced an average of nine billion-dollar natural disasters per year; from 2020 to 2024, there were an average of 23 billion-dollar events per year.

When a wildfire envelops Colorado’s Western Slope, Central Texas endures a deep freeze, or the Gulf Coast gets walloped by a CAT-4 hurricane, these events “can create fiscal shocks that increasingly test the resilience of government budgets,” note Thao Pham and Manuela Sasot, the co-authors of a Government Finance Review article that examines the public sector’s readiness to address the fiscal realities of extreme weather events.

Sources of Fiscal Shocks

Fiscal shocks arise from different sources. Business activity, employment, and incomes often decline in the immediate wake of a disaster, which results in lower tax revenues. First responders and other immediate local support needs can sap local budgets. The destruction of physical assets can cause decreased property tax collections over time, which comprise a large portion of local government revenue. Over the longer term, however, rebuilding and related recovery activities can stimulate business activity, job creation, and wage increases, which have positive impacts on tax revenues, according to Pham and Sasot.

Sales tax rule changes and rate increases can become part of the policy discussion when state and local governments lack the fiscal resilience to cover costs for the duration of remediation efforts before the economic benefits of reconstruction take hold or before property tax revenues return to pre-disaster levels. State rainy day funds (which all states maintain) and disaster recovery funds (which 43 states maintain) can be tapped. Although rainy day funds are not too far below decade highs, they are showing signs of decline.

Additionally, property tax reform efforts could reduce tax revenues in several states if adopted. On a positive note, a growing number of states are using cost analysis and advanced data analytics to model the likely impacts of extreme weather events, prioritize investments, and develop remediation plans before disasters strike. A recent Minnesota study estimated that annual weather- and climate-related costs could increase threefold to $57 billion. The study also found that investments in resilience measures could cost roughly eight to 15 times less.

Translating this to Tax

These types of analyses demonstrate that state and local government officials are embracing a more comprehensive and interconnected approach to addressing fiscal resilience. Whether these efforts ultimately reduce the need for sales tax rate increases (or new sales taxes, new fees, or new rules extending sales taxes to previously exempt professional or other services) remains to be seen.

Rather than waiting for that outcome, tax leaders should take a similarly comprehensive and interconnected approach to managing the tax compliance lifecycle. A continuous compliance capability will give tax groups additional time to monitor governmental fiscal resilience, rainy day funds, property tax reform, and other drivers of tax rule and rate changes.