The U.S. economy shrank for the second quarter in a row this year, signaling the start of a recession. But what kind of recession is this? And how would a slowdown affect taxes?

In fact, it’s a “technical recession,” said Viraj Patel, the New York-based managing director and head of asset allocation at Fiduciary Trust International. By “technical,” he says that GDP might have fallen off for two consecutive quarters, but not every part of the economy is shrinking. In fact, the six variables used by the National Bureau of Economic Research to make a recession determination have been positive rather than negative since December.

“There are many variant perceptions here,” Patel said, “as traditional indicators such as unemployment, output, income and so on are still fine and not indicating a recession.”

Much of the economic turmoil has to do with lingering distortions from the Covid-19 pandemic, including problems related to trade, inventories and housing.

No matter how it shakes out, however, whether it’s a downturn or recession, taxes are going to be affected, since governments turn to either tax cuts or tax increases to deal with the fallout from economic problems.

“Many people believe … that recessions occur because of insufficient taxation or that government can or should tax us out of them,” said Peter C. Earle, economist at the American Institute for Economic Research. “In fact, recessions are when taxes should be either lowered or removed to let markets function and kick-start both production and consumption.

“When production and consumption drop, as occurs in a recession, taxes based upon consumption—sales taxes, mostly—fall,” Earle added. “Officials are likely to try to find ways to make up for the shortfall by raising various taxes and fees—at the worst possible time.”

He specifically noted the current Inflation Reduction Act—now working its way through Congress and recently approved by the U.S. Senate—as a good example. The legislation has some major tax provisions, such as a 15% minimum tax on the book income of companies.

Businesses carrying too much debt may find their deduction for the interest expense associated with this debt curtailed because of the legislation.

“The limitation to deduct interest is modified for 2022 and will make it more difficult to deduct the full amount of the interest incurred,” said Jim Brandenburg, a Milwaukee-based tax partner at the professional services firm Sikich.

Inflation, and the Federal Reserve’s efforts to fight it with higher interest rates, is going to change the math, too.

“Many businesses will face a double whammy of higher interest expense this year and perhaps not being able to fully deduct this interest. Companies may want to model out their situation now so they’re not surprised later,” he said.

Lisa Cappiello at EisnerAmper in New York said other taxes are going to be affected as well.

“Personal income tax, sales tax and corporate income taxes [will] fall due to decreased wages, less investment activity, reduced consumer spending and lower corporate profits,” said Cappiello, a director in the firm’s Personal Wealth Advisors Group. “As property prices and assessed values fall, property taxes may or may not be impacted.”

Property taxes could in fact come down, said another advisor.

“We saw tremendous growth in home values across the country over the last year, and that appears to be reversing quickly, so property taxes may be coming down from their recent highs,” said Erik Preus, Minneapolis-based head of investment solutions for Envestnet PMC. “Capital gains taxes are likely also to feel some downward pressure just given the market correction we’ve gone through.”

Amy Sewell, Dallas-based senior tax manager at Exencial Wealth Advisors, said some people might actually end up paying less in taxes. On the other hand, taxes could also make up a larger proportion of disposable income.

“In theory, a recession itself will not have a significant impact on income tax rates paid by most taxpayers,” she said. “If a taxpayer’s taxable income drops due to a recession, the taxpayer may fall into a lower tax bracket, paying less taxes. Also, tax brackets and many other thresholds are inflation-adjusted each year. Since the adjustments for 2022 won’t match the current pace of inflation, income taxes may be a bigger percentage of disposable income for many taxpayers.”

“There are some benefits during a recession,” Cappiello said, “including bargain-shopping opportunities, reduction in real estate prices and developing the skill of saving money.”

There’s also going to be an effect on real estate tax given the current rate of inflation, which hasn’t been seen in 40 years, said Craig Richards, managing director and director of tax services at Fiduciary Trust Company International.

“Increased interest rates meant to curb inflation could result in a fallout to real estate tax,” Richards said. “If real estate prices decrease, the amount of property taxes collected will decrease.” Regarding sales tax, “if consumer spending is reduced, so [is] the collection of sales tax.”