Falling Property Tax Revenues Will Force Tough Choices on Local Spending

We’ve discussed the impact of declining property taxes resulting from falling home values a number of times over the past year.  The effects of declining home equity and foreclosure on the broader economy have been discussed ad nauseum in the media for three years.  Of equal interest, but less discussed is the effect that falling home values will have on county budgets and services.

Many crucial services such as education, fire, police, and local infrastructure are paid for at least in part by property taxes.  When the tax base diminishes due to foreclosure or declining home prices, services must be cut or taxes must be raised in order to make up for the shortfall.

On average, home prices are down more than a third since the property bubble burst in 2006. Although most markets have seen some decline to one degree or another, the losses are not evenly spread.  The biggest losses occurred in states that saw exponential growth in the first part of the decade, and places like Florida, Arizona, Nevada, and California were particularly hard hit.

Now many of the hardest hit places are grappling with declining property tax revenues.  Because homes are not assessed for property tax purposes every year, there is a lag between when home values fall and when taxes are impacted.  Large numbers of homeowners are now appealing their tax assessments, and we are beginning to see the first waves of property tax declines.

In April, a Bloomberg article said that property tax revenues in the last quarter of 2010 fell at the fastest pace in the last four years.  An increasing number of homeowners in South Florida owe no property taxes because their homes fell in value below certain thresholds.  Last week, the Wall Street Journal published an article by Justin Scheck that details the situation in California:

“The toll is evident here in Calaveras County, a largely rural area about 100 miles east of San Francisco.  Over the past three years, it has seen among the biggest property-tax roll declines of any California county, with the total value of taxable properties down about 5% from the last year – and 18% over the past three years – to $5.67 billion.  Statewide, assessed values declined 1.8% last year from a year earlier, according to state data.”

Although the situation in California is somewhat unique due to a law that limits property taxes to 1% of a home’s value, this is a scenario that we should expect to see replayed across the country for years to come.  According to the WSJ article, property taxes account for 45% of local government revenues throughout the nation.

If we learned anything from the recent debt limit debate, it is that Americans strongly dislike two things: raising taxes and cutting spending.  They may be in favor of one or the other, but rarely are willing to do both.  Local officials across America will soon be put in a position to make tough choices about both taxes and spending.  Barring a sudden upswing in home values and a rebound of tax rolls, I think more pain is inevitable – be prepared.