Slowing a Property Tax Spiral

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The median US price of a single-family, metropolitan home has increased more than 16 percent in the past two years. As property values have gone up, so have tax bills. In the hot market of greater Washington D.C., for instance, home assessments are rising so rapidly that even with a new cut in the tax rate, people who own a house of average value in Fairfax County, Va., still will see their property taxes increase by $364 compared with last year ( see story).

Across the US, lawmakers are considering reducing, capping, or just limiting the rate of increase in property taxes. The issue is prominent in two gubernatorial races this fall: New Jersey and Virginia.

So far, it doesn't look as if there's a temptation to repeat the example of California, which in 1978 drastically cut property taxes and limited increases to 2 percent a year. That's because after Californians rebelled via the infamous Proposition 13, 42 states moved to impose some kind of property tax limits of their own.

Property taxes play a fundamental role in local government, acting as reliable revenue for everything from fire protection to schools. California, whose schools have suffered greatly as a result of Prop. 13, shows the adverse consequences of severely restricting this basic revenue stream.

But lawmakers are right to show sensitivity in today's heated real estate market. When these taxes surge, homeowners instinctively question doling out more for the same place they've always owned. They bristle at government getting a windfall for which no politician has had to ask permission. And some people who are retired or with low income may find rising property taxes actually turning them out of their homes.

Local governments should be up front with homeowners, telling them how they're spending their windfall. Many states, meanwhile, have since recovered from the worst fiscal crisis in 60 years, so budgets seem right for lawmakers to proceed with some kind of property-tax relief. Unlike in 2003, when more than 40 states faced budget gaps, rising revenues mean that this year, all but three states expect to fully fund their budgets.

Property taxes and government fiscal health vary widely across communities. Given that dynamic, it doesn't make sense to suggest a one-size-fits-all solution. But lawmakers can at least start by giving relief for elderly and other low-income homeowners, who need the most help.