Home prices fall, but local property taxes rise, Census says

Local property tax revenues are up 3.6 percent, according to new census data, despite a 30 percent decline in home prices.

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If you own a home, chances are its value has plunged in the last couple of years. How about your property taxes?

In the teeth of the worst real estate downturn since the 1930s, have your taxes stayed the same? Have they gone up?

If so, join the crowd. Nationwide, housing prices have fallen nearly 30 percent from their 2006 peak, according to the S&P 500/Case-Shiller 20-city index. But property tax revenues went up in the third quarter of this year,– an average 3.6 percent nationwide compared with the same period a year ago, according to Census data released Tuesday (.pdf).

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That's fertile soil for the seeds of a tax revolt. If antitax activists, or perhaps the "tea parties" of the political right, began to focus on local taxes, the effects could put municipalities in a difficult bind. Already strapped for cash, they may well be forced to raise the property tax at a time when voters expect them to cut it.

"Very likely there will be further property-tax increases that many voters will find highly objectionable," says Robert Ward, deputy director of the Rockefeller Institute of Government in Albany, N.Y.

Cities are always slow to reassess the value of property. Assessments don't rise as fast when the market is going up and they are especially resistant to declines when the market is going down, says Robert Tannenwald, a vice president of the Federal Reserve Bank of Boston. Historically, the lag has been three to five years. But "we're entering uncharted territory here."

Most assessors have never had to consider revaluing downward the entire value of their housing stock. Now, this historic downturn is putting them between a rock and a hard place.

On the one hand, local politicians are eager to delay the process. Property taxes represent a huge and predictable source of funding for everything from schools to police and fire protection. In 2007, an average of 71 percent of local government taxes and 44 percent of their overall revenue (counting fees and other sources) came from property taxes, Mr. Tannenwald says.

And cities are already hurting financially. States, also facing shortfalls, are beginning to pull back local aid. Nearly nine in 10 city finance officers said they had trouble meeting fiscal needs this year, according to a recent survey by the National League of Cities.

On the other hand, individual taxpayers in many cities are beginning to press for reassessments. If the value of their homes has fallen so much, they reckon, there's no reason that their taxes shouldn't fall, too, especially in an economy where pay increases are paltry and the prospects of joblessness loom large. If that dissatisfaction coalesces into a full-fledged movement, then the pressure to begin rolling back or capping local taxes could flare again as it did in states like California and Massachusetts three decades ago.

"I could see that scenario," Tannenwald says, but many states already have caps on the increase in local taxes. "If you were to constrain [revenues] further, people would see that they would be consigning themselves to poorer public services than they enjoyed in the past. I think people can see that the problem isn't runaway government this time as much as it is a really weak economy and plummeting property values and demographic pressures."

That's an optimistic view. If antitax protestors were able to generate a powerful multistate movement in the early 1980s when home values were going up, their potential appeal appears even greater when home values are falling.

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