Property Taxes Keep Rising as Home Values Keep Falling
CHARLES HUGH SMITH
Posted 8:00 AM 12/18/10
Common sense suggests that as home prices decline, the
property taxes based on their valuations ought to as well. But even as
house prices continue to slip, property taxes nationally are clicking
Why is this occurring? There are several factors at work.
The first is that many local governments are responding to sharp
declines in real estate values by raising property tax rates. In one
southern Washington state county this year, the rate jumped from $10.06 to $11.60 per $1,000
of assessed value -- a more than 15% increase. Throughout
Washington, even as assessed values slumped by more than 13%, property
tax revenues rose 2.1% to $8.8 billion -- a $181 million increase.
Though the state has limits on property tax hikes,
local governments' property tax rates don't rise or fall based on
assessed values -- they're set by budget requirements. So falling
prices don't necessarily translate into lower property taxes.
Real Values Would Need to Drop Much Further
Next door in Oregon, state law has combined with the law of unintended
consequences to produce an unusual twist on the property tax problem:
A voter-mandated statute limits increases in assessed values to 3% a
year. As a result, those assessed values are still lagging market
prices, which soared during the housing bubble. In Multnomah County, the average assessment of $174,000 is
$100,000 lower than current average market values.
Thus, assessed values -- as opposed to actual values -- will keep
rising, and property taxes will rise with them, by 3% a year even as
real home prices slip. Property taxes in those markets won't fall
unless real values drop below assessed values, which would require
massive additional price declines.
In northern New Jersey, property taxes are rising by as much as 12% in some municipalities, after skyrocketing 80% over the
past decade, far outstripping growth in the consumer price index (31%)
and household incomes (24%). The state government in Trenton has cut
its contributions to local governments by $200 million over two years,
and other revenue sources are falling. Localities now say raising
property taxes is their only option.
Property Taxes Now Dominate Local Revenues
According the U.S. Census Bureau data, the nation's local governments
will collect an
estimated $476 billion in property taxes in
2010 -- almost twice the $250 billion that states garnered
from income taxes and 66% more than total sales tax revenues of $286
A decade ago, revenues from property taxes were roughly equal to those
from sales taxes. In 2000, property taxes totaled $247 billion, and
sales taxes came in at $223 billion -- a difference of roughly 10%.
Since then, sales taxes have increased by 28% -- roughly in line with
the rise in consumer prices, as
calculated by the Bureau of Labor Statistics.
Property taxes, though, have far outstripped inflation, soaring by
$229 billion, about 92%.
State income taxes have risen nationally from $217 billion in 2000 to
a peak of $303 billion in 2008, just as the global financial meltdown
began. Since then, they've dropped back $250 billion in 2010. Over the
decade, that's a total rise of $33 billion, or 15% -- actually less
than inflation, since income taxes have fallen substantially since the
Going in Opposite Directions
Add all this up, and we can see that local governments have become far
more dependent on property tax revenues than they were in 2000. As
levies on sales and incomes have stagnated in the recession, property
taxes have continued their decade-long rise, jumping $45 billion (over
10%) since 2008 even as
home prices plummeted roughly 30%
nationally since the 2006 peak of the housing bubble.
Since California's voters passed Proposition 13 in 1978, property
tax increases there have been limited to 1% of assessed value a year,
and assessed value increases are limited to a 2% a year. Additional
parcel taxes can be added only through voter-approved bond measures
and "special assessment districts" which fund municipal water
districts, libraries and other local government services.
But those assessed values are reset to market valuations when
properties are sold. As millions of homes changed hands during the
boom years, their assessed value skyrocketed, reaping huge increases
in property taxes for local governments in California.
An Illustrative Case
A random selection of homes in the San Francisco Bay Area yielded
these representative increases (addresses are not listed due to
confidentiality concerns, but property taxes and sales figures are all
public records, easily accessible on sites such as zillow.com.)
A 3-bedroom, 2.5-bath home, built in 1924:
assessed at $270,000 in 2004, property taxes: $5,090
sold 2005 for $725,000: 2006 taxes: $10,997
sold 2010 for $540,000, 2010 taxes: $12,193
Once this home was sold at a bubble-era valuation, its
property tax more than doubled, and then rose 10% from 2006 to 2010,
despite a fall in value, as local "special assessment district" levies
Now that the home has sold for $185,000 less than its previously
assessed value (a drop of 25%), the property taxes collected will
certainly decline by a similar percentage. Multiply that by hundreds
of thousands of homes sold since 2007 for less than their bubble-era
valuations, and it paints a bleak picture of major declines in
property tax revenues for California's local governments.
Rising Rates Risk Homeowner Revolt
Homeowners in many locales can petition their property assessor's
office to lower the assessed value of their homes. If granted, such
reductions can substantially lower property taxes.
Again turning to California for an example, a
3-bedroom, 1.5-bath house built in 1928 saw its assessed value leap
more than tenfold when it was sold for $770,000 in 2006. Property
taxes jumped from $2,522 to $11,394. But the assessed value was
notched down from $810,000 in 2008 to $630,000 in 2010 in an
adjustment to the realities of post-bubble valuations.
Either by reassessment or by sales, assessed property values are
falling around the nation. While local governments can compensate by
jacking up their tax rates every year, at some point, those
substantial annual increases will likely trigger resistance from
homeowners watching their home values stagnate or decline.
The property tax cash cow will likely get leaner as a result, and
local governments will have to find other revenue sources or slim down
budgets to match the new realities of the realty market.
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