The Housing Crash May Not Hurt Property Tax Revenues

Even though home prices peaked in 2006, at the end of the following year, nationwide property tax revenues were still growing strongly.

The likely reason is that property tax levels are "backward looking" by nature," writes Federal Reserve economist Byron Lutz in a new working paper.

States can take many years to reasses the value of a home, meaning that if a home falls from $250,000 to $200,000 in value this year, it may take until 2010 before the price decline is recorded by state tax authorities. Utah once went 20 years without a proper reapprasial.

Lutz estimates that it typically takes about three years after a 3 to 8 percent increase in home prices for the change to get reflected in property tax revenues. And for every dollar increase in home prices, the levied tax goes up by $0.40. But it turns out that 60 percent, or about $0.24, of this tax increase is offset by reductions in other taxes. Hikes in levied taxes are smaller though, about $0.20, when housing prices grow particularly rapidly. This could mean either that tax rates were reduced to avoid a big additional property tax burden or that some places had caps on how much taxes could increase, says Lutz.

More relevant to the current economic situation, Lutz finds that during times of falling home prices, property tax revenue declines are offset by tax increases in other areas.

"There is little evidence that house price declines influence property tax revenues," writes Lutz. This outcome might be a good reason to think that Barack Obama's intention to raise some taxes won't be, as Charlie Gasparino said yesterday morning on CNBC, like "throwing gasoline on the fire."

Still, Lutz cautions that the data on home price declines reflects only small drops in price, so with the rapid defaltion of home prices we're seeing right now, the outcome on property tax revenue could be quite different.

Comments

[JasonC:]

Clueless ignorant pols in denial.

If you take more of an impoverished people's wealth, all you will do is wreck future recovery. The wealth isn't created by rates or appraisals or votes or laws, but by real economic activity. Which is going away, and tax increases aren't going to bring any of it back. The level of complacent idiocy on display right now is simply appalling.

2008 Oct 09 03:46 PM

[topretirements:]

More than that, it doesnt matter much if the assessed value of the home goes down, the local tax authority will just raise the mill rate. Presto - no change in revenues. Another reason why this regressive tax should be retired

2008 Oct 10 08:04 AM

[rm:]

[Lutz finds that during times of falling home prices..]

And exactly how is the current situation similar to "times of falling home prices?"

Hey, maybe with this study, we could create a mathematical model so we could ensure that all levels of government won't have to tighten their belts.

Maybe Fair, Isaac could be in charge of this program. Moody's could provide oversight.

2008 Oct 10 09:49 AM

[BerkeleyBob:]

California, a leader in foreclosures and declining housing prices, has a constitutional amendment, Prop. 13, which limits appraisals for property tax to a low percentage. Unforeseen consequence is that property tax revenues are less important in good times and bad, but the real beneficiaries haven't been the widow taxed out of her cottage (she can defer her property tax until death) but large corporations, which never seem to sell real property outright, which would trigger a re-appraisal. Of course, the suggestion that the rating agencies which ratified the toxic loan packages have a role in local and state revenues is marvelous, since they have escaped any attention or blame in the present world credit morass...

2008 Oct 10 02:47 PM

[imbabci2:]

Property taxes are applied directly to your local needs, schools etc. This type of tax should be the most palatable type to a believer of reduced Federal Gov inervention in our lives.

Ron Paul's "Property Tax Deduction for All Act" would make taxes on property an “above the line” deduction, meaning that taxpayers could deduct their property taxes without having to itemize all their deductions.
See: www.house.gov/paul/pre...

Interesting!

2008 Oct 10 03:36 PM

[CLH:]

Property taxes went down big time during the 1930s. Houses that are empty for years do not pay taxes.

Taxes will go down during a depression and they will now. Governments are reluctant to displace people during hard times.

2008 Oct 10 11:10 PM

[Still Renting:]

I heard that in washington property taxes are a relative thing. That is, your house is taxed according to it's value relative to other properties. The total state taxes are a fixed amount and assessment only determines what portion of that amount you pay. That means if all property values were to go down the exact same amount, nobody's tax would change at all.

2008 Oct 10 11:41 PM