Tuesday, November 10, 2009

Pressure Builds for Property Tax Hikes

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Published: Nov. 8, 2009
By Steve Cook Real Estate Economy Watch

A perfect storm is brewing for big property tax hikes across the nation next year, increases that could add significantly to the costs of homeownership.

This year one out of every four US cities has already increased property taxes, which make up the bulk of city revenue nationwide. Many more local governments will have nowhere else to turn to balance their budgets as their operating costs rise and revenues fall.

Local government budgets are under tremendous pressure from spiraling costs and shortfalls in income and sale tax receipts caused by the struggling economy, according to an annual report on cities' financial conditions by the National League of Cities. Income tax revenues are off 1.3 percent and sales taxes 3.8 percent

Nine in 10 (88 percent) of city finance directors surveyed by the League say this year will be difficult in meeting fiscal needs, while 89 percent expect the same in 2010. This is the worst outlook the annual report has detailed in 24 years.

A similar survey released last week by the US Conference of Mayors found that in nearly 27 percent of the surveyed cities, this year's budget shortfalls amount to 10 percent or more of total operating and capital budgets; in a few of the cities the shortfalls range from as much as 20 to 30 percent of total budgets. When asked about next year, the vast majority of mayors (86 percent) say projected shortfalls will be the same or larger than this year's. Forty percent reported a decline in property tax revenues.

In California, which has led the nation in foreclosures, property tax revenue in the state is forecast to fall 6.1 percent in the next fiscal year, which runs from July 1 to June 30, 2010. The following year will see a 3.6 percent decline, followed by a more modest 0.8 percent drop.

Under state laws, most cities are required to balance their budgets, which means their expenses cannot exceed revenues in a given budget year. Cities are cutting expenses and they are also looking for ways to raise revenue, such as increasing the fees charged for city services, but they have few choices. Raising property taxes is the only viable option for many.

Despite the 21 percent decline in existing home sales prices since 2006, the League's survey found that nationally property tax revenues actually rose 1.6 percent this year, though at a slower pace than in 2007. In 2010 they are expected to fall; assessments are adjusted to reflect declining housing values.

One reason local governments have yet to feel the full brunt of falling property values is they are collected. Property tax revenues are collected over the course of several years and there is usually a time lag of 18 months to several years before economic shifts have an impact on city fiscal conditions. A growing number, but still very small percentages, of homeowners are challenging their assessments. Most municipalities are flooded with homeowners seeking tax reductions, and many towns are reluctant to deliver because they can't find money anywhere else.

The main factor in determining property taxes, however, is not how much a property is worth but how much money the local government needs to raise. Each year municipalities first determine their revenue needs and then create a multiplier to raise it. The multiplier is calculated by taking the amount of money needed, and dividing it by the total assessed value of the real estate in the jurisdiction. Thus, if everyone had their assessed value reduced by 50 percent, their taxes would stay the same since the local government still needs the same amount of money. All it would do is double its multiplier.

"Cities will be seeing difficult conditions for some time," said Chris Hoene, co-author and director of research and innovation for the National League of Cities. "The impact of the housing market drop is really just beginning to be felt. City leaders and residents will need to work together more than ever to make decisions about the future of their communities in terms of the types and levels of services cities will provide in the next few years."

From Real Estate Economy Watch

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