Bankrupting the Common People

House Prices Down, Property Taxes . . .Up?

May 28, 2010

The Curious Capitalist - One of the worries as house prices began their now three-year plunge back in 2007 was the affect of falling values would have on budgets of cities and other local governments, which rely heavily on property taxes. Well it turns out, property tax revenue is far more resilient than people thought.

The strength of the property tax was the main driver of the small positive growth in overall state and local taxes for the fourth quarter of 2009. This was a theme in many of the presentations. New research by Byron Lutz, Raven Malloy and Hui Shan illustrates that house value declines don't necessarily lead to lower property taxes, and when they do, it can take a while. With luck, by the time property taxes do dip, sales and income taxes will be recovering. The good news is that if property taxes could stand up in this recession, which was both deep and caused by a housing collapse, they can stand up to most crises.

The fact that property taxes held up despite the housing bubble bursting has ramafications for tax policy in general. Here's why:

First of all, it is just interesting that property taxes held up despite the real estate recession. In fact, property tax revenue has held up better than any other of the general ways states and local governments raise money. Sales and individual tax revenue were both down sharply in 2009. Property taxes, on the other hand, were up. Why is that? The professors said that was mostly the result of the fact that local governments tend to offset declines in house prices by raising taxes. Or they just don't lower the assessment on houses when property values fall, which essentially does the same thing as raising tax rates ...