According to a new paper from Byron Lutz, Raven Molloy, and Hui Shan from the Federal Reserve, the answer is “not as much as you might think”. They identify five channels through which low house prices can affect state and local government tax revenues:
1) property taxes
2) home sales transfer taxes
3) sales taxes via spending on construction materials
4) sales taxes via impact on consumption of lower housing wealth
5) personal income tax
Compared to the 1995-2002 trend, state tax revenues in 2009 were $31 billion below where they otherwise would be, which is 5% of total revenues. Looking at the short-run trend, the total 2005-2009 shortfall is only $15 billion.
Partly driving this result is that property taxes are based on assessments which are lagged, so that falling prices do not show up immediately. As a result, in 2008 and 2009 property taxes rose 5%. This can be seen clearly in the figure below.
This is helpful for local governments, because it means their tax base does not dry up during a recession. However, it does create something of a anti-Keynesian policy where property taxes continue to rise as prices plummet. A 5% increase in assessed value on top of a 15% decline in house prices means an $85,000 house is being taxes as a $105,000 house.
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Tuesday ~ November 23rd, 2010 at 12:02 pm
Apex
In what universe are total property tax revenues correlated to house prices? The county, city, and school districts have their budgets and they allocated those to the property owners based on value. It’s not the other way around where property taxes are based on some percentage of value and then when the value drops by 30% the city just gets 30% less money. That just doesn’t happen.
I really don’t see what property values have to do with property taxes. In many instances while values were doubling in housing from 1995-2005, property taxes saw increases that were minimal or greatly lagged the house appreciation. It would be very hard to justify doubling the city budget just cause everyone’s house is suddenly selling for double what it was 10 years ago.
The same is true when prices decline. Everyone likes to complain about their house values being too high on the property tax records due to the lag. But if everyone’s house value drops 30% the tax implications will be zero. You only benefit if yours drops more than your neighbors.
Tuesday ~ November 23rd, 2010 at 12:25 pm
sardonic_sob
We got our first property tax bill last week (we moved to a new house in a new county in July.) Interestingly, this county breaks out assessment by land value and fixture value. The land value assessment was unchanged, the fixture value assessment went down about 12%, and the total assessment went down 9% (IIRC. It was something like that.)
More relevant to your post is the fact that the tax bill had a notice on which read, again IIRC and paraphrasing, “Your assessment went down, so your taxes would normally go down, but it is very common for property tax jurisdictions to raise tax rates when assessments go down so your taxes may not actually go down.”
Tuesday ~ November 23rd, 2010 at 1:00 pm
Kenneth Hunter
The lag with property tax impact is not always the case. With the adoption of annual, market-based revaluations in several areas, they feel prey to a pretty destructive cycle of hyperactivity. Look at local jurisdictions in Northern Virginia that saw values rise and fall dramatically over the past 6-7 years.
The issue wasn’t just revenue, however. Significant growth in cash revenues due to real estate activity led to significant increases in spending, especially on expanding law enforcement and provided greater quality of life amenities. Schools were also built, far more luxurious than before. The resulting debt service, staffing costs, and overhead consumed excess revenues during good times, and creates greater budget strain during lean ones.
I am not surprised about the findings with respect to most markets in terms of revenue. This is another example that spending levels, and the factors that influence them, need closer examination and action.