Ryan Avent writes
t’s worth being a little careful when drawing lessons from all of this, however. If you look at the table above, you see that the housing sector was responsible for more of the drag relative to other recoveries than was government. And as the authors explicitly note, government spending—and local government spending especially, given its dependence on property tax revenue—is a housing-sensitive sector.
The issue here is complex but for most jurisdictions I would say this is not really true.
Property taxes are charged as a percentage of value but they are basically just a lump-sum transfer and the residents major property owners are well aware of this.
This is why in North Carolina for example, you are required by law to tell your residents how much their property tax rate should be lowered after revaluation in order to get them back to revenue neutral.
In some states even if property values grow you still have to tax property as if it didn’t, that is there is a revaluation cap.
Now, it is true that if you are adding lots of taxpayers to your jurisdiction via migration or outside investors then you can probably raise more revenue. However, that’s not so much housing per se. Movements in the economy affect property tax revenue to the extent they affect willingness-to-pay but not in the same mechanical way that income and sales taxes are affected because there is very little “rate illusion.” Everyone The major property owners know the actual billed amount is what matters and so the rate changes whenever the valuation changes.
For State and Local Governments the issue is more likely sales of building materials which in most states are taxable under the general sales tax. Because homes are not taxable under the sales tax, the materials that go into them are.
So, when construction declines, sales tax revenues decline. Since autos are often not taxed under the general sales tax – but under some highway financing arrangement - this is the most volatile part of your sales tax base.
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Monday ~ March 5th, 2012 at 2:55 pm
Matt (@MeCampbell30)
I still don’t understand what your saying. I understand that local income and sales taxes are probably better linked to decreases in local revenue. But the property tax disconnect can’t be just that people can delay revaluations, especially in the face of a prolonged housing downturn.
Monday ~ March 5th, 2012 at 3:54 pm
AngryKrugman
@ Matt–Property values matter only in relative terms, not absolute ones. Local governments impute tax rates based on the money they want to raise and the total tax base. If all property values go down, the tax rates simply goes up. The true importance of property values is measured as compared to your neighbors, because that’s how the tax gets apportioned between households.
Monday ~ March 5th, 2012 at 5:23 pm
OGT
Right this is misunderstood fairly often, in part because different states have such different rules. Many, if not most, states the budget set the amount of taxes to be collected and the assessed values just determine the tax rate.
However, in addition to sales taxes and traditional property taxes, many states, notably including Florida and California, have transfer taxes on real estate sales. Those, of course, are highly pro-cyclical.