The dramatic fall in home prices is shrinking the property tax base, contributing to a sharp decline in municipal tax revenues, says a study by Federal Reserve Bank of Cleveland researchers Thomas Fitzpatrick IV and Mary Zenker.
Using Cuyahoga County, Ohio, as an example, Fitzpatrick and Zenker say that differences between market and county estimates of property values from 2008 through 2010 imply that when property values are reassessed in 2012, they will be between 11 percent and 18 percent lower than the 2010 county estimates. This suggests that after reappraisal, the county tax base will be at least $1.1 billion lower than it was in 2010.
The impact has been felt most strongly in Cuyahoga County's central city (Cleveland) and its inner-ring suburbs, which may see property values fall 38 to 45 percent and 26 to 30 percent, respectively.
To make up for the declines in the property tax base, local governments may need to raise property taxes or reduce services, say Fitzpatrick and Zenker, making the municipalities a less desirable place for new home owners to locate. Weakening housing demand could then lead to further declines in property values.
When residential property values fall, the impact on local government budgets depends not only on the extent of the losses but also on when the losses are realized relative to the budget cycle. The timing can vary by state, and it depends on how property values are calculated. While most states use appraisals to estimate the market value of property, they update these estimates in very different ways. The way estimates are updated can have a significant impact on when the losses in property values are realized.
California, for example, reappraises the value of properties for tax purposes whenever ownership of the property changes. This forces cities in California to reduce the taxable value of a property when it goes through foreclosure. With foreclosures figuring so prominently in the past recession, this reappraisal mechanism has contributed to the budget challenges now facing California cities, as losses are realized immediately with every foreclosure, write Fitzpatrick and Zenker.
Unlike California, Ohio, on the other hand, reappraises the value of properties for tax purposes every six years. 2012 is a reappraisal year.
The impact on tax collections in the central city of Cleveland and inner-ring suburbs could be significant, amplifying their budget issues. Implied declines of 30 percent or 40 percent of residential property values suggest large declines in property taxes, even considering the value-stabilization feature of the tax revenue calculation, write Fitzpatrick and Zenker. Other states that adjust their tax estimates using methods similar to Ohio’s may also see municipal budget crises amplified by the fall in property values.
Bottom line: This is not the time to own municipal bonds. It's unlikely that it is just a coincidence that George Soros is funding Paul Volcker to develop plans for a financial crisis in the US at the state level. Volcker's partner in the study is Richard Ravitch who is warning taht municipal bond holders will have to take hits.
WSJ writes:
A Democrat who was named lieutenant governor in 2009, and served until the end of 2010, Mr. Ravitch also predicts that municipal bond holders will have to share with taxpayers and public workers the pain in correcting the problems. "What we are seeing in Europe is that everyone has to throw something into the pot to avoid catastrophe," Mr. Ravitch recently told a group of municipal analysts.
The problem with this argument is that while municipalities will lose a significant portion of their assessed value, in most cases they will just up the tax rate to accommodate their budget needs, hitting up the property owner who may be on the verge of losing a job. It will be interesting to see how the rate of municipal tax sale changes over the next few years. Or if cities expand their housing authorities to acquire and rent the properties so affected.
ReplyDeleteI'm perplexed. in civics class I was taught that a municipality set a budget for the year, then allocated the expense among all the appraised real estate in its jurisdiction. People paid the expenses of the municipality in proportion to the value of their reality.
ReplyDeleteIf the general price level of RE in a community goes up it should not cause a windfall or even an increase in the revenuers of the government. Similarly, a decline i the value of RE does not change the municipal budget one cent. The budget is voted on by the counsel, owners pay whatever they decide to budget. Only the allocation of the cost among the various property owners is affected by the relative values of their property.
those boomtime revenues are not coming back. fire the slugs!
ReplyDeletealso, it's true that municipalities will be raising rates as fast as they can. the big problem with that is, we all know that rates generally only go one direction and are very sticky on the way down. this will be another thorn in the side of America's already brutalized cities. the tax rates will be such that if the property values of these homes ever raised up to a normalish middle class level, the tax take would be so daunting as to prevent any sane middle class person from living there. add in the horrible schools and the gangs empowered by the drug war, and these houses will never rise above rock bottom levels again.
ReplyDeleteRaise taxes on the rich!
ReplyDeleteTheyre stealing all our jobs, money, and houses.
The last 10 years of george bush and his trickle down economics has failed the middle class. Trickle down economics and free markets introduced by reagan and practiced by bush only benefits the rich. Democrats are in office the economy is good, republicans are in office the economy is a disaster, thats all you need to know! Clinton had the largest surplus in american history!
History proves high taxes is needed for a good economy and full employment.
But the rating agencies say mun'l bonds are safe...
ReplyDeleteQuoting from another article about this topic:
ReplyDelete"...Mr. Klee, the county’s bankruptcy lawyer, said about 40 percent of America’s counties appear to be in the same boat, issuing full faith and credit debt even though they have no legal authority to raise taxes, as the term implies...."