The Coming Property Tax Cliff Means More Bad News for Municipal Finances

Property Tax Woes Will Mean More Bad News for Municipal FinancesA recently updated Federal Reserve staff working paper, "The Housing Crisis and State and Local Government Tax Revenue: Five Channels," notes that property tax collections "have been surprisingly resilient" during the financial crisis and downturn. That's in sharp contrast to the steep drops seen in other municipal revenue streams, as shown in the following chart from their study:

According to authors Byron Lutz, Raven Molloy and Hui Shan, the strength in property tax collections in comparison to those from other sources, including income and sales taxes, stems from "the long lag between changes in the market value of property and changes in taxable assessments and the tendency of policy makers to insulate revenues from housing price declines by raising tax rates."

"This propensity," they conclude, "makes it unlikely that property tax revenues will fall sharply in coming years."

Unfortunately, as was the case before the current troubles began, these researchers (and others) are guilty of making the kinds of analytical mistakes that helped bring about the financial crisis in the first place. Simply put, they're basing some of their conclusions on unrealistic and backward-looking assumptions, and they're failing to take the bigger picture into account.

For example: How realistic it is to assume that property taxes won't be affected by the same economic pressures that have undermined other sources of revenue? While sales and income taxes have so far suffered most from weak labor markets, stagnant incomes and high consumer debt loads, is it a stretch to think that the long-running "jobless recovery" will soon take a big bite out of property tax revenues?

To be sure, tax assessments in many areas have ticked higher even as property values have fallen. But the recent electoral successes of the Tea Party movement and the growing popularity of fiscal conservatives like New Jersey Governor Chris Christie suggest taxpayers will resist efforts to boost rates even further.

In fact, unless one believes that real estate prices are poised for a sharp rebound -- which seems far-fetched in light of the large imbalances that still exist between supply and demand -- a quick read of another chart highlighting the historical relationship between the rates of change in house prices and property taxes suggests the latter is set for a substantial fall (note the slide that occurred in the early 1990s following the last great real estate downturn.)

With that in mind, the authors' other conclusion that "the downturn in state and local tax revenues was likely driven by the economic recession rather than the direct influence of the housing market downturn" is not exactly reassuring. The data they've presented suggest we've not yet felt the second blow of a predictable but devastating one-two punch to the finances of municipalities around the country.

Yet another reason to be wary of the muni bond market?

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The people in Colorado are so stupid...everytime there is a request for tax increases to pay for some new project they always vote to approve it. People areout of work ans losing their homes and still they vote for higher property taxes. My house has gone down in value but my property taxes have gone up. I think Minnasota doesnt make people over the age of 65 pay property least they get to keep what they worked their whole life for and not have to sell their homes because they cant afford the taxes.

December 01 2010 at 12:02 AM Report abuse rate up rate down Reply

Property owners should make sure the information on their tax statement is correct. Counties sometimes make mistakes determining property values, and/or calculating the amount of tax. If the statement doesn't look correct, it is worth having an expert take a look to see if there is a basis for an appeal. Prime Property Tax Negotiation ( is a company specializing in property tax appeals, and a good information resource.

November 30 2010 at 11:49 PM Report abuse +1 rate up rate down Reply

How realisric is a to believe a tax assessor will look at the market and say, "Housing values are going down so we'll have lower the taxes on those houses." Come on. Taxes don't go down for regular home owners. They go down for Mike Madigans clients. He's are Speaker of the House here in Illnios who has a law firm dealing in tax law.

November 30 2010 at 8:33 PM Report abuse +1 rate up rate down Reply

My houses value is down 20% each year for the last 2 years but my property taxes have gone UP 3% each year. The game is rigged.

November 30 2010 at 8:04 PM Report abuse +2 rate up rate down Reply

It is totaly amazing to me how fast the county reassest my property value when I put a addition on my house, But when the value of my house dropped it took 3 years to lower my assesment. And when they did they just raised the rate so my property taxes still went up. There is at least one house on every block surrounding me that is in foreclosure. How many tax dollars are they getting from those properties. The schools are suffering, the roads are bad, buisnesses are leaving, and people are moving out. Get a clue politicians. If people are jobless and they loose there homes you will loose your political free ride.

November 30 2010 at 7:49 PM Report abuse +4 rate up rate down Reply

Did you notice that most states the politicians including school boards have put all raises for the state workers the teachers the legislature and yes the courts (judges) all on the same percentage of pay raise , retirement and health benifits. They don't care where they get the money just their raises and benefits. There is no separation of powers so the courts could defend the public tax payers. They are in on it you can't beat them. Kiss your homes and rights away.

November 30 2010 at 7:02 PM Report abuse +3 rate up rate down Reply

Anyone thinking Chris Christie in NJ is doing a good job needs to think again. This governor has done nothing to really help the people of NJ. He has taken the middle class and dug them into a bigger hole - but he talks as if he is doing something, and the tatic is working by reaching the unsuspecting people in other states. Please see the average property tax bill in NJ prior to making a judgement. Then consider Christie has cut state aide to schools, and even decided he needs to lay off state workers details according to him will come after Jan.'11) I really don't see how adding people to the unemployment line will help anyone except the fat cats that are going to benefit from selling off NJ's assets one by one. Buyer beware in this case.

November 30 2010 at 4:56 PM Report abuse -3 rate up rate down Reply
1 reply to weeziebathome's comment

LOL, I live in NJ and couldn't disagree with you more. Corzine killed jobs in NJ and ran up the unemployment rate, the welfare rolls swelled under Corzine and in his last year in office he left New Jersey, my area anyway, with a nice just about 100% property tax increase! He left NJ flat broke and busted and on the verge of being the next Califorian, paying state workers with IOU's! Yes, Corzine screwed Jersey over hard and you know it! My property taxes rose from $2,800 to $4,900 in his last year! He left a bag of crap for Christie as a parting gift as he stole what was it, over 70 Million dollars of state money and sent it to the hoods in Jersey (Camden,Newark,Jersey City) on his last night in office. Money that Christie couldn't get back! Far as "cutting state workers" lmao... You talking about the 6 teachers he fired who have been sitting in a school getting paid full salary for the last 10 years when they didn't teach anything? Just hung out in the teachers lounge reading the paper all day. Nah, your not talking about them, are you? Maybe your talking about the fact that not one teacher spends one red cent for their own healthcare. Nah, you aren't talking about the Facts, your echoing what the teachers unions and other unions in NJ are crying...."Christie is going to fire all the teachers and state workers". Is there any moron out there that would believe that? In New Jersey there are! Problem is simple. We have given to much away as the progressive left liberals have gained power in America. The check is coming due.... This will be an interesting next few years in America and NJ, that's for sure!

November 30 2010 at 6:42 PM Report abuse +4 rate up rate down Reply

Property tax should be illegal. First, you cannot own your own property in the U.S. We just rent from the government. Imagine buying a home, paying it off in 30 years, retiring, and then having to move becuase you cannot afford the property tax anymore. This is just wrong. If you buy and pay for your house, it should be yours. Furthermore, when you die, your heirs should not be required to buy it back from the government again.

November 30 2010 at 3:55 PM Report abuse +14 rate up rate down Reply
1 reply to drdave415's comment

interesting debate. On the one side, we have the anarchist. And on the other, we have someone that previously stated that 80% of nassau county lives in "utter poverty". This would be a county where the median income is over $90K. In other words, half the population makes more than $90K a year. Meaning that 30% the population makes more than $90K but is in "utter poverty".

November 30 2010 at 4:42 PM Report abuse +3 rate up rate down Reply

not higher taxes the good time is over time to cut the state workers pay starting at the top

November 30 2010 at 3:40 PM Report abuse +4 rate up rate down Reply
bill griffis

more higher taxes to come

November 30 2010 at 3:11 PM Report abuse +1 rate up rate down Reply