Property Taxes & Falling Values Part I - Howard Voyles / HousingMatrix.com

The Cleveland Fed just released a study on the impact of falling property values on municipal finance.

This is a subject we have from several points of view over the past months and this report brings it home for communities surrounding Cleveland, a lesson for all communities.

“The fall in property values associated with the recent recession has caused a decline in property taxes which may be amplifying local government budget crises across the country. Cuyahoga County is set to reappraise property values in 2012, and when it does it may only then absorb the full force of the housing market losses caused by the recession. We estimate the potential losses in property values and the county’s tax base and find that the impact could be significant.”

“Historically, recessions tend to trigger a drop in tax revenue and an increased demand for government services, which stresses government budgets. The most recent recession was no different, but this time, declines in municipal tax revenues have been more acute. At fault mostly are a prolonged period of high unemployment and a sluggish economic recovery, which have been compounded by a drop in transfer payments from state and federal governments.”

“Another factor that is contributing to the current sharp decline in tax revenue is the shrinking of the property tax base because of falling home prices. During and after earlier recessions, home prices remained flat or increased. Stable home prices provide stable tax revenue, which is used to fund many critical city services, such as the local police force, fire department, public education, and infrastructure projects. The fall in property values that began in the recent recession—and that continues in many markets today—may be amplifying the budget crises across the country because of the decline in property taxes it is causing.”

“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…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.”

“Ohio, on the other hand, reappraises the value of properties for tax purposes every six years. While minor revisions are made between these formal appraisals, the methods are imprecise and they can miss big changes. Because a number of Ohio counties have yet to undergo the formal reassessment since the last recession, the full impact of the recession on property taxes and local government budgets may still lie ahead for many places…Home values have continued to fall since the last adjustment, suggesting that there may be a large correction upon reappraisal.”

Next week we will discuss the implications for tax collections.