Property Taxes & Falling Values Part II - Howard Voyles | HousingMatrix.com

This issue we will look at the Cleveland Fed’s study on the impact of falling property values and their implications for tax collection.

The Fed’s study focused on Cuyahoga County surrounding greater Cleveland. The lessons are common to many communities across the nation.

“Fortunately, large declines in the reappraisal values will have smaller effects on tax collections. In Cuyahoga County, residential property taxes are calculated by multiplying the tax rate of the district by 35 percent of the value of the home as appraised by the county. Basing property taxes on a percentage of the tax estimate reduces the impact of fluctuations in estimates on tax revenues. Governments sometimes use a value stabilizer in property tax calculations similar to that of Cuyahoga County, providing some protection against such steep declines in value.”

“This value-stabilizing feature would likely make the implied 8 percent decline in outer-ring-suburb property values have a small impact on property tax collection. However, any loss is unprecedented in the outer-ring suburbs, so the small loss could still cause problems in a post-recession environment experiencing sluggish recovery, where sales and income tax revenue remain low.”

“In Cleveland and the inner-ring suburbs, the impact on tax revenues might also be substantially lower than our market estimates imply. First, for many properties, any decline in the appraisal value will have no impact on tax collections. Residential property may be in a period of tax abatement, when no tax is owed on the property. This is particularly important in Cleveland, which has abated taxes on some new residential construction in order to draw new home owners into the city.”

“Second, not all residential property owners pay taxes. On average, 52,000 properties in Cuyahoga County are nontrivially tax-delinquent in a given month, which represents nearly 10 percent of the parcels in the county. (Whitaker, Fitzpatrick 2011) Any decline in the value of these properties will have no impact on tax collections, since nothing is being collected. For example, according to Cleveland’s 2009 Comprehensive Annual Financial Report (available through the Division of Financial Reporting and Control), the city collected roughly 60 percent of real property tax revenue owed in 2008 and 2009.”

“But if the implied change is close to the reappraisal value, the impact on tax collections in the central city 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. 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.”

“If creative ways to make up for this lack of revenue are not found, local governments may face the undesirable choice of either raising property taxes or reducing funding for essential services. Both actions may make the municipality a less desirable place for new home owners to locate. Weakening housing demand may lead to further declines in property values. In any case, it appears that the dramatic fall in property values across the country will accelerate the financial distress of municipalities in the wake of the Great Recession.”

This is a sobering reality for every community.