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October 27, 2010

Real estate and municipal revenue

In September, the Federal Reserve Bank of Atlanta's Center for Real Estate Analytics sponsored a conference to examine the impact the real estate downturn is having on public sector finances.

It's no secret that state and local governments are currently experiencing substantial revenue declines. One popular explanation is that deteriorating local real estate conditions are responsible for a portion of that decline, but it turns out that this explanation is not the main cause, at least not yet. One of the sessions in the conference featured attempts by three economists from the Federal Reserve Board of Governors (Lutz, Molloy, and Shan) and two from Florida State University (Doerner and Ihlanfeldt) to estimate the direct impact of the decline in real estate values on local tax revenues. Both papers examined the multiple channels of influence between the decline in real estate values and local revenues.

The largest channel, of course, is the decline in property tax income related to declining assessed property values. Of course, property owners don't pay property taxes based on the current value of their home. They pay based on an assessment that is at least a year old. Thus, the decline in property values takes considerable time to work its way through the assessment process and into property tax revenues. Consequently, declines in property values have only more recently started to be reflected in lower property tax revenues. Experts expect the decline in those revenues to continue for another couple of years, with the worst shortfall two or three years out. Some of the assessments are fairly gloomy.

To illustrate that point, I've pulled a few charts from the Lutz, Molloy, and Shan paper. The first chart illustrates the decline in revenues led by individual and sales taxes. Notably, property tax collections grew at an increasing rate in 2009 over 2008.

102610a
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The next chart directly depicts the relationship (or the short-run lack thereof) between housing price growth changes and property tax revenue. Lags in changes in assessments and the ability of local governments to change property tax rates can go a long way in explaining why overall property tax revenue continues to grow.

102610b
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Finally, Lutz, Molloy, and Shan broke down the data by some states, and I include the case of Georgia below. (The Ihlanfeldt and Doerner paper does something similar—and in great detail for the state of Florida.) The Georgia case clearly shows the effect of the lags: property values rose through the first part of the last decade and, even though tax rates were falling, overall tax revenue rose. Post-2007, however, market values of homes declined while the aggregate assessed values continued to rise through 2009 (along with property tax revenue).

102610c
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It is hard to imagine the trend of aggregate increased assessed valuation continuing. If the assessed values begin to track the market values, pressures will emerge on the government entities that depend on property taxes. The picture suggests that tax rates and/or spending on programs are likely to change notably during the coming few years.

By Tom Cunningham, vice president and associate director of research and acting director of the Center for Real Estate Analytics at the Federal Reserve Bank of Atlanta

October 27, 2010 in Economic Growth and Development, Fiscal Policy, Taxes | Permalink

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Comments

I think many, if not all, munincipalities change the mill rate of the tax assessment to collect the tax revenue needed. As in, they take their budget and divide THAT by the new lower total property values in the district to arrive at the new (higher) rate of individual parcel tax liability, so a lower property value does not necessarily mean lower taxes! Lower tax revenues are the result of income, sales, and other taxes, not property taxes.

Posted by: Thrill | November 01, 2010 at 01:22 PM

I disagree Thrill. I think that this is a fantastic post. In Illinois, virtually all property tax revenue goes to pay for local schools.

When a house is valued at 500k and resells at 300k, the property tax won't remain the same. Government revenue should decrease.

Posted by: Jeff | November 04, 2010 at 07:53 PM

You would only get a 3 BR if there were one male and one female child. Bear in mind, as well, that you may not get any voucher at all, if your area has a waiting list. The funding for Sec 8 is not unlimited, and it's generally a 'first come, first served' situation. There are many Sec 8 areas of the country in which the lists are so lengthy that they aren't even accepting applications.

Posted by: Poplar Bluff Real Estate | November 08, 2010 at 06:59 AM

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