State and local governments are suffering substantial declines in tax revenue and one popular explanation is that the crash in the real estate market is to blame. As it turns out, that's not the case-at least not yet.
At a fall conference sponsored by the Center for Real Estate Analytics at the Federal Reserve Bank of Atlanta, one of the sessions featured economists from the Federal Reserve and Florida State University presenting research on the impact of the decline in real estate values on local tax revenue. Both papers examined multiple factors that impact property taxes.
The largest factor is the drop in assessed property values. But property owners don't pay taxes based on current home values, but rather on an assessment that is at least a year old. So any decline in property values takes a considerable period of time to work its way through the assessment process and thus impact tax revenue.
From 1990 to 2008, property, sales, and individual tax receipts bounced around a great deal; annual growth rates ranged from 0 to 14 percent. However, the fluctuations from one year to the next largely stayed positive.
This long-term growth trend changed in 2009: The revenue received from sales and individual taxes shrank, though revenue from property taxes continued to climb by about 5 percent despite the recession. It is especially notable that property tax collections grew at an increasing rate in 2009 over 2008.
The economists found that annual home price appreciation reached its peak in 2005. Since that time, home prices initially experienced smaller annual increases, and then started to fall, with a trough in depreciation of close to 15 percent in 2008. Through that same period, property tax receipts increased each year by 5 percent or more. Even in Georgia-a state hit particularly hard by the real estate crisis-property tax revenue has been resilient so far. Property values in the state rose through the first part of the past decade, and despite falling tax rates at that time, overall tax revenue rose. After 2007, however, home values fell, while the aggregate assessed values continued to rise through 2009-along with property tax revenue.
Regardless of what happens with the economic recovery, local and state governments are facing several gloomy years of declining property tax revenue, with the worst shortfall expected to hit two or three years out.
