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The tax man doesn't want housing to recover

July 5th, 2011 9:44 AM by Lehel S.

Housing can't recover if property taxes keep going up. Cash-strapped governments should look elsewhere to fill budget gaps.

FORTUNE – During the housing boom, governments enjoyed windfalls from property taxes tied closely to home prices. But since the real estate bubble burst, the revenue stream officials had come to rely on to help pay for everything from education to roads has dried up.

Officials have responded by embarking on everything from delaying road projects to freezing hiring and salaries and cutting public employees.

In addition to cutting expenses to cover budget shortfalls, governments have been forced to look for ways to raise more money. And increasingly, that's resulting in higher property taxes – which experts warn could actually hurt more than help public finances. Everything from high unemployment to record foreclosures are already hampering the real estate market, and since higher taxes add to the costs of a home, it could also make owning even less appealing.

In a 2011 survey of U.S. counties, 15% reported raising such taxes – an increase from the 10% reported during the previous year. The survey by the National Association of Counties also found that property taxes, which account for almost three-quarters of all tax revenue collected by municipalities, was one of the biggest reasons why governments were experiencing revenue shortfalls.

Last year, Miami-Dade County raised rates to deal with a $444 million budget gap in the face of plunging property values. So did the city of Austin, TX. And earlier this month, the Philadelphia City Council hiked up its tax rate for a second year in a row to help bail out its cash-strapped school district. More broadly, the amount of money state and local governments collected from property taxes between 2006 and 2008 surged from $364.5 billion to nearly $410 billion, according to the U.S. Census Bureau.

To be sure, the tax bump isn't happening everywhere. At a time when millions of Americans are still jobless, many elected officials haven't mustered the political will to raise costs for homeowners and would rather delay road projects instead. It seems Miami-Dade County Mayor Carlos Alvarez learned this all too well when voters in March ousted him out of office following several missteps culminating in the city's hike on property taxes.

But for governments trying to make up for the shambles of the housing market, those same efforts could very well prove self-defeating. If not for their political career, then likely the housing market.

"Given the situation we've been in for the past few years, increasing property taxes is not likely to aid in the short-term recovery of the housing market," says McKay Price, real estate finance expert at Lehigh University.

But a rise in property taxes doesn't always lead to a fall in home prices. It depends how much taxes are raised and if the additional tax dollars go toward things that support property values, such as good schools, parks, roads and other public infrastructure.

Many governments are faced with a dilemma. Following years of too much spending, officials find themselves having to rapidly cut services. In the National Association of Counties survey, nearly half of respondents reported delaying purchases and repairs, as well as capital investments to address revenue shortfalls.  About 41% reported halting new hires, 45% froze employee salaries and pay, while 52% gave furloughs. About 34% reported delaying infrastructure repairs, while 31% delayed construction projects.

So for those municipalities considering asking homeowners to pay more, it might be time to think a little more long-term.

Posted in:General
Posted by Lehel S. on July 5th, 2011 9:44 AM

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