Property Taxes Help Boost 3Q State and Local Collections

Municipal government tax receipts in the third quarter grew at the fastest annual rate since 2007 as property taxes continue to defy the years-long housing malaise.

State and local governments collected $284.3 billion in tax revenue in the third quarter, according to the Census Bureau, an increase of 5.2% from the third quarter last year.

About half of state and local governments' roughly $2.7 trillion of annual revenue comes from taxes. The rest comes mainly from the federal government and fees charged by utilities, hospitals, and other government bodies.

The big story in municipal tax revenues is that local governments' property tax receipts continue to disobey property values.

Three-quarters of local tax receipts come from property taxes, which are typically assessed as a percentage of taxable property values.

According to the Case-Shiller Home Price Indices, residential property values are down 29.5% from their peak in August 2006. Yet local government property tax receipts have skyrocketed 36% since then.

This disconnect reflects a procedural quirk in how governments assess property taxes. Governments normally charge a property tax rate against an assessed value, rather than a market value. That assessed value is updated sporadically, and often at a lag of years.

Taxes are thus being charged on properties whose values were assessed years ago.

Many analysts by now expected property tax collections to reflect the decline in home prices, but each quarter home values drop and property tax revenues rise.

Local property tax receipts jumped 7.7% in the third quarter from the year-earlier period.

State tax revenues, which rely more on income and sales taxes, increased too.

States collected $168.1 billion in taxes in the third quarter, an annual increase of 4.8%.

Personal income tax receipts, which contribute a third of state tax revenues, rose 4.9%. According to the Bureau of Economic Analysis, personal income rose about 3.5% year over year in the third quarter, buttressed by higher wages rather than investment income.

Sales taxes, which also represent a third of state tax receipts, increased 4.4%.

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