WASHINGTON — Local property tax revenues declined by 0.9% in the first quarter of this year, after two consecutive quarters of growth, the Rockefeller Institute of Government said in a report Monday.

After adjusting for inflation, local property taxes actually declined by 2.8% in the first quarter of 2012, marking the sixth consecutive quarterly decline in real collections, the 13-page report said.

“Prolonged weakness in the property tax, combined with soaring employee benefit costs, continued budget stress at the state level and the prospect of deep spending cuts in Washington, raise the prospect of serious budget problems and service cutbacks in local governments in many parts of the country,” said Lucy Dadayan, senior policy analyst at the Institute and author of the report.

Property taxes are the most significant source of revenue for local governments, accounting for nearly three-fourths of total tax collections, and are particularly important in financing K-12 education, police and fire protection, according to the report.

Local property taxes remained relatively strong during and immediately after the Great Recession, which officially ended in June 2009. But tax collections have softened due in part to the delayed impact of falling housing prices on property assessments and tax collections. National housing prices declined 15.6% between the last quarter of 2007 and the first quarter of 2012, the report found.

The report concluded that local property taxes are projected to continue to decline and contribute to budget problems for local governments and school districts. The significant declines in housing prices caused by the Great Recession have had a noticeable impact on local property tax revenues.

The severity in weakness in property taxes varies among states and is most noticeable in states that have experienced the largest drops in housing prices, such as California, Florida, Michigan and Nevada.

“This weakness in property tax revenue comes at a tough time for local governments,” Dadayan said. “Budget pressures are coming at local governments from every angle and affect both the revenue and spending side of municipal and school budgets.”

Property taxes are trending downward and are likely to fall further in the coming quarters, the report said.

While personal income and sales taxes rebounded along with economic growth, property tax revenues declined during the worst years of the Great Recession. The same patterns were true during the recessions of 2002 and 1991, the report said.

An analysis of year-over-year percent change for local property taxes in both nominal and real (inflation-adjusted) dollars, show that local property taxes have declined since the first quarter of 2009. Nominal local property taxes recorded a decline of 0.1% in the fourth quarter of 2010, the first time in the last two decades that local property taxes in nominal terms showed negative growth, a trend that has continued throughout the first quarter of 2012.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.