The downturn in property tax receipts for municipal governments may finally have begun.

State and local governments reported $378.3 billion in tax receipts for the fourth quarter, according to the Census Bureau, a 1.6% increase from the fourth quarter of 2009.

Last year’s total tax receipts of $1.29 trillion represented a 2.3% jump from 2009, though they remained below the $1.32 trillion of tax revenues reported in 2008.

States and local governments rely on taxes for about half of their revenue, according to the Census Bureau.

Municipal tax receipts have been in recovery for more than a year now, but that in large part is thanks to a quirk in how local governments assess property taxes.

The sales and income taxes that states primarily rely on are sensitive to economic cycles, and have responded predictably to both the economic contraction from December 2007 to June 2009 and the modest expansion since then.

Income tax receipts climbed 4.8% last year after sinking 1.8% in 2009, which corresponds roughly with the 3.1% increase in personal income reported in 2010 and the 1.7% decrease reported in 2009 by the Bureau of Economic Analysis.

Sales taxes tell a similar story, rising 3.1% in 2010 after falling 7.9% in 2009, corresponding at least directionally with the 6.6% increase in retail sales in 2010 and 6.5% decrease in 2009.

The property taxes that local governments rely on for revenue are a different animal, though. They have not responded at all to the downturn in home prices.

For instance, municipal property tax receipts surged 7.6% in 2008, even though home prices tumbled more than 18% that year, according to the Case-Shiller Index.

Same thing in 2007: property tax receipts soared 6.6%, despite a 9% decline in home values. In 2009, property tax revenue climbed 9% while property values sank 3.1%.

Property tax receipts have continued to grow even as property values have plunged for several reasons. One is that local governments, which derive 85% of their tax revenues from property taxes, don’t charge tax rates on the market value of taxable real estate. They charge tax rates on the last formally assessed value of taxable real estate.

These assessments are often not conducted frequently. While the process varies by jurisdiction, some counties go years between property value assessments.

That has enabled localities to charge taxes on stable property values from the last assessment, rather than on plummeting market values.

Moreover, some jurisdictions, such as California and Florida, cap increases in assessed property values, which helped keep assessed property values lower than the inflated market values during the real estate boom and consequently resulted in lower declines during the bust.

Experts have been wondering for several quarters how much longer these dynamics would buoy property tax revenue. The Case-Shiller Index is down more than 30% in the past five years, and at some point even lagged assessments will have to catch up to reality.

This might be happening now. State and local government property-tax receipts grew just 0.2% in 2010, the slowest rate of growth since at least the late 1980s.

The property tax numbers were worrisome for local governments, which are the entities that need property taxes the most. Local governments’ fourth-quarter property taxes shriveled 3% from the fourth quarter of 2009, the worst year-over-year contraction since 2003.

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