Property Taxes Buck Trend

Growing property tax receipts in California have bucked the trend of falling market values of homes, according to a recent report from Moody’s Investors Service.

The credit quality of the state’s 10 largest cities has been preserved thanks to growing property tax receipts even as the housing market was collapsing, the report said. That has acted as a buffer at a time when other revenue streams, such as sales taxes, are declining, giving major cities in the state more time to adjust expenditures.

With the housing market in the state beginning to recover, property tax receipts will lag the rebound in market values, analysts wrote. Property tax rolls are used to determine assessed values, so while a sharp contraction of the California residential property market resulted in unprecedented declines in the market value of homes, their assessed values did not follow suit.

The phenomenon was caused by the state’s unique method of determining assessed values, according to Moody’s. In California, market values of fully constructed properties affect assessed value only when market gains or losses are actually realized with a sale of the property. Unlike other states, assessed values are not reassessed annually or periodically, except for a small, annual inflationary adjustment limited to 2%.

The report predicts that general revenue for California cities is likely to remain severely suppressed for the near term, whether or not residential property values have bottomed out, or whether more economically sensitive revenues have started to grow.

Proposition 8 rollbacks will also affect trends in 2010. The rollbacks adjust assessed values for property tax purposes, in which the county assessor preemptively lowers the values for certain properties. For such cities as Sacramento and Oakland that experienced the steepest declines in market values, property taxes are likely to continue to fall. Assessed values in the cities continue to exceed market values.

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