State and local governments pulled in their biggest-ever tax haul in the fourth quarter as they leaned on property tax collections to help recoup shortfalls in other types of revenue.
States and localities collected $360.1 billion in taxes in the fourth quarter of 2009, according to the Census Bureau, a 0.8% increase over the fourth quarter of 2008 and the biggest total since the government started tracking collections in the early 1960s.
The increase was almost totally attributable to local government property tax receipts, which continue to defy the real estate downturn.
Property tax receipts rose 5.6% from the year-earlier quarter to $165.4 billion.
Local property taxes generally constitute about a third of all sub-sovereign tax receipts in the U.S. In the fourth quarter, they constituted more than 45% of state and local government tax revenues that came from local property taxes.
The leap in property tax receipts comes despite warnings from many analysts about the impact of real estate revaluations in the aftermath of the housing crisis.
Consider the following discrepancy: local property tax receipts are up 19% since the end of 2006, during which time the Standard & Poor’s/Case-Shiller index tracking home prices in 20 metropolitan areas is down nearly 30%.
The reason for this divergence is the method municipalities use to assess property taxes.
Cities, school districts, and other municipalities that depend on property tax revenue typically charge tax rates on properties based on a value ascertained during a formal assessment.
Because these assessments are sometimes conducted infrequently, municipalities often charge rates on properties based on their values several years earlier.
Richard Ciccarone, director of municipal research at McDonnell Investment Management, said it is clear many local governments are still collecting property taxes based on real estate values from before the downturn.
According to Ciccarone’s Merritt Research Services, the median city’s assessed property value was pretty much flat in fiscal 2008 versus 2007. Based on the cities that have filed their annual reports, assessed values for 2009 have actually increased. That’s a little counterintuitive during a recession that saw home prices slide 33% from the peak in July 2006 to the trough last April, based on the S&P/Case-Shiller index.
The market value of a home matters little to local governments if it is not what the tax assessor bases the tax levy on.
“Government hasn’t paid the piper,” Ciccarone said. “I think there’s some hold-back on the part of assessors to move anything down too quickly. They’re not too quick to move [assessments] down, particularly if they think it might be a one-time revenue drop.”
Ciccarone thinks the tailspin in real estate prices may not filter into property tax receipts until late this year or early next year.
Local governments will have to hope other sources of revenue will have recovered by then, he said.
For now, though, property taxes are filling the gap left by shriveling income and sales taxes.
Local government tax revenue has increased 7.7% since the recession began in December 2007.
For the year, state and local government tax revenue plunged 5.6% to $1.235 trillion.
State government revenue sank 11.3% to $687.5 billion, while local government revenue increased 3% to $547.1 billion.
According to the Bureau of Economic Analysis, total state and local government revenue in 2009 increased by about $20 billion, to $1.996 trillion. The increase was solely because of an $85 billion boost in federal government aid.
Stripping out federal dollars, state and local government revenue shrank 4% in 2009.
Mitchell Savader, chief executive officer of Savader Asset Advisors, pointed out that taxes are not the only source of revenue for localities.
State aid constituted 40% of local governments’ revenue in 2007 and 2008, according to the BEA.
While the BEA has not yet reported state aid to local governments for 2009, Savader said it likely fell precipitously as states grappled with their own budget shortfalls and kept the money for themselves.
“As state support is reduced, local governments have to look to property taxes to make up the difference,” Savader said.
States are facing $375 billion in budget gaps over the next two years, according to a report last month from the Center on Budget and Policy Priorities.
States derive about 80% of their tax revenue from individual and corporate income taxes and various forms of sales taxes.
These are less dependable sources of revenue and are more sensitive to economic fluctuations than are property taxes, Savader said.
State tax receipts tumbled 3.4% in the fourth quarter, according to the Census Bureau, to $165.7 billion.
Receipts were hampered by a 4.7% decline in individual income taxes and a 2.9% decline in sales taxes.