Falling home prices cause first drop in local property taxes since 1985; more pain to come

Housing slump hammers local government tax revenue

WASHINGTON — City tax revenues dropped this year by the most in 25 years, hit hard by falling home prices that could crimp local budgets for years to come.

Property tax revenue in U.S. cities fell 1.8 percent in fiscal year 2010, according to a report released Wednesday by the National League of Cities. It’s the first drop in the 25 years that the survey has been conducted.

Depressed home values are just beginning to affect property tax receipts and the impact could linger for at least two more years, the report said. The declines are only now being felt because real estate assessments lag changes in market values.

City governments are already facing tough choices between spending cuts and possible tax increases. Many are laying off workers and cutting services to make up for lost revenue. Strapped city budgets could increase already high unemployment and further restrain economic growth.

“While the recession might have officially ended for the national economy, cities are now in the eye of the storm,” said Chris Hoene, a director at the NLC and co-author of the report. “The pain is intensifying.”

Overall, tax revenue fell 3.2 percent in 2010, and cities cut spending by 2.3 percent. It’s the fourth straight year that city tax revenues have declined.

“The full weight of the decline in housing values has yet to hit the budgets of many cities and property tax revenues will likely decline further in 2011 and 2012,” the report said.

One reason cities are suffering is that it’s unusual for both sales taxes and property taxes to fall at the same time, said Michael Pagano, a dean at the University of Illinois at Chicago and co-author of the report. Property and sales taxes are the two main sources of cities’ revenue.

Sales taxes respond quicker to changes in the economy and usually pick up as a recovery begins, Pagano said, even as declines in home values have a delayed impact on property taxes.

All states, except for Vermont, require their cities to balance their budgets every year. To do that, city officials have cut spending and raised taxes to make up for the declining revenue.

The survey found that 74 percent of cities instituted a hiring freeze this fiscal year, while 54 percent reduced or froze salaries and 35 percent implemented layoffs. Local governments have cut 120,000 jobs since the recession began.

There are more layoffs to come. Hoene said a separate NLC report earlier this year projected that cities will cut 480,000 jobs this year and next. More jobs will be lost among private companies that do business with cities, he said.

Many cities are also canceling building projects. Sixty-nine percent of cities have delayed or cancelled infrastructure projects this fiscal year, the report found.

Cities in all regions have been hit hard, though municipal officials in the West were slightly more likely to say their cities are worse off this year than last. Many Western cities are struggling with widespread home foreclosures and falling home sales.

Ronald Loveridge, the mayor of Riverside, Calif. and president of the NLC, said he has cut the city’s budget to $190 million from $228 million in the past three years. The city has instituted a hiring freeze and cut back on library and community center hours and also made cuts to its police department, he said.

Many cities are increasingly turning to states for help with their beleaguered finances. The most prominent example is Harrisburg, Penn., the state capital, which last Friday asked the state government for help in avoiding bankruptcy.

That’s not a realistic option for most cities, Loveridge said.

“States … have no money,” he told reporters on a conference call. “Most of them have severe budget problems. They’re taking money from cities rather than giving money.”

Many cities traditionally receive revenue from their states for education and other services, but those revenue streams, along with federal stimulus money, are being cut, Pagano said.

The report is based on survey responses from 338 cities of all sizes.