Local tax revenue drops by most since 1985 as falling home prices reduce property taxes

Housing slump hurts local government tax revenue

WASHINGTON — Local tax revenue fell this year by the steepest amount in 25 years, with falling home prices just beginning to drag down property tax receipts.

Property tax revenue in U.S. cities fell 1.8 percent in fiscal year 2010, the National League of Cities said Wednesday. It was the first drop in the 25 years that the survey has been conducted.

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.

Revenues are likely to fall further in coming years as the housing slump takes its toll on real estate values. That will increase the pressure on city governments to cut services and raise taxes and fees.

Home prices peaked several years ago, but the impact of falling prices takes time to affect property taxes. Most local government real estate assessments lag changes in market values. Property tax revenues were still rising in fiscal 2009, the report said.

“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.

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 from property and sales taxes.

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.

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