Housing Crash May Not Hurt Property Tax Revenues

Even though home prices peaked in 2006, at the end of the following year, nationwide property tax revenues were still growing strongly.

The likely reason is that property tax levels are "backward looking" by nature," writes Federal Reserve economist Byron Lutz in a new working paper.

States can take many years to reasses the value of a home, meaning that if a home falls from $250,000 to $200,000 in value this year, it may take until 2010 before the price decline is recorded by state tax authorities. Utah once went 20 years without a proper reapprasial.

Lutz estimates that it typically takes about three years after a 3 to 8 percent increase in home prices for the change to get reflected in property tax revenues. And for every dollar increase in home prices, the levied tax goes up by $0.40. But it turns out that 60 percent, or about $0.24, of this tax increase is offset by reductions in other taxes. Hikes in levied taxes are smaller though, about $0.20, when housing prices grow particularly rapidly. This could mean either that tax rates were reduced to avoid a big additional property tax burden or that some places had caps on how much taxes could increase, says Lutz.

More relevant to the current economic situation, Lutz finds that during times of falling home prices, property tax revenue declines are offset by tax increases in other areas.

"There is little evidence that house price declines influence property tax revenues," writes Lutz. This outcome might be a good reason to think that Barack Obama's intention to raise some taxes won't be, as Charlie Gasparino said this morning on CNBC, like "throwing gasoline on the fire."

Still, Lutz cautions that the data on home price declines reflects only small drops in price, so with the rapid defaltion of home prices we're seeing right now, the outcome on property tax revenue could be quite different.

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