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Fall in Property-Tax Revenue Squeezes Cities


Local governments have endured the first back-to-back declines in quarterly property-tax revenue on record, Census Bureau data show, in part because some have been unable or unwilling to raise tax rates fast enough to offset drops in home prices.

Property taxes bring in more than a quarter of local-government revenue, according to Moody's Investors Service. And until recently, they had been a steadier and more reliable income source than sales and income taxes, which react faster to current economic conditions.

But total revenue from property taxes across the U.S. fell 3% in the fourth quarter of 2010 and 1.7% in the first quarter of 2011, compared with a year earlier. Consecutive declines hadn't happened before in census data stretching back to 1963. That has put a squeeze on already-strapped cities, counties and school districts.

Unlike the early years of the most recent recession, property taxes aren't providing "the relief governments are looking for to get them out of their fiscal doldrums," said Richard Ciccarone, chief research officer at McDonnell Investment Management in Oak Brook, Ill.

One reason is the sharp decline in property values, on which the taxes are based. Another factor: Statutory property tax caps in some states and taxpayer resistance to higher property-tax rates in others have prevented local officials from trying to raise rates enough to compensate for falling assessed values of homes, Mr. Ciccarone said.

Property taxes had shown resilience until now because municipalities charge tax rates on assessed real-estate values that often lag market values by at least few years. So the sharp decline seen in property values during the recession is just starting to be reflected in some valuations.

And while the pace of the decline in home prices has eased, tens of thousands of foreclosures and faltering consumer confidence are expected to leave housing markets bumping near their current level for the rest of the year.

Nationally, home prices were down 4% in April from year-ago levels, according to the Standard & Poor's Case-Shiller 20-City index.

Still, said Bob Kurtter, managing director of public finance at Moody's, local governments can offset declining home-value assessments by charging a higher tax rate.

For example, Washington's King County, home to Seattle, increased its tax rate 14.6% but saw its tax levy—or target for property-tax revenue—increase just 0.5% in calendar 2010, according to Moody's.

Such large property-tax increases aren't always politically palatable, though.

Honolulu experienced a 7.6% decline in property assessments for fiscal 2011, Moody's said. Although the city raised its average property tax rate to $5.21 per $1,000 of property value from $5.05, the higher rate wasn't enough to offset the decline in assessed values. Honolulu's tax levy shrank 4.6%.