Local budgets rise and fall with housing

Hillary Wicai Nov 29, 2006

BOB MOON: The Commerce Department reported today that sales of new homes fell in October. For the record, new home sales had managed to grow the previous two months. On the other hand, the government’s latest numbers show that at least the foundation hasn’t crumbled: The median selling price for new homes actually rose to the highest level in eight months. That’s not just good news for prospective sellers. Declining home values have meant dwindling property taxes. Marketplace’s Hillary Wicai reports that’s forcing some tough choices:

HILLARY WICAI: About an hour west of Washington, D.C., Loudon County, Virginia, is one of the fastest growing counties in the country. Homes pop up from old farm fields in bumper crops, the average is assessed at about $526,000.

Between 2000 and 2005 average home prices more than doubled. That translated directly into property taxes, which means Loudon has new parks and libraries, new police and fire stations and it’s built six new high schools in the past decade. But times, they are a changing.

LOUDON COUNTY BOARD MEETING: Board members, I would encourage you, this is not our day to decide the tax rate but to hear from the administrator, and if there are any questions . . . .

At a recent meeting, the chairman of the county Board of Supervisors prepared the members for an unwelcome projection. The county administrator says Loudon’s home values are expected to decline 3 percent in 2007. But needs aren’t expected to drop — the county’s still growing. It’s anticipating 2,900 new students next year alone. They’ll all need schools and teachers. The bottom line: the county administrator predicts Loudon will be almost $61 million short in 2008. Supervisor Mick Staton knows exactly what that means.

MICK STATON: The question is now do we raise taxes to fully fund the expected requests or do we trim down the requests to meet the tax rate.

And that’s it in a nutshell: raise taxes or cut services.

STATON: And my opinion is that we trim down these requests. These are tight times, people’s homes are going to be worth less and I’m not ready to tell them they need to pay more for a home that’s worth less.

But holding the line on property tax rates brings other difficult choices: Which services to cut? Ben Mays is Loudon’s deputy chief financial officer.

BEN MAYS: What that means on the education side is that they either have to increase classroom size or slow the rate of teacher compensation.

These are difficult decisions more cities and counties are facing as a slowing housing market drags down property tax revenue. Scott Pattison is with the National Association of State Budget Officers.

SCOTT PATTISON: There are about 45 major metro areas that have seen a decline in housing prices and 38 states are seeing that slump in the real estate economy.

Indianapolis’ Mayor Bart Peterson calls property taxes the least popular forms of taxation. But, he says, cutting services won’t make constituents happy either.

BART PETERSON: People don’t want to drive across roads full of potholes. They don’t want to go without sidewalks. They certainly don’t want to see police officers laid off, and firefighters laid off and parks closed. And those are really the only options we face if we can’t have enough revenue to at least keep up with inflation.

This dilemma is motivating some like Peterson to look at how governments are funded: cities and counties mostly count on property taxes. States, on the other hand, tend to rely on sales and income taxes. And it was just a couple years ago that states battled horrible budget crises as those revenues plummeted after 9/11.

Peterson believes it shouldn’t be boom for one and bust for another. So he’s taking a tax proposal to Indiana’s state legislature that would allow local governments to also charge sales or income taxes if they cut back on property taxes. The state, in turn, would get a share of cities’ property taxes. These are big new ideas.

PETERSON: I expect some of those will be controversial, so . . . .

Indeed, they represent massive changes to a complex tax system that isn’t easily overhauled — definitely not a short-term solution. In places like Loudon County, Virginia, tough choices between things like tax rates and class sizes will have to be made soon to balance the budget.

In Washington, I’m Hillary Wicai for Marketplace.

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