Several readers have mentioned that a reason "we" need home prices to remain elevated is because property taxes depend on home values. That's true in some areas, and irrelevant in others. In my town, for example, we don't have a cap on property taxes as a % of home value. In other words, the town needs X dollars to fund its budget. It needs these dollars regardless of what the property values of the town are.
I made the mistake, when I was looking at my home before I bought it, of assuming that since I was paying 15% below the assessed value, that when I bought my house and got it reassessed, my taxes would go down by 15% of what was listed on the old sheet. Instead, all the houses in town got reassessed at the same time as mine, with mine actually getting assessed correctly to the price I paid for it. Hence, my taxes actually went up - because the town still needed to collect its X dollars.
If this doesn't make sense to readers, think about it like this: my house can be thought of as owing 10 tax units (I picked 10 as a random number) in my town, where as other houses owe fewer tax units, and some houses own more tax units. That number of "tax units" doesn't change with home values - unless my home's value changes out of proportion to the average home value in town, since the town still needs to collect the revenue to fund its budget. (I keep saying this, but the bottom line is, even if home values went down 50%, as long as we don't cut spending, we still have to fund our budget. The budget has nothing to do with property taxes.)
Now, in some towns, that's not true - because they've instituted laws that make it so that the property taxes can't be more than a certain % of the home's value. This may have seemed like a good idea at some point - with a desire to keep taxes low, but of course, as I've mentioned in previous posts, I feel that the better way to fix this equation is to work on the spending side.
Towns that have legislated max property tax ratios have now handcuffed themselves as home values fall, and they cannot collect enough property taxes to fund their budgets.
So - how does your town do it? Do you live in a capped town? Is it working?
Basically, I live in an "uncapped" town, and it actually makes sense to me. We don't slash the town budget in proportion to home valuations, so we shouldn't expect property taxes to fall in proportion either. Property taxes are (or at least, in aggregate, should be) a function of municipal spending - not home values.
-KD
10 comments:
After working on the budget committee for Sisters, OR this spring, I have a little insight. Sisters is capped, but the average has was so high during the boom that the averages are just now getting down to the cap. The interesting thing I learned was that because assessments are taken in January, but not applied until when the City budget fiscal year begins in September, it is a huge lagging indicator. For the next two or three years, even with a "full recovery" (whatever that is), property tax revenues will be down and the budget is going to suffer.
yeah Easycure - that sounds like a textbook example of why the caps don't work.
Have they considered removing the caps?
I am not sure I understand how your house has a relative value of 10 units to other house's 1. How was that relative valuation determined?
In St. Louis County, just outside of the City proper, the rate is set at $1.24 per $100 dollars of assessed value. These assessments are done biennially, using a proprietary real estate computer program that you cannot really challenge or know how it works.
They just recently did one after real estate prices have declined, but lo and behold!, assessed values haven't budged. This is how they get around this problem. Mind you, they sure were jacking up assessments in the boom years.
anon - i just made up the "share" numbers. they're based on assessed value - so you can take my house's share of the total town's assessed value, and then you know how much in taxes everyone needs to pay. (if my house is 1% of the town's total property value, i pay 1% of the total property taxes)
it's based on your SHARE of the total value, not YOUR VALUE... get it? since the spending is still the same regardless of the value of your (my) house...
Kid - don't you have some capability to vote on your town's budget though? If you just had shares without that capability then that could be a recipe for out of control spending (until you booted out the bums who did it in Nov).
Seems to me the problem is that home prices don't correlate all that well to budget need. Then again as home prices fall that usually means recession which means that towns SHOULD cut budgets. probably the degree and/or lag is the problem.
of course Yangabanga - EVERYONE has that capacity to vote on their town's budget.
and yes - the reason it makes no sense to cap property tax rates is that the budget is NOT tightly correlated with home values - that's exactly my point.
Your share = your value/total town value. No?
F(total value)=your share
So they still are doing an evaluation of your value at some point, even if that doesn't always change the amount you own in taxes.
How is the total budget decided?
This seems to be a more stable process of budget making because the way you describe it, the town first has to decide the total amount it wants to spend and then allocate the funds according to what they need. Most of the time budgets are made such that the revenue side is emergent and the spending side is a function of that growth or decline.
How was your town's budget growth over the decade prior to the crash? I would predict, if I understand the budgeting process correctly, that they had slower than average growth in expenditures.
lenin3: yes. exactly - "Your share = your value/total town value." i thought that's what i said. maybe i mistyped somewhere.
yes - of course they still do assessments, but it's pretty unlikely that my home will change in value much more (on a % basis) than the average home - that was my point.
the bottom line is that revenue and spending need to be balanced - that's what a budget is. spending and home values do not need to be balanced, which is why making revenue dependent on home values (As a % property tax cap DOES!) doesn't work.. does that make sense?
how is our budget determined? we decide what we want to spend.. then we figure out if we can spend it...
i don't have data for the last 10 years, although i do know that taxes have "doubled" in the last 10 years -but i don't know if that's gross taxes, or tax RATES (which, as the point of this post goes, are pretty much irrelevant).
I live in a virtually capped State.
Prop 13 caps property taxes at 1% of assessed value. And also has the great charm of capping increases in assessments to 2% rise/year in assessed value.
Biggest advantage of letting real estate meltdown occur in California is fairness slowly returns to taxes as values for long term residents are still behind and they get tax increases while recent buyers get property tax cuts.
Biggest disadvantage is state is so frkn broke that some school districts have asked that kids bring 2 rolls of toilet paper as part of their school supplies.
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