California’s housing crisis hit local government revenues
California’s real estate market experienced some wild swings that pushed housing prices up faster than anywhere in the nation before plummeting in response to the financial crisis. Local government revenues rode the same boom-bust cycle.
After the housing crash, a California state law, Proposition 8, allowed temporary property tax reductions for 3.2 million properties — about 2.6 million homes and 600,000 other properties. Under Prop 8, property assessments were allowed to be lowered to match the market value of the property. According to a recent legislative report, these reductions dragged down local government revenues by approximately 15 percent. As the housing market has rebounded, property assessments that had special treatment under Prop 8 have increased, providing a positive impact on local government budgets. The Sacramento Bee reports:
The average homeowner saw a $1,600 property tax cut while those for commercial property averaged $7,500. ‘In total, temporary property tax reductions depressed local government property tax revenues by an estimated $7 billion in 2013-14, amounting to a 15 percent reduction statewide,’ the Legislative Analyst’s Office (LAO) says in a new report.
The income from Prop 8 property assessments is a huge plus for cash-strapped local governments, but it could come as a rude surprise to homeowners. From the LAO report:
Home values increased 12 percent during 2012, yet property taxes for most property owners were largely unaffected. This is because state law limits property tax increases for most properties to 2 percent each year. However, taxes on properties with temporary tax reductions under Proposition 8 can increase faster than 2 percent each year. Property taxes for these properties increase based on the property’s market value because these properties are assessed at market value each year that they receive a reduced assessment. Real estate improvements during 2012 resulted in property tax increases ranging from 5 percent to 20 percent for many of these properties in 2013-14.
Looking ahead, property tax payments for many owners that received temporary property tax reductions during the real estate crisis could increase by more than 10 percent annually for the next several years. These increases likely will cause local property tax revenues to grow swiftly over the next several years as well.
California property taxes support several levels of municipal government, including school districts. When property tax collections dropped due to Prop 8, the state made up the revenue shortfalls to school districts.
From the LAO report:
About 40 percent of local property tax revenues go to schools. In most cases, property tax revenues that go to schools and community colleges offset required state spending on education. As a result, most reductions in school property taxes are made up by increases in state resources for education. Thus, the 3.2 million Proposition 8 reduced assessments, which lowered total local property taxes by about $7 billion, likely increased state education spending by about $3 billion in 2013-14.
Property tax revenues often lag housing activity and fully assessed revenues may take several years to be completely realized. The return of property tax assessments to market rates is positive news for the credit quality of California’s local governments.