Property Taxes - Troubling Economics
April 29th, 2008 by Kyle
Property taxes are a sensitive subject in Greater Hartford. Just about every year there is a budget referendum in at least one local town as angry residents fight yet another property tax increase. The debate in some towns is more heated than in others (but we won’t mention any names).
You may be happy to know that rising property taxes are a hot topic in other cities and states as well. An editorial in this weekend’s Wall Street Journal highlights a number of areas that are experiencing increasing taxes at the same time as they see falling home prices. In Arizona, where there is a state property tax, property values have fallen 17% on average in the past year. But taxes are on the rise. Ouch!
Unfortunately the root cause of property tax tension throughout the US is likely to get worse. The economics of running a town are deteriorating. Let’s consider the revenue and expenses separately.
Nearly all of town revenue comes from property taxes. Although real estate has historically been an appreciating asset, that is perhaps not the case today. Let’s assume that property values have stagnated. Therefore town revenue has also stagnated.
Expenses, on the other hand, are rising even more quickly than their historical rates. Education (much of a town’s budget) is rising at 2.5x general inflation, healthcare (another significant piece) is rising at 2.0x general inflation. We all know about energy prices, which impact many of the services the town provides (police, fire, trash pickup, snow plowing, heating city buildings, …).
Revenue is stagnant while expenses are accelerating. We all better sharpen our pitchforks and ready our torches because in the current global economic environment, this dynamic looks like it will only get worse. Other than protest, is there anything we could or should do? Or should we just ride it out? This is shaping up to be a big problem throughout the country.
April 29th, 2008 at 11:09 am
[…] a blog post today, Hartford-based real estate professional and blogger Amy Bergquist said this tax increase […]
April 29th, 2008 at 11:29 am
Just a note, I corrected the name of the author of this post too late to catch the ping above! But it was corrected; sorry about that Kyle.
April 30th, 2008 at 1:13 am
Like the new pic, Amy.
So, couple of thoughts. First, the education inflation number that you linked to includes college tuitions which shouldn’t impact town budgets much (state, federal, maybe).
Second, this is likely to be a blip. housing prices have to drop, the market will correct itself and then it will return to being a solid investment. Imagine backing away from the stock market after the crash in 1929 or in the late 80s.
That’s my generally optimistic long term view, but in the next few years we’re likely to see some issues. I really wish WH hadn’t taken on so much debt, because this correction was coming for a few years.
In the short run, it would be great if the town could suspend some raises. Ultimately, they don’t have too many choices: fire people, cut back on services, or borrow.
It would be interesting to see towns and the unions look at models like big companies use where raises are contingent on “making the numbers.” its got risks, and I hven’t thought this through, but it’s how companies manage costs.
April 30th, 2008 at 6:44 pm
Thanks for the comments, Sujal. Some follow-up notes on the issues you raise.
The cost of college education is definitely an imperfect proxy for the costs towns face as they run primary education programs. In my mind the main differences are that colleges often have research programs that may or may not be funded by outside grants and staff is more expensive. However, I think that enough of the same forces are at work to conclude that the costs associated with running a town school system are rising faster than general inflation. Both maintain buildings, employ teachers, support extra-cirriculars, …
I completely agree that the current state of the housing market is a blip in the long-term picture. Like all investments, it has periods of below average and above average performance. Thank you for underscoring this point, because I think it got lost in my post with all the talk of pitchforks and torches.
You also raise a fascinating question of whether or not there is a better way to financially run a town. Is there an alternative to property taxes as the primary revenue source? Is it feasible to move to a pay-as-you-use model such that the inevitable pro-education and anti-taxes factions can peacefully coexist?
My current sense is that the status quo will be nearly impossible to change. So taxes will go up, expenses will be reduced, and everyone will be unhappy. And the battle will be fought again next year.