Property Values - The Next Huge Wave Of Revenue Losses

The enactment of Prop. 13 in 1978 prohibited commercial and residential property taxes from rising as property values rose. Curiously (actually not so curiously), it did not prohibit them from falling should values fall. And as property values crater year-over-year in the housing implosion, homeowners and businesses have the ability to reassess. They have every right to do so under the law. But this is going to bankrupt California cities.

Assessors in Los Angeles, Riverside and San Bernardino counties are forecasting the first drops in property tax collections in more than a decade, presaging reduced revenues for many cash-strapped local governments.

Until now, property tax revenues had been a relatively stable source of money for cities amid a recession that has dramatically reduced sales tax intake, particularly from car dealers.

Even with the decline in home values, the property tax base in five Southland counties grew last year thanks to continuing sales and the completion of construction begun during the 2003-2006 building boom. But assessors in those counties said they have reduced the value of more than half a million properties and expect to make deeper cuts to their rolls by the summer.

This is bad news for local governments that have been relying on property tax proceeds to help make up the shortfall from reduced incomes and spending in their areas. Already, cities and counties across California have been freezing jobs, imposing work furloughs and pay cuts, postponing repairs and reducing some public services.

The reason Prop. 13 is such a disaster is that property taxes are a stable revenue source no matter what the economic climate. Unless a massive housing bubble bursts and prices collapse. Just to show you how big this is, the county assessor in Los Angeles is predicting a 1% decline in the property tax base. That comes out to ELEVEN BILLION DOLLARS. The drop in San Bernardino County, one of the ground zero sites of the housing crisis, is predicted to be much greater, nearly 6%. I can only imagine what the number is in the Central Valley, which lawmakers want declared an economic disaster area.

When you keep in mind that property taxes fund a great deal of municipal education, you can see what a major problem this is. And without structural change, not one that's fixable.