Wednesday, April 11, 2007

Local Government Finance Note

Dave Schuler in comments makes a very astute point concerning a potential vicious cycle in the housing market:

Expect state and local governments, heavily dependent on real estate taxes and budgeted for rising assessments (in most states), to have revenue problems. They've grown used to being able to increase services without raising marginal tax rates due to the tax increase implicit in rising assessments. This will come to an end and, unwilling to make genuine cuts, they'll turn to increased tax rates. This, in turn, will mean more foreclosures. It's not the first time.


Another mechanism that will produce the same type of result but with different intermediate steps is a common mechanism in Pennsylvania. Municipalities and counties can refuse to re-assess property values downward, or they can choose a particularly high value base year if they use the base year system. Either choice freezes values at an above market rate level, so revenue can still be level but on a smaller real base of values which means implicitly higher tax rates. On a personal note, that is what a town 800 yards north of my house has been forced to do as a result of middle class flight over the past twenty years.

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