Windfall Property Taxes
I tend to agree with Alan Greenspan and others that, in many markets, home prices are radically over-inflated. As I said to my wife when we bought our home in Burke, Virginia three years ago, this will end . . . badly. My concern over a substantial drop in the Northern Virginia market (whether as a result of normal market activity or in combination with another terrorist stike in the D.C. area) was one of the reasons (though not the principal reason, which was quality of life) we re-located to York, PA. After only two-and-a-half years of ownership, we conveyed our Burke home for a nearly 60% gain.
If the market does breakdown in over-priced areas, affected homeowners would likely suffer a secondary hit in the form of rising tax rates. The issue is straightforward. In the event of a market breakdown, local communities would find themselves in narrowed fiscal straights insofar as property taxes tend to be assessed based on present market value. In other words, a 50% increase in market value normally results in a roughly equal increase in property tax. During the boom, most localities have received an enormous property tax windfall. Problem is, for the most part localities do not sock away windfall income for a rainy day. Rather, as with almost all tax revenues, once revenue is received, it is appropriated. Problematically, authorities then rely on that windfall income for budgeting purposes. In other words, one year's windfall becomes the next year's budgeting baseline.
What would happen if the market breaks down? Would your local authorities strive to make do without the enormous windfall they received during the housing boom (i.e., spend less as tax receipts shrink)? Or would your local authorities increase the tax rate to compensate for an "unexpected revenue shortfall"? If history is any guide, not only would homeowners suffer the sting of stagnant or falling values (and the myriad naturally-attendant difficulties), but also localities would insult that injury by increasing tax rates applicable to remaining value.
If the market does breakdown in over-priced areas, affected homeowners would likely suffer a secondary hit in the form of rising tax rates. The issue is straightforward. In the event of a market breakdown, local communities would find themselves in narrowed fiscal straights insofar as property taxes tend to be assessed based on present market value. In other words, a 50% increase in market value normally results in a roughly equal increase in property tax. During the boom, most localities have received an enormous property tax windfall. Problem is, for the most part localities do not sock away windfall income for a rainy day. Rather, as with almost all tax revenues, once revenue is received, it is appropriated. Problematically, authorities then rely on that windfall income for budgeting purposes. In other words, one year's windfall becomes the next year's budgeting baseline.
What would happen if the market breaks down? Would your local authorities strive to make do without the enormous windfall they received during the housing boom (i.e., spend less as tax receipts shrink)? Or would your local authorities increase the tax rate to compensate for an "unexpected revenue shortfall"? If history is any guide, not only would homeowners suffer the sting of stagnant or falling values (and the myriad naturally-attendant difficulties), but also localities would insult that injury by increasing tax rates applicable to remaining value.
posted by Anonymous at 8/27/2005
<< Home