Rising Property Tax Appeals Are Credit Negative for US Local Governments
16 may 2011
The National Association of Realtors reported 10 May that home prices nationally fell 4.6% in the first quarter of 2011 compared to a year earlier, and that the median home price has fallen 30% from its 2006 high of $227,100. The decline in home values has spurred a corresponding rise in property tax appeals in many parts of the US. The combination is credit negative for any local government facing a significant number of appeals.
A tax appeal is an argument by a property owner that his or her property?s assessed value (i.e., the value upon which the property tax bill is based) is unreasonable compared to its market value.
The increase in tax appeals and their corresponding reductions in tax revenues come at a particularly difficult time for local government finances: public sector entities are already facing losses in property tax revenues because of declining assessed values. Substantial state aid cuts and political sentiment against raising tax rates add to local governments? financial challenges.
New York and New Jersey are especially hard hit. Westchester County, New York, reports a 68% jump in property tax appeals to 9,714 in 2010, which is more than 10x the average before the real-estate boom. From 2001-05, the wealthy county saw an average of 791 appeals.
Similarly, a New Jersey League of Municipalities survey found a 44% jump in tax appeals from 2009 to 2010, and predicted ?a multiplier effect? for 2011. The League attributes the trend to human behavior: ?When neighbors learn of their neighbor?s tax reduction, it increases the likelihood of more numerous appeals.?
Often, property assessments take place 12-18 months before the tax funds are due to the local government, and it is not unusual for a jurisdiction to reassess only one-third of its property every year. Therefore, 2011 property tax bills in those municipalities are based on a home?s 2009, 2008, or even 2007 or earlier market value.
Property taxes comprise 35%-95% of local government?s total tax revenues. They adopt their budgets assuming that a reasonable percentage of the property tax bills sent out will be paid on time and in full (usually at least 95% of billings). When property tax bills are appealed, there?s a budget hole.
Many local governments in New York and New Jersey have reserves for appeals, which can be an adequate buffer, but many reserves are diminished by significant pay-outs over the last year or two.
In New Jersey, local governments must give refunds as cash pay-outs or tax credits on fourth-quarter property tax bills, which immediately lowers that fiscal year?s revenues. If they do not have adequate reserves for these pay-outs, they must ask their state Finance Board for permission to borrow money to pay for the refunds, which can cause a credit negative increase in their debt burdens.
Tax appeals could start to slow. Our housing economists forecast that the housing market will start to recover late this year. However, house prices are forecast to be one of the last measures of the national economy to return to health largely because a high proportion of distress sales are still working their way through the market. We expect home prices to bottom in the third quarter of this year.
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