States Could Face New Shortfalls as Homeowners Beg for Lower Taxes

This post first appeared on Minyanville.

When the value of your house starts heading to south, there isn't a lot to be thankful for. Some homeowners, however, are looking for a silver lining.

The New York Times reports that homeowners across the country are petitioning state and local governments for lower property tax bills. The timing couldn't be worse for municipalities, many of which are already facing a cash crunch. In California, the state has begun issuing IOUs to contractors and other creditors. Some states, like New Jersey, have increased property taxes in an attempt to prop up revenue -- much to the chagrin of its homeowners.

As property values fall, homeowners face bills that can far outweigh what they would owe should the taxman keep his records in real time. This doesn't sit well with most citizens -- many of whom are already behind on mortgage payments and struggling to make ends meet.

Property taxes are assessed using myriad formulas and reassessment schedules, such that predicting exactly how much you'll owe each year can be nightmarishly complex. Historically, as home prices rose, periodic reassessments benefited homeowners, since the tax assessed value of most properties lagged their true value.


In California, for example, property taxes have increased around 1% per year since 1978 (the year in which voters enacted Proposition 13). Since then, home prices have soared -- the recent decline notwithstanding -- which means residents who have lived in the same home for decades owe a fraction of the taxes than do those neighbors who just moved in.

Requests for tax reassessment have skyrocketed as besieged consumers look for ways to trim monthly expenses. According to the Times, petitions in Ohio have increases fivefold; lines at government offices in Atlanta stretched around the block on the March 31 deadline to file reassessment requests; and in New York, municipalities had to hire extra staff to handle the influx of petitions from cost-conscious homeowners.

Meanwhile, localities are suffering from lower tax receipts across the board as job losses slam income taxes, anemic consumer spending hits sales taxes, and a weak business environment is reducing or eliminating corporate profits. This means staff cuts, wage decreases, and fewer services -- all at a time when the federal government is banking on the public sector to pull the economy out of its tailspin.

Even as Washington funnels billions into the financial industry, bailing out the likes of AIG (AIG), Citigroup (C), and Bank of America (BAC), money has been slow to reach local governments. The endgame isn't clear: Unlike the federal government, states don't have the luxury of running a budget deficit. When counties, cities, or even states go broke, they just go broke.

The next round of bailouts could be just around the corner.