The U.S. housing boom is swelling tax revenues, but for many municipal officials it is creating new headaches: higher spending on infrastructure, growing demand for property tax relief and worries about a real estate slowdown.
The boom is lifting assessed valuations of existing properties and adding new homes and condominiums to tax rolls at a pace not seen in decades. The windfall is making up for lean years following the end of the Internet bubble when sales taxes and state aid to counties fell sharply.
"The money is rolling in," said Jacqueline Byers, head of research for the National Association of Counties. "But it is not rolling in at levels sufficient to pay for all of the services that new development is going to require."
Los Angeles County is expecting the boom to add $68 million in taxes in its next fiscal year, helping to support increased health care spending and more sheriff's deputies.
The District of Columbia is projecting a $103 million, or nearly 10 percent, increase in property tax revenue for the fiscal year starting Oct. 1. The city council is confident enough that figure will be revised upward that it has already earmarked the next $21 million for social services programs.
For many communities, particularly those in far-flung suburban areas experiencing rapid development of affordable housing, a lot of the additional cash will be spent on capital projects such as fire stations, police stations, roads and schools, Byers said.
Rising tax bills
Clark County, Nevada, home to Las Vegas, North Las Vegas and Henderson, is currently building about one new school a month to accommodate rapid population growth, said county Treasurer Laura Fitzpatrick.
Property parcels on the county's tax rolls climbed 8.7 percent in the last fiscal year to 619,673, while net assessed valuation rose a staggering 34.5 percent to $61.06 billion.
However, with the new July 1 fiscal year, the county has capped tax bill increases at 3 percent for existing primary residences and 8 percent for existing rental properties. This will limit the county's overall real estate tax revenue growth this year to 13.5 percent, versus what would have been 33.9 percent without the cap.
Many communities are having to cut tax rates or provide other relief as homeowners whose incomes can't keep up with rising values threaten revolts similar to California's 1978 Proposition 13, which capped annual increases at 2 percent except when the property is sold.
"The increase in value has made the legislature step in and change the methodology. I think most jurisdictions are getting to that point," said Clark County property appraisal manager Jeff Payson.
Economists say some of these cap arrangements actually could smooth out spikes in real estate markets, providing local governments with steadily rising tax revenues for years to come as tax liabilities "catch up" to valuations, even after markets slow down.
Transaction-fee vulnerability
Few economists are predicting a major correction in real estate prices, with long-term rates remaining low, demand outstripping home supply in most areas and continued growth in jobs and incomes.
"If anything, we're probably going to see sales level off a bit, see supply catch up with demand and a little bit less appreciation in the next few years, but still appreciation," said Mark Vitner, senior economist at Wachovia Bank.
Still, communities need to be careful in their revenue assumptions, particularly in overheated coastal areas of Florida, California and New York, he said.
Local governments in markets that are more heavily dependent upon real estate transactions for revenue, such as California, are more vulnerable to a real estate slowdown.
Economy.com's government consulting manager, Mark McMullen, said valuations may not fall in hot California markets, but the number of transactions, particularly among speculators, will drop off, reducing local transaction fee revenues.
Another risk is that a rise in interest rates could dampen sales tax revenue as homeowners extract less equity from their properties and spend less. McMullen estimates that around one-third of home equity loan funds are used to repay other debt, one third are spent on home improvements and one-third on miscellaneous consumption.
However, he said for the most part, the picture remains encouraging. "Even with housing market correction, you're not going to see a property tax correction, other than those places that are enjoying a boom in transaction fees."