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Did housing crisis hurt states?

By Kay Bell · Bankrate.com
Tuesday, November 30, 2010
Posted: 3 pm ET

You know all about the housing bubble bursting.

How folks got loans they shouldn't have. How all these new buyers spurred a run-up in home values. How these unqualified homeowners soon defaulted on their mortgages.

Now many of these folks are homeless and banks are left with properties worth much less than the original loans.

Well, there's another group hit by the housing crisis: states.

Most states depend on real property taxes to help fill up their treasuries. So the aftermath of the housing crisis obviously is causing big trouble for state tax collectors all across the country, right?

Not as much as you might think, according to a recent discussion paper from the Research and Statistics and Monetary Affairs divisions of the Federal Reserve Board in Washington, D.C.

In "The Housing Crisis and State and Local Government Tax Revenue: Five Channels," Fed employees Byron Lutz, Raven Molloy and Hui Shan note that state and local government tax revenues dropped steeply following the most severe housing market contraction since the Great Depression.

But, as the paper's title indicates, the authors look at five taxing areas through which states get money: property taxes, real estate transfer taxes, sales taxes on construction materials, sales taxes on individual purchases, and personal income tax.

Of that group of taxes, property tax collection actually held up pretty well in this latest housing slump.

"We find that property tax revenues do not tend to decrease following house price declines," wrote Lutz, Molloy and Shan. "We conclude that the resilience of property tax receipts is due to significant lags between market values and assessed values of housing and the tendency of policy makers to offset declines in the tax base with higher tax rates."

The official word from Fed employees is no surprise to homeowners.

Even as housing values dropped, annual property tax bills nationwide indicated that local tax collectors had an inflated opinion of just how much those houses were worth. That's why there have been so many folks protesting their property tax assessments and ensuing tax bills.

And even when the assessments are brought into more proper price alignment, folks often are paying the same or even more real estate taxes because of tax rate hikes.

Will states eventually pay a price when the housing market shakes out and settles down at lower market-value levels? That depends on just how willing state and local lawmakers will be to increase real estate -- and other taxes -- in the future.

And those other taxes must be considered because, according to the paper's authors, any recent reduction in state and local tax money was likely driven by the recession rather than the direct influence of the slumping housing market.

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