Sooner or later there’s going to be a tax revolt in Virginia. That’s my story, and I’m sticking to it. Indulge me for a moment while I recapitulate the argument that I’ve been making for a couple of years now:
Housing values shot through the roof, particularly in Northern Virginia and Hampton Roads; property tax assessments — and taxes — shot up along with them. Higher taxes were palatable to homeowners as long as the value of their houses were climbing in sync. It was relatively painless to finance the higher tax load by dipping into the magically increasing homeowner equity through a refinancing or a second mortgage. Once real estate prices started declining and homeowner equity started evaporating, however, that practice could no longer continue. Local governments, addicted to the revenue, would raise tax rates to offset declining assessments. Unable to pull equity out of their houses, homeowners would feel the pain of higher taxes more acutely than ever before.
That’s the scenario I laid out, and I expected a tax revolt here in Virginia. So far that revolt has failed to materialize. But in other states, the scenario is unfolding more or less as I predicted. For evidence, I present this editorial in the Wall Street Journal.
Arizona is one of a growing list of states and big cities looking to raise taxes on homes to close budget gaps in 2008 and 2009. Housing values are expected to decline by $1.2 trillion this year, according to Global Insight Inc., an economic consulting firm, and that means tens of billions of dollars in lost taxes.
In recent weeks, Fairfax County in northern Virginia, Washington state, Chicago and Memphis have announced proposals to increase residential property tax rates to offset declining revenues. So at the very time that states and cities are begging for money from Washington to help distressed homeowners pay their mortgages, property tax hikes could push hundreds of thousands of homeowners under water.
Here’s a contributing factor that I hadn’t considered: Higher property taxes have a double whammy: Not only do higher tax rates increase the homeowner’s tax liability, they simultaneously reduce the homeowner’s ability to dip into equity to pay those taxes by aggravating the decline in housing values.
The Center for Business and Economic Research at the University of Kentucky reviewed dozens of studies on real-estate prices and concluded that “the evidence from the most reliable estimates” is that between 60% and 90% of property taxes are capitalized into a reduced value of the home. So a permanent $200 a year increase in the property tax could reduce the sales value of the home by between $1,200 and $1,800.
The explosive growth in local government spending is not sustainable. Between 2000 and 2007, personal incomes increased 27 percent, median home values 48 percent, and property tax collections 62 percent. Something has to give. The Journal sees tax revolts brewing in Arizona, Florida, Georgia and Nevada, and expects property tax relief to be the sleeper issue of 2008.
While the WSJ is spot on regarding the impact of rising property taxes, I have seen no indication that its editorial writers understand the driving force behind local government spending. Outside the usual cesspools of corruption and incompetence, the problem isn’t extravagant spending in the traditional sense of waste, fraud and abuse (WFA). WFA is a constant, part of the background noise. Increasing spending has two sources, neither of which are easily remedied: (a) increasingly dysfunctional human settlement patterns, which drive up the cost of providing infrastructure and public services, and (b) the institutional rot of public education, which absorbs massive funding increases to little effect.
The tax revolt is coming, I’m tellin’ ya. It’s coming. Sooner or later, I’m going to be right!
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