The past three years have been hard on Maryland real estate, with average property values dropping 22 percent – the largest decline in the history of the state’s Department of Assessments and Taxation – since 2007[1]. Maryland recalculates property values every three years, basing new assessments on the sales of more than 50,000 properties during that time. 2011’s tax bills will be calculated based on the new assessed values, which could mean trouble for municipalities across the state as the tax revenue will be dramatically decreased unless major changes that homeowners can ill afford are made to the tax rate equations.
Although 95 percent of residential properties in Maryland decreased in value in the recent reassessment, the Department of Assessments and Taxation predicts that homeowners will, in at least some cases, see an increase in their taxes[2]. “The drop [in value] represents new territory,” explained C. John Sullivan, Jr., the director of the department. The phasing in of Homestead Tax Credits could actually result in an increase of taxes as well, since these credits phase in over three years and are based on old values rather than new ones. While property owners can appeal the assessment on their home, the issue is not so much what the property is worth, but how it is taxed and at what levels. Sullivan insists that “we are watching what is going on with these declining values.” However, what most homeowners will be watching is the “amount due” box at the bottom of their tax bills in July.
Do you think that it is reasonable for cities to change their tax codes in response to declining home values, or is there a better solution?
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[1] http://www.businessweek.com/ap/financialnews/D9KD2R7G0.htm
[2] http://www.wbaltv.com/r/26303265/detail.html
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The State of Wisconsin has done a similar property tax increase – it is my understanding, from family, that they have
done so by increasing the value of the land??
I think this really depends on the state and whether they have used realistic market values to calculate taxes in the past or not.
The state or municipality has a budget for which they need a given amount of revenues to pay for their expenses. Those expenses are not going to change based on the value of the homes. So in that sense, municipalities must do what they have to do in order to collect the revenues they need. Using this logic, essentially the assessed property value is used to determine the proportion of each tax payer’s taxes due. So if the value of the properties drop, they may need to raise the assessment to be able to get the revenues.
On the other hand, during the boom years, many municipalities kept raising the assessed values (and hence their revenues) based on increases in property values each year. Those municipalities were able to collect a lot of extra revenues during the good times and it would be unacceptable for them to continue to raise revenues during the bad times. They should now lower those assessments and find ways to cut their expenses (or perhaps they have reserves saved up from the good years).
This whole conundrum–the bankrupt counties and municipalities around the country–illustrates why it is a bad idea for property taxes to be used for ANYTHING except property-related services such as fire and police departments. Schools are not a property-related service. Welfare is not a property related service. Etc. We get away with it as long as the economy is zipping along and property values are increasing. But the basic insolvency of this arrangement comes crashing down on us when the economy turns south and property values decline. The inverted pyramid collapses under its own weight. Beyond this, the whole valuation and assessment process is fraught with inefficiencies and corruption. Property taxes should go to a flat tax system, for the same reason that income taxes should go to a flat tax system. Think about it: All the money that currently goes to the entirely parasitic professions of tax accounting and tax law (talk about opportunity costs!) could be freed up for productive uses. Thank you for your consideration of my comments.