July 2005

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Guest Commentary

Daniel Weintraub is a columnist for The Sacramento Bee. This column (opinion@sacbee.com) was published on June 26, 2005, and is reprinted with permission. Readers can see Mr. Weintraub’s daily Weblog at www.sacbee.com/insider

California's booming housing market is having a ripple effect on local government by boosting property tax assessments and giving cities and counties a windfall of new revenue to spend.

That money has allowed many jurisdictions to expand programs, give their employees pay and benefit increases, and build reserves, even as they manage the loss of $2.6 billion in property tax revenue that the state took last year to help balance its budget.

Sacramento County just raised its estimate of property tax growth to 14.5 percent for the coming year. The county will use some of the new revenue to increase its payments to the pension fund for employees who were given bigger retirement benefits in recent years and to comply with a new analysis that predicts the pension fund will run short of cash.

"This will be our third year of double-digit property-tax growth," said Geoff Davey, the county's chief financial officer. "It's been a long time since we have seen that. I don't know if it has ever occurred."

The trend is sweeping the state. Los Angeles County just approved a budget fattened by a 9 percent surge in property taxes, allowing the county to hire 1,200 new sheriff's deputies and shore up its health care system. In Riverside County, property tax revenue is forecast to climb by nearly 30 percent. In San Bernardino, it will nearly double.

The rising revenues are driven by two factors. One is new construction, since the assessed value of property with a building on it is far higher than it is for bare land alone. The second force is the general rise in housing values, because California homes are reassessed upward to current market value only when they change hands. Otherwise, assessments can rise only 2 percent per year.

Property tax levies grew at anemic rates for most of the 1990s, even as the economy recovered from a recession early in that decade. But they have grown by an average of about 8 percent per year throughout this decade and are now forecast to rise another 10 percent in the coming fiscal year, according to numbers from the state Board of Equalization. That will mean an additional $3 billion for local governments and the schools.

In fact, California this year is almost certain to pass a major milestone. Property taxes levied, adjusted for inflation, appear set to finally surpass the level they were at in 1978, when voters slashed the tax rate and capped it at 1 percent with the passage of Proposition 13.

That year, property tax levies statewide plummeted from $10.3 billion to $5.6 billion. In today's dollars, that $10.3 billion would be worth about $33 billion. And when the property tax collections for the 2004-05 fiscal year are tallied, it appears the new number will be higher, probably in the neighborhood of $35 billion.

The rapid growth over the past few years has helped cities, counties and special districts weather the shift of $1.3 billion in property taxes from their coffers to the schools this year and next to relieve the state of part of its obligation to public education. But starting in 2006-07, local governments will get that money again, on top of the windfall they are already enjoying from the natural growth in property taxes.

The question is how much longer the good times will last. If the ride ends abruptly, the boom in property tax revenue could have the same effect on local government that a similar surge in income tax collections had on the state during the late 1990s. State lawmakers built that money into their budgets, and when the income tax crashed, the result was a massive deficit.

But the strong property tax revenue growth seems likely to continue, though perhaps not at its current torrid pace, even if the housing market cools. Unless property values sink dramatically, homes will still be reassessed upward over time as longtime owners move out and new owners are required to pay substantially higher taxes.

"Property tax has this sort of lag period," says Mark Ibele, a researcher with the Legislative Analyst's Office. "It takes awhile after the economy comes around for the assessed values to reflect that. And when the economy starts to drag, the same thing happens in reverse."

Still, elected officials treated to a windfall are always tempted to make long-term commitments as if the merry-go-round will never stop. But it always does, eventually. This one will be no exception.