Property Taxes Are Coming to Get You

N E W  Y O R K, May 14, 2003 -- Roger Ribar is mad as hell, but according to the law, he still has to take it. He just doesn't have to take it well.

The 49-year-old auto-shop worker is so incensed by rising property taxes in his hometown in Coffee County, Tenn., he protested by delivering his tax payment — $279.35 — in nickels, dimes and pennies. He counted the change twice on his own, but insisted on taking a day off from work to wait while the county clerk counted the change at the bank because, he says, "I don't trust the government. I love my country, but I don't trust the government."

He's not alone. Given the fact that government spending sprees (combined with revenue shortfalls) in recent years have landed local and state governments in fiscal fiascos, the bill is getting passed to property owners, who in some cases are paying twice as much in property taxes as they had in previous years. It's understandable why some Americans are comparing city governments' fiscal mismanagement to the scandal-ridden Enrons and WorldComs of the business world.

At the very least, rising property taxes have caused public outcry. In more extreme cases, homeowners are taking it to the streets. Last week, for example, hundreds of homeowners in Newark, N.J. — where the effective property tax rate is already 2.95 percent — marched in front of City Hall; they are promising to march again in the immediate future.

About 73 percent of the taxes collected by local governments are property taxes, so they're an important source of revenue, particularly during financially difficult times. According to Washington D.C.-based tax research group Tax Foundation, property taxes in 2001 were expected to generate $256 billion.

High Taxes Scare Away Buyers

The rub for many homeowners is that, in many of the most attractive suburbs and cities, there is often a direct correlation between their property taxes and the quality of local schools — in addition to services like collecting garbage and filling potholes. Most parents are willing to pay higher taxes in return for a good education for their children, but sometimes the size of the bite can scare away prospective residents.

For instance, in Pelham, N.Y, a pretty bedroom community just outside Manhattan with excellent public schools, a $1.2 million home carries property taxes of more than $30,000. Not only does this figure put it out of reach of many prospective buyers looking to take advantage of low interest rates, but it also becomes an unfair burden for people without children or whose children have finished school. After 20 years, the owner of this house might have spent about $600,000 — half the cost of the house — or more in taxes.

Although property taxes are deductible, when they are as high as they are in places like Pelham, they can negatively affect how easily a home can be sold — or bought. Realtors swear that property tax hikes aren't stopping people from buying right now, but it probably helps that mortgages haven't been this cheap in 40 years.

When mortgage rates rise, it's almost a given that home buyers will begin taking property taxes more seriously. Home prices are negotiable, and nearly anyone can refinance a mortgage, but there isn't a whole lot that can be done about property taxes. Homeowners can always appeal their tax assessment, but they're still legally obligated to pay up.

Realtors in New York City, where property taxes were recently raised to 18.5 percent, insist the rate hike hasn't hampered buyers' enthusiasm.

"After New York City's property tax hike came through, we were expecting our clients to have a lot of questions and concerns," says Pamela Liebman, chief executive of New York City-based real estate firm Corcoran Group. "It was a hot topic, but it hasn't had much of an impact. Maybe if the rate increase had come at a time when mortgage rates were high, it would have been different."

One reason why many New Yorkers might be unfazed is that many of them own apartments and already pay pretty steep monthly maintenance charges that incorporate such charges as staff salaries, insurance and property taxes.

Cities Spread Tax Burden

There are thousands of tax jurisdictions across the country, and because each jurisdiction has its own property tax assessment level (the percentage of the property's value that can be taxed), along with the rate (the percentage paid per $100), it's extremely difficult to ferret out a comprehensive list of the districts with the highest property taxes.

Further complicating the matter, cities that have inordinately high property taxes are often compensating for the fact that they have small or nonexistent commercial districts, or very low sales taxes and income taxes. Property taxes alone, therefore, only show part of the picture of a city's tax burden.

Natwar M. Gandhi, the chief financial officer of Washington, D.C., issues an annual tax-burden comparison of the largest cities in all 50 states. Although it's hardly comprehensive and the most recent data are from 2001, it's still telling.

The five cities with the highest property taxes (an effective rate, which accounts for the tax paid per $100 as well as the percentage of the property taxed) are not bustling metropolitan areas. They are the cities hard up for cash and are taking it out on homeowners. Similarly, the five cities with the lowest property tax burdens are places with diverse revenue sources, cities that cannot afford to push away landowners with taxes, or places that simply are not dependent on property taxes.

Most cities have limited means of closing budget gaps. They can cut government employees or raise property taxes — along with auto, tobacco and alcohol taxes. In some cases, local governments are trying all options available to them but are still coming up short. Other cities, such as Grand Forks, Minn., are trying to avoid raising property taxes by slashing government jobs and increasing sales taxes.

Tale of Two Cities

In some places, raising property taxes can be surprisingly easy. Take New York City as an example. In November 2002, Mayor Michael Bloomberg proposed a 25 percent property tax rate hike, which could have been implemented without state approval. The public cried foul; papers were full of editorials lambasting Bloomberg and predicting the real estate market would grind to a halt.

By December 2002, Bloomberg signed legislation spelling out an 18.5 percent property tax increase, which was expected to raise $837 million this year. Yet Corcoran Group's Liebman says the firm's sales numbers in January were stronger than last year's January numbers.

In Bridgeport, Conn., however, the plan backfired. During the last recession, the city filed for bankruptcy in 1992, after it raised property taxes by 18 percent in an effort to close its budget gap.

According to real-estate agents who worked in the area at the time, it was a devastating blow to the local real estate market. One Connecticut agent says that he was one of many who simply pulled out of Bridgeport. Even large real-estate firms closed up shop there because there wasn't much buyer interest and it was difficult to make money. At the time, Bridgeport had the highest tax rate in Connecticut and its per capita income was roughly one-third the state average. Its unemployment rate was also above the state and national rates.

Today, Bridgeport real-estate agent Joe Formato paints a rosier picture. He says that's all ancient history. Over the last five years, Bridgeport home prices have appreciated 55 percent, according to the Office of Federal Housing Enterprise Oversight; and anecdotally, Formato says that although taxes are certainly discussed, sales are strong.

"Everyone complains about taxes," Formato says. "Maybe if taxes were lower, the market would be better, but the bottom line is that the cost of a house in Bridgeport is still less than other areas, so taxes haven't been a big problem."

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