Municipal Finance in the Face of Falling Property Values :: Thomas J. Fitzpatrick IV and Mary Zenker :: Economic Commentary :: 12.06.11 :: Federal Reserve Bank of Cleveland
The fall in property values associated with the recent recession has caused a decline in property taxes which may be amplifying local government budget crises across the country. Cuyahoga County is set to reappraise property values in 2012, and when it does it may only then absorb the full force of the housing market losses caused by the recession. We estimate the potential losses in property values and the county’s tax base and find that the impact could be significant.
Using data from the Cleveland area the authors predict: "If creative ways to make up for this lack of revenue are not found, local governments may face the undesirable choice of either raising property taxes or reducing funding for essential services. Both actions may make the municipality a less desirable place for new home owners to locate. Weakening housing demand may lead to further declines in property values. In any case, it appears that the dramatic fall in property values across the country will accelerate the financial distress of municipalities in the wake of the Great Recession."
My research shows that fiscal distress leads local governments to encourage or mandate CIDs in new housing, because it allows them the "double taxation" windfall. So, when housing construction kicks up again, it will be overwhelmingly in CIDs.