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The COVID-19 pandemic is driving a sharp decline in state and local income and sales tax revenues. But history suggests that one key local government revenue source—property taxes—may be relatively immune from this public health crisis.
Pandemics can drive down housing prices. University of Amsterdam professor Marc Francke and Maastricht University professor Matthijs Korevaar examined 10 outbreaks of bubonic plague that ravaged Amsterdam in the 16th and 17th century and two episodes of cholera in Paris in the 19th century. They found that these pandemics lowered home prices by an average of between 5 percent and 6 percent during the outbreaks and another 4 percent in the following year.
In Amsterdam, average prices fell by 13 percent within six months of a plague outbreak. And in Paris, home prices fell more in areas heavily affected by cholera. Yet, these price effects were short-lived: The “shocks were only transitory, and both cities quickly reverted to their initial price paths.”
Even if property values fall, the COVID-19 pandemic probably will have little immediate effect on local government revenues. And even over the longer run, revenues will probably not be severely affected.
The reasons can be found in two papers analyzing state and local government revenue after the real estate bubble burst during the Great Recession. Indiana University professor John L. Mikesell and KDI School of Public Policy and Management professor Cheol Liu state in a recent article that in many areas of the country after the Great Recession, assessments for property tax purposes were much lower than market prices. In part, this occurs because some areas cap allowable annual increases in assessment values. They point out that if the growth rate in property values exceeds the caps for a long time, even substantial declines in the market values of properties can lead to little or no change in assessed values.
This phenomenon mitigated the effect of housing price declines during the Great Recession. The result? Even as home prices fell by “25% in many cities in California, Arizona, Nevada and Florida and by 10% or more in most other cities” in 2007 through 2009, assessments increased by more than 9 percent in 2007, more than 8 percent in 2008, and by 2 percent in 2009.
Research by Federal Reserve Board economists Byron Lutz and Raven Malloy, and former Fed economist Hui Shan shows that there are often significant lags between changes in property values and assessments, delaying the effect of the decline in values. They also find that local governments can partially compensate for falling declining assessments by raising tax rates. As a consequence “property tax receipts continued to grow at a robust pace through the end of 2009, even though house values had plunged in the previous three years.” Reflecting the timing lag, growth rates for property tax receipts eventually went negative in 2011 and 2012, before rebounding in 2013.
No one knows for certain what comes next for property values. In particular, uncertainty surrounds commercial properties as the pandemic has led to shutdowns of office buildings and retail outlets. But if history is a good indicator, and so far it seems to be, property taxes may hold up better in the COVID-19 economy than sales and income taxes, which is a small piece of goods news in an otherwise dismal outlook for state and local governments.
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