Downturn Made States and Cities More Dependent on Property Taxes

A new analysis shows that cash-strapped state and local governments have increasingly come to depend on property taxes to fill revenue shortfalls as other sources of income soured.

"The local property tax is one tax the local [authorities] can use to offset declines in state money," says William Fischel, a professor of economics at Dartmouth College. "To some extent, if the state is sending municipalities or even school districts less money because they're in fiscally difficult times, the one tax the local [authorities] have some discretion over raising is the property tax."

Meanwhile, states have grown more reluctant to lift income or sales taxes in recent years for fear of political retribution, economists say. In some cases, they are even prevented from doing so by laws passed during the 1990s boom.

The increased state and local reliance on property taxes over the past few years marked a reversal from the trend of the mid to late 1990s. "Over time, there had been a trend for property taxes to play a smaller role in overall tax collections than income or sales taxes," says Judy Zelio, principal at the National Conference of State Legislatures' fiscal affairs program. But in recessions, property taxes tend to creep back up as a percentage, as happened during the recession of the early 1990s.

(8-24-04 wsj; email me for full article)