The Housing Crisis and the Coming City Budget Crunch

The federal government’s single biggest source of revenue is income tax, but cities and towns are primarily funded by sales and property taxes. That means Washington’s revenue took a huge hit in 2008 and 2009, as payrolls declined. But Springfield and Bethesda and Houston? The bust of housing market is just catching up with them.

That’s the conclusion of a report released by the National League of Cities today. Property tax revenue rose 4.2 percent last year. This year, cities expect revenue to fall 1.8 percent — meaning hundreds of billions of dollars less for schools, roads, police officers and other local-government services. And the worst is yet to come.

That is because income tax works directly: You and your employer inform the government how much you make, and transfer a set percentage. But property taxes are based on assessments — essentially guesses about the value of the property. Those assessments take time, and are imprecise. Housing values have been in sharp decline, and continue to fall in many parts of the country, and local governments are only now accounting for that.

The loss of property tax revenue, combined with shrinking sales tax revenue, means that cities will take in 3.2 percent less this year, the biggest downturn since the NLC started keeping track.

“These stark numbers continue the trend we’ve been seeing for the past several years: lower revenue and reduced services at a time when there is an increased demand for services,” the report’s co-author, Christopher Hoene, said in a release. “Unfortunately, because of the loss in revenue, cities will face even more difficult circumstances in the months, if not years, to come.”