Rising real estate tide not lifting U.S. cities' revenues

WASHINGTON, April 4 Thu Apr 4, 2013 1:20pm EDT

WASHINGTON, April 4 (Reuters) - The real estate recovery has yet to lift the property tax revenues of many U.S. cities, a worrying sign for municipalities that rely on the taxes as their chief sources of income, according to a report released on Thursday.

In a survey of local economic conditions, the National League of Cities found that residential property vacancies and values are "still a problem" for more than half of U.S. cities. Officials in 65 percent of the cities consider commercial property vacancies a problem, and those in 57 percent say commercial property values are still a concern.

"Although generally positive, the slow rebound in the real estate market is a compounded problem for local governments because of the lag between economic cycles and local property tax collections," said Christiana McFarland, director of the league's research department, who conducted the study. "This lag can last 18 months to two years -- meaning that real estate market improvements take time to register in local budgets."

"We anticipate continued decline in 2013 property taxes as collections continue to catch up with market conditions," she added.

Most cities do not frequently assess the values of homes and land to determine the taxes that owners must pay. Some can take three years to re-assess real estate values. The bursting of the housing bubble, for example, took two years to show up in property tax collections.

Of late, demand for houses has risen so sharply that economists and real estate agents are worried about a supply squeeze, with areas such as Washington, D.C., and New York experiencing acute inventory crunches.

Even so, in the fourth quarter of 2012, property tax revenue totaled $177.6 billion, "not statistically different from the same-quarter 2011 property tax revenue of $177.4 billion," the U.S. Census said last week. Local governments collected 97.7 percent of the property taxes.

"Challenges in the commercial property market have been overshadowed by improvements in the housing market and are likely the result of slow job recovery and decreased demand for space," said McFarland. "We anticipate hearing more about commercial property in the months to come."

Cities are also nervous that a new surge in consumer confidence that has helped local sales tax collections will not last -- 55 percent of those surveyed said that retail sector health "continues to be problematic for their communities."

Meanwhile, local income taxes "have remained fairly flat in recent years, evidence of a national recovery characterized by slow income and job growth," the survey found.

For most, though, business growth is improving or it has ceased to be a threat to cities' budgets.

"Although there continues to be significant barriers to across-the-board economic growth, a tenuous recovery is taking hold," the survey found. "The increasing confidence of local officials can be seen in their anticipated spending and investment activities."

According to the survey, more than one in two city officials anticipate increasing investments in 2013 in new infrastructure and capital projects and maintenance of existing infrastructure and capital.

Officials also say they are still pressed to spend on emergency services. The survey found that more than three years since the recession's end, requests for aid have not abated.

"Demand for basic survival services such as food, heat and clothing is a widespread concern, with one in two city officials reporting that it is a problem in their communities," the survey found. "One in four city officials report that this condition has actually worsened over the past year."

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