Rising Property Taxes Fill Gaps, Pinch Homeowners

Pain Is Worsened by Housing Slump, Economic Slowdown

Faced with revenue shortfalls, local governments across the U.S. are raising property-tax rates, angering homeowners already hit by the housing slump and economic slowdown.

Spring Valley, N.Y., approved a 9.7% increase in the property-tax rate to balance its budget. A number of fast-growing suburbs around Washington, D.C., have raised rates, while Memphis Mayor Willie Herenton has proposed a 17% increase in the property-tax rate to close a budget gap.

"Everyone is feeling this pinch and we are not immune," he told the Memphis City Council last week.

Increasing property taxes is especially sensitive when housing prices are falling, the labor market is weakening and household budgets are strained by the rising cost of food and gasoline.

Steven White, a nutritionist in Spring Valley, a suburb north of New York City, recently went to a public hearing to protest an increase in his property taxes, which will add about $200 to his annual bill. "I'm already having trouble making my monthly bills and this is one more expense that's driving me out of the village," says Mr. White, who works for the county government.

His family is already taking vacations closer to home and eating less meat for dinner. He and his wife recently changed life-insurance policies to save $90 a month. "Everything seems to go up except for your paycheck," he says.

Property taxes are a major source of funding for municipal governments, accounting for an average of about 40% of general revenue, according to the Census Bureau. The rest of the funds come from sales taxes, fees, money from state governments and other sources.

In the long run, falling home prices could give homeowners a property-tax break by reducing the assessed value of their homes. However, appraisals often lag behind market conditions. Many homeowners, believing the value of their property has fallen, are pushing for reassessments in hopes of lowering their tax bills.

In the meantime, flat assessments and rising rates add up to higher bills for many. Arlington County, Va., recently raised its property-tax rate 4% in part to cover retiree health benefits. Portland, Maine, has a proposal to raise the property-tax rate 3.7%, and lay off city workers. Oak Ridge, Tenn., near Knoxville, is preparing to raise its rate 5%, in part to cover the rising cost of items, such as gasoline for police cars and asphalt to resurface streets. The city's sales-tax revenue has stayed about flat, as the weak economy keeps a check on consumer spending, City Manager James O'Connor says.

Some cities and states are dropping plans to roll back or eliminate property taxes. Arizona Gov. Janet Napolitano, a Democrat, recently vetoed a bill that would have repealed the state property tax. The tax, which had been suspended for the past two years, will be back in effect next year.

"The way the economy is, I was hoping that she was going to take note," says Joe Ritz, the owner of an automotive shop in Tempe, Ariz. The five-year lease on his auto shop is $4,350 a month, but the rent can be raised if property-tax rates increase.

Baltimore is also putting off a planned tax decrease. Four years ago, the city hatched a plan to cut the property-tax rate during a five-year period starting in 2006. The first three cuts went through. But now, with revenue slipping -- receipts from a real-estate transfer tax have fallen by almost a third -- the city says it needs to hold the line on property taxes.

Local-government costs have been growing more quickly than in other parts of the economy because municipalities spend disproportionately on fast-rising items such as building materials, fuel and health insurance. From the fourth quarter of 2006 to the fourth quarter of last year, prices for state and local expenditures rose 6.1%, compared with an increase of 2.6% for the broader economy, according to the Bureau of Economic Analysis.

Local governments are generally required to balance their budgets, so in lean times they either have to cut services or increase taxes. Some taxpayers would prefer they cut services. "At some point you need to cut the government," says Philip Zanone, a Memphis investor.

Both raising taxes and slashing costs can accelerate the economic cycle's downward turn. Municipal spending accounts for one-eighth of the nation's gross domestic product and the U.S.'s eight million municipal workers account for 6% of the nation's employment ranks.

Like many cities, Watertown, N.Y., located near the Canadian border, is in a budget crunch. The city has trimmed costs, such as putting off a $319,000 project to replace the windows at City Hall. Even so, Watertown says it is proposing to raise the property tax 4% to cover rising costs. "When you're in a recession and people are more guarded in their spending the amount of sales-tax dollars coming in are much more volatile," says Mary Corriveau, the city manager.

Write to Conor Dougherty at conor.dougherty@wsj.com