The drop in real estate values and its impact on property taxes is easy to envision. But that’s just part of the problem. Deeper seated is linkage between housing construction, and the many ways that home sales and building activity affect state and local government revenues.
Let’s start with housing sales and how they affect economic activity that, in turn, generates tax revenue. In 2005, 1.28 million new homes were sold at an average price of $290,000, according to the U.S. Census Bureau. That meant a total sales volume of $371 billion. Meanwhile, 7 million existing homes were sold in 2005 at an average price of $269,000, which meant a volume of about
$1.88 trillion. The new homes, of course, had a greater per-dollar spending impact since they had to be built. But sales of existing houses count too. Buyers spend thousands of dollars on repairs, new appliances, legal fees and sales commissions -- which add up to a huge boost to the economy.
By contrast, the annual rate of new home sales in July was 288,000 and the average price was $244,300. The total dollar volume of new home sales was $70.3 billion -- an 80 percent decline from the level five years earlier. The annual sales volume on existing houses was $890 billion, marking almost a 60 percent decline. That’s for one month at an annual rate, but it suggests that there yet may be no floor on the real estate market.
A result of this horrendous decline in value has been a large percentage of properties going under water -- having less market value than the mortgages they carry. Foreclosure rates are astronomically high, particularly in Arizona, California, Florida, Illinois, Nevada and New Jersey. Not surprisingly, these states also saw the greatest burdens in terms of mortgage costs to household income during the fever pitch of the housing boom. And all are having severe budgetary problems.
There are other powerful fiscal connections. By mid-2010, construction jobs had fallen by 2 million workers since their peak in 2006. Roughly speaking, construction jobs generate about two additional jobs off site for every worker employed on site. Thus the $800 billion in wages not being earned by active construction workers results in a decrease of $1.6 trillion in related industries and perhaps another 4 million jobs. (The blow is somewhat lessened by unemployment benefits that replace about 35 percent of wages on average.) These very round numbers add up to 6 million jobs lost in the U.S. economy since 2007.
Then there are implications from lower sales of building materials, household appliances and furnishings, which are subject to sales taxes in most states. In addition, building permits, hook-up fees and titling taxes are part of the state and local revenue mix, not to mention the profit taxes applied to land corporations and limited liability partnerships. Impact fees and development charges are another part of the revenue arsenal. Each tax system is idiosyncratic, but for years the ability to load costs on new development has been low-hanging fruit for the tax collector. But times changed. Overall, according the Nelson A. Rockefeller Institute of Government, state taxes in fiscal 2010 were about 17 percent below collections in 2008. Property taxes showed a year-to-year decline of about 1 percent -- and they react more slowly than other taxes. The effect on property taxes has yet to play itself out as assessment practices in many states delay the impact.
The tie binding state and local revenues to the activities embodied in construction spending, high levels of mobility and fast-paced development are long-standing. That suggests we should be doing some basic thinking about what state and local revenue systems should be based on and how much volatility we are willing to accept. We may need to live through many more years of fiscal distress before finding a proper balance between what public services we are willing to pay for and how they should be financed. As former British Prime Minister Winston Churchill once said, “You can always count on Americans to do the right thing -- after they’ve tried everything else.”
