As state and local revenue sources go, the property tax always has been the steady one. Its cousins -- the income and sales taxes -- are more temperamental, rising triumphantly or falling tragically with the peaks and valleys of the economic cycle. When those latter two financial divas have stopped singing, because a local industry is in trouble or Wall Street is on a bear run, real estate properties have held their own, and the revenue based on that value has kept moving surely and quietly into local coffers.

Voters may rant about the property tax -- it ranks first on the list of most-hated levies -- but almost every economist who studies public finance has admired its strengths. "It's stable." says Jeffrey Chapman, director of the School of Public Affairs at Arizona State University. "It's efficient. And it's equitable."

Or rather, it was all those things. It isn't right now. In the current recession, real estate values are plummeting, foreclosures are rising and huge numbers of taxpayers are disappearing from tax rolls. "The property tax," says Guy Griscom, past president of the International Association of Assessing Officers, "is the primary source of revenue for localities. Right now, it's threatened."

Whatever the law may be in a given jurisdiction, it's inevitable that when assessed values fall, the tax base ultimately shrinks. There is less money to spend for public purposes. "We are still in phase one of what is likely to be a several-year cycle of property tax revenue declines for locals," says Chris Hoene, of the National League of Cities. "We've only just entered the woods."

And for many homeowners, the woods will be full of unpleasant surprises this year. For example, every state sets an assessment date for establishing the value of property in the coming tax year. In many states, that date is January 1. Property owners receive a notice of the evaluation and of what their property tax will be some three or four months later. If the value of a house drops between the assessment date and receipt of the tax bill, that downward change is rarely reflected in the bill. The gut reaction of the homeowners is often vitriolic. They see themselves as being taxed on an unrealistic and unwarranted value. This is especially true right now.

"What taxpayers might not understand," Griscom says, "is that they are going to pay taxes at the end of 2009 based on the value levied at the beginning of the year." That is a tough sell to homeowners who may have had their salaries frozen, who have lost their jobs or who have seen a huge chunk of their 401(k) savings melt away.

Not surprisingly, the discrepancy between assessed and market values is leading to a leap in the number of property tax appeals. In Harris County, Texas, there were 350,000 appeals on 1.7 million parcels in 2008. The county is gearing up for more than 400,000 this year. In New Jersey, the Division of Taxation reports that the number of tax appeals nearly doubled between 2005 and 2008, and county assessors in the state are forecasting an even greater number of appeals this year.

"This is a dangerous period politically," says Hoene. "There's a lot more taxpayer animosity out there than normal right now."

Clumsy Caps

The right of property owners to protest their evaluations does relieve some political pressure. But a spike in protests also drives up a locality's costs. Hearings must be held on each appeal, and the jurisdiction must pay board members to review a huge caseload and make determinations. The more cases, the more costs.

One approach to heading off a protest movement is for a jurisdiction to impose a temporary cap on a property's taxable value -- no one's assessment can go up by more than a given number of percentage points at a time. Since it's temporary, the locality can end it when things stabilize.

Hoene argues that California's voter-approved Proposition 13, which caps market value increases statewide at 2 percent a year and has caused a series of big fiscal shortfalls since its enactment in 1978, might have been avoided if localities had preempted the ballot measure by imposing their own temporary caps and then lifting them when the economic climate changed. The same can be said for other rigid permanent tax caps passed in other states around the same time.

In fact, though, most local governments don't like property tax caps at all, permanent or temporary. They feel such laws hamper their ability to provide basic services. They tend to chafe even when a legislature enacts a relatively gentle version, such as a cap of 10 percent per year, which allows for a fair amount of revenue growth for localities.

A cap, which gives homeowners comfort in a rising market, can, however, create the opposite effect in a down market. In Texas, which sets a 10 percent limit, property values rose by as much as 18 percent per year during the past decade, but assessed valuation could go up by only 10 percent per year. As a consequence, a large gap exists between real market value and taxable value. Because of that gap, assessed value may go up this year even though market value is coming down. Until the two come together -- the market value falls to the level of the taxable value -- 5 to 10 percent increases in assessments are a real possibility. "That's going to be another contributory factor in taxpayer frustration," says Griscom, who is the assistant chief appraiser for Harris County. "Legislatures didn't look at that side of it when they gave property owners the benefit of these caps. Ultimately you have to pay it back. This is not what people want to hear."

Spreading the News

One way to dampen some of the taxpayer alarm over the seeming inequity of all this is proactive communication. A local jurisdiction can use its Web site, for example, to offer a clear explanation of just what is going on. On the Harris County appraisal Web site,, taxpayers can learn how the county arrived at the value of their property and what other neighborhood values are. If they want to protest, they can see the information that appraisers will use to defend their evaluations.

"The Web site is an opportunity to have a direct dialogue with an individual property owner," Griscom says. "Hopefully, if you have an informed public and taxpayer, then the system is easier to administrate." That said, Griscom admits protests are inevitable: "The one place homeowners can go with the idea that they can impact their own personal tax burden is to attack the value. Therefore, they are going to file a protest and try to get a reduction."

Some localities operating under a tax cap at least have flexibility to adjust rates within those limits. But a majority of local governments in the United States lack even that sort of freedom. In fact, says Hoene, there are only about a dozen states where localities have authority to raise the annual tax rates entirely on their own. "There is," he says, "much less control over the property tax in terms of raising or lowering the rate than most people imagine."

Hoene predicts one result will be a trend toward "pay to play" -- an imposition of or increase in fees for parks, recreation, libraries, trash collection and recycling, among other services. Some communities will impose stiffer penalties on parking violations. "Essentially, if you can charge a fee for the service," he says, "the locality will try to use that." But the amount of money that a jurisdiction can raise through fees won't come near filling the gap left by a diminished property tax take. "It's not a one-for-one swap," Hoene says. "It means we are going see a lot of service cuts."