Schools Facing Hard Times as Property Tax Revenue Falls

September 8, 2009

The New York Times ran a piece this morning citing the difficulties facing many school systems as tax revenues have sharply decreased. Federal stimulus money is currently acting as a stop-gap filling these budget shortfalls. These funds, however, will not last forever.

School districts and other local governments have been especially hard hit due to their reliance on property tax revenue. Property taxes have been the preferred source of revenue for local communities. Historically, property taxes have provided a stable source of income for localities with low variance.

As the housing market began its climb ten years ago these localities saw assessed home values steadily increase. Without changes to the rates this lead to budget surpluses. These surpluses were used to expand and create a number of new programs. There are exceptions to this. Some governments have lowered their rates as the assessment values have increased. Peoria Unified in Arizona consistently lowered their rate during the real estate boom.

Now that we have passed through the proverbial seven fat years and now are in the lean years, these municipalities must choose between trimming the services that have been recently added or finding new sources of revenue.

Behavioral economics has shown us that cutting these programs will be a more painful task than if we had never had them.

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