Many homeowners in the District and Northern Virginia will receive lower property tax assessments next year, a radical reversal from the trend of the '60s and '70s when assessments each year shot up by huge amounts for almost everyone, local officials say.
Marylanders, on the other hand, will have to wait two or three years before today's depressed real estate market is reflected in lower assessments because Maryland has a three-year assessment cycle, according to state officials.
Declining residential values are starting to hurt local governments, which rely heavily on property taxes for revenues. And, as a result, both financial and political crises appear to be brewing in cities and counties throughout the country.
Local jurisdictions -- already strapped for funds because of the recession, unemployment and federal cutbacks -- have started searching for new sources of revenue, such as user taxes or fees. If they choose this method rather than raising property tax rates, local tax burdens could make a major shift away from property in the future.
Whether decreasing assessments will actually translate into lower property tax bills for homeowners depends on what their particular local government decides to do about tax rates.
The tax bill is calculated by applying the set tax rate to the assessed value of the property.
In the past, this system gave local politicians their own automatic money machine: The stunning appreciation in property values in the 1970s meant that city and county revenues could jump sharply each year even if the tax rate was not changed. In fact, most local governments were able to lower rates each year -- and still get more revenue.
But now the money machine is grinding to a halt as property values fall.
"The rate-cutting days have got to be over," said John Peterson, director of the Government Finance Research Center. Peterson doesn't see a return to the days of wild jumps in real estate values for at least another decade and said local governments are going to have to find new sources of revenue or cut spending sharply.
Local politicians also may contemplate the unsavory prospect of actually having to raise property tax rates but -- in the words of Peterson, a former city council member himself -- to an elected official, this is "akin to performing a public lobotomy on yourself."
Property assessment notices in most local jurisdictions go out in the spring, while in Maryland they will be sent next month. Most local governments then set a tax rate in the spring or summer.
In sharp contrast to the double-digit increases that were typical in recent years, the local property assessment picture for next year is shaping up like this, according to the localities' assessment and budget officials:
* In the District, single-family home assessments are expected to decline an average of 4 percent next year. In some neighborhoods assessments may decrease 15 percent while in others they may rise 20 percent.
* In Arlington County, average single-family and condominium values could drop about 3 percent for 1983, according to a midyear estimate by the Department of Real Estate Assessments. The range of decreases and increases in the suburbs will not be as great as the District expects to see, however, because values are not as variable, Virginia assessors said.
* In Alexandria, residential assessments are expected to decline somewhat, perhaps an average of 1 1/2 to 2 percent.
In Fairfax County, values of existing homes have leveled off, and any assessment changes are expected to be very slight.
* In Maryland, assessed values reflect conditions three years ago when prices were still rising rapidly. The average assessment cannot be expected to decline for at least two years.
* In Prince George's County, the increase in Maryland assessments won't make much difference, however, because of the local law limiting the revenue the county can collect from property taxes. If assessments rise, rates have to be cut.
Each of these jurisdictions attempts to take "creative financing" into account in its assessments. In recent years many home sellers have had to provide low-interest financing to sell the home. And the price of the home, therefore, was higher than it would have been otherwise. So while nominal home prices may have increased somewhat, factoring in the creative financing in some cases will be responsible for the expected assessments declines.
* Prince George's experience with its property tax limits may foreshadow some of the problems other jurisdictions can expect, even though the revenues are being limited by economics rather than the electorate. Collections reached the legal limit for the first time in Prince George's this year. As a result, the budget for schools was cut drastically, and about 500 teachers were laid off. All other agencies have had a virtual hiring freeze for years.
Increases in commercial assessments and the addition of new properties to the tax base will help the revenue picture throughout this area, but these gains are slowing considerably, as well. Fairfax County, for example, probably will see its tax base grow about 5 1/2 percent this year because of additions and rising commercial values, said James P. McDonald, deputy county executive. But this is down from a 15 percent increase just last year, he said.
"We'll have some hard decisions to make," McDonald said, a sentiment echoed by budget directors throughout the area. In Fairfax, these will have to be spending-cut decisions, McDonald said, because the board of supervisors already has decided not to increase property tax rates for fiscal 1984 and 1985.
Already this year, the District, Fairfax County, Alexandria and Montgomery County all decided to keep the tax rate at the previous year's level, foregoing the decreases that many now be a relic of another era. Arlington in March actually approved a residential property tax rate increase of two cents per hundred dollars of assessed value.
Later, the Arlington County Board considered reducing the rate for the October 1982 collection but was dissuaded by the county's financial situation. When the county's fiscal year 1983 budget originally was adopted, it assumed a 12 percent increase in total assessed property values. In a midyear review, this was changed to a 0.85 increase, with the 3 percent projected decline in residential assessments offset by an increase for small commercial properties and by additions of new property.
The revised statistics resulted in a shortfall of $3.5 million to $3.8 million for the May 1983 collection from original budget estimates. Real estate taxes make up about 35 percent of Arlington's revenues--about half of that coming from single-family homes.
The District went through the same process this summer, with the City Council foregoing a rate decline when it heard the city finance director tell them that assessments would not be increasing next year.
Local budget officials now are starting to look anxiously at next year's figures and looking for ways to raise or save large sums of money.
Henry Howard, director of management and budget for Alexandria, said that his office will have to present the city council with four alternative budgets: one which generally keeps services at current levels, another which reduces spending and two which add programs. As part of this process, a number of revenue-raising alternatives will be presented, as well, including possible user fees or service charges, he said.
In Maryland, the crunch will not come for another couple of years because of its three-year assessment cycle. One-third of the county is assessed each year, and increases are phased in over three years.
Robert L. Rudnick, supervisor of assessments for Montgomery County, said he expects "more challenges and more questions" on assessments this year because they will continue to rise as values decline.
But Rudnick argued that, even though values are falling, the assessment policy remains valid because it is applied uniformly. The actual tax bill is determined by the rate applied, and as long as assessments reflect relative values of homes, they are taxed appropriately, he indicated. People probably will not be able to win challenges based on the recent trends in the market, Rudnick said.
The lag experienced in Maryland is not uncommon across the nation. As many as 20 states have lags of about four years, said Richard Almy, executive director of the International Association of Assessing Officials. Some have lags as long as 10 years, he added.
"Nationwide declining values don't appear to have taken effect yet, but there is a lot of noise in the system," said Peterson of the Government Finance Research Center.
But Peterson also thinks the situation has the makings of a "second-tier taxpayer revolt" not unlike the surge of property tax limit campaigns of the late 1970s, primarily Proposition 13 in California on which Prince George's law was modeled.
With people losing their jobs and watching their home values decline, they won't be willing to put up with higher tax bills reflecting the market several years ago, he predicted.
"On a case-by-case basis, it has come to people's attention," he said. "People are challenging the assessments now."