The upside to property tax spike

When it rains in Scottsdale, Ariz., the water streams down hardened gullies, sometimes flooding neighborhoods. But this year, the city is building new drains to try to channel the water away from vulnerable houses.

Clark County, Nev., best known as the home of the Strip, is building six neighborhood parks so kids can play in water sprays during summer.

And Montgomery County, Md., is adding classrooms and teachers for all-day kindergarten.

Much of the funding for these projects is coming from the booming real estate market, either from rising property taxes or fees on real estate transactions. Indeed, as housing prices increase dramatically, mayors are garnering funds for projects dry-docked after the dotcom bust. New roads and sewage lines are suddenly off the drawing board and causing traffic tie-ups.

For many communities, the windfall couldn't come at a better time: Their budgets are still recovering from the recession.

"Without this increase in property-tax collections, many communities would be in dire straits," says Chris Hoene, director of research at the National League of Cities in Washington.

Nationally, property-tax collections rose about 6 percent last year after several years of rising about 5 percent. But for some localities, the numbers are much higher. Montgomery County, Md., for one, estimates its revenue from real estate transfer taxes and a tax on recording deeds is up 80 percent.

States in red-hot real estate territory are also taking part in the boom. In Arizona, for example, property-tax collections were up 13 percent in 2004 compared with 2003, according to census data. Overall, the state reported an increase of 77 percent in individual income-tax collections this April over the prior year.

Officials are attributing the surge at least partly to the capital gains that individuals are taking on their real estate. "It's an important factor," says George Cunningham, deputy chief of staff and Gov. Janet Napolitano's top budget adviser. "But Arizona really has been on the rebound for the last two to three years."

Like other places with an unexpected increase in revenues, Arizona has lots of ideas on how to spend the money. Some lawmakers would like it to go to additional English-language instruction. Some money might go toward a reserve in case the forest-fire season is severe, and some money may be used to fund the third-year phase-in (out of five years) of all-day kindergarten. Funds might also go toward increasing the salaries of state employees. "Our employees are 20 percent below the market in salaries, and they are getting hired away at a fast rate," says Mr. Cunningham.

Many communities are wary of spending the money on programs that need to be funded every year since the real estate boom may slow or fizzle in the future. "It's a lot harder to cut than to add, especially after you've hired people," says Craig Clifford, the chief financial officer of Scottsdale, which is spending much of its "growth revenue" on capital projects such as new water and sewage lines as well as the drainage systems.

However, the rising property values have many elected officials dreaming of bigger tax collections. For example, in Maryland's Montgomery County, property values are reassessed every three years. The latest reassessment increased values by 70 percent. But there is a cap of 10 percent per year on assessments.

"This year, the County Council recommended going the whole way - 10 percent," says Tim Firestine, the county's chief financial officer. "But the county heard from homeowners that it was too much, so they had to moderate those increases by lowering the millage [the rate per $1,000 of value] and adding a property-tax credit on everyone's bill so it helps the progressivity of the structure."

Even with the changes, Montgomery County's revenues are up 7 percent, partly from an increase in income tax collections and also from the 80 percent increase in property transfer taxes and taxes on recording deeds. The extra money, says Mr. Firestine, will come in handy since the county is still implementing all-day kindergarten and had its healthcare costs rise as much as 15 percent.

Clark County, Nev., saw its revenues increase by 10 percent this year at the same time as property values have increased 30 percent. The state has capped assessment increases at 3 percent at a time when the county is seeing a boom in new housing and a continued increase in population.

George Stevens, the county CFO, says the 10 percent gain in revenue is not a big windfall given the population growth pressures on the county. "We need the revenues for additional staff, new schools, additional police, and fire stations," says Mr. Stevens. "We've had a huge increase in caseloads for the public defender, child welfare, and all the courts."

The additional income is also helping the desert community spend money on new parks, including the six neighborhood parks that will have swings, picnic tables, and water sprays for children. They will be funded by residential construction taxes in the districts where they are built.

In addition, this year, Stevens says, the "growth revenue" will add $30 million to $40 million more for parks. Some of this has already gone for a new wetlands park where visitors can spy on some of the 138 species of birds that call the area home.