As Property Values Plunge, Tax Bills Might Not Follow

By Ashley Halsey III
Washington Post Staff Writer
Friday, December 26, 2008; B01



Homeowners whose property values have plummeted as much as 40 percent are unlikely to see a corresponding drop in their real estate taxes next year, and some might face a tax increase as the counties surrounding the District struggle with huge budget shortfalls.

Nearly every county in the region is deep in red ink, with some of the most populous jurisdictions looking at overwhelming budget gaps: Fairfax County faces a $650 million shortfall; Montgomery County, $450 million; and Prince William County, $190 million.

Most county officials are signaling that they will make dramatic service cuts, invoke salary freezes and furlough workers to balance their budgets. But many have been forced to take those steps already to plug gaps in the current budget year.

As officials face the most challenging budget season in recent memory, independent analysts say the projected shortfalls next year are too steep to be solved by cost-cutting alone, leaving little alternative to increasing tax rates.

"They're going to have to bump up the tax bills. It's a question of increasing the [tax] rate or cutting services, and I think you're going to see a little bit of both," said Greg Leisch, chief executive of Delta Associates, an Alexandria-based real estate analysis firm. "The politicians . . . are going to be in agony. The cost of government hasn't declined. If anything, it's gone up. Services are going to have to be slashed, but there's only so much they can cut."

County elected officials are weighing those options as they await word of the current value of real estate in their jurisdiction. Once they receive that report from tax assessors, they can calculate the tax rate required to meet their budget needs.

Throughout the region, the once red-hot housing market has cooled so much that property values have declined virtually everywhere. With property taxes based on the value of residences, the only way county governments can take in the revenue needed for services -- after any cuts -- is to raise the rate. That might mean property owners' tax bills stay the same, but it also means a tax rate increase nonetheless. And depending on the rate and how individual assessments come out, some property owners' tax bills could go up. Arlington County is already considering a rate increase.

A tax rate increase is also on the table in Prince William, whose real estate market has been particularly hard hit because many risky subprime mortgages were made in the county.

"It's those loans that are failing and dragging down home values," Dan Fulton, president of Fulton Research and Consulting, said of the Prince William situation. "You are going to see a tax increase against a lowered [property] value."

Thus far, Montgomery officials have ruled out raising the tax rate, and Prince George's County has a law making such increases difficult.

The independent analysts say the dawn of the new year, however, might require a rethinking.

In Virginia and the District, the values of all residential properties are adjusted each year. In Maryland, one-third of homes are reassessed each year. This month, 700,000 Maryland homeowners statewide will receive reassessment notices.

Since the real estate market hit the skids three years ago, state real estate assessor Henry Sikorski said, homes in the "middle range" of prices, $500,000 to $700,000, have suffered the largest loss in value.

"The upper end, the $2 million-plus, seem to be holding their own," Sikorski said. "And so are the more modest homes in, say, the $300,000 range."

Counties in Washington's outer ring have suffered the biggest loss in value since the residential real estate market peaked.

Leisch, the independent analyst, estimated that Loudoun, Prince William and Frederick counties registered a 40 percent drop, while inner ring counties such as Fairfax, Montgomery and Prince George's experienced half that loss.

"It's going to take time for the assessments to catch up with the decline in property values," he said. "They can't afford to write [values] down that much, or they'd be broke."

Loudoun County Assessor Todd Kaufman said county property values have declined almost 8 percent this year, with condominiums (22 percent) and townhouses (13 percent) dropping the most. He cautioned that those losses are not across the board.

"Averages can get you in trouble," he said. "You put your head in the oven and your feet in the freezer, and your average body temperature may be okay, even though you're dead."

Averages aside, however, he expects the bottom line value for all county real estate will be about $5 billion less than the $68 billion he reported to county budget officials last year.

The nuances of setting assessments and tax rates can get confusing.

For instance, Arlington and Prince William are considering rate increases so that the average tax bill will be about the same as this year's. "Average" is a key word, because individual property owners might see bigger changes. If the average home in a county lost 20 percent of its worth and tax rates were bumped up so that the average tax bill remained constant, anyone whose home lost less than 20 percent in value would see an increase in their tax bill.

In some cases, an increase in the tax rate might not mean an increase in the bill received by homeowners. In counties where the decline in values has been particularly dramatic, bumping up the tax rate might be more than offset by the loss in value.

Prince William, for example, is considering a proposal to increase the tax rate from 97 cents to $1.13 for every $100 of assessed value. At the old rate, a house valued at $150,000 would have paid $1,455 in taxes. If the assessed value of that same house were reduced to $125,000, the new higher tax rate being discussed would yield a tax bill of $1,412.

The situation may be acute but less catastrophic in more established communities, which had little room for growth during the housing boom.

The outer-ring counties and the outer reaches of such counties as Prince George's and Montgomery experienced residential expansion that required new tax-supported infrastructure: roads, classrooms and police, fire and recreational services. By contrast, such places as Alexandria, Arlington and the District faced few new financial burdens.

"Arlington has no land for expansion, so inventory is fixed," said Arlington Assessor Thomas L. Rice, "whereas in the outer suburbs, you have to compete against new developments and new homes that the builder can offer at a lower price."

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