States Move To Cut, Cap Property Taxes

Soaring property values in recent years swelled the coffers of counties and municipalities, raising calls for property-tax cuts. Now, even as foreclosures and dwindling home sales shrink local tax bases, a number of state governments are slashing or capping property-tax rates.

But many of these property-tax initiatives, while politically popular, mask a hidden truth: They are likely to lead to increases in other kinds of taxes.

So-called "swaps," under which property taxes are cut and made up for by levies elsewhere, have been popular in statehouses. Idaho, South Carolina and Texas passed their own versions in 2006. But even when states don't make such deals outright, they may in the long run resort to tax increases to plug revenue holes.

The national movement against property taxes dates to the 1970s. But the most recent real-estate bubble has given it more potency in certain regions of the country, like the New York City suburbs. Median property taxes paid in New York's Westchester, Nassau, and Rockland counties all ranked in the top 10 nationally for 2006, according to the nonprofit Tax Foundation.

This March, Republican Indiana Gov. Mitch Daniels signed legislation to cut property taxes by an average of 30% and, starting in 2010, to cap the taxes at 1% of assessed value. The state will assume some program costs formerly borne by localities and pay for them by boosting its sales tax to 7% from 6%.

But growth in state sales-tax revenue has slowed to a virtual standstill as consumers adjust to the pain of the housing and credit crunch, according to Nicholas Johnson, director of the State Fiscal Project at the Center on Budget and Policy Priorities. That could lead states to look to tax increases elsewhere to pick up the slack -- for instance, by broadening the sales-tax base to tax services like health-club memberships or spa services, he said.