Higher Property Taxes Prop Up Ailing School Budgets

As the recession rages on, states and municipalities from Pennsylvania to Chicago to New Jersey to Hawaii are raising property taxes. The number one reason for these new tax hikes? Ailing school budgets. Obviously, good schools equal higher property values. But if they also equal higher property taxes, are they worth it?

In most cases, it's a tricky balance. But the fact is, when you buy a house, it comes with a lot more than four-bedrooms, two-baths and a yard.Take the the small town of Pen Argyl (population: 3,615), in Pennsylvania's Slate Belt, which is reeling after exhausting $9 million in federal stimulus funds that were applied to the current and next year's school budgets. Thanks to rising education costs, the town is expected to show a $400,000 to $500,000 deficit for the 2011-12 school year.

So in the first week of February, the local school board passed a preliminary budget for 2010-11 of $26.5 million, including a property tax increase that will jack up the average homeowner's tax bill a minimum of $100. "We're going to see shortfalls. It's a fact of life," said the school board's business manager, Walter Schlegel Jr. "The economy is not improving and we see less money from the earned income tax and real estate transfer taxes."

In Fairfax County, Va., home to some of the nation's highest rated public schools, the story isn't much different. County Executive Anthony H. Griffin recently proposed a 5-cents-per-dollar increase in the county's real estate rate after a $257 million budget shortfall forced 100 layoffs and reduced spending in education, public safety and social services. But here's the twist: Even if the county's real estate tax rate is raised, most homeowners will experience around a $50 decline in their tax bill due to declining home values. And that puts a further squeeze on the county. "At a time of declining revenues from both county sources and our intergovernmental partners, we are also seeing increased demand for county services by our residents," Griffin told the Washington Post.

And in Hastings-On-Hudson, a Weschester, New York enclave, steadily rising property taxes that support the area's well-funded schools have fueled a backlash among the unemployed and elderly.

Not that higher property taxes guarantee better schools. In Chicago, for example, city property taxes skyrocketed 9.6 percent in 2009, but the short-term impact was negligible. Chicago Public Schools head Ron Huberman recently announced that the system was on track to register a deficit of $975 million for 2011 on a budget of $6.2 billion.

Huberman is regarded as a savvy financial analyst, but that's not always the case. "In some cases, where the money is just being wasted, it doesn't make sense to vote for the schools," Patrick Fleenor, chief economist at the Tax Foundation, a nonpartisan tax research group in Washington, D.C., tells HousingWatch.com. "But generally, taxpayers do have an incentive to make sure that schools don't fall below a certain level of quality."

New Jersey, the state with the highest property taxes in the country, raised them once again last year. The average bill for New Jersey homeowners jumped 3.4 percent in 2009, the lowest increase in recent years but still seven times the inflation rate.

"Some states don't rely on property taxes to fund education as much [as New Jersey]," says Joseph J. Seneca, a professor at Rutgers University's School of Planning and Public Policy. "New Jersey has a very large number of school districts for a state its size, well over 600 school districts." However, add Seneca, New Jerseyites can rest easier knowing that the bulk of those real estate tax dollars go back into their local school districts, whereas income taxes are redistributed throughout the state to poorer school districts.

In Hawaii, America's high-end real estate mecca, state legislators recently decided not to put in place a plan which would have taken $100 million in hotel tax revenues from the counties to offset a state budget shortfall. But Hawaii's mayors objected, since the move would have guaranteed a property tax increase for most residents. Meanwhile, Hawaii's state senators are demanding a 5 percent cut in the state's board of education budget, an amount that comes to $78 million. To date, the board has only come up with on a total of $37.7 million so far. The board "decided that the $37.7 million was the most we could do without further adversely affecting schools and operation of schools," said Garret Toguchi, the board's chairman.

But in the end, no matter how you run the numbers, families in search of good schools inevitably end up in towns with regular property tax increases.

The key for homeowners, says the Tax Foundation's Fleenor, is to understand that buying real estate isn't only about the house. "Housing is a composite product," he says. "It looks as though you're just buying a house, but actually buying another number of factors, as well."
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