Foreclosure’s other tax cost

Much attention has been paid recently to the unexpected tax bills faced by folks who have their home foreclosed. If you missed it, you can read my comments on the topic in this previous post.

But the neighbors who remain, who are able to make their mortgage payments, also are likely to encounter some tax issues of their own. They could end up coping with higher property taxes.

It doesn’t take an advanced economics or math degree to understand that when a glut of foreclosed properties are on the market, it’s a buyers’ bonanza. Prices keep getting cut as banks try to unload the assumed properties.

Those bargain basement deals then mean that folks who are trying to sell because they want to, not because they have to, must drop their asking prices to be competitive.

All those lower prices lead to lower property valuations for the whole neighborhood. And that’s where the dominoes start to fall.

Lower property values mean a smaller tax base. That results in either 1) fewer services that are paid for via those property taxes or 2) higher tax rates to keep the tax intake at the previous level. Or both.

When property taxes on remaining homeowners are hiked, residents who have affordable principal and interest payments could see their mortgage payments go up to cover the added escrow amount for the new, higher taxes.

The tax dilemma is mentioned in a story in today’s New York Times on how the subprime mortgage crisis could decimate an entire town.

Michael G. Ciaravino, the mayor of Maple Heights, Ohio, tells the paper that his town has shut down its two swimming pools, cut police and firefighter ranks and eliminated services like free plowing of snow-covered driveways for senior citizens.

The town’s finance director, Michael H. Slocum, elaborates: "It puts a big question mark out there; historical collection patterns for taxes are becoming less reliable."

In fact, reports the Times, Maple Heights’ assessment last month for garbage collection produced receipts 15 percent below projections. That meant a 50 percent rate increase, since few folks want to give up regular trash pickup.

At some point, communities in these situations will essentially become unlivable.

Reduced operating revenues from less taxes will mean that there isn’t enough money for services that make the place an appealing place to call home. Or, if city officials try to maintain the previous standards, the tax costs would be too much for most homeowners.

Another option: Raise other taxes, such as sales or income, to help solve the property tax problem.

The Times lets Mayor Ciaravino paint the bleak picture: "There is truly a cascading effect. The folks living next to these empty homes get discouraged, and middle-class people are leaving. … We’re not giving up the fight here, [but] It’s frustrating because this could have been avoided. We as a nation are capable of much better than this."