Wisconsin and California Show that Local Taxes are a Political Death Trap

Here’s a simple piece of arithmetic to keep in mind after Wisconsin voters overwhelmingly supported Gov. Scott Walker and California voters backed pension cuts for retired municipal workers. I reviewed some of these numbers last October in this space, and add some state-level detail below. Back on Jan. 24 I insisted that “Obama is toast” because of the rotten economy. It’s sure starting to look that way.

State and local property tax collections (blue line in the graph below) have risen by 10%, from $400 billion to $440 billion, since 2008, even though the price of homes in most American markets (red line)  has fallen by 30% since 2008. Your house is worth less and your property taxes have gone up. Most of the $440 billion in property taxes is paid by homeowners. That compares with the $380 billion a year or so that homeowners pay on the $10 trillion in outstanding home mortgage debt. Homeowners now pay roughly as much in property taxes as in mortgages interest. It used to be a quarter to a third as much. No wonder home prices remain depressed.

FRED Graph

Things are even worse in Wisconsin than in most American states. As shown in the chart below, property tax collections have risen by nearly $25 billion, or almost 20% in Gov. Walker’s state, compared to a 10% increase nationally. No wonder Wisconsin voters backed Walker by a margin of nearly 3:2. There are a lot more people paying property taxes to pay the salaries and benefits of government workers than there are government workers.

Graph of State Government Tax Collections, Property Taxes in Wisconsin

California is the worst of all: Despite one of the weakest housing markets in the country, property tax collections in California spiked by nearly 50% since 2008.

FRED Graph

State and local government spending doubled since the property boom began in 1998:

FRED Graph

The federal government’s spending rose even faster, but it is borrowing $1 out of every $3 it spends, but state and local governments can’t do that by law. So they have pushed up tax collections even while federal tax collections have fallen.

Federal (Left-hand scale) vs. State+Local (Right-hand scale) Tax Collections

Source: Census Bureau

Because it’s easier to push up property tax rates than to pass new sales or income taxes, that’s where the incremental tax burden has fallen.

Property Taxes as a % of Total State and Local Tax Collections

Source: Census Bureau

State and local governments are standing on the sore toe of the American middle class–the housing market. It’s much worse than under the Carter administration. During the 1970s, home prices tripled while consumer prices doubled, so the net worth of the middle class actually rose. Now the 30% collapse in housing prices has wiped out the net worth of perhaps half of American middle-class families, at a moment when less of the population is working than at any time since the data have been kept:

Graph of Employment-Population Ratio - Men