As California property values continue to molder, so goes the state’s revenue. Counties across the Golden State are quickly realizing the relative worthlessness of their properties is leading to lower assessed market values and thus diminished revenue for county coffers. [For a report on California property tax rolls one year prior, see the August 2010 first tuesday article, Total assessed values, and taxes, drop in many counties.]

Although every county across California is presumably suffering from this phenomenon to some extent, some are harder hit than others. Calaveras County, the seat of a mid-size township east of San Francisco, is among the worst blighted. The total value of taxable properties is down 5% from last year and 18% over the last three years.

Stanislaus County in Central California has seen the cumulative value of its assessed properties plummet 21% over the past four years of steady market decline. Southern California, with its relatively impenetrable property values along the coast, has suffered as well. Property-tax levies in San Diego County fell by more than $100 million in 2010 — the first decline in over a decade for the home of America’s finest city.

Many are blaming the revenue dearth on the notorious Prop. 13 — a staple of California tax law that caps property tax to one percent of a home’s assessed value and bars reassessment unless there is a transfer of ownership. Prop. 13 shields California homeowners from having to pay property tax rate increases beyond a combination of the property’s current value and 2% per annum increases from the year of purchase.

While Prop. 13 may not be helping matters now, it is clear that California counties are struggling due to flagging property values, not a possibly faulty property tax code.

first tuesday take: The vicious cycle just got downright nasty. As assessed property values decline and less property tax is paid by homeowners, less revenue is earned and thus county services and improvements fall off since county services are largely funded by property tax revenue. As such services and improvements wither, crime increases, parks become overgrown, libraries are shuttered and the local stop-and-shop becomes a way-station for drifters. Then, the process starts all over again and property values decline further, leading to less revenue and further compromised county services. [For an historical and forward-looking assessment of the cause and effects of the Millennium Boom, see the November 2010 first tuesday article, Economic Forecast Conference points to a long period of recovery for California’s real estate market.]

But what are the assessors to do? It is not their fault that California property values are a mere shadow of what they once were. And it is illegal to bill California homeowners for taxes on a property assessed at more than two to three times its current value.

A dearth of county revenue is a cold hard fact of lower assessed property values during an extended real estate market downturn. Especially given the paradigm shift in real estate that has taken place, where previous but foreclosed homeowners are now seriously considering becoming life-long renters (by choice or not). Waiting for assessed property values to increase is tantamount to waiting for a windfall — it won’t come for a couple of decades, if at all.

In the meantime, real estate agents and brokers need to consider using lower property taxes as a valuable marketing tool for potential homebuyers. While a decrease in total operating costs for a single family residence (SFR) may pose difficulties for the counties depending on them for revenue, it can be attractive to potential homebuyers.

If lower taxes are successful in driving home sales, the idea could jump-start the cycle and eventually lead to greater revenues and better-funded communities. This, for better or worse, is how the system works. [For marketing material on the benefits of low assessed property values for homeowners, see the September 2010 first tuesday farm letter, How to lower your property taxes in a market of declining property values.]

Re: “California counties reel from tax hit” from the Wall Street Journal