'Phenomenal' Impact of Mortgage Crisis on States, Cities

Dozens of states, counties and cities across the nation will enter the new year facing deep and unexpected budget holes as the widening mortgage crisis cuts sharply into tax revenue. Elected officials, scrambling to adjust, are trimming money for public schools, reducing grants to help the homeless, even asking police to dry-clean their uniforms less often.

What makes this all so painful is that up until a few months ago, many government officials felt certain they could weather the storm. They knew property values wouldn't soar forever. So they factored a downturn into budget calculations. They built up sizable emergency funds.

But the rainy day they prepared for turned out to be a monsoon.

The effects of the housing slowdown are not being felt evenly across the nation; in states such as Wyoming, Alaska and Texas, they're more than offset by the boom in oil and gas prices. But in a recent survey, 24 states reported that their tax collections had taken a hit because of the housing crisis.

The 10 most affected states, including California, Nevada and Arizona, will lose a combined $6.6 billion in tax revenue next year, according to a report prepared for the U.S. Conference of Mayors.

The mortgage crisis cuts into tax revenue in several ways.

The most obvious victim is property tax collection. Homeowners in foreclosure don't pay taxes on time. And as foreclosures spread, property values drop -- dragging down assessments and collections.

On average, states receive about a third of their revenue from sales taxes. So it hurts -- deeply -- when families don't have reason to splurge on the new sofa and coffee table that will make a just-purchased house look like home.

Jacqueline Byers, director of research for the National Assn. of Counties, said she had taken to wondering, as she drove past yet another vacant house: "Does that translate into the library's going to close at 6 p.m. instead of 9? Little things like that are all affected. It's a phenomenal impact."