New York City is doing what few municipalities dare: cutting property taxes. Unfortunately, these cuts are not permanent.

Mayor Bloomberg recently announced plans for a $400 property tax rebate and a 7% cut in the property tax rate in 2009, but taxes are scheduled to rise after next year as the city government prepares to meet subsequent expected budget shortfalls.

Like every other municipality, New York City plans its budget years in advance. Relative to most other cities, New York has many property tax advantages. Namely, while residents are mercilessly overtaxed for income and transactions, New Yorkers are not unusually burdened on property taxes.

In a Tax Foundation survey of residential property tax rates for 51 major cities, New York ranked a respectable 40th. Perhaps partly as a consequence, property values in New York have been more buoyant than in the remainder of America, and the city is somewhat insulated from the subprime debacle.

Deteriorating real estate values distress not only homeowners, but also tens of thousands of municipalities that are far more reliant on property taxes than New York City. Half of the homeowners in Hunterdon County, N.J., for example, had the dubious distinction of paying more than $8,000 in property taxes in 2006, the highest median value in the country. The next four counties with overtaxed homeowners were Nassau and Westchester in New York, and Somerset and Bergen in New Jersey. In fact, according to the Tax Foundation, all of the top 16 counties nationwide in median property taxes on owner-occupied housing are in the New York metropolitan area.

Much further down the list are the New York City counties. Median home prices in Manhattan, for example, were 66% higher than in Hunterdon County, yet median property taxes on housing were less than half the size, at $3,565. Median property taxes in Staten Island, Brooklyn, and Queens were approximately $2,500, and they were only $2,000 in the Bronx. Whether measured as percentage of the value of property or as a percentage of income, property taxes in New York City tend to be lower than in the surrounding municipal areas.

Individuals and families decide whether to live in New York City or its suburbs for many different reasons; lower property taxes are not one of the reasons to live in the suburbs.

While New York City, with stable and even rising housing values, has the luxury of reducing property taxes, most municipalities confront a very different situation. In much of the country, housing prices are stagnant or declining. According to the Office of Federal Housing Enterprise Oversight, housing prices in the West and in the eastern half of the Midwest are substantially below the levels of 18 months ago.

The lower housing prices also correspond to the greater difficulties in meeting mortgage payments. The most recent data from the Mortgage Bankers Association show that late payments and serious delinquency rates (defined as mortgages 90 days or more behind schedule or in foreclosure) are lower in New York than the national average for all loans and for subprime loans. At the end of 2007, more than 20% of subprime loans in Michigan and Ohio were seriously delinquent. Florida, Indiana, Massachusetts, Minnesota, Nevada, and Rhode Island had rates that exceeded 17.5%.

Declines in housing values pose challenges to municipal budget offices across America. Lower values mean that, even if all homeowners pay their property taxes, those revenues today and years from now will be lower than expected. Moreover, higher delinquency rates mean that many homeowners are not likely to pay property taxes at all.

Facing budget shortfalls, many municipalities are responding in predictable but counterproductive manners, such as increasing property taxes. Raising property tax rates in a declining real estate market almost certainly exacerbates the harm to the housing industry by discouraging new real investment and giving an additional incentive for current residents to leave.

The cycle of New York City’s economy may have peaked. As economic growth slows, the challenge for the city’s government is not to make a difficult situation worse. The temptation will be to raise taxes; New York’s residents and the city government would be all the poorer for it.