The city and state governments are bracing for a precipitous drop-off in the tax revenues they will receive from real estate transactions.

The city is forecasting a 39% decline in sales volume for all commercial transactions through 2009, and the median price of those transactions is expected to decline by 32%, according to its latest budget projections. Fewer sales at lower prices are leading to projections of declines of hundreds of millions of dollars in revenue derived from both the real property transfer tax and the mortgage recording taxes.

Since roughly 2002, low interest rates, a weak dollar, and rising office rents have paved the way for explosive growth in the commercial real estate market. The repeal of the “Cuomo Tax” on commercial real estate transactions 11 years ago increased the number of billion-dollar deals, which in turn helped fill city and state coffers.

In the last five years of the real estate boom, the real property transfer tax and the mortgage recording tax have been a windfall for the city and state, accounting for more than $4 billion in combined revenues last year.

The real property transfer tax imposes a levy on people or businesses selling property, who must pay up to 2.6% of the sale price to the city. The state has a similar tax, which takes in less than 1% of each transaction. The city and state also impose a mortgage recording tax. Depending on the type of property and its location, the taxes can range from 75 cents to $2.75 for each $100 of debt secured by the mortgage.

Last summer, the city was touting its $1.7 billion take in real property transfer taxes for the fiscal year, up $350 million from 2006 and almost eight times as much as was collected a decade earlier. In the last fiscal year, the city derived another $1.5 billion from the mortgage recording tax.

Now, city revenue from the real property transfer tax for 2008 is forecast at $1.5 billion, representing a decline of more than 14% from the 2007 level, while the mortgage recording tax is forecast at $1.15 billion for 2008, a decline of about 27%.

“It is obviously a trend that we are very concerned about,” the chairman of the City Council’s Finance Committee, David Weprin, said.

The state is also predicting a large drop-off in real estate tax revenue. Last fiscal year, the state collected more than $1 billion from the real property transfer tax, revenue that had doubled since 2003. The state projects that revenues from its real estate transfer tax will drop about 3%, amounting to a loss of $30.8 million from last year. The state budget projections do not break out the amount earned by its mortgage recording tax.

City economic analysts are warning that the tighter credit markets will affect the city’s revenues.

“Lenders have become reluctant to extend mortgages unless the borrower brings a much higher level of capital. Mortgage recordings taxes are forecast to decline 17.8% to $949 million in 2009 and to decline further by 1.8% and 1.3% in 2010 and 2011 respectively before growth returns in 2012,” the city’s budget report says.

The chairman of the real estate brokerage Massey Knakal, Robert Knakal, said he hasn’t seen a steep decline in the number of real estate transactions, but he predicted there would be a decrease in the number of large transactions, which he described as those above the $100 million threshold. According to Mr. Knakal, New York’s commercial real estate market accounted for about $45 billion in sales in 2006, climbing to $60 billion in 2007. “This year $60 billion is not likely. It’s going to be down primarily because you are not going to have those large property sales,” he said, adding that this was not “an optimal time to be putting a $500 million building on the market.”

The city and state have profited handsomely from the mega-deals. For example, the $1.8 billion sale of 666 Fifth Avenue a year ago netted $47.2 million for the city and $7.2 million for the state, and the sale of Stuyvesant Town and Peter Cooper Village in 2006 is said to have contributed more than $250 million to government coffers.

To close gaps in this year’s city budget, Mayor Bloomberg is calling on all city agencies, including the Department of Education and the Police Department, to make budget cuts this year and next year. The Department of Education will see its budget shrink by about $180 million this year and $324 million next year. Overall, the cuts and new revenue proposals are projected to save the city $1.42 billion.

The fiscal outlook stands in contrast to Mr. Bloomberg’s budget projections one year earlier, when he announced in January 2007 that he was expecting a $3.9 billion surplus, fueled by taxes from commercial real estate sales and record Wall Street profits.

On the state level, the Spitzer administration has had to grapple with a $5 billion budget gap. In his executive budget, Mr. Spitzer proposed closing the gap by raising numerous fees and assessments, shrinking agency costs by more than $1 billion, reducing Medicaid spending by changing hospital and nursing home patient reimbursement rates.

The chief of staff of the Independent Budget Office, a publicly funded city budget oversight agency, Douglas Turetsky, said that despite the decline, the taxes would still generate revenues far beyond historical levels. The budget highlights not only the the coming downturn but also the tax windfalls that accompanied a five year period of unprecedented growth in New York’s real estate market, he said.