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ANALYSIS-Harvey-struck Texas counties face blow to property tax revenues

NEW YORK, Sept 8 (Reuters) - Texas communities flooded by Hurricane Harvey could see their property tax revenues sink, a financial blow that would leave many cities and counties struggling for years.

Property taxes are the top source of revenue for local governments in Texas, which depend on it to fund schools, roads and other public services.

With tens of thousands of homes and businesses damaged, officials foresee tumbling values when those structures are reassessed.

"This is something that is going to depress revenues, the only major revenues our counties have, immediately and for years," said Donald Lee, executive director of the Texas Conference of Urban Counties, a non-profit organization of 37 member counties. Texas is one of seven states nationwide that has no state income tax, leaving it with an outsized dependence on property taxes. The Lone Star state has the third highest average property tax rate in the United States, at 2.06 percent, according to a study by real-estate tracker ATTOM Data Solutions.

Neighboring Florida, which likewise has no state income tax, could face a similar challenge. The state is bracing for a direct hit from Hurricane Irma, one of the strongest storms ever recorded in the Atlantic. Florida counties like Miami-Dade, which is in Irma's immediate path, also count property taxes as their biggest revenue source.

Wind and flooding damaged at least $65 billion worth of property since Hurricane Harvey made landfall on Aug. 25 and tore across dozens of Texas counties in the following days, according to a preliminary report by AIR Worldwide, which evaluates the impact of catastrophes.

Assessors in Harris County, home to Houston, began visiting neighborhoods struck by Harvey this week, according to Harris County Appraisal District spokesman Jack Barnett.

But with roughly 1.8 million parcels of property in the county, where property taxes poured more than $1.4 billion into county coffers last year, the impact to property values was largely unknown.

Harris County Treasurer Orlando Sanchez echoed the sentiment. "There will be a hit, there's no question about it, but we'll have to see what that is," Sanchez said.

Still, analysts and local officials suspect Harvey could wallop property tax revenues to a degree few storms have in the United States.

"The flooding that we're seeing reminds me a lot of (Hurricane) Katrina," which devastated New Orleans in 2005, said Kate Boatright, a Dallas-based analyst with S&P Global Ratings.

Property tax collections in New Orleans dropped 17 percent after the storm, and did not recover to pre-Katrina levels until five years later, according to the city's financial reports.

Thousands of New Orleans workers and teachers were laid off while major streets lay broken for years. S&P downgraded the city's credit.

In Texas, certain Harvey-struck counties, like Harris, are starting from a stronger financial position than that of New Orleans and Louisiana when Katrina bore down, which could help with recovery, Boatright said.

Harvey, which brought a record 51.88 inches of rain to southeast Texas, also flooded large swaths of residential and commercial property.

By Friday, Texas counties and cities had reported at least 68,981 homes and businesses were destroyed or severely damaged in the storm, with another 145,944 properties affected in some way, the Texas Department of Public Safety said. Many were outside of designated flood plains.

Properties beyond mapped flooding areas typically are not required to have flood insurance, and the cost of rebuilding or repairing can fall on property owners.

"A lot of property owners do not have the money sitting around to rebuild," said Lee of the Texas counties organization.

As a way to mitigate the costs, owners will look for emergency reassessments of their homes to reduce their upcoming tax bills, he said.

Each county in Texas has an appraisal and collection system. Values are usually set in January and bills go out in October and November.

Even if property owners don't get reappraisals, revenues will still likely sink if the homes are not restored to pre-storm conditions by the next annual appraisals, Lee said.

The potential drop in revenue comes amid a state legislative fight over property taxes, which many Texas residents say have become unaffordable. Republican Governor Greg Abbott has supported an effort to make it harder for large counties and cities to raise property taxes. But that measure stalled in a special legislative session last month.

Texas-based Fitch Ratings analyst Steve Murray said he was concerned about the impact on smaller Texas localities, which typically have lower financial reserves to sustain them than do larger cities and counties.

The speed at which communities recover and grow back their tax bases will also depend on the timeliness and amount of federal aid, Murray said.

But that money can take months, and often years, to reach damaged communities after disasters.

"In the meantime, revenue is going to take a hit," Lee said. (Reporting by Laila Kearney; Additional reporting by Karen Pierog; Editing by Megan Davies and Marla Dickerson)