Wednesday, Jul 27 2011 2:47PM

A California state law which prevents local officials from raising property tax rates has caused many rural communities to suffer severe budget shortfalls as home values have fallen during the past few years, the Wall Street Journal reports.

According to the WSJ, a 1978 law limits property taxes to 1 percent of a home's assessed value, and doesn't allow officials to make major increases unless the home is rebuilt or resold.

The paper says the law was designed to protect seniors or fixed-income residents from struggling with rising property values, but wasn't designed for a situation in which prices fell significantly.

In other states, such as Washington and Hawaii, officials have raised property tax rates to make up for lower assessed values - a strategy the law prevents California communities from adopting. Now, many local counties and towns are faced with dropping tax revenues and cutting their budgets dramatically, hurting rural community development.

For example, the Journal reports Calaveras County has seen property values fall 18 percent during the past three years, while Stanislaus County has experienced a 21 percent drop during the past four. Calaveras County officials are now looking to cut next year's budget by a full 10 percent, trimming public health programs and other services.

Nathan Anderson, an economics professor at the University of Illinois, told the WSJ property taxes generally make up 45 percent of revenue for local governments.