Property Taxes Constitute One-Quarter of Ownership Costs

Property taxesrnare collected by virtually all local governments; levied on land, commercialrnproperties, and residential homes.  Taxesrnare generally determined by a combination of the assessed value of thernproperty, the share of that value subject to tax, the property tax rate and therntax base.  These taxes are an importantrnsource of revenue at the local level although rates vary substantially acrossrnthe nation but in most localities are around $1000 per homeowner and below 1rnpercent of house value.</p

Two associatesrnof Brookings, the Urban Institute and the Urban-Brookings Tax Policy Centerrnhave done a comprehensive study of these taxes at the county level.  The authors are Benjamin H. Harris, policy directorrnof the Hamilton Projectrnand a fellow in economicrnstudies at Brookings and Brian David Moore, a research assistant at the Urban-Brookings Tax PolicyrnCenter.</p

Forrnresidentialrnhomeowners, the burden of the property taxrnmakes up about one quarter ofrnhomeownership costs over the coursernof a median duration of ownership.  Statesrnhave enacted a wide variety of laws to limit this burden including restrictionsrnon the formula for the rate and assessments and outright elimination of taxrnliability.  Homestead exemptions lowerrnproperty taxes for owner occupants, “circuit breakers” reduce taxrnlevels of specific homeowners such the elderly, abatements limit taxes ofrndesignated land or classes of taxpayers such as veterans.  Virtually all states limit the scope of propertyrntaxes in some ways but the nature and strength of the limitations vary widely.</p

The authors say that economistsrndo not agree on how to treat property taxes theoretically with some viewingrnthem as a benefit tax providing revenue for local amenities while others view themrnas a tax on capital, serving to depressrnreturns to capital and distortrninvestment decisions.  Characteristics such as progressivity andrnefficiency depend on one's interpretation of the theoretical classification of the tax.</p

Property taxesrnmake up 34.6 percent of total local revenues andrn63.9 percent of local own-source revenue.  They tend to be a stable revenue source asrngovernments set a revenue target then vary the tax rate accordingly.  Even in the aftermath of the Great Recession, in which property valuesrnin the United States underwentrnhistoric declines, property tax revenue fell less than house pricesrndid.</p

Using data from thernAmerican Community Survey (ACS), the authors found that mostrnhomeowners self-reported theirrnproperty tax burdens at betweenrn0.5 percent andrn1.0 percent of their homesrnvalue or $500 to $2,000. Thesernself-reported burdens vary substantially by region, withrnespecially high rates in the Northeastrnandrnparts of thernMidwest.   While property tax burdensrnvary substantially across counties-withrn2011 property taxes as a sharernof home values rangingrnfrom 0.2 percent (MauirnCounty, Hawaii) to 3.1 percentrn(Wayne County, New York)rn-most of thernvariation is due to variation across rather than withinrnstates, in part reflecting staternlaws and dependencernon property taxes versus otherrnstate and local revenue sources.  </p

That property taxes are a stablernsource of revenue is evidenced by figures gathered between 1981 and 2008.  Aggregate property taxes remained between 24rnand 27 percent of total revenues which includes intergovernmental transfers andrnbetween 37 and 41 percent of own-source revenues.  Prior torn1981 the property tax represented a larger component of revenues but taxrnrevolts in some states led to legislative changes to limit the taxes.  </p

Figure 1, local property tax revenues, p3</p

After 2008 the share of localrnrevenues increased, largely because property taxes responded more slowly to thernGreat Recession than other sources of revenue. rnChanges in housing prices usually lag in their effect on assessed valuesrnand in 2009, two years after prices began to plummet, property taxes peaked.  By Q1 2012 property tax revenues had fallenrnfor six straight quarters.  Other studiesrnhave found that the lag typically occurs over three years and even then declinesrnin home values do not lead to proportional declines in revenues as governmentsrnmay adjust tax rates in response to falling prices.</p

Revenues vary in their importance to local governments by region.  In the Northeastern states at least 30rnpercent of local revenues is derived from property taxes while many west coastrnand southern states garner less than 20 percent of revenues this way.  Taxes, on both a per capita and share of revenuernbasis, are highest in the Northeastern states and lowest in the South. </p

From ACS data the authors found that 60rnpercent of counties had an average tax burden between $500 and $1,500 perrnhomeowner.  Homeowners in about 13rnpercent of counties paid less on average and 27 percent paid more.  Only 3 percent of counties have average billsrnexceeding $4,000 and only nine had bills over $8,000. </p

Fig 2 Averagernproperty tax per household p 5</p

In thern2007-2011 period about 60 percent of counties had property tax bills of lessrnthan 1 percent of median home values. rnAbout 37 percent had bills between 1 and 2 percent of home values.  Of the three percent of counties withrnproperty taxes of more than 2 percent of home value only five counties exceededrn3 percent. </p

At thernstate level most states fell between $1,000 and $3,000 in per-householdrnproperty tax revenues but ten had averages in excess of $3,000 and eight,rnalmost all in the south, averaged less than $1,000.  Asrna sharernof housing values,rnresidents in all but 14 states paid between 0.5 percent and 1.5 percentrnin taxes. Residents in three states,rnDelaware, Hawaii, and Louisiana, paid 0.5 percent or less, whilernresidents in 11 states, Connecticut, Illinois, Michigan,rnNebraska, New Hampshire, New Jersey, New York,rnNorth Dakota, Texas, Vermont, andrnWisconsin, paid more thanrn1.5 percent.</p

Figure 3, property tax as share of valuern- p 6</p

The authors foundrnthat almost all variation in property taxes burdens in counties resulted from across-rnrather than within-state variation; that is almost exclusively as a result ofrndifferences in state rather than county-level tax regimes, differences in tax rates or housing prices.rn However, some states do exhibit more variation than others, some in terms of absolute dollars (Illinois, New Jersey,rnVirginia) and some as a share of house prices (Pennsylvania, Michigan, andrnTexas) or both (New York.)</p

Measured in dollars, the tax burden is highest in counties in California, Illinois, and the Northeast where the mean property tax burden typically amountsrnto $3000 or more.  This is in part arnreflection of high propertyrnvalues rather than a variation inrntax rates.  For example, the mean housing value for the ten states withrnthe lowest absolute property tax burden is $127,341, compared with an averagernhouse value of $356,085 in thernten states with thernhighest absolute tax burden.rnHouseholds in the Mountain West and Southeast regions tendrnto havernlower burdens regardless of metric.</p

Therncountiesrnwith the highest property taxesrnpaid per homeowner are those surrounding New York City. Westchester, Nassau, and Bergen countiesrnhad the three highest average tax burdens, all in excessrnof $8,500; this in part reflectsrnhigher house prices and higher reliance on property taxes to providernstate and local services. Therncounties with the highest property tax burdensrntend to be in New York and NewrnJersey, with all but three ofrnthe top 25 counties being fromrnthese two states. Conversely,rn24 counties had average property taxes below $250; almost allrnof these counties were located in Alabama or Louisiana. </p

The authors conclude that property taxes will continuernto serve asrna critical revenue source for local governments in the foreseeable future. But thernproperty tax isrnnot just relevant as arnstream of revenue. As it is oftenrntied to education spending,rnit has important consequences for school financing andrnthe health of public education. And, asrna tax on owner-occupied housing,rnthe property tax affectsrnthe cost of residential investment,rnthe housing sector, and thernpersonal finances of homeowners.

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