Economic Development

A Revolting Development

Even as state revenues rebound, a property tax rebellion is brewing.
by | December 2004

After a three-year period in which state and local reliance on property taxes grew noticeably, sentiment for capping those taxes appears to be bubbling to the surface again. The issue is percolating in several state legislatures, including Nevada and Iowa. In South Carolina, the legislature recently passed a measure capping increases in property values at 20 percent for assessment purposes. At the local level, voters in Houston approved two competing tax-relief measures on November 2, although they gave more of their votes to an initiative focused narrowly on limiting property-tax and water-sewer rate increases.

Meanwhile, Maine voters this November resoundingly rejected a measure to cap property taxes at 1 percent of assessed value. The rebuff stemmed from fear of the initiative's impact on local government, but lower property taxes are still high on the public's agenda, says Sandy Maisel, director of the Goldfarb Center for Public Affairs at Colby College. "For six years, the legislature didn't do anything, and it should have," he says. Indeed, on Election Day, Democratic Governor John Baldacci said he would send the legislature a tax-relief measure this month and keep it in session until the issue is resolved.

Maine ranks first in property taxes as a share of personal income, according to the Washington, D.C.-based Tax Foundation, but it is hardly alone in having seen both rising property taxes and rising reliance on them. In a study prepared for the Wall Street Journal earlier this year, economist Robert Tannenwald of the Federal Reserve Bank of Boston found that from 2001 to 2004, property taxes rose substantially as a share of total state and local tax revenues-- jumping from 25.5 percent of total revenues in the first quarter of 2001 to 28.2 percent in the same quarter of 2004. "That is a rather unprecedented rise over a three-year period," Tannenwald says.

One reason for the jump is statistical: The relative share of personal income tax revenues fell by a comparable percentage, because of the stock market bust and the recession. But there also was an increase in property taxes overall, as states cut back on aid to localities. Faced with the choice of cutting spending or raising taxes, local governments tended to opt for the latter. "Politically, it might have been relatively easy to raise property taxes because property values have been rising so rapidly," Tannenwald says. "They could raise taxes without raising the statutory rate; in fact, they could even cut the rate a bit and still increase revenues."

It might seem, then, that as other tax revenues recover, the pressure on property taxes ought to decline--and with it, the political pressure to do something about them. In its study of state tax revenues for the second quarter of 2004, the Rockefeller Institute of Government at SUNY-Albany noted an overall increase of 11.3 percent compared with the same quarter in 2003--the fourth straight quarter of real adjusted growth after eight straight quarters of decline, moving state tax growth back to pre-2001 recession levels.

But Harley Duncan, executive director of the Federation of Tax Administrators, does not expect that to translate into reduced reliance on property taxes. "Revenues aren't growing fast enough to make up for the state aid cuts," he says. "And there are so many demands on states."

Rob Gurwitt  |  Former Correspondent

More from Economic Development