A Lagging Local Tax
Property taxes once showed a sizable rate of growth. Not anymore.
As soon as the Great Recession started, states and localities felt it: Income and sales tax receipts plunged. Yet the downslide may have hit bottom. There are signs that those collections are starting to inch back up -- not with any real vigor but at least with more positive hills than negative valleys. Property taxes, however, may not see any real growth for a long time.
Chris Hoene, director of the Center for Research and Innovation at the National League of Cities (NLC), notes that from 2004 to 2009, the annual rate of property tax revenue growth was between 4 and 6 percent a year (adjusted for inflation). In 2010, the bottom dropped out. Property tax revenue sunk by 2 percent. "We are starting to see the decline we were expecting because of what happened with the housing market," he says.
I talked to Hoene about what property tax trends he's seeing, and what may lie ahead in this edited transcript.
The Wall Street Journal recently reported that "cities across the nation are raising property taxes, largely citing rising pension and health-care costs for their employees and retirees." Is this what you see happening?
The reassessment and collection of property tax revenues are showing a downturn that will continue for the next couple of years. In jurisdictions where there is still some local authority over tax rates -- and there are not that many -- you are probably going to see some raising of rates. It's going to be primarily in states in the Northeast where cities have responsibilities for general city operations and for schools. Otherwise, in the majority of the country, local property taxes, in terms of raising or decreasing the rate, are capped or limited in some way by state legislatures or voter measures.
For the last 15 years, in our annual survey at NLC, the percentage of jurisdictions considering raising property tax rates ranges between 17 percent and 25 percent. It may go a little higher during economic downturns but there's not much variation. So, the story line that the majority of jurisdictions are raising rates is just not true. There are some that will be, but the majority don't have the authority to do so or the political pressure is such that they won't.
What pressures are there on property tax rates?
The pressures that will drive raising of the rates in places that can raise them -- and that goes for sales tax and income tax rates as well -- are school expenditures. But the more common story is about pension and health-care expenditures. A jurisdiction is going to feel pressure to raise rates first, because revenue is going down and it has to balance the budget, and second, because it is trying to catch up to pension and health benefit liabilities. It's true that pressure comes from unfunded pension liabilities, but the way it is being cast in the national media is that it's everywhere when in fact it's just a few places.
In some places, the tax rate may go up because the locality wants to make sure it is meeting its debt obligations. The first and foremost thing most cities don't want to do is default on debt. In almost all instances, jurisdictions will raise tax rates or find new revenues to meet debt obligations before they default. In some places they are legally required to meet debt payments first and foremost.
Why is the property tax the most hated tax of all?
Well, in the last couple of polls that have come out, property and income taxes were equally disliked. For some reason, though, the traditional notion that the property tax is the most disliked tax is less true today. It used to be that the property tax bill came once a year and you had to pay a large amount. Now, the property tax is often incorporated in your mortgage payment so it's not the lump sum it once was. Administration of the tax is a bit more transparent, particularly in how the assessment is levied. Most places have a cap on how much the assessment can go up in a given year, so assessed value doesn't catch up with actual value. If everyone were forced to pay the sales tax monthly or quarterly, no one would like it either.
New York Gov. Andrew Cuomo is calling for a cap on the property tax in New York. Is that going against current trends?
There are some moves to cap property taxes in places where they aren't already capped and where the local property tax is overwhelmingly the biggest source of revenue. We've seen that in New Jersey which enacted a cap recently; Indiana moved to cap property tax over the last several years. Talk of a New York cap has been running the halls in Albany for a couple of years now. It tends to happen in places where local governments are more reliant on property taxes than [others], and where there weren't other local sources.
Are there different ways of capping the tax?
You can restrict property taxes by the amount by which the value of the home can increase for tax purposes. You can cap any changes in rate. So, you could say the rate can't go above inflation or income levels. You can also put a general cap on overall collection of revenue -- revenues can't go up by more than 1 or 2 percent. Usually we see caps on assessed value growth or rates or some combination of the two. How the cap is put in might be less the issue than whether there's enough flexibilility. In Texas, where the cap is on the total amount of revenue collected from property taxes, assessments can increase up to 8 percent in a given year, whereas some states set caps at 1 to 2 percent. That's where the caps becomes very restrictive.
Everyone was waiting for the decline in property tax revenue because of the real estate bust. What lies ahead?
The wave everyone is worried about right now is the commercial property market, which has lagged residential this time around. The commercial market stayed strong for a bit, but in the last year values have declined significantly. That will show up in another year or two. It's part and parcel of the overall problem. The economy may start to show signs of more marked growth, but the impact locally is still going to be registering at the low point of the downturn.