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How Will Property Taxes Fare in a Surging Housing Market?

State laws and local practices vary widely, so the impact on budgets will defy generalizations. But it’s unlikely that rising revenues will uniformly cover impending growth in municipal costs.

Rows of houses in a suburb.
Public policy and government finance people tend to love or hate the property tax. Supporters, most of them local government officials and notably budget officers, favor its consistency over economic cycles; it’s the most reliable and least volatile of all the major revenue sources that states and localities deploy. But political progressives and purist public-finance economists dislike its regressivity; lower-income residents bear a disproportionate share of the total levies derived from taxes on housing. Elderly homeowners living on fixed incomes also dislike the property tax, unless it’s been capped along the lines of California’s Proposition 13.

So it should come as no surprise that perspectives and opinions about how best to manage property taxes will be diverse and conflicting in coming years, with the prospect that residential property values will continue to surge in many communities at rates we haven’t seen since the inflationary 1970s. Add to that the complete lack of uniformity in property assessment procedures between various states, and even divergent local practices within some states, and the discussion becomes something like the parable of the blind men and an elephant: Everybody has a viewpoint on the topic but their factual knowledge is typically limited by their experience with local practices.

What sets the stage for some spirited debates and diverging public policy decisions in coming years is the housing shortage. Beginning in the Great Recession, homebuilders cut back new construction rates sharply and never returned to robust 2006 levels. Meanwhile, Gen Z and millennials stayed home longer than elder generations out of economic necessity, and only recently have begun shifting from rental housing to homeownership. The COVID-19 pandemic forced most of us to work from home, and that pushed some urban tenants (especially those with young families) to become suburban house-seekers. To make matters worse, homebuilders now face shortages of land, labor, materials and appliances. So new home construction now falls even shorter of demand, and existing homeowners are sitting tight because of a scarcity of available homes to switch into. And to further tighten the stock of housing for sale, institutional real estate buyers have been scarfing up huge portfolios of single-family homes and renting them out for investment income.

With demand for homes outstripping supply, prices have jumped the most in decades. In many communities, the increase in the past year has been double-digit, and for some it’s been double-digit for several years. At least for now, there is no end in sight. So housing inflation is now running well above the rate of national consumer inflation indexes, and that will likely continue until the Federal Reserve yanks the punchbowl with significantly higher interest rates in a year or two at the earliest.

So how will these increases in home values work their way into local government budgets, and how soon can city, county and school officials expect to see a surge in property tax revenues? Well, that depends on how one’s state administers property taxes, beginning with its basic property assessment rules and then the legal and practical limits that are placed on local officials for adjusting their tax rates.

On one extreme, or at least the edge of it, we have California’s Prop 13 rules: Until a property is sold, property assessments on an individual parcel cannot escalate more than 2 percent annually. And because local tax limits require a special vote, the revenue increases allowable for most municipalities, schools and agencies are capped. Only the incremental value of construction, property improvements and new assessments resulting from fresh property sales can augment this restricted level of revenue increases. If property values have increased over time by 20 percent on average from their capped assessments, but only 5 percent of a jurisdiction’s properties are sold in a given year, then the local total revenue increase in that year would be something close to 2.9 percent plus the taxes on new construction and improvements. It’s clearly an inflation-inelastic formula, along with gaping horizontal inequities between properties with similar market values.

On the other extreme, some states require annual property reassessments (often calculated by computer algorithms rather than site-specific appraisals) and allow local jurisdictions to set their own tax rates. In those places, the level of tax revenues is really based on budgetary and political decisions more than property price inflation, and jurisdictions can calibrate their tax rates to match budget growth — even when assessed values are escalating rapidly. These are the entities with maximum financial flexibility, and sometimes the spiciest debates over tax rates.

In between, there are some states that limit tax revenue increases one way or another. Some let the assessed values float with the market but limit total revenues to an inflation rate plus a factor for new construction and population growth. In some states, property reassessments are performed triennially or quadrennially; inflationary tax increases are deferred for a few years but eventually catch up to market levels, which is perplexing and aggravating to many taxpayers.

Add to such disparities the divergence between property price appreciation in various market segments: single-family houses, rental apartments, and commercial and industrial buildings. The latter are often dependent on the income generated for the property owner, which assessors often must consider in addition to brick-and-mortar replacement costs and comparable sales. In today’s economy, for example, malls are still suffering and may demand assessment relief, and office building owners may demand similar reductions using the income valuation approach to reflect vacant space and tenant concessions.
With this complex milieu of property tax conventions, it is impossible to make sweeping generalizations about how housing inflation will impact local government budgets. In some locations, tight revenue caps will result in local revenues falling short of higher costs for police cars, road-building supplies, health-care benefits, and eventually public payrolls. In others, elected officials have sufficient latitude to make ends meet by adjusting their tax rates — whether or not such decisions are popular with homeowners. Some of this will depend on whether overall inflation remains within the Fed’s recent 3.4 percent forecast.

One housing-related budgetary mismatch is predictable in many (but not all) jurisdictions: The cost of housing for younger workers is likely to increase faster than many public employers’ revenues, and eventually that will work its way into payroll increases that put pressure on their budgets. Labor statistics also portend a trend to raise pay for state and local employees.

For urban municipalities that now strive to induce their police officers and firefighters to live in the jurisdiction where they work as a way to foster community attachment, expect a double whammy. Even local governments’ commuting office workers may face rent increases and housing inflation that drive some to seek alternative employment at a higher pay. Eventually, therefore, rents and housing cost inflation will creep into the public payroll.

To paraphrase the iconic monetarist economist Milton Friedman, who said that wage and price inflation follows the money supply with long and variable lags, housing inflation will similarly impact local governments in coming years. It’s not a double-digit problem, but hotter than the Fed’s latest inflation forecast. The trend is obvious, although the impacts and remedies are both disparate and circumstantial.
Girard Miller is the finance columnist for Governing. He can be reached at
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