Property Taxes Soar to Close Budget Gaps
Policy + Politics

Property Taxes Soar to Close Budget Gaps

Property taxes are soaring, even as U.S. home values have plummeted 40 percent or more since 2006. State and local governments struggling to make ends meet have pushed up property tax bills for the average homeowner by about 20 percent over the past five years, and as much as 25 percent in some suburban counties in New Jersey and New York, such as Bergen and Westchester.

“One would think with the bursting of the bubble we’ve experienced in the housing market, that it ought to show up in falling property taxes,” says Pete Sepp, executive director for the National Taxpayers Union. “But the level and amount of property taxes keeps rising,” Sepp says. Property taxes are the only taxes whose revenues haven’t declined in a single year since 2000, according to the Census Bureau.

Most of a homeowner’s total property tax bill is levied by municipalities and school, fire, police and other districts, although 37 states also have their own property taxes. Local governments have come under enormous fiscal pressure in recent years as revenues from sales and income taxes have fallen due to a slowdown in consumer spending and a decline in earnings in the latest economic downturn.

To close these revenue gaps, it has become the norm to bump up property tax rates almost automatically, says Josh Barro, Walter B. Wriston fellow at the Manhattan Institute in New York. “Unlike other tax rates, property tax increases are on autopilot,” Barro says. “A municipality figures out how much it is going to spend, figures out its tax base, and [calculates] the property tax rate. In the most basic form, they’re setting the rate to meet a revenue target rather than saying these are the rates, now how much can we plan on spending.”

Beleaguered by complaints, some states and local governments have moved to try to quell taxpayer unrest. In Nevada, for example, where the housing market decline has been among the worst in the nation, the state government responded to a flood of property tax appeals by changing an outdated and ineffective system for assessing properties.

And in New Jersey earlier this month, Gov. Chris Christie signed into law a 2 percent cap on property tax hikes. New Jersey ranks as the state with the highest average property tax burden. The median annual property tax on New Jersey homes in 2008, the latest year for which information has been compiled, was $6,320, compared to the national median of $1,897, according to the Tax Foundation, a nonpartisan tax research group in Washington D.C. Connecticut, New Hampshire and New York are next in the lineup, with median property tax bills of $4,603, $4,501 and $3,622.

Municipalities also are grappling with a decline in state funds. Last year, the state cut off this lifeline to local governments.

“How do local governments respond? They can either reduce spending by $400 million to $500 million or increase property taxes – or do something in between, which is what most have done,” says Matthew Gardner, executive director of the Institute for Taxation and Economic Policy in Washington D.C.

Some local governments are under pressure to raise property tax rates because homeowners are appealing their property tax bills, especially in areas with the biggest housing market declines. In Clark County, Nev., where Las Vegas is located, the average home lost about 50 percent of its value in four years through the first quarter of 2010, according to Fiserv, a research firm in Cambridge, Mass. The number of property tax appeals to the county government exploded from 725 in the county’s fiscal year 2008, to 8,302 in the fiscal year that ended June 30, according to Michele Shafe, assistant director of the County Assessors Office. About two-thirds of the appeals were successful, she says.

Even where tax rates haven’t risen, property tax bills have been climbing despite a decline in market values. That’s because almost half of all states, including California, Michigan and South Carolina, have a reassessment cap, which sets a limit on how much a property’s assessment for tax purposes can go up each year.

“During boom times, assessed property values don’t keep pace with market values,” Gardner says. “The flip side comes out during economic slowdowns, when your property assessment will continue to rise to even things out.”

In Washington D.C., for example, assessed values can’t grow by more than 15 percent per year. If market values go up 30 percent one year, and the next year they don’t grow at all, a homeowner’s assessed value will go up 15 percent in the first year, and will still rise 15 percent in the second “to smooth the effects of property value growth,” Gardner says.

Political pressure to address rising property tax rates has most commonly resulted in caps that limit how much a property tax can rise. Massachusetts is often used as a model, because its cap has a long history: In 1980 , the state set a 2.5 percent annual limit on the amount that property taxes could rise. Barro at the Manhattan Institute says that has successfully slowed the growth in the property tax rate, while education (schools are the primary beneficiary of property tax revenues) in Massachusetts has not suffered. The state’s schools rank among the top performers in the nation.

But results elsewhere have been mixed, and some analysts are skeptical about whether New Jersey’s 2 percent cap will have much effect because it includes a number of exclusions and waivers, such as for healthcare costs and pension contributions.

When property taxes are capped, other taxes often inch up to compensate. In 2008, Montgomery County, Md., enacted a  10 percent cap on annual property tax increases, “but then it looked to other taxes to increase – there were new taxes on energy bills as well as cell phones,” Sepp says. “Sometimes these taxes are called surcharges, but in the end it’s the same to the person paying it.”