Property Taxes Account for 40% of State and Local Revenue Among Major Sources

March 26, 2014

According to the latest data from the Census Bureau, taxes paid by homeowners and other real estate owners remain the largest single source of revenue for state and local governments. Beginning with the third quarter of 2013, the survey of State and Local Government Tax Revenue was streamlined and now includes only four major sources of revenue; property tax, state and local individual income tax, corporate income tax, and sales tax. At 40.2%, property taxes represent the largest share of revenue generated from the four major sources.

By focusing on only four sources, the quarterly survey no longer includes data on revenue from miscellaneous sources like motor fuel taxes, motor vehicle taxes, tobacco taxes, and alcohol taxes. In the second quarter of 2013, prior the change, revenue from miscellaneous sources was $74 billion or 19.3% of total state and local tax revenue for the quarter.

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The major revenue source with the largest increase over 2012 was state and local individual income tax receipts. In 2013, approximately $344 billion in taxes were paid. This was an increase of increase of 10.0% from 2012. Corporate income tax receipts increased 6.6% and sales tax receipts increased by 3.4% over 2012.

State and local government property tax collections continue to increase on a nominal basis. In 2013, approximately $488 billion in taxes were paid by property owners. This was an increase of increase of 3.1% from 2012.

As state and local government property tax collections from the four major sources of revenue increased in recent years, the share of local tax collections due to property taxes fell from a high of 44.9% in the third quarter of 2010 to the current share of 40.2%. The average share for property taxes since 2000 is 39.2%.

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State and local individual income tax, corporate income tax, and sales tax collections are very responsive to changing economic conditions. The changing share of local collections is due predominantly to fluctuations in state and local individual income tax, corporate income tax, and sales tax receipts. For example, in the fourth quarter of 2009 state and local governments collected $60 billion in individual income tax. In the fourth quarter of 2013, the most recent, state and local governments collected $77.5 billion in individual income tax. The dramatic 29% increase in state and local individual income tax receipts is due to improving economic conditions, rising incomes, and higher individual income tax rates in several states.

Although house prices experienced healthy increases over the last two years, one should not expect property tax collections to increase significantly. The S&P/Case-Shiller House Price Index – National Index grew by 2.6% on a not seasonally adjusted basis in the fourth quarter and 11.4% last year. Instead, lagging assessments and the ability of local jurisdiction to make annual adjustments should lead to only modest increases.

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* Data footnote: Census data for property tax collections include taxes paid for all real estate assets (as well as personal property), including owner-occupied homes, rental housing, commercial real estate, and agriculture. However, housing’s share is by far the largest when considering the stock of both owner-occupied and rental housing units.


Land Value Tax: An Alternative to the Property Tax

November 18, 2013

An alternative to the local property tax, the land value tax offers certain benefits over the economically inefficient property tax. However, its novelty and legal and political challenges continue to make it an elusive option at this time.

According to numerous polls, the most hated tax is the local property tax. Economists Marika Cabral and Caroline Hoxby argue that Americans are averse to the property tax because it is the most noticeable and important major tax. In addition, many economists agree the property tax is economically inefficient because it taxes the value of improvements, which acts as a tax on economic development. A tax is said to be inefficient if another system could raise the same revenue while increasing economic growth.

One proposed alternative to the property tax is the land value tax. The land value tax would allow state and local governments to maintain control over a significant source of tax revenue while addressing issues of efficiency.

Although not used extensively, the land value tax is more than a theoretical abstraction. Local governments in New York, Pennsylvania and Hawaii have used it. In addition, twenty-five nations use some form of the land value tax.

The land value tax has been implemented in two forms. In a pure land value tax system, the tax is applied to the value of the land with no tax applied on improvements. In a split-rate tax system, land value is taxed at a higher rate than improvements. For example, in Harrisburg, the 2008 tax on the value of land was 28.67 while the tax on improvements was 4.78, a ratio of 6 to 1.

In addition to being more economically efficient, proponents argue that the land value tax provides an incentive for development. The evidence to support this conclusion is limited by the availability of data within the United States. Economists Oates and Schwab in a 1997 paper find a positive association between adoption of land value taxation and building activity in Pittsburgh. In a 2000 paper, economists Plassmann and Tidemann use data from 15 Pennsylvania municipalities and find a direct, positive relationship between the tax differential between land and improvements and the number of building permits. In other words, under a split-rate system, Plassmann and Tideman find evidence that the higher the land tax in relation to the improvements tax, the more building activity occurs.

Elimination of the inefficient property tax system in the U.S. would be challenging because of the importance of the tax revenue to state and local governments. Property taxes are the largest single source of revenue for state and local governments, accounting for over one-third of all revenue. Opponents of the land value tax also argue that it encourages overdevelopment. The land value tax was largely blamed for the overdevelopment of Waikiki. Although unwanted higher density was most likely the result of poor planning rather than the land value tax, the county of Hawaii abolished the land value tax in 2002.

A recent study, Assessing the Theory and Practice of Land Value Taxation, lays out a framework for implementing the land tax. Another study, Land Value Taxation – Theory, Evidence, and Practice, includes an exhaustive discussion of legal issues that need to be overcome in each state in order to implement the land value tax. The legal and political challenges of changing the current property tax system are daunting.

In spite of these challenges, Connecticut signed into law this June a pilot program allowing three municipalities the option of implementing a land value tax. The success or failure of the program will likely determine the programs expansion within the state.


A Good Source for Property Tax Information

November 6, 2013

Property tax systems vary markedly in the United States. From assessment ratios to valuation standards even the terminology is inconsistently applied. The differences exist not only across states but often within states. In Illinois, for example, real property is assessed at 33.33% of fair cash value for all counties except those with a population of more than 200,000.

Thankfully, keeping track of these differences has been made less difficult with the help of the Lincoln Institute of Land Policy.  The Lincoln Institute of Land Policy is a private operating foundation whose mission is to advance the study of land policy and land related tax policy. The foundation maintains an online database of Significant Features of the Property Tax.

The online database provides information on the property tax systems of all 50 states and the District of Columbia.  Topics tracked include property tax fundamentals, property tax base, property tax relief, and incentive programs. Property tax fundamentals are further divided into property tax rates, tax limits, real estate transfer charges, and legal definitions of property. The property tax base is divided into tax base by property type, value standard, and assessment ratios.

The on-line database is free and allows users to create tables for selected topics. The exportable tables make it easy to compare property tax features across states and years. The resource is useful not only for academics but also for homebuilders interested in quickly comparing property tax systems or builders interested an unfamiliar property tax environment.

A sample of the type of data available is provided by selecting the link below (Significant Features – North Carolina & Texas). It is important to note the that on-line database provides more information including descriptions of residential property tax relief programs, descriptions of tax limits, and statute or tax code.

Significant Features – North Carolina & Texas

Don’t forget that NAHB’s website is also a good source of free property tax information.  After persuading the Census Bureau to include summary property tax statistics in its American Community Survey data base, NAHB regularly uses these data to calculate effective property tax rates in a consistent manner for areas across the country.  NAHB’s August 2011 Special Study, for example, published effective property tax rates for cities and counties.


Real Estate Taxes by State 2012

October 15, 2013

The median real estate tax bill in New Jersey was $7,183, the highest in the nation, according to the recently released 2012 American Community Survey (ACS). The median real estate tax bill, by contrast, in Alabama was $535, the lowest in the nation. Eight of the top ten highest real estate tax states are located in the Northeast while a majority of the lowest tax states were found in the South.

The ACS is a survey conducted by the U.S. Census Bureau to determine how federal and state funds are distributed. About 3.5 million addresses are randomly selected to participate in the survey each year. In addition to basic demographic and financial questions, participants in owner-occupied units are asked to provide the amount of real estate taxes paid.  If taxes are paid in installments, the payments are converted to a yearly basis. The total amount provided by participants includes real estate taxes on the entire property (land and buildings) payable to all taxing jurisdictions.

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Although total real estate taxes paid are informative, it is often useful to compare effective tax rates per $1,000 of property value by state. These numbers are presented in the fourth column of Table 1 below. Hawaii has the lowest effective real estate tax rates in the nation, $2.77 per $1,000 of home value. Two states with the highest effective rates are Illinois and New Jersey, where rates exceed $23 per $1,000 of property value.

Table 1 – Property Values and Real Estate Taxes (RET) in 2012

Real estate taxes are positively correlated with home values. However, cross-country differences in home values do not explain well differences in median real estate tax bills. For example, according to the 2012 ACS, Hawaii has the highest median housing value of owner occupied units but relatively low median real estate tax bill (34th) and the lowest effective tax rate.

Instead property tax systems vary significantly across states. Local jurisdictions in Illinois, for example, assess real property at 33.3% of fair cash value, whereas in Idaho the standard assessment is 100% of market value.

In addition, although property taxes remain the largest source of revenue for state and local governments in the United States, some states rely more heavily on property taxes as a source of revenue than others. For example, in Texas the median real estate tax bill is relatively high (16th) but residents do not pay an individual income tax at the state level. Alabama, on the other hand, has the lowest median real estate tax bill, but residents pay an individual income tax of 5% on all income over $5,000.

Therefore, when comparing residential tax bills across states it is important to consider government finances. The Census Bureau’s Annual Survey of State and Local (S&L) Government Finances helps explain some of these sizeable cross-country differences in the median real estate tax bill. The last column of table 1 shows statewide property taxes as a share of S&L government own-source tax revenue, based on data from the most recently available 2011 survey.

A simple correlation analysis confirms that the extent to which state and local governments rely on property taxes to fund local services greatly affects the median real estate tax bill. The correlation between median real estate tax bill and statewide property taxes as a share of S&L government revenue is 0.66. At the same time, the correlation between state median real estate tax bill and median home values is only 0.49. [1]

[1] Correlation indicates the strength and direction of a linear relationship between two variables and ranges from -1 to 1. Larger correlation numbers (i.e., further away from zero) mean that variables tend to move closer together in the same (positive correlation) or opposite direction (negative correlation). Zero correlation means that changes in two variables are completely independent or unrelated to each other.


Property Tax Remains Largest Revenue Source

September 24, 2013

According to the latest data from the Census Bureau, taxes paid by homeowners and other real estate owners remain the largest single source of revenue for state and local governments. At 34%, property taxes represent a significantly larger share than the next largest sources: individual income taxes (24%) and sales taxes (21%).

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State and local government property tax collections continue to increase on a nominal basis. From the third quarter of 2012 through the end of the second quarter of 2013, approximately $479 billion in taxes were paid by property owners. This was a small increase from the previous trailing four-quarter record of $477 billion, set last quarter.

The modest changes throughout the Great Recession in nominal state and local government property tax collections are due in large part to lagging property assessments and the ability of local jurisdiction to make annual adjustments to tax rates. In general, declining property values are not reflected in the system until a few years after the decline occurs. Once assessments are updated, property tax authorities can adjust rates thus maintaining a desired level of collection.

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As state and local government property tax collections increased in recent years, the share of local tax collections due to property taxes fell from a high of 37.4% in the second quarter of 2010 to the current share of 33.5%. The average share for property taxes since 2000 is 32.4%.

The changing share of local collections is due predominantly to fluctuations in all other tax receipts. State and local individual income tax, corporate income tax, and sales tax collections are very responsive to changing economic conditions. For example, in the second quarter of 2009 state and local governments collected $76 billion in individual income tax. In the second quarter of 2013, the most recent, state and local governments collected $114 billion in individual income tax.  The dramatic 50% increase in state and local individual income tax receipts is due to improving economic conditions, rising incomes, and higher rates in several states.

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The S&P/Case-Shiller House Price Index – National Index grew by 7.1% on a not seasonally adjusted basis in the second quarter and 10.1% over the previous four quarters. Although house prices remain on a path toward recovery, one should not expect property tax collections to increase significantly. Just as declining property values did not lead to a significant decrease in property tax collections, it is unlikely that rising property values will lead to dramatic increases in property tax collection. Instead, lagging assessments and the ability of local jurisdiction to make annual adjustments should lead to only modest increases.

* Data footnote: Census data for property tax collections include taxes paid for all real estate assets (as well as personal property), including owner-occupied homes, rental housing, commercial real estate, and agriculture. However, housing’s share is by far the largest when considering the stock of both owner-occupied and rental housing units.


Property Tax Collections Reach Nominal High

June 26, 2013

During the last four quarters, state and local government property tax collections reached a historic high on a nominal dollar basis, according to the latest data from the Census Bureau. From the second quarter of 2012 through the end of the first quarter of 2013, approximately $478 billion of tax was paid by property owners. This exceeds the previous trailing four-quarter record of $476.5 billion, set at the end of the third quarter 2010.

Property taxes are an important source of revenue for state and local governments to finance services, particularly education. Some analysts expected large declines in property tax collections in the wake of the Great Recession. However, this drop never happened, despite historic price declines for owner-occupied housing. At its peak, property tax collections had fallen only 2.26%. 

 

S&L prop taxes

 

As state/local income and corporate tax receipts recovered in recent years, the share of local tax collections due to property taxes fell from recession highs. The average share for property taxes since 2000 is 32.3%, while the current share stands at 33.6%.

prop taxes and housing prices

The decline in housing prices since 2006 led many to incorrectly conclude that property tax payments would also significantly fall. According to the Case-Shiller national house price index, with the recent rebound in values, housing prices are down on net 26% over the last six years. Yet property tax collections have actually risen. While the stock of taxable real property has increased, the disconnect between the decline in values and total taxes paid means that the effective tax homeowners pay on their homes remains high. 

There are several reasons why property taxes have not dropped with housing values. First, assessments of value tend to lag. Second, property tax authorities can adjust tax rates (such as millage rates in many jurisdictions) thus increasing rates as property values decline, holding receipts approximately constant. However, such policy actions mean the effective rate of tax (taxes paid divided by the property value) on the property increases.

Taxes paid by homeowners and other real estate owners remain the largest single source of revenue for state and local governments. At 34%, property taxes represent a significantly larger share than the next largest sources: individual income taxes (23%) and sales taxes (21%).

S&L taxes

* Data footnote: Census data for property tax collections include taxes paid for all real estate assets (as well as personal property), including owner-occupied homes, rental housing, commercial real estate, and agriculture. However, housing’s share is by far the largest when considering the stock of both owner-occupied and rental housing units.

 


Property Tax Share Falls as Total Tax Receipts Increase

March 28, 2013

Property taxes are an important source of revenue for state and local governments to finance services, particularly education.

Some analysts expected large declines in property tax collections for state and local governments in the wake of the Great Recession. However, this drop has never happened, despite historic price declines for owner-occupied housing. In fact, recent data demonstrate that nominal property tax collections are on the rise again, leading to higher effective property rates for homeowners and other property owners.

According to the latest data from the Census Bureau, over the course of 2012, approximately $474 billion of tax was paid by property owners.

prop tax share

As state/local income and corporate tax receipts recovered in recent years, the share of local tax collections due to property taxes fell from recession highs.

The average share for property taxes since 2000 is 32.3%, while the current share stands at 34.1%. Consequently, housing and other real estate owners are still paying a higher than average percentage of total state and local government tax receipts.

prop taxes and house prices

This elevated tax burden is significant, especially when one considers the decline in housing prices since 2006 – a decline that led many to incorrectly conclude that property tax payments would also significantly fall. According to the Case-Shiller national house price index, with the recent rebound in values, housing prices are down on net 29% over the last six years. Yet the decline of property taxes paid from the peak level is negligible (0.5%). This means that the effective tax homeowners pay on their homes remains high. 

There are several reasons why property taxes have not dropped with housing values. First, assessments of value tend to lag. Second, property tax authorities can adjust tax rates (such as millage rates in many jurisdictions) thus increasing rates as property values decline, holding receipts approximately constant. However, such policy actions mean the effective rate of tax (taxes paid divided by the property value) on the property  increases.

Taxes paid by homeowners and other real estate owners remain the largest single source of taxes for state and local governments. At 34%, property taxes represent a significantly larger share than the next largest sources: individual income taxes (22%) and sales taxes (21%).

S&L tax receipts

* Data footnote: Census data for property tax collections include taxes paid for all real estate assets (as well as personal property), including owner-occupied homes, rental housing, commercial real estate, and agriculture. However, housing’s share is by far the largest when considering the stock of both owner-occupied and rental housing units.


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