The Property Tax: Unsung Hero

By :: May 26th, 2010

It is not news that state tax revenues have been absolutely hammered in the current economic downturn. But you may be surprised to learn that one local tax has held up relatively well.  It is, of all things, the property tax.  How can that be, you ask, if so much of the economic mess was caused by a collapse of a housing bubble?


Last week a Tax Policy Center conference on the housing crisis and its impact on state and local governments took a close look at why.   


In part, it’s because the dog hasn’t barked yet. Nationally, property tax revenues have yet to fall (see graph) both because the levy tends to be backward-looking (it takes a while for assessed values to catch up with reality on both the upside and the downside) and because local governments can raise rates. The strength of the property tax was the main driver of the small positive growth in overall state and local taxes for the fourth quarter of 2009.  This was a theme in many of the presentations.  New research by Byron Lutz, Raven Malloy and Hui Shan illustrates that house value declines don’t necessarily lead to lower property taxes, and when they do, it can take a while. With luck, by the time property taxes do dip, sales and income taxes will be recovering. The good news is that if property taxes could stand up in this recession, which was both deep and caused by a housing collapse, they can stand up to most crises. 


Before getting too optimistic, keep in mind that Lutz, Malloy and Shan also found the housing decline affected other taxes (including sales taxes on construction goods and real estate transfer taxes). But the effects were not consistent across the country.  These taxes fell by a lot in markets in Florida, Arizona, and Nevada, but not in others. Both the depth of the problem and the response of state and local governments varies widely among both regions and governments. The lesson for Congress is that not every place necessarily needs federal aid to balance its budget or keep from laying off public sector employees.


One final lesson from the conference was that government spending is remarkably sticky and cutting state services will be tough to do. States struggle to do more than trim around the edges of long-standing spending programs.  Deviating from these patterns will require making hard choices.


Unfortunately, states may be facing a new normal. Budgets may be out of balance for the next 4-5 years and even when tax revenues recover, they won’t return to pre-recession levels. We may be entering a period when aggregate tax revenues will grow just 1 or 2 percent annually rather than the 6 percent rate we’ve seen over the last 20 years. Stable property taxes have helped keep matters from being much worse, but state and local governments face some difficult choices in coming years. 


  1. Anonymous  ::  11:51 pm on May 26th, 2010:

    The key is for local officials to have courage. If they lack it, or if they have greater convictions than sense, they will be in a world of hurt – especially if they have brain washed their voters with anti-tax rhetoric.

  2. Anonymous  ::  11:52 pm on May 26th, 2010:

    It would be interesting to see if there is a difference between governments in areas where Tea Partiers hare included and ones where they are not.

  3. Anonymous  ::  7:16 pm on May 27th, 2010:

    In the same way that unindexed taxes such as the estate tax and the AMT are defective, property tax limits tend to be defective. Limiting increases to 2% or 2.5% per year will fail badly when inflation accelerates. The more money the federal government prints to roll over its bonds, the more (in real terms) the states will lose in property taxes.
    By the way, property taxes are collected locally but they no longer controlled locally. Courts have ruled that public school financing must be equalized statewide, so states now collect the property taxes and give some of it back to local governments. Without a major source of revenue they control, local governments have become little more than divisions of their state government.

  4. Anonymous  ::  7:53 pm on May 27th, 2010:

    You can equalize spending in two ways. One is to pool property taxes. The other is to supplement with sales or income tax revenue.
    I am frankly shocked that no one has brought up Land Value Taxes yet.

  5. Anonymous  ::  5:27 pm on June 1st, 2010:

    Land value tax? As in Henry George?
    I have often wondered about that myself. But then again, that would upset a lot of special interests, too.
    Of course, I live in Pop. 13 California. CA is totally messed up and is America's Greece. But at least we have Prop 13. They are making noises about trying to 'amend' (translation: abolish) it as the state becomes more and more desperate.

  6. Anonymous  ::  4:32 pm on June 2nd, 2010:

    This limited elasticity is a good thing only with respect to its effect upon revenues and budgets in general. We must also remember the greater economic effect, which in the case of this mildly regressive tax increasingly limited in its connection to ability-to-pay, is generally negative. Not enough usually to offset the positive effect on budgets (buoyed spending and public investment), but negative enough to avoid applause or the encoragement of its weight or prevalence, given the far more preferable option of increased income tax revenue, through reduced tax expenditures, modernization and increased graduation of brackets, or, failing these, increased rates. When a regressive tax delivers revenue stability in downturn, this is a sign that those least able to pay are picking up the slack–not a very wise way to go in any macroeconomic sense.

  7. Anonymous  ::  7:06 pm on June 2nd, 2010:

    The author is correct that property tax assessments tend to lag behind the market and this helps jurisdictions maintain revenue during a recession (at least in the short run). However, this does not make the property tax a “hero.”
    The portion of the property tax that falls on building values in regressive. Furthermore, by inflating the cost to construct, improve or maintain buildings, it reduces the quantity and quality of built space (for businesses and residents alike). This is hardly heroic.
    The portion of the tax that falls on land value does not diminish the amount of land available for use. If it were used more agressively, it would help make infrastructure self-financing by recapturing publicly-created land values. Futhermore, taxes on land value tend to incentivize development where land values are highest — which is near infrastructure where we want development to occur.
    Harrisburg, PA reformed its property tax in the 1970s by reducing the tax rate on buildings and increasing the tax rate on land. This reform helped Harrisburg eliminate scores of vacant buildings and lots in its downtown. For more information, see the cover article of the March issue of PM Magazine (ICMA).

  8. Anonymous  ::  8:19 pm on June 2nd, 2010:

    Some of what falls on improvements is regressive, except to the extent that the tax funds services to those improvements – like police, fire and housing inspections – as well as sanitation and public works. Ideally, taxes on improvements should reflect what an HOA would charge for the same services.

  9. Anonymous  ::  9:57 pm on June 4th, 2010:

    I just wanted to clarify that the chart included isn't from Lutz et. al but is from a presentation Don Boyd of the Rockefeller Institute gave.

  10. Anonymous  ::  8:34 pm on August 7th, 2010:

    Local governments will keep property taxes high regardless of home prices/values. They will adjust the mill rate to match their spending.

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