Property Tax Backlash Brewing in the States?

August 25, 2006

Andrew Chamberlain

Andrew Chamberlain

Although soaring home prices have slowed recently, the rapid run-up in real estate values in the last decade has led to booming property tax bills around the nation. Not surprisingly, support for property tax reform is building among irritated homeowners.

Today’s USA Today ran two pieces exploring the growing dissatisfaction with rising state and local property tax bills. Our annual tax policy survey is quoted in the first piece, titled “States attack property taxes“:

At least 10 states have cut property taxes this year or are preparing to do so, part of a tax mini-rebellion that has been brewing alongside higher home prices.

States are raising other taxes, especially the sales tax, and spending budget surpluses to replace lost property tax revenue. That makes the trend more of a tax shift than a net tax cut. Political leaders are pledging that local government and schools, which depend on property taxes, will be protected.

“We will replace the money so that education doesn’t get shorted,” says Idaho Gov. James Risch, a Republican who has called a special legislative session today to cut property taxes.

Polls show the property tax is the most unpopular tax. A 2006 survey by the Tax Foundation, a non-partisan tax research group, found 39% considered it “the worst” state or local tax, about twice as many as thought that of the state income or sales tax…

Property taxes have risen 27% since 2000, after adjusting for inflation and population growth. That’s less than the 41% inflation-adjusted increase in home values, but it’s twice as fast as the growth in sales or income taxes.

Property taxes now consume a greater share of personal income — 3.4% — than any time since 1992, according to a USA TODAY analysis.

And from the second, titled “Soaring property taxes elicit backlash among homeowners,” which also quotes the Tax Foundation on the likely reasons behind the perceived unfairness of property taxes among many taxpayers:

Fallout from property tax cuts is wide and complicated. The changes are shifting public school financing from locally controlled property taxes to state-controlled sales and income taxes.

The changes also are carving out new winners and losers. Tax exemptions are being expanded for the elderly, the disabled, veterans and people who have owned their homes for long periods. New Jersey is considering taxing business property at a higher rate than residential property, a practice some other states use.

The property tax is under fire in states that have high property taxes, such as New Jersey, and states that don’t, such as Idaho. The rebellion is mostly in states that have had soaring home values, but it’s also found in some states that haven’t, such as Indiana.

“People hate the property tax because it’s visible,” says economist Andrew Chamberlain of the Tax Foundation, a research group in Washington, D.C. “One of the great ironies of tax policies is that people hate the tax that’s easiest to see, not necessarily the one that costs them most.” State and local governments collect more in sales taxes than in property taxes.

For more on the good, the bad and the ugly of state and local property taxes, check out our “Property Taxes” section. Also, be on the lookout for our forthcoming report on growing property taxes around the nation, due out in the coming weeks.

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A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

Inflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.

A tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax.

A sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.

A property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services.