Key Takeaways
- Property taxes are the main source of revenue for local governments.
- They fund taxpayer services like roads, schools, and fire departments.
- When property values increase rapidly or by a significant amount, homeowners can end up paying much higher taxes without much change in the services they receive in return.
- Most states place limits on property tax increases to help keep taxes from rising too rapidly.
- Assessment limits and levy limits are two common tools policymakers use to constrain property tax growth.
- Assessment limits place an artificial cap on how much the assessed value of a home can increase annually. Assessment limits typically reset when a home is sold or transferred, and renovations also reset to market value when added.
- Assessment limits result in unequal tax burdens that hurt younger and lower-income home buyers, and discourage selling or improving houses, or building new ones.
- Levy limits are a better alternative. They cap how much more a local government can collect in property tax revenue from existing properties each year. New construction, which creates new expenses, is outside the cap, and the limits are subject to voter override if the government needs more revenue.
- If soaring property values mean property tax revenue will exceed the levy limit, the government must lower the tax rate to prevent the overage, keeping tax bills in check.
- Levy limits are a more effective policy to address property tax burdens.
- They protect against unlegislated tax increases while keeping tax burdens better aligned with property tax values and without penalizing homeowners for improving or selling their homes.
Transcript
When property values skyrocket, what happens to property taxes?
Property taxes are the main source of revenue for local governments, funding taxpayer services like roads, schools, and fire departments.
But when property values soar, homeowners can end up paying significantly higher taxes for basically the same services.
This is why most states have limits on property tax increases, but not all limits are created equal.
Assessment limits put an artificial cap on how much the assessed value of a home can go up each year, and typically reset when a home is sold, transferred, or renovated.
They help keep taxes low for long-time homeowners but also have unintended consequences.
Imagine two identical houses on the same street in a popular neighborhood. The city has a 2 percent assessment limit.
One house has had the same owner for 10 years, with modest tax increases.
The other was recently sold and reassessed at market value, leaving the new owner with a much higher tax bill for the same house.
Assessment limits result in unequal tax burdens that hurt younger and lower-income home buyers, and discourage selling or improving houses, or building new ones.
What’s the alternative? Levy limits.
A levy limit puts a cap on how much the local government can increase property tax revenue from existing properties each year.
If a city has a 2 percent levy limit and they collected $10 million in property tax revenue last year, they could only increase collections from those existing properties to $10.2 million this year. New construction, which creates new expenses, is outside the cap.
If soaring property values mean collections will exceed the limit, the government must lower the tax rate to prevent the overage, keeping tax bills in check.
These limits are also subject to voter override if the government needs more revenue.
Levy limits still protect against unlegislated tax increases, while keeping tax burdens better aligned with property values, and they don’t penalize improving or selling property.
Levy limits are the most neutral and effective way to limit property tax increases.
