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| Photo by Phil Hearing on Unsplash |
Local real estate taxes are the primary funding method used by municipalities in the United States. According to the Institute on Taxation and Economic Policy, 75% of the $800 billion raised annually to support local government spending comes from property taxes.
The Federal Reserve Bank of St. Louis put the total value of raised state and local property taxes in the U.S. at a little over $12 billion in 2023. The graph below shows how this amount grew over time and nearly doubled since the mid-2000s. The Tax Policy Center notes that localities generally levy taxes on real estate and states are more apt to tax only personal property, such as business equipment and furnishings in second homes.
The increasing burden on real estate property owners has spurred some states to consider abolishing property taxes. This is an interesting concept that begs the question: where will the funding for local government come from?
But first, a little history about property taxes.
A Tax Owed to Landlords and Kings
Property taxes were levied by kings in ancient Babylon, China, and Egypt, as well as other countries and city-states where land was taxed according to its production value. During feudal times, William the Conqueror instituted a land tax system whereby a list of property owners was kept in a book along with the land’s assessed value and the amount of tax due.
Until the 19th century, taxation schemes were disorganized and widely considered inequitable. States began the move toward uniformity, and the real property tax was seen as a realistic way for rural areas to raise money.
The 20th century saw growing discontent with property taxation methods. In some states, a mix of government entities and special districts would tax the same parcel multiple times.
Reform efforts introduced the concept of exemptions, property classifications, and training for tax assessors. The economic expansion following World War II brought higher real estate prices, values, and tax bills. The property tax revolts of the 1970s led to the passage of Proposition 13 in California and Proposition 2 ½ in Massachusetts, both measures intended to put the brakes on escalating property taxes.
Where the Real Property Tax is Under Attack
Rapidly rising real estate prices and values have renewed the anti-tax vigor of the 1970s. Several states are considering eradicating property taxes but are finding it difficult to replace the revenue adequately.
Texas
Governor Greg Abbott has made it clear that he supports abolishing the local property tax. Last summer, Abbott signed a bill to cut local taxes by $18 billion. In November, voters approved a constitutional amendment, known as Proposition 4, to increase the state’s homestead exemption and restructure how schools are funded. Essentially, surplus state funds were used to supplement school maintenance and operations budgets, thus reducing the amount needed from property taxes.
North Dakota
In 2012, voters failed to pass a ballot question to end local property taxation. In July 2023, a group spearheaded by former state legislator Rick Becker began circulating a similar petition that, by January of this year, garnered a little more than half the signatures needed to be placed on the November ballot.
Becker claims that the lost revenue of $1+ billion would be replaced by “legacy fund earnings and operation prairie dog funds”, plus ending wasteful spending.
Florida
House Bill 1371, first filed on January 5, 2024, would have increased the homestead exemption for property owners under the age of 65 to $100,000 and for homeowners over the age of 65 to $250,000. The bill would also have required a study of the impact of replacing the real property tax with a new consumption tax.
A new filing on February 1 left only the language regarding an impact study intact; on March 8, the bill died a quiet death in the State Affairs Committee.
Michigan
An initiative seeking a place on the November ballot calls for the Michigan property tax to be voluntary for all services but “police, fire, and road commissions”. Whether or not the petition is placed before voters, the subject has elicited fiery debate between property owners on both sides of the question.
Addressing Calls for Property Tax Relief
So far, no state has eliminated the local property tax since no comprehensive plan replaces the revenue. Raising or instituting consumption taxes has been floated as a solution, though such revenues would be harder to predict than taxes on a stable tax base like real estate.
Escalating demands for relief have resulted in legislative actions to address the problem, primarily by using Covid-related relief funds to subsidize property tax revenues. With those funds drying up, some states, like Colorado, have passed bills to limit assessed valuations for tax purposes while other states, like Georgia, will put constitutional amendments limiting assessed values on the November ballot for voter approval.
With home prices continuing to rise, the momentum to reign in property taxes is not likely to slow. CoreLogic’s May 2024 report notes a 5.3% increase in home prices from March 2023 to March 2024, higher than its year-ago prediction of a 4.6% price increase–with Northeastern states leading the way.
Massachusetts has one of the highest median home sale prices in the country. This chart from Rocket Homes, published May 8, shows our fair state sporting a median price of $571,436, with only California, Washington, D.C., and Hawaii commanding higher median prices. On May 24, The Mortgage Reports pegs Massachusetts’ median price at $622,639, nearly tied with Colorado and trailing California, Hawaii, Washington, D.C., and Washington state.
Notably, property owners in the Northeast have not joined in the current tax revolt. If home prices and values soar, that could change.
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