Are Property Tax Collections Rising or Falling?

There seems to be some confusion regarding the amount of tax homeowners are paying to state and local governments. For example, just recently the Wall Street Journal noted that local tax collections fell in the first and fourth quarters of 2010 due to “slumping real estate tax receipts.”

So is the tax burden on housing – a burden too often overlooked in federal tax policy debates – falling as a result of the Great Recession?

Not yet.

The publication of the Census data that generated recent press coverage reveals that real estate owners have in fact paid a growing share of state and local taxes during and after the Great Recession. Despite some quarterly ups and downs, total property tax collections are up almost $100 billion per year since 2006, an increase of more than 25%. And the share of all state and local tax collections allocable to property tax receipts has grown from about 31% of total state/local tax collections in 2006 to around 37% for 2010.

It is true that on a year-over-year basis, as reported in the linked press account above, property tax collections for fourth quarter of 2010 were down 2.9% from the fourth quarter of 2009. But taxes paid for the third quarter of 2010 were up more than 7% from the same quarter of 2009. You really have to look at annual totals to make sense of what’s going on. For example, even the recent, small decline in the total share of property tax collections – seen above – is due to a rebound in individual and corporate tax receipts rather than a decline in property tax collections.

But what about housing price declines? Shouldn’t that have reduced taxes allocable to property?

As the following chart illustrates, despite declines in housing prices (the Case-Shiller index, the green line below), property tax collections have not declined…yet. It is true that property tax collections lag changes in prices due to assessment lags. However, offsetting this is the fact that some jurisdictions are raising rates; 15% thus far, according to the National Association of Counties; compared to the just 2% who have raised sales tax rates.

Going forward, these data suggest that for 2011 two factors will be at play: declining assessments generally and rising rates in some jurisdictions for budget challenged local governments.

Nonetheless, housing’s importance to financing state and local governments operations is key, particularly in times of economic distress since property tax collections do not exhibit the variance seen with other sources of revenue. And perhaps more importantly, these data highlight that federal policies that would produce further housing prices declines would affect more than just homeowners. Without rate increases, such policies would reduce revenues for already cash-strapped state and local governments.

* Data footnote: the 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. We estimate, using IRS data for itemizing taxpayers claiming the real estate deduction and the American Housing Survey, that housing’s share of property tax collections is approximately 60%.



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