Property Tax Receipts Decline as Housing Weakness Continues

Property taxes are an important source of revenue for state and local governments to finance services, particularly education.

Census data of state and local government tax collections for the second quarter of 2011 indicate a small decline on an annualized basis to $469 billion. Total property tax collections from the third quarter of 2010 through the second quarter of 2011 were down 1.8% on a year-over-year basis. This was the first such decline since the Great Recession began.

Moreover, as the chart above demonstrates, the share of state and local government tax collections due to property taxes continues its decline, falling to 35% in the second quarter of 2011. However, it is important to note that this share remains relatively high compared to recent history. The average share since the year 2000 has been 32%, so housing and other real estate owners are still paying a higher than average contribution of state and local government tax receipts.

This elevated tax burden is significant, especially when one considers the decline in housing prices since 2006. According to the Case-Shiller house price index of the 20 largest metropolitan areas, housing prices are down almost 32% over the last 5 years. Yet the decline of property taxes paid is negligible thus far (1.8%). This means that the effective tax homeowners pay on their homes remains high. However, as assessments catch-up to accurately reflect current fair market value of owner-occupied homes, property taxes are expected to decline both in terms of the total amount paid and the share of all taxes collected.

And despite the recent decline in the share of total taxes due to property tax, taxes paid by homeowners and other real estate owners remain the largest single source of taxes for state and local governments. At 35%, property taxes represent a significantly larger share than the next largest source: sales and gross receipt taxes at 23%.

Given the ongoing weakness in housing due to the lack of robust job creation and tight credit conditions, recent declines in property tax collections for state and local governments emphasize the importance of housing for the U.S economy. Federal policies that would weaken housing prices by undermining demand would not only affect homeowners and would-be homebuyers, but such proposals would also harm the largest revenue source for state and local governments, a source that is expected to diminish as assessments continue to fall.

*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. However, housing’s share is by far the largest when considering the stock of both owner-occupied and rental homes.

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2 Responses to Property Tax Receipts Decline as Housing Weakness Continues

  1. Jeff Skall says:

    “However, as assessments catch-up to accurately reflect current fair market value of owner-occupied homes, property taxes are expected to decline both in terms of the total amount paid and the share of all taxes collected.”

    I think this statement from the acticle is incorrect as it fails to acknowledge how property taxes are assessed. Property taxes, in its simplest form, are the total municipal budget for the region (for the ascribed categories that property taxes can be collected for) divided by the total assessed value of all real estate for the designated region. This creates a millage rate. If the values in the region fall, the millage rate goes up. If the values in a region rise, the millage rate goes down. Assuming that all property falls equally in value, the individual share of the tax burden does not change, it is just an increase in the millage rate. Changes in property taxes paid are only impacted when an INDIVIDUAL property value is assessed at a disproportionally higher or lower rate than those within the region.

    The reason for the decline would be because municipalities set their respective millage rates and then there were appeals to values that subsequently reduced values for many individual properties that impacted how much was to be collected (the municipality can’t go back and redistrubute the reduced collections from the successful appeals). As values are reduced/reset in municipalities, the millage rates will again redistribute the burden accordingly.

    The conclusion is that as long as values are equitably representative (regardless of higher or lower valuations), and there are no changes in the regional budgets, the individual property owner will continue pay the same amount it property taxes, regardless of which way the tides are turning.

  2. Robert Dietz says:

    Jeff —

    Thanks for the thoughful reply. I agree with you on the technical points of how property taxes are, in general, collected, especially with respect to the relative tax burdens of individual homes.

    But given that total property tax collections are declining, and most economists expect them to continue doing so, it must be the case that regional budgets are in fact allowing the “effective tax rate” on homes to decline, given that they have risen in recent years, as price declines have outpaced reductions in property taxes.

    Perhaps the sentence you highlighted should have focused more on the effective tax rates to make this clear.

    If you are right, then we will likely not see significant declines in total property tax collections.

    We will of course be tracking this number more closely over the next year, perhaps on a quarterly basis.

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