Property Tax Remains Largest Revenue Source

According to the latest data from the Census Bureau, taxes paid by homeowners and other real estate owners remain the largest single source of revenue for state and local governments. At 34%, property taxes represent a significantly larger share than the next largest sources: individual income taxes (24%) and sales taxes (21%).

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State and local government property tax collections continue to increase on a nominal basis. From the third quarter of 2012 through the end of the second quarter of 2013, approximately $479 billion in taxes were paid by property owners. This was a small increase from the previous trailing four-quarter record of $477 billion, set last quarter.

The modest changes throughout the Great Recession in nominal state and local government property tax collections are due in large part to lagging property assessments and the ability of local jurisdiction to make annual adjustments to tax rates. In general, declining property values are not reflected in the system until a few years after the decline occurs. Once assessments are updated, property tax authorities can adjust rates thus maintaining a desired level of collection.

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As state and local government property tax collections increased in recent years, the share of local tax collections due to property taxes fell from a high of 37.4% in the second quarter of 2010 to the current share of 33.5%. The average share for property taxes since 2000 is 32.4%.

The changing share of local collections is due predominantly to fluctuations in all other tax receipts. State and local individual income tax, corporate income tax, and sales tax collections are very responsive to changing economic conditions. For example, in the second quarter of 2009 state and local governments collected $76 billion in individual income tax. In the second quarter of 2013, the most recent, state and local governments collected $114 billion in individual income tax.  The dramatic 50% increase in state and local individual income tax receipts is due to improving economic conditions, rising incomes, and higher rates in several states.

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The S&P/Case-Shiller House Price Index – National Index grew by 7.1% on a not seasonally adjusted basis in the second quarter and 10.1% over the previous four quarters. Although house prices remain on a path toward recovery, one should not expect property tax collections to increase significantly. Just as declining property values did not lead to a significant decrease in property tax collections, it is unlikely that rising property values will lead to dramatic increases in property tax collection. Instead, lagging assessments and the ability of local jurisdiction to make annual adjustments should lead to only modest increases.

* Data footnote: 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 housing units.



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