Real Estate Taxes by State 2012

The median real estate tax bill in New Jersey was $7,183, the highest in the nation, according to the recently released 2012 American Community Survey (ACS). The median real estate tax bill, by contrast, in Alabama was $535, the lowest in the nation. Eight of the top ten highest real estate tax states are located in the Northeast while a majority of the lowest tax states were found in the South.

The ACS is a survey conducted by the U.S. Census Bureau to determine how federal and state funds are distributed. About 3.5 million addresses are randomly selected to participate in the survey each year. In addition to basic demographic and financial questions, participants in owner-occupied units are asked to provide the amount of real estate taxes paid.  If taxes are paid in installments, the payments are converted to a yearly basis. The total amount provided by participants includes real estate taxes on the entire property (land and buildings) payable to all taxing jurisdictions.

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Although total real estate taxes paid are informative, it is often useful to compare effective tax rates per $1,000 of property value by state. These numbers are presented in the fourth column of Table 1 below. Hawaii has the lowest effective real estate tax rates in the nation, $2.77 per $1,000 of home value. Two states with the highest effective rates are Illinois and New Jersey, where rates exceed $23 per $1,000 of property value.

Table 1 – Property Values and Real Estate Taxes (RET) in 2012

Real estate taxes are positively correlated with home values. However, cross-country differences in home values do not explain well differences in median real estate tax bills. For example, according to the 2012 ACS, Hawaii has the highest median housing value of owner occupied units but relatively low median real estate tax bill (34th) and the lowest effective tax rate.

Instead property tax systems vary significantly across states. Local jurisdictions in Illinois, for example, assess real property at 33.3% of fair cash value, whereas in Idaho the standard assessment is 100% of market value.

In addition, although property taxes remain the largest source of revenue for state and local governments in the United States, some states rely more heavily on property taxes as a source of revenue than others. For example, in Texas the median real estate tax bill is relatively high (16th) but residents do not pay an individual income tax at the state level. Alabama, on the other hand, has the lowest median real estate tax bill, but residents pay an individual income tax of 5% on all income over $5,000.

Therefore, when comparing residential tax bills across states it is important to consider government finances. The Census Bureau’s Annual Survey of State and Local (S&L) Government Finances helps explain some of these sizeable cross-country differences in the median real estate tax bill. The last column of table 1 shows statewide property taxes as a share of S&L government own-source tax revenue, based on data from the most recently available 2011 survey.

A simple correlation analysis confirms that the extent to which state and local governments rely on property taxes to fund local services greatly affects the median real estate tax bill. The correlation between median real estate tax bill and statewide property taxes as a share of S&L government revenue is 0.66. At the same time, the correlation between state median real estate tax bill and median home values is only 0.49. [1]

[1] Correlation indicates the strength and direction of a linear relationship between two variables and ranges from -1 to 1. Larger correlation numbers (i.e., further away from zero) mean that variables tend to move closer together in the same (positive correlation) or opposite direction (negative correlation). Zero correlation means that changes in two variables are completely independent or unrelated to each other.



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