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New Homeowners Face Tax Disadvantage in Many U.S. States

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Tax breaks for longtime homeowners are one of many issues analyzed in the annual 50-State Property Tax Comparison Study by the Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence

Cambridge, MA – April 17, 2018 (PRNewswire-USNewswire) In Los Angeles, a new owner of a median-valued home pays about $7,000 per year in property taxes – nearly double the $4,000 paid by someone who has owned an identical home for 14 years, the average length of homeownership in the city, according to the annual 50-State Property Tax Comparison Study by the Lincoln Institute of Land Policy and the Minnesota Center for Fiscal Excellence.

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Such preferential treatment of longtime homeowners is a function of California’s Proposition 13, the 1978 ballot initiative that greatly restricts reassessment of property, among its many tax-limiting provisions. Of the ten American cities with the greatest discrepancy in taxes paid by new homeowners and longtime homeowners, six are in California and two are in Florida, where the 1992 Save Our Homes constitutional amendment similarly restricts reassessment.

These discrepancies are just one phenomenon explored through the study’s comprehensive analysis of effective property tax rates – the tax paid as a percentage of market value – in more than 100 cities in every U.S. state and Washington, DC.

State Property Tax ComparisonAs the study makes clear, the property tax is the most stable source of revenue for schools, public safety, and other public services and infrastructure provided by local governments. Effective tax rates vary widely, and, drawing on data for 73 large U.S. cities and a rural municipality in each state, the study explains the reasons why.

Reliance on the property tax is chief among the reasons. Cities with high local sales or income taxes do not need to raise as much revenue from the property tax and thus have lower property tax rates on average. For example, Bridgeport (CT) has one of the highest effective tax rates on the median-valued home, while Birmingham (AL) has one of the lowest. But the average Birmingham resident pays 30 percent more in total local taxes when accounting for sales, income, and other local taxes.

Highest and Lowest Effective Property Tax Rates on a Median-Valued Home (2017)

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Property values are the other crucial factor explaining differences in tax rates. Cities with low property values need to impose a much higher tax rate to raise the same revenue as cities with high property values. For example, the effective tax rate on the typical home in Detroit, which has the lowest median home values in the study, is four times higher than in San Francisco, which has the highest. In Detroit, to raise $3,000 per home – the national average tax bill on a median-valued home – would require an effective tax rate 24 times higher than in San Francisco.

The other drivers of variation in property tax rates include the treatment of different classes of property, such as residential and commercial, and the level of local government spending.

The average effective tax rate on a median-valued home was 1.49 percent in 2017, with wide variation across cities. Three cities have effective tax rates that are roughly 2.5 times higher than the average – Bridgeport (CT), Aurora (IL), and Detroit. Conversely, seven cities have tax rates less than half of the study average – Honolulu, Charleston (SC), Boston, Cheyenne (WY), Denver, Birmingham, and Washington, DC.

Commercial property tax rates on office buildings and similar properties also vary significantly across cities. The effective tax rate on a $1 million commercial property is about 2 percent, on average, across the largest cities in each state. The highest rates are in Detroit, New York City, Bridgeport, Chicago, and Providence, where rates are at least 75 percent higher than average. Rates are less than half of the average in Fargo (ND), Virginia Beach, Honolulu, Seattle, and Cheyenne (WY).

Highest and Lowest Effective Property Tax Rates on $1-Million Commercial Property

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The study includes a detailed analysis of classification, the practice of taxing specific types of property differently. New York City has the nation’s largest discrepancy between rental apartments and owner-occupied homes, with an effective property tax rate for apartment buildings that is nearly five times higher than the rate for owner-occupied homes, or “homesteads.” Boston has the largest discrepancy between commercial properties and owner-occupied homes, with an effective tax rate on commercial properties that is 4.3 times the rate for homesteads. On average, effective property tax rates for commercial properties are 64 percent higher than for owner-occupied homes, and effective rates for apartments are 33 percent higher.

The report is available for download on the Lincoln Institute website.

The Lincoln Institute of Land Policy seeks to improve quality of life through the effective use, taxation, and stewardship of land. A nonprofit private operating foundation whose origins date to 1946, the Lincoln Institute researches and recommends creative approaches to land as a solution to economic, social, and environmental challenges. Through education, training, publications, and events, we integrate theory and practice to inform public policy decisions worldwide.

The Minnesota Center for Fiscal Excellence was founded in 1926 to promote sound tax policy, efficient spending, and accountable government. As a non-profit, non-partisan group supported by membership dues, the center pursues its mission by educating and informing Minnesotans about sound fiscal policy; providing state and local policy makers with objective, non-partisan research about the impacts of tax and spending policies; and advocating for the adoption of policies reflecting principles of fiscal excellence.

Report Details How and Why Communities Should Allow Monthly Property Tax Payments

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Cambridge, MA – Jan. 18, 2018 (PRNewswire-USNewswire) If all homeowners could pay their property taxes monthly rather than just once or twice per year, the fiscal health of local governments could improve and there would be greater political support for a fair and stable source of revenue. That’s according to a new report authored by Lincoln Institute of Land Policy Senior Research Analyst Adam Langley.

Lincoln Institute of Land Policy

For many homeowners, property taxes represent the single largest bill that comes due each year, since most other bills are broken into smaller monthly payments. Despite the widespread payment of property taxes as part of monthly mortgage payments, roughly half of U.S. homeowners still pay their property taxes in one or two lump sums each year rather than monthly, an outdated practice that creates financial challenges for homeowners and increases property tax delinquency.

In Improving the Property Tax by Expanding Options for Monthly Payments, Langley analyzes property tax payment systems throughout the United States and recommends steps state and local governments can take to enable monthly payments. The paper draws on interviews with tax collectors and experts, as well as a review of past research, and of the state laws that govern local property tax collection.

“Expanding the use of monthly property tax payments would help millions of homeowners avoid financial stress and hardship while giving a boost to local governments that rely on property taxes to provide basic public services,” Langley said.

Currently, many homeowners pay property taxes monthly as part of their mortgage, but this practice is less widespread than commonly thought. In 2015, fewer than half of U.S. homeowners paid their property taxes as part of their monthly mortgage payment. Among homeowners over age 65 – who are more likely to own their homes free and clear – only 20 percent pay property taxes with their mortgage.

The consequences are real. Saving large sums of money can be a challenge for many households, and evidence suggests that a less frequent payment schedule makes it more likely that homeowners will fall behind on payments. Property tax delinquency has plagued struggling cities such as Detroit.

For cities and counties, receiving payments only once or twice per year means relying on short-term borrowing or holding large amounts of idle cash in accounts that earn little interest in order to meet payroll and other regular expenses. Finally, evidence shows that by making homeowners more acutely aware of their tax burden, lump sum payments increase opposition to the property tax.

Sixteen states provide an alternative – the option to prepay taxes before a lump sum is due. However, homeowners typically need to apply in advance for this option – greatly limiting its use – and local governments need to reconcile monthly payments with homeowners’ actual tax liabilities at the end of the year, which are usually still calculated annually or biannually. The payments are held for several months in escrow accounts managed by tax collectors, where they are unavailable for local governments to spend right away.

One unique case is Milwaukee, Wisconsin, where every homeowner is allowed to pay property taxes in monthly installments without submitting an application. As a result, homeowners are five to ten times more likely to make monthly payments than in cities and counties that require applications for prepayment. Milwaukee taxpayers can set up automatic monthly payments, and the funds are available to local governments immediately.

The paper recommends that states changes their laws to allow monthly property tax payments, and that local governments offer the option automatically to homeowners. Recommendations include:

  • Allow taxpayers to pay monthly without requiring an application.
  • Create established processes that make it easy for taxpayers to pay monthly.
  • Encourage automated monthly payments, but provide other options.
  • Monthly payment plans should be authorized as a local option, but not required for all governments.
  • Consider shared service arrangements to reduce the cost of tax collections.
  • Minimize transaction costs for monthly payments.
  • Use outreach and advertising to increase participation rates.

Langley will cover key findings from his report in a webinar on monthly property tax payments at 2 p.m. EST Thursday Feb. 1. He will be joined by Claudia Fuentes (Treasurer for Marion County, Indiana), Jim Klajbor (Deputy Treasurer for Milwaukee, Wisconsin), and Vincent Reitano (Public Finance Associate for the Government Finance Officers Association). The webinar is part of the Lincoln Institute’s webinar series on Municipal Fiscal Health.

The paper builds on extensive research on the property tax including the 2016 book A Good Tax by Joan Youngman, and numerous reports on topics including property tax incentives, payments in-lieu of taxes, and assessment limits.

The Lincoln Institute of Land Policy seeks to improve quality of life through the effective use, taxation, and stewardship of land. A nonprofit private operating foundation whose origins date to 1946, the Lincoln Institute researches and recommends creative approaches to land as a solution to economic, social, and environmental challenges. Through education, training, publications, and events, we integrate theory and practice to inform public policy decisions worldwide.