Amid rising home values, cities and states need to provide targeted relief to keep property taxes affordable while avoiding overly broad measures that could undermine the largest source of local revenue, a new report finds. 

In the Policy Focus Report Property Tax Relief for Homeowners, Lincoln Institute scholars Adam Langley and Joan Youngman evaluate more than a dozen common tools for tax relief and explain how state and local policy makers can keep tax systems fair and fiscally sustainable. They recommend a mix of sound tax administration, highly targeted relief, and robust state funding. 

“An approach that includes policies such as circuit breakers, deferrals, sound assessment and collection practices, and well-designed state aid formulas will promote a tax system that is fair and affordable for taxpayers while providing the revenue needed to maintain quality public services,” the authors write. 

The report addresses a challenging aspect of the property tax: higher home values do not always equate to greater cash flow for homeowners. Thus, keeping tax bills stable is essential.  

In an attempt to provide stability, states sometimes enact ineffective measures that destabilize state and local budgets, reduce the quality of public services, and deliver disproportionate benefits to wealthier homeowners. The most common among these are far-reaching limits on local tax rates, revenues, and taxable property values. 

“All state-imposed tax limits reduce local control over budget decisions, and so diminish the capacity of local governments to respond to taxpayer preferences and changing circumstances,” Langley and Youngman write. 

Instead, policy makers can employ targeted approaches that keep tax bills as stable as possible and provide relief to those who need it. 

Regular and accurate assessment of property is critical. Without it, assessed values stay artificially low until they eventually spike after a long-delayed revaluation. Further, if property values increase faster than incomes, policy makers need to reduce tax rates accordingly to stabilize tax bills. 

While sound assessment and rate-setting practices go a long way to prevent financial hardship, targeted tax relief is needed to support some homeowners, such as seniors with fixed incomes, people who have lost their jobs, or lower-income residents of gentrifying neighborhoods, whose property tax bills are still growing relative to their income. 

Langley and Youngman recommend circuit breakers, which provide property tax relief to those whose tax bill exceeds a certain percentage of income—so named because they function like a switch that cuts off an electrical circuit when too much current flows. They also recommend deferrals, which delay taxes until the property changes hands, enabling homeowners or their heirs to use proceeds from the sale of the home to pay off the taxes. Finally, they recommend monthly payment options so that homeowners do not face a large bill once or twice per year.  

While cities and towns can administer such programs, states play a critical role. They need to remove legal barriers that prevent local governments from effectively administering the property tax and provide robust aid to make up for gaps in real estate values among different cities and towns. Adequate state funding ensures that even low-wealth jurisdictions can provide quality local services at affordable tax rates. 

“If policy makers are sincere about providing targeted property tax relief for homeowners that has the fewest unintended or spillover effects, they would benefit from serious study of the concepts and approaches presented in this report,” said Alan Dornfest, property tax bureau chief for the Idaho State Tax Commission. “It could not be more timely or more complete.” 

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

Image: Mailboxes along Route 66, Arizona. Credit: libre de droit/iStock/Getty Images Plus.

Home prices in Idaho are surging. Over the past year, median home values in large cities like Boise and Nampa have increased by as much as 38 percent. Those higher prices, combined with the end of a property tax break granted during the pandemic, mean that many Idahoans are now seeing dramatically higher property tax bills. In response, the state legislature passed a controversial bill aimed at tax relief this spring.

The new law is unusual compared with typical approaches to property tax relief, and some local leaders are warning that its revenue limitations could ultimately force them to raise taxes or fees elsewhere, or cut essential services. As cities and counties assess how the law will affect their budgets, one city has even put a temporary halt on development.

Among other things, HB 389 places caps on local revenue growth. Idaho already had a 3 percent cap on local property tax revenue growth, but the cap didn’t apply to new development. That’s no longer the case—now, allowable property tax revenue growth from new construction will be calculated on only 90 percent of its assessed value. In addition, existing properties returning to the tax rolls under programs to encourage new economic development will contribute only 80 percent of their assessed value to the taxing district’s allowable revenue base. The law also imposes an 8-percent cap on localities’ total annual revenue growth, regardless of the amount of new development.

The bill’s author, House Majority Leader Rep. Mike Moyle, has said the new changes would stop the rapid development growth in Idaho from driving up existing homeowners’ tax bills. Even with the old revenue cap in place, homeowners saw their bills rise faster because home values are rising rapidly while the value of nonresidential property is not. “Right now in Idaho, when somebody builds a new house next to you, your taxes go up,” he told a local news station in May.

Although Moyle argued the bill “fixes that problem,” that’s not the result homeowners are likely to see. Properties are reassessed every year in Idaho, and an existing homeowner’s bill based on that value is more affected by the overall market rather than whether a new house is built nearby. Areas with a lot of growth might experience faster appreciation in home values, and thus faster growth in property tax bills, but restricting taxation of new property will not provide a direct benefit to existing homeowners.

What’s more, the cap on taxes collected from new development actually burdens existing homeowners more by artificially deflating the tax bills for new homes while taxing existing homes at full value.

Officials in fast-growing places are especially worried. Cities must provide newly developed areas with services such as water and sewer, public safety, and street maintenance. Up until this year, revenue collected from those new properties helped pay for that, but now cities are limited in their ability to pay for growth.

The restriction on tax revenue from new development is an unusual approach, said Lincoln Institute Senior Fellow Joan Youngman. While many states limit the total tax revenue a city or town may collect each year, Youngman says that increases are often permitted to reflect the addition of new construction to the tax base.

“Allowing a city’s total tax revenue to keep pace with new development enables the jurisdiction to raise funds to meet the service needs of a larger population without increasing taxes on the existing residents whom the limits are designed to protect,” Youngman said.

Responses to the Bill

Local leaders in Idaho were caught off guard by the bill, which was introduced during the last week of the legislative session in May. The bill faced bipartisan opposition but ultimately passed by a ratio of two to one. Legislators who voted against it said they were concerned it would erode local governments’ ability to provide services, particularly in rapidly growing communities.

That issue is perhaps most pressing in Treasure Valley, the most populous region of Idaho, which encompasses the fast-growing Boise metro area. The city of Nampa has grown by 36 percent over the last decade. That influx of new residents, combined with historically low interest rates, has fueled a home building boom. Under normal circumstances, when such growth occurs, tax rolls increase accordingly. But capping revenue from new construction now means that localities will have to look elsewhere for the funds needed to cover costs related to growth—or they’ll have to cut public safety and other critical services.

Cities and counties across the state are still evaluating how the new caps will impact their revenues. Nampa Finance Director Douglas Racine estimates that HB 389 will reduce revenues from new construction by $1 million. So far, city leaders have responded by increasing impact fees, which are tied to new construction, and are considering other ways to balance the budget without raising costs for existing homeowners.

Northwest of Nampa, the city of Caldwell (pop. 59,000) has enacted the most aggressive response to the legislation so far with a 120-day moratorium on annexations and new development approvals. Supporters said the pause would help give the city, which grew 26 percent between 2010 and 2019, time to come up with a new plan for how to handle growth in the face of the “imminent peril” posed by the state legislation. The move was opposed by builders who warned that pausing development could cause home prices to soar even higher.

Relief by Any Other Name

The new state law also includes two changes aimed at property tax relief. It increases the current cap on the homeowner’s exemption, the portion of a home’s value that is spared from taxation, from $100,000 to as much as $125,000 (depending on the assessed value). And it increases the maximum benefit provided by the circuit breaker program, which offers tax relief to seniors and homeowners whose property tax bills exceed a certain share of their income.

However, starting in 2022, anyone whose home is valued at more than 125 percent of the area median will not be eligible for the circuit breaker program. Opponents warned that adding the home value provision would unfairly deprive people from tax relief if they have fixed incomes but happen to live in hot housing markets. Further, restricting cities’ ability to generate revenue from new construction will erode the tax base over time.

“In the final analysis, the financial benefit to taxpayers will be difficult to quantify and will very likely be negligible,” Nampa’s Racine wrote in a June budget report.

Mayor Debbie Kling of Nampa hopes to rally other Treasure Valley leaders to support property tax relief next year to address the issue from another angle: changing the way homes are assessed. Currently, Idaho law requires that homes be assessed at market value. Kling supports an amendment to the state constitution that would limit how much a home’s assessed value can increase each year. She lobbied for the change this year but hopes next year it will have more support.

“It’s frustrating,” said Kling. “We have the ability to do something that provides actual tax relief to our citizens. Unfortunately, this year, a few in the legislature just wanted to point their fingers at the cities and say our budgets were too high.”

However, unlike revenue limits, which affect only the amount of tax collected, assessment limits can distort the taxes due on similar properties. For example, in California, properties are generally only reassessed at market value upon sale, which means that longtime property owners pay artificially low rates compared to newer purchasers. The 50-State Property Tax Comparison Study by the Lincoln Institute and the Minnesota Center for Fiscal Excellence examines 29 large cities in which state-imposed assessment limits favor longtime owners by limiting the growth in the assessed value of individual properties.

Youngman points out that when housing values rise precipitously it is important to adjust tax rates to moderate the effect on tax bills. In Massachusetts, Proposition 2½ imposes both a revenue limit and a rate limit but maintains fair market value as the basis for assessments. This system has remained stable for over three decades. “This shows that limitations can be based on accurate assessments,” Youngman said.

Liz Farmer is a fiscal policy expert and journalist whose areas of expertise include budgets, fiscal distress, and tax policy. She is currently a research fellow at the Rockefeller Institute’s Future of Labor Research Center.

Photograph: Municipal leaders in Idaho say new legislation intended to provide property tax relief will force them to cut essential services or raise taxes and fees elsewhere. Credit: picmax via iStock/Getty Images Plus.

In Fresno, California’s fifth-largest city, someone who has owned a median-priced home for 11 years—the average length of ownership there—paid less than $2,000 in property taxes last year, more than $1,400 less than the new owner of an identical home, who paid more than $3,400. This disparity between the tax burden for new and longtime homeowners grew by more than 14 percent last year alone in Fresno, recently named the nation’s hottest housing market by the Los Angeles Times for its fast-rising real estate values. This tax disparity has more than tripled in Fresno over the past five years, according to the annual 50-State Property Tax Comparison Study by the Lincoln Institute of Land Policy and the Minnesota Center for Fiscal Excellence.

The 50-State Property Tax Comparison Study explores several key factors influencing property taxes, providing a comprehensive analysis of effective property tax rates—the tax paid as a percentage of market value—in 123 cities and towns in every U.S. state and Washington, DC. 

Fresno is one of 29 large cities included in the report where assessment limits cap annual growth in the assessed value of individual properties, a policy that favors longtime homeowners. The faster real estate prices rise, the more assessment limits shift the tax burden to newer homeowners, whose properties are assessed closer to the market value. Overall, in the 29 cities with these assessment limits, new homeowners paid 30 percent more in taxes last year than those who have owned their homes for the average duration within their city. That difference was more than double the 14 percent disparity in the same cities five years earlier.

In addition to providing data on effective tax rates, the study explains why property taxes vary so widely from place to place. The extent to which a city relies 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, Connecticut, has one of the highest effective tax rates on the median-valued home, while Birmingham, Alabama, has one of the lowest. But the average Birmingham resident pays 39 percent more in total local taxes than the average resident of Bridgeport when accounting for sales, income, and other local taxes.

Property values are the other crucial factor explaining differences in tax rates. Cities with low property values need to impose a 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 value in the study, is three times higher than in San Francisco, which has the highest median home value, after accounting for assessment limits. In Detroit, raising $3,379 per home—the national average tax bill on a median-valued home—would require an effective tax rate 20 times higher than in San Francisco.

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

Among the largest cities in each state, the average effective tax rate on a median-valued home was 1.4 percent in 2020, with wide variation across cities. Four cities have effective tax rates that are at least double the national average—Aurora (IL), Bridgeport (CT), Newark (NJ), and Detroit. Conversely, eight cities have tax rates of half of the average or less—Honolulu, Charleston (SC), Boston, Denver, Charleston (WV), Cheyenne (WY), Salt Lake City, and Birmingham (AL).

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 2 percent, on average, across the largest cities in each state. The highest rates are in Detroit and Chicago, where rates are more than twice the average for this group of cities. Rates are less than half of that average in Cheyenne (WY), Seattle, and Charlotte.

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

https://www.lincolninst.edu/publications/other/50-state-property-tax-comparison-study-2020

Will Jason is director of communications at the Lincoln Institute of Land Policy.

Image: Fresno, California. Photo by Denis Tangney Jr/iStock via Getty Images