Property Taxes

A property tax is a tax on “real property” (land and buildings) or personal property (e.g., business equipment, inventories, and noncommercial motor vehicles).

Taxpayers in all 50 states and the District of Columbia pay property taxes, but the tax primarily levied at the local level, particularly by cities, counties, and school districts.

This backgrounder answers four questions:

All revenue data are from the US Census Bureau’s Annual Survey of State Government Tax Collections. All dates in sections about revenue reference the fiscal year unless explicitly stated otherwise.

How much revenue do state and local governments raise from property taxes?

Property taxes are a very small source of revenue for states, in part because states typically tax personal property but not real property. State governments collected $13 billion in revenue from property taxes (0.8 percent of state general revenue) in 2012 (table 1). Fourteen state governments did not collect any property tax revenue in 2012. However, property taxes are the largest own source of revenue for local governments. Local governments collected $433 billion (29.7 percent of local government general revenue). By comparison, local governments collected 22.5 percent of general revenue from charges and 6.7 percent from sales taxes.

TABLE 1

State and Local Property Tax Revenue, 2012

 

Revenue ($ billions)

Share of general revenue

State and local governments

$446.1

17.2%

State governments

$13.1

0.8%

Local governments

$433.0

29.7%

 School district

$180.5

36.6%

 County

$102.9

27.9%

 Municipality

$102.2

24.0%

 Township

$28.8

60.2%

 

School districts ($180.5 billion), counties ($102.9 billion), municipalities ($102.2 billion), and townships ($28.8 billion) all collected property tax revenue in 2012. The remaining local government property tax revenue was collected by “special districts,” which are specific-purpose units such as water and sewer authorities.

Property taxes were 17.2 percent of combined state and local general revenue in fiscal year 2012. That was lower than sales taxes (18.3 percent) but higher than individual income taxes (11.8 percent) and corporate income taxes (1.9 percent).

Figure 1

Figure 1: Taxes as a Percentage of State and Local General Revenue, 2012

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How has property tax revenue changed over time?

Real per capita state and local property tax revenue increased from $1,078 in 1977 to $1,421 in 2012, but property tax revenue as a percentage of personal income declined from 3.80 percent to 3.22 percent over that period (figure 2).

Figure 2

Figure 2: State and Local Property Tax Revenue

Property tax revenue in both measures declined precipitously between 1977 and 1981 as many states—most notably California’s Prop 13 and Massachusetts’s Prop 2 ½—imposed limits on property tax rates, property tax revenue, or how fast assessed property values could rise.

The Great Recession, and more specifically the housing market crash, caused the recent drop in property tax revenue—in both real per capita and percentage of personal income terms. However, because some governments do not reassess real property annually, property tax revenue often lags trends in other revenue sources.

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How much do property tax rates differ across the country?

Real property tax rates differ widely both across and within states, making them difficult to compare. In addition, local governments use various methods to calculate their real property tax bases.
Every jurisdiction’s property tax requires at least three steps:

  • Assess the value of each property.
  • Determine the taxable value of each property.
  • Apply the tax rate to the taxable value of each property.

The government levying the property tax typically assesses the real property value by estimating what the property would sell for in an arms-length transaction. However, some jurisdictions base value on the last sale price or acquisition value of the property, others consider the income a property could generate (e.g., hotels), and some base the assessment solely on the size or physical attributes (e.g., design, location) of the property. The timing of assessments also varies, with some jurisdictions assessing annually and others less frequently.

Some jurisdictions impose tax on the entire assessed value of the property (before deductions and credits). In others only a fraction of the assessed value is taxed. For example, South Carolina counties impose tax on only 4 percent of a property’s assessed value.
States and local governments also often use limits, exemptions, deductions, and credits to lower a real property’s taxable value or the taxpayer’s payment. Some major examples:

  • Assessment limits prevent a property’s assessed value from increasing by more than a fixed percentage between assessments. These limits reduce a property’s assessed value below its actual market value, and thus prevent rapid property value increases from raising the owner’s tax burden. When the property is sold, its assessed value is reset at its market value.
  • Homestead deductions or exemptions decrease the taxable value of real property by a fixed amount (much the same way a standard deduction decreases taxable income) for residents who occupy the property.
  • Circuit breaker programs provide relief for elderly and low-income residents with property tax liabilities above a specified percentage of their income. Although relief is based on property tax payments, it is typically provided via an income tax credit. Unlike the other two approaches described here, circuit breakers can benefit renters as well as homeowners in some jurisdictions.

These relief programs can lead to significantly different tax burdens, even among taxpayers who have homes of similar vintage and pay the same tax rate in the same jurisdiction.

Further, some jurisdictions impose different tax rates—or classifications—for different types of property, most commonly distinguishing between residential and business property.

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Which states are most reliant on property tax revenue?

New Hampshire was the most reliant on property tax revenue in 2012; the tax accounted for 36.2 percent of its combined state and local general revenues (figure 3). Property taxes also contributed more than 25 percent of state and local general revenues in New Jersey (30.7 percent) and Connecticut (26.1 percent). Ten states, including seven in the Northeast, collected at least 20 percent of their general revenue from property taxes.

FIGURE 3

Figure 3: Property Tax Revenue, 2012

Alabama relied least on property tax revenue in 2012: 7.6 percent of its combined state and local general revenues came from that source. Nine states, including six in the South, collected less than 10 percent of state and local general revenue from property taxes.

A state might have high (or low) relative property tax revenue for one or a collection of reasons:

  • the property tax rates in the state’s local jurisdictions
  • the value of the property in the state
  • the relative amount of other tax revenue in the state

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