WASHINGTON, D.C. – A report from a nonpartisan research and policy institute claims local property tax payers across the nation have it too easy and should be paying much more in order for government to provide necessary services.
The report, written by Iris J. Lav Michael Leachman and published by the Center on Budget and Policy Priorities (CBPP), says state limits on property taxes hamstring local services and should be relaxed or repealed.
The report claims Iowa has a Rate Limit (A legal limit on property tax rates so that they are either frozen or tied to an index or formula) and an Assessment Limit (A legal limit on annual increases in assessed values that either freezes such values or ties such increases to an index or formula.)
The report goes on to claim:
Beginning in the 1970s, many states adopted new limits that sharply reduced funding for education and other important services by capping property taxes. The time has come for states to reconsider these harsh limits, which have put severe pressure over time on local governments’ ability to deliver the services that their residents expect and need, from schools and police and fire protection to city parks and affordable housing initiatives. Property tax limits also hamstring localities’ ability to provide services that boost opportunity for their residents. And they increase racial and economic inequities, in part by leading localities to use revenue sources that fall harder on lower-income people. In these ways, property tax limits harm the quality of life of our communities and make it much harder to produce broadly shared prosperity.
States haven’t made up the revenue that localities have lost due to property tax limits — sometimes even when the limits supposedly required them to do so — and some states have cut local aid. Massachusetts, for example, initially raised aid to localities after the 1980 passage of its property tax limit, but after enacting major income tax cuts it slashed unrestricted local aid by 44 percent between fiscal years 2001 and 2015, adjusted for inflation, according to the Massachusetts Budget and Policy Center. The federal government hasn’t stepped up, either. State and federal aid has declined as a share of local revenue since the late 1970s.
As a result, local governments have cut services and now rely more heavily on less desirable forms of revenue such as sales taxes and fees. These trends have resulted in less funding for schools and other local services. One study of spending by Michigan cities other than Detroit found that total spending fell by more than 17 percent between 2008 and 2014, after adjustment for inflation. Funding declined for every category of services: for instance, police and sheriff by 13 percent, fire by 14 percent, parks and recreation by 27 percent, and health and human services by nearly 8 percent.
The shift to sales taxes and fees also increased income disparities because they are more regressive than property taxes are. Property tax limits appear to increase localities’ reliance on fees to fund services, from community college tuition and hospital fees to fees for student athletic participation and occupational licensing. This may be particularly problematic when the fee increases occur in the area of courts and police services, a recent trend that has exacerbated racial inequities and undermined public trust in the criminal justice system. A U.S. Justice Department report warned of “the illegal enforcement of fines and fees in certain jurisdictions around the country — often with respect to individuals accused of misdemeanors, quasi-criminal ordinance violations, or civil infractions.” As the report explained, people facing these fines and fees “may confront escalating debt; face repeated, unnecessary incarceration for nonpayment despite posing no danger to the community; lose their jobs; and become trapped in cycles of poverty that can be nearly impossible to escape.”
Property tax limits also have expanded racial income gaps by providing disproportionate savings to white homeowners, who are more likely than African Americans or Latinos to own expensive homes, in part because past government policies segregated people of color in lower-value areas. And limits have created other problems as well, some of them unintended. In Oregon, for example, similarly valued homes can receive drastically different tax treatment because the state’s limits do not reset when a property is sold but instead are permanently attached to the property. Some homeowners in Portland actually pay more property tax than they would without the limits.
This report looks at the problems that property tax limits have caused across the country and focuses on four states: Michigan, Massachusetts, Oregon, and New York. (See box for description of the limits in each state.) These states reveal the range of problems that property tax limitations typically cause. Every state with a property tax limit would do well to examine the consequences of its limit and consider relaxing or repealing it. States can employ more targeted alternatives, such as circuit breakers (which provide refunds to households whose property taxes are deemed too high) and homestead exemptions (which exempt a flat amount of home value from the tax), to relieve property taxes for seniors and others who might have difficulty affording them.
Property taxes are an important component of a healthy state-local revenue system, and limits interfere with this important role. It is helpful for states and localities to use a variety of taxes that exhibit different properties across the business cycle and tax different aspects of residents’ behavior. Property taxes have historically been more stable than income or sales taxes; if they do decline in recessions, they usually do so with a lag, even as other revenue sources are recovering. And they are, at least in part, a tax on wealth rather than income or consumption, adding diversity to revenue sources.
As states repeal or reform property tax limits, they can reduce the pressure for property tax increases by strengthening other revenue sources. Possible steps include raising personal income taxes for high-income residents who have gained the most from rising inequality, adopting or expanding state inheritance and estate taxes, closing loopholes that allow profitable corporations to avoid taxes, and other measures that ask the wealthy to contribute at least as much of their income in state and local taxes as middle- and low-income families. The federal government can also help by increasing — or at least not further cutting — funding for schools, infrastructure, and other national priorities delivered at the state and local level.
States Constrain Local Property Taxes
The property tax is primarily a local government tax and can be a flexible revenue source to support schools and locally provided public services. In its purest form, it is based on an assessment of the market values of all properties in a jurisdiction. Once these values are established, the jurisdiction applies a tax rate to yield the amount of revenue needed to support the desired level of services. Property tax limits interrupt this calculation. Some constrain the percentage by which assessed values can grow each year, others limit the property tax rate, and still others — the most severe — limit the percentage growth in property tax revenue each year. These last are known as levy limits.
Although property taxes are primarily a local revenue source, states largely control the conditions under which they are administered. Property tax limits generally are enacted by states and cover an entire state. Some states have statutory limits enacted by legislatures; others have constitutional limits, which generally required approval by voters.
Property tax limits date far back to the 19th century, but the late 1970s was by far the most significant period for states adopting limits. The number of state-imposed limits nearly doubled in the 1970s and 1980s, as levy and assessment limits first became widespread. Today, 44 states and the District of Columbia impose at least one kind of limit, and many use a combination of limits.
Since the late 1970s, the property tax has shrunk considerably as a local revenue source. Between 1977 and 2015, property tax revenue nationally fell from 50 percent of local governments’ own-source revenue to 39 percent, Census data show. Over that same period, local government property tax collections fell from 3.7 percent of personal income to 3.0 percent.
