The Taxman's Ever-Costlier House Calls
Skyrocketing property taxes are the dark side of the real estate boom. And they're sure to keep climbing even if resale values cool
Thanks to the twin forces of a booming real estate market and higher costs facing local governments, property taxes have been rising sharply the last few years. According to Census Bureau data, from 1999 to 2003 property-tax receipts jumped 25%, to $297 billion. Over the same five years, state and local income taxes rose just 3.6% for individuals and fell 6% for corporations.
Already judged by experts to be the most hated tax, property taxes are about to get even more loathsome. That's because they tend to lag behind the real estate market. In the coming year, as interest rates rise, it's likely that the housing market will start to stall at the same time property taxes continue their ascent. In some of the country's most inflated real estate markets, homeowners could find that they're paying more in property taxes at the same time their house is becoming worth less.
THIRSTY COFFERS. For recent buyers who stretched to get into a pricey home, that means an additional squeeze. "Interest rates basically work in the same fashion property taxes do," says Charles Gilliland, an economist at Texas A&M University's Real Estate Center. When they go up, they make the home less affordable, which reduces demand and crimps the market value. "If you get both at the same time, then you get a double dip."
So far, however, the direction of both property taxes and home prices is up, up, and away. In 1998 the average home value in the U.S. was $121,000, and the average tax due was $1,780, according to the Minnesota Taxpayers Assn., which conducts a detailed nationwide survey of property-tax rates every two years. Five years later, the average home value was up to $168,000, and the property tax bill had climbed to $2,550. That's a 43% rise in property taxes, while home values climbed 38%.
The tax bill is rising even faster than home values because states and towns are using the boom in real estate to boost local coffers depleted by lower income tax receipts and higher expenses for things like education and health care, say tax experts. Property-tax hikes are easier to slip through because voters blame higher real estate prices (not local politicians) for the increase, not realizing that a growing local budget is also usually part of the problem. "It's like a secret tax increase," says Mark McMullen, a senior economist specializing in state and local taxation at research firm Economy.com. For local governments, "they love it," he says.
"CRISIS FOR POLICYMAKERS." Although tax laws vary widely by state, which makes generalizations difficult, in most places if local budgets remained flat as assessed home values rose, the tax rate would come down, and the total amount of money raised would remain constant. But on a national level, that isn't what's happening. "People tend to focus on the [assessed] value" of their home going up, says Lynn Edward Reed, executive director of the Minnesota Taxpayers Assn. "The real issue is: How much is your town assessing in taxes, which is a function of the budget."
Already, a property-tax revolt is building in certain parts of the country. New Jersey -- No. 1 in per capita property-tax collection, according to the 2000 census -- is considering raising income taxes to lower property taxes. Maine has an initiative on the ballot that limits property-tax growth. The town of Killington recently voted recently to secede from Vermont and become part of New Hampshire in an effort to reduce property taxes -- a move unlikely to pass legislatures in either state.
"Over the past two years property taxes have been the No. 1 state and local issue with citizen groups," says Pete Sepp, spokesman for the National Taxpayers Union, which supports local organizations on initiatives to lower taxes. The revolt isn't nationwide, however, since about half the states already have some limits on higher property taxes. In 1978, when the U.S. was in the throes of the last major property-tax revolt, states like California, Oregon, and Massachusetts passed strict limits on increases in property taxes. "It's not everywhere, but there are many places around the country where the way voters feel about property taxation is a crisis for policymakers," says McMullen.
TRANSPARENT CHARGE. From a policy perspective, raising revenues through property taxes vs. other means has some benefits, say experts. For one, property taxes are more stable year to year than receipts from income and sales taxes, which fluctuate based on the economy's strength. "Diverse tax systems are good," says McMullen. Property taxes are also progressive in that people with the most wealth are taxed more, he says.
Reed likes property taxes because they're the most transparent to average citizens. In contrast to income taxes that are muted through withholding, or sales taxes that are spread out over a year's worth of purchases, property taxes are all too clear. Homeowners understand what they're paying and what it goes for -- also the main reason they incite so much passion. Reed believes citizens hold local politicians more accountable for fiscal spending as a result.
A&M University's Gilliland points out residents may effectively get back the amount they pay in higher property taxes by benefiting from high-caliber schools and quality public services. Such things enhance the community, increasing real estate values enough to more than offset the additional property taxes, he says.
VOTE WITH YOUR FEET? That's the goal anyway. But if your property taxes are rising faster than you think is fair or your ability to pay, you can take some steps. Consider appealing your assessment, advises Sepp. If it's inaccurate (it lists three bathrooms, and you have only two) or isn't in line with other properties in your neighborhood, that can be grounds for appeal. A few hours of effort, "can save you several hundred dollars a year in inflated property taxes," he says.
Many states and towns have programs in place to allow low-income or elderly residents to defer property taxes. Mortgage lenders seem to come up with ever more ways for homeowners to tap into their home equity to pay current bills. Refinance or, if you don't have a mortgage, consider a "reverse mortgage." With those, lenders supply homeowners with a monthly income stream, which is eventually paid back (with interest) when the home is sold.
Moving to a lower-tax area is also frequently an option for homeowners facing a property-tax squeeze, as distasteful as it may be to long-term residents. But as the anger intensifies in pockets of the country, cashing in on a high-price home and getting out of town may turn out to be the best escape.
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