State and Local Tax Policy: How do property taxes work?
Jurisdictions in all 50 states and the District of Columbia impose property taxes, which provide local and some state jurisdictions with a stable and reliable source of revenue. Most property tax revenue comes from levies on real property (land and improvements to land) but states often tax personal property (such as noncommercial motor vehicles) as well. The tax equals a percentage (the tax rate) of the assessed value of the property and may be levied in some form at every level of government—state, county, municipal, township, school district, and special district. In 2010, states and localities collected $441 billion, nearly 97 percent at the local level.
- The property tax gives state and local governments a stable and reliable source of revenue. Its base is immobile and, as real property values rise over time, revenue grows with no rate change. Tax jurisdictions generally just adjust the rate as needed for the budget.
- The property tax is very unpopular among taxpayers. It is highly visible, different assessments for similar properties give a sense of unfairness, and the tax may unduly burden fixed-income property owners in areas of high-growth.
- The share of own source general revenue provided by property taxes varies widely from state to state, ranging in 2010 from just 10 percent of general revenue in Delaware up to 44 percent in New Hampshire.
- In the aftermath of the Great Recession, real property tax revenues have fallen from their peak and still have not recovered three years after the end of the Great Recession. This is the first time real property taxes have stayed below their peak for three years since the early 1980s (see Harris and Shadunsky 2013).
- The importance of property taxes differs greatly across levels of government.
- In total, local governments – counties, cities, townships, school districts, and special districts – get 30 percent of their general revenue and 75 percent of their tax revenue from property taxes, a total of $427 billion in 2010.
- Independent school districts rely most heavily on the property tax for own-source general revenue, receiving 77 percent from this source in 2007 (more recent data unavailable). They also receive intergovernmental aid, usually from the state.
- Counties raise 39 percent of own-source general revenue from the property tax, while property tax revenues make up 34 percent of own-source general revenue for cities and townships.
- States get only a small fraction of their tax revenue from property taxes, about 2 percent in 2010. However, states that lack a sales tax or an income tax (or both) typically rely more heavily on property tax revenue: the levy’s share of total state tax revenue exceeds 8 percent in Vermont, New Hampshire, Wyoming, Arkansas, Washington, Montana, and Michigan. Some states, including Michigan, Vermont, and New Hampshire, have recently enacted state property taxes as part of school finance reform.
- Reliance on the property tax has declined over the past 30 years, as state and local collections have dropped from 22 percent of general revenue in 1977 to just 16 percent in 2001. Virtually all of the drop occurred in the 1970s and early 1980s with slight increases in reliance on the property tax in the last ten years. State and local governments raised 17.7 percent of their general revenue from property taxes in 2010, with the vast majority of property taxes being collected by local governments. Property taxes made up about one percent of general state revenues and 26.5 percent of general local revenues in 2010. State property tax collections have consistently stayed around 1 percent since 1977. Local collections, however, fell from 33.7 percent of general local revenues in 1977 to 26.5 percent in 2001. Since then the share has increased, with property taxes making up 30 percent of general revenue in 2010. This is the highest it has been since 1993 but is due to the weakness in the other revenues rather than particular strength in property tax revenues which grew only 0.6 percent in 2010.
- In recent decades, many states have imposed limits on property tax rates, property tax revenue, or increases in assessed property values, reducing reliance on the property tax as a source of revenue. California, for example, limits the tax rate to 1 percent and annual assessment increases to 2 percent until a property is sold. As a result, neighbors with similar houses may have dramatically different tax liabilities depending on how long they've owned the house.
- Many states have provisions that reduce property tax burdens.
- Homestead exemptions in 41 states and the District of Columbia reduce the fraction of the assessed property value subject to tax.
- Twenty-eight states and the District of Columbia use circuit breaker credits and refunds to limit the share of income claimed by property taxes.
- Property tax deferrals allow elderly and disabled homeowners to defer payment until the sale of the property or the death of the taxpayer; 22 states and the District of Columbia allow such deferrals but they are not widely used.
State and Local Tax Policy: What are the sources of revenue for state governments?
State and Local Tax Policy: What are the sources of revenue for local governments?
State and Local Tax Policy: How have the sources of revenue for state and local governments changed over time?
Tax Policy Center, State and Local Government Finance Data Query System.
Brunori, David, Local Tax Policy: A Federalist Perspective, 2nd ed. (Washington: The Urban Institute, 2007).
________, State Tax Policy: A Political Perspective, 2nd ed. (Washington: Urban Institute Press, 2005).
Harris, Benjamin H. and Yuri Shadunsky, “State and Local Governments in Economic Recoveries: This Recovery is Different,” Urban-Brookings Tax Policy Center (April 22, 2013).
Authors: Kim Rueben and Yuri Shadunsky
Last Updated: May 9, 2013