City tax rates struggle to keep up with rising home values

While the overall amount of property taxes Americans paid rose in 2022, effective property tax rates — a homeowner's tax bill as a percentage of a property's value — dropped slightly in large cities last year on average, as home values rose faster than taxes.

• That's according to a new report from the nonprofit Lincoln Institute of Land Policy and the Minnesota Center for Fiscal Excellence.

Why it matters: "The data highlighted in the report have important implications for cities, because the property tax is a key part of the package of taxes and public services that affects cities' competitiveness and quality of life," the report notes.

• Property taxes "are one of the largest sources of revenue for local governments," per the Urban Institute, generating 30% of local revenue — or $581 billion — in 2020.

Driving the news: Property taxes continue to be out of sync with soaring real estate prices in most places.

• But property tax rates vary widely depending on the policies and fortunes of each individual city.

By the numbers: The average effective tax rate on a median-valued owner-occupied home fell to 1.32% in 2022 from 1.33% in 2021, the report found.

• That's a modest but noteworthy drop, given continuing economic prosperity and high inflation.
• At the 1.32% rate, someone whose home is worth $200,000 would owe $2,642 in property taxes (due to rounding), compared with about $2,660 at 1.33%.

Case study: San Francisco and Detroit have the highest and lowest median home values in the report — $1,306,400 and $69,300, respectively.

• To raise the same amount from a median valued home, the effective tax rate would need to be nearly 20 times higher in Detroit than in San Francisco — 5.03% versus 0.27%.
• But in actuality, Detroit's effective tax rate is just 1.9 times higher (1.71% vs. 0.90%).
• This means San Francisco collects 10 times more in property taxes from a median-valued home ($11,756 vs. $1,183).

The big picture: High property tax rates usually reflect a combination of heavy property tax reliance and low sales and income taxes.

• Cities with high property tax rates generally have low home values, which drive up the tax rate needed to raise enough revenue.
• But higher property tax rates can sometimes reflect more local government spending and better public services.

Between the lines: The fact that some cities depend more heavily on property tax income than others has led to a counterintuitive situation in which the cities with the highest effective property tax rates — Detroit and Newark, New Jersey — are among the poorest.

• Wealthy cities like Salt Lake City, Denver and Boston reap revenue from other sources, and thus have the lowest effective rates.
• To see where individual cities rank, see page 19 of the report.

Zoom in: The effective tax rates in Bridgeport, Connecticut; Aurora, Illinois; Newark and Detroit are at least two times higher than the average.

• Conversely, seven cities have tax rates that are half of the study average or less: Honolulu; Charleston, South Carolina; Boston; Denver; Salt Lake City; Boise; and Cheyenne.

Yes, but: In terms of the overall tax bill — the amount people pay — the results looked somewhat different, with some of the nation's most expensive cities rising to the top.

• The top five: Portland, Oregon; Newark; Los Angeles; New York City; and Aurora, Illinois.
• The bottom five: Charleston, South Carolina; Cheyenne; Charleston, West Virginia; Jackson, Mississippi; and Birmingham, Alabama.

What they're saying: The discrepancy in tax rates between rich and poor cities is probably "the hardest thing to get your head around," said Bob DeBoer, research director at the Minnesota Center for Fiscal Excellence.

• "In these large cities where the home values are quite low, they still need to collect enough property tax revenue to run a big city," he explained.
• "Unless their commercial values are high, they're going to need to collect a higher percentage — a higher effective tax rate — than a wealthier city."

The intrigue: Cities in states with "assessment limits," which shield longtime homeowners from the higher rates paid by new buyers, showed a dramatic difference in property taxes in 2022.

• In Jacksonville, Florida, for example, there was a 64.3% difference in property taxes for newly purchased homes vs. those that had been owned for the average duration for the city — the highest difference in the report. (See chart on page 42).
• Other cities with dramatic tax discrepancies caused by assessment limits: New York City (59.6%), Los Angeles (53.8%) and Phoenix (50%).
• "That was a little eye-popping," DeBoer said, chalking up the pronounced differences to how much property values rose during the pandemic.

Zoom out: A separate report published in April by ATTOM, the leading provider of real estate records and property data, found that nationwide, the effective property tax rate declined to 0.83% in 2022 from 0.86% in 2021 — the lowest point since 2016.

• States with the highest effective property tax rates in 2022: New Jersey (1.79%), Illinois (1.78%), Connecticut (1.57%), Vermont (1.43%) and Nebraska (1.36%).
• States with the lowest: Hawaii (0.30%), Alabama (0.37%), Arizona (0.39%), Colorado (0.40%) and Tennessee (0.42%).
• Last year, "effective rates continued to decline even as total taxes rose because home values went up faster than taxes yet again around the country," ATTOM said.

What's next: If home values rise — because high mortgage rates keep the supply of homes for sale tight — the effective property tax rate could continue to decline.

• But assessors seem to be getting wise: An analysis by the National Association of Home Builders found that property tax revenue rose steeply in the first quarter of this year, as tax rates started to catch up to home values.