Managing property taxes effectively requires seeing this as more than just having to pay another bill. Seeing the whole picture is critical: What are property taxes? What role do they play in terms of economic impact? And, what are some of the variables that might shape our understanding?  

Despite good intentions, proactive property tax management remains an enormous challenge. Some lack the data, others lack the tools. Almost universally, the industry throws significant volumes of human resources at the problem in an effort to get control of what is, for many, the largest operating expense in their portfolio.  

While there are some property tax professionals that endeavor to be strategic despite the challenges, others still see property tax simply as an exercise in paying bills—full stop. Realistically, however, many more layers need to be considered.  

Regardless of jurisdiction, (or nation, for that matter,) we find that nuances, exceptions, and anomalies embedded in every single tax bill. What we refer to as “variances” are the only constants across the property tax landscape. To illustrate how variance, as a consistent theme in property tax, manifests in a variety of ways, this paper offers examples from various jurisdictions across North America. As is often the case, the devil is in the details, so that is where we will begin.

In this brief, we present a contextual overview of property tax and the inherent variances that appear to be “built-in”. The topics we will cover include:

1. A definition and “rationale” for taxation

2. The financial impact of property taxes as a funding source

3. State- and local-level reliance on property taxes as a revenue source

4. How property taxes apply differently across different asset classes

5. The imbalance that plays out between commercial and residential property tax rates

Defining Property Tax

At its most basic level, a property tax is an ad valorem tax on real property (meaning it is a tax proportionally tied to the value of a property,) including land, buildings, and structures and is sometimes described as a “group user charge for benefits received” within city limits.  

A property’s value, often a contentious issue in the context of tax, can be calculated using any one of several different assessment methods. State and local governments establish property tax rates and precedents for assessment that are particular to that area (often a function of economic activity). It should be noted that in some jurisdictions, the methods for deriving assessments have remained unchanged for years.

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Financial Impact and Reliance

Property taxes are generally the primary source of revenue for local governments, and one of the largest sources of tax revenue across all levels of government. Just how significant is this source of funding?  

Recent statistics by Urban Institute suggest state and local governments in the United States collected a combined $577 billion in revenue from property taxes, or 17 percent of general revenue, in 2019. Property tax revenue as a percentage of state and local general revenue was higher than general sales tax revenue, individual income tax revenue, and corporate income tax revenue in 2019.

This study found property taxes accounted for 46 percent, almost half, of own-source locally generated revenue (i.e., excluding transfers from the federal and state government). This 46% represents a national average. However, in Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, and Rhode Island, property tax revenues accounted for more than three-quarters of own-source locally generated revenue in 2019.  

These large percentages provide just a sample of how reliant local communities can be on property taxes in various jurisdictions.

It is reasonable to think that any jurisdiction with high property tax rates reflects a government (or governments) that heavily rely on property taxes as a source of revenue. This can be especially true in jurisdictions with relatively low sales and/or income taxes.

It is also relevant to consider that many jurisdictions must factor in the impact of low home values on property tax revenue. Substantial funding needs and low home values can drive up tax rates. When required to raise enough revenue for higher local spending and better public services, there are only so many levers available to governments.  

Urban Institute stresses that the importance of property taxes directly correlates with the importance of local needs and the responsibilities of governing authorities. Property taxes are commonly collected at the local level of all 50 US states and the District of Columbia, where we commonly see cities, counties and school districts playing a substantial/direct role in the tax on real property.  

Similarly, in Canada, cities and municipalities commonly play a central role in collecting and spending property taxes. In many cases, property tax is the only funding source over which local governments in Canada have any control.  

In other words, to increase the revenues available to fund activities at the local level, jurisdictions usually have one of two choices—exercise their power over property tax rates or go pleading, hat-in-hand, to other levels of government that possess additional revenue tools.  

Reliance on Property Taxes at the State and Local Levels

Logically, it is common to see property taxes constituting a smaller portion of state revenue (as opposed to local government where, in some cases, property tax is the only source of revenue). In some instances where states leave taxation of real property to the local government, the share of property taxes that go to the state might be based solely on “personal property.”  

Of course, in property tax what may be generally true cannot be considered the norm.

Consider these statistics from Urban Institute reporting that state governments collected $18 billion from property taxes in 2019. In this example, the $18B constituted only one percent (1%) of state general revenue.  

In contrast, as one of their most critical revenue sources, local governments collected $559 billion in property taxes in 2019, or 30 percent (30%) of local general revenue. (Note: We previously cited a total of $577 billion in property tax revenue—that figure combines both the $18B and $559B presented above.)  

Once collected, property taxes help various levels of government fund a wide range of public services. The wide disparity (i.e., property tax makes up 1% of state revenues and 30% of local government revenues) sheds light on the fact that property tax revenues predominantly fund local services.

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Taxes Across Different Real Estate Asset Classes

Tax rates often vary widely across different real estate asset classes. These asset types include residential, multi-residential, commercial, and industrial, as well as a range of optional classes and sub-classes.

While there is a great deal of variance between jurisdictions, it is virtually always the case that commercial property taxes are higher than residential ones. One could say this is due to the fact that non-residential asset classes tend to have higher assessed values. However, tax rates are also subject to a great deal of variance across different property classes, most notably between residential and non-residential classes (such as commercial and industrial).  

To illustrate, consider the following statistics from Canada. A recent study by Altus Group showed the differences between tax rates in 11 cities across the country. In all cases, non-residential taxes were higher than residential, and in seven of the 11 markets, commercial taxes are currently more than two and a half (2.5) times higher than residential rates. These ratios are shown in the following illustration:

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Imbalance Between Commercial and Residential Property Tax

From a policy perspective, the gap between commercial and residential property tax rates has become an important area for communities to pause and reconsider their policies. Many cities are doing what they can to achieve a greater degree of “tax equity” across residential and non-residential asset classes.  

Toronto, a city where real estate prices have spiked, is trying to achieve a greater balance by increasing the tax rate for residential properties by a higher percentage than commercial.  

For example, in 2017, commercial property rates were almost quadruple (3.81 times) residential rates. At the time of this writing, the commercial-to-residential property tax rate ratio has dropped to 3.36, which is a reduction of 2.42%.  

Local governments are trying to devise solutions to address these disparities (such as the ratios between residential and non-residential property tax rates). As well, there are other systemic shortcomings (e.g., infrequent assessments will be discussed in more detail below) that local taxing jurisdictions are working to resolve. The intention of such efforts is to try to find creative solutions that might smooth out inconsistencies in property tax policy and give local real estate taxing authorities more revenue stability and predictability as markets evolve and shift.

The intended effect of reducing the commercial-to-residential ratio is working. Nevertheless, one major concern remains: infrequent property assessments do not make sense in a market that is experiencing incredible short-term changes in property values. This is the case in Toronto where property values are assessed every four years and property values have been skyrocketing in the intervening years. It’s virtually impossible to use taxation policy to combat/correct for the significant impact of rapidly changing values on future tax treatments when frequent assessments are not part of the solution.

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Variance Is the Challenge

Variance is the common theme interwoven throughout this discussion and occurs at multiple levels. Whether involving different asset types or multiple geographic regions, we see that local tax contexts and policies across North America are distinct with their own patterns and anomalies. It’s as if every jurisdiction has its very own property-tax fingerprint.  

The variations we see in property tax policies between jurisdictions reflect the need for local governments to address differences in property values, revenue needs, and more. There is no one-size-fits-all solution when it comes to administrating property taxation.  

At the same time, such variations contribute to the ongoing challenges associated with managing property tax obligations. Certainly, managing property taxes is complicated by the volume of properties in one’s portfolio. We also know that, for every taxing jurisdiction, property taxes must be managed in a way that is sensitive to the local policy anomalies and contextual factors.  

It’s easy to understand how those responsible for managing property taxes for large real estate portfolios can quickly become overwhelmed. The variances we see across jurisdictions, asset classes, values, and market conditions are merely a small snapshot of the complexity real estate owners and operators face.  

In one way, it is shocking to consider that, even in 2023, there is a faction of the industry viewing property tax assessment as just another bill. It’s as if this complex arena of real property taxation can be reduced to the status of any other utility bill or user fee. The fact is, processing payment on property tax bills as an instant and knee-jerk reaction is not the best option—not by a long shot.  

We can accept that the reality of variances makes operational differences in property tax management a necessity. You simply cannot use the same spreadsheets and protocols to manage property taxes across a divergent and geographically dispersed property portfolio. Doing so would be a risky business proposition. That being said, assuming every taxing jurisdiction gets your bill right and paying it blindly every time is risky business too.  

What it comes down to is this—How can property tax management be optimized? Once “optimized,” is it possible to gain control over property tax as an expense line item? When considering the strategic importance of property tax to your investment portfolio’s value, control and optimized property tax management become imperatives. So, we shouldn’t be asking if optimization is possible. We should be asking how it is possible.  

Wouldn’t it be wonderful to have so much control that you can begin to see property tax as a strategic lever you can use to optimize the value of your investment portfolio?

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‍Conclusion

This brief provides a high-level perspective on the contextual complexity, nuance, and differentiation inherent in the property tax industry. Variances multiply almost exponentially with every new property, parcel/roll number, and jurisdiction you add to your portfolio.  

To strategically manage the burden of property tax expenses, especially in the context of a large portfolio, ignoring the variances between jurisdictions is no more an option than attempting to juggle them all at once. No matter how many expert hands you add to your “property tax juggler team,” you’re still juggling—and there is potential to drop a ball.  

As said at the opening of this primer, vast human resources are invested to tackle the issue of variances in property tax. At Rethink Solutions, we’re not convinced the issue (or solution) is expertise. The problem may be that variances create a circus-type scenario where it’s just a matter of time before someone slips off the tightrope, no matter how skilled they may be.

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Next Steps

At Rethink Solutions, we believe the solution to today’s property tax management challenges is one of design. We all know what we wish we could easily and quickly do with the data at our disposal. That’s where technology comes into play.  

Built into its very design, our flagship software—itamlink—streamlines any number of variances into best-practice processes. In so doing, itamlink unlocks and operationalizes the power of your experts so the strategic possibilities become virtually limitless.  

Beyond itamlink, there is simply no other software on the market today that services the complete property tax lifecycle in a way that makes variances manageable at every stage.  

If you are interested in seeing how itamlink can help tame the variances muddling your portfolio, , book a personalized consultation and demo: www.rethinksolutions.com  

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