Introduction
In matters of property tax, a consistent and recurring theme is the variability of tax rates and tax policy across different jurisdictions. Urban Institute conducts very sophisticated work and recently presented some fascinating statistics depicting the degree of this variability.
When we reviewed the report, one statistic really stood out concerning how reliant some states are on property tax revenue. Though all states rely on property tax to some degree, there were some who were particularly reliant. According to Urban Institute:
“All states have property taxes (at least at the local level). New Hampshire was the most reliant on property tax revenue in 2019, as the tax accounted for 36 percent of its combined state and local general revenues. “
We wondered what was it about New Hampshire, in particular, that made it stand out the way it did. For that matter, what were the characteristics of the other states on this list, as well as those at the bottom of the list? We believed this was tied to their correlation to other underlying factors that might present a more complete picture, so this prompted us to dig a little deeper.
We proceeded to conduct our own investigation and found detailed statistics from the Tax Policy Center of Urban Institute and The Brookings Institution, which largely validated these findings. The following infographic has been extracted from that data showing the top ten states most heavily reliant upon property tax revenues:
Chart 1
Source: Tax Policy Center (TPC), State and Local General Revenue, Percentage Distribution
We then observed a data set at the other end of the spectrum showing those states least dependent on property taxes. These findings are displayed below:
Chart 2
Source: Tax Policy Center (TPC), State and Local General Revenue, Percentage Distribution
A cursory analysis of these numbers might suggest the latter grouping possesses a greater degree of resilience in terms of tax dependence, but before jumping to conclusions, remember, these figures are expressed as percentages, and actually represent the proportion of revenue collected by governments from all sources.
Consider the most significant source of revenue comes from transfer payments from both the Federal and State governments, which according to Urban Institute research, constitutes 51% of total general revenues. But in addition to property taxes, local government also generates revenue from several other sources, including individual income taxes, general sales taxes, selective sales taxes (items such as alcohol, gas, and tobacco products), corporate income taxes, and estate taxes. Thus, property tax is only one part of the equation.
One theme repeatedly emphasized in this forum is the fact that tax policy between states differs widely. In some states, the funds they may not be able to generate via property tax are made up in other areas. This explains New Hampshire’s heavy reliance on property tax in the absence of individual income tax or general sales tax. Another example is Florida, which since 1968, has eliminated the collection of income tax. This, in part, has contributed to explosive population growth within the state.
Tax policy is generally a function of many variables, but we had a hunch that these numbers might better be explained by examining a connection to other economic factors. Our thesis was basic: property tax dependence was a function of the general economic health of an area; the higher the dependence on property taxes, the greater its economic health, which in turn is the major driver of real estate prices (for both residential and non-residential real estate).
Examining the Impact of Per Capita GDP
Once we established a viable framework to proceed, it was simply a matter of sourcing the right statistics. We began by examining data measuring GDP output from the Bureau of Economic Analysis, which is a division within the U.S. Department of Commerce. We initially gathered cumulative data on GDP by State and Region. Once collected, we divided it by the population of each state to yield a per capita estimate. The following states had the top ten highest levels of per capita GDP:
Chart 3
Source: Bureau of Economic Analysis (U.S. Department of Commerce)
We now compare this with the states having the lowest per capita GDP:
Chart 4
Source: Bureau of Economic Analysis (U.S. Department of Commerce)
When these datasets are compared, there is a loose connection within the top ten as three of the states (Massachusetts, Connecticut, and Texas) are also on the list of the most dependent on property tax. This also may suggest that given the high output, the economy is more diversified, which in turn allows a greater proportion of income to come from those other areas cited above, including income tax and corporate tax.
We also can’t discount the impact of legislation in some states limiting the amount of property tax that can be collected. In this regard, simply consider the impact of Proposition 13, a piece of legislation passed in California in 1978 that restricted assessment increases.
Things become a little clearer in terms of establishing a connection between economic data and reliance on property taxes when we examine the bottom ten, as six of the ten states (West Virginia, Arkansas, Alabama, Kentucky, New Mexico, Louisiana) are also on the list of states least dependent on property tax. Lower GDP output suggests a lower demand for real estate, thus limiting the amount of revenue that can be collected from property taxes.
Measuring the Impact of Per Capita Income
GDP and income are closely connected concepts, so we examined the connection between these two metrics by analyzing per capita income, a metric commonly used to gauge the economic health of a region, to see how well it correlated with the top ten and bottom ten lists of property tax reliance. The methodology was identical to the one used above – we compared the states with the top ten and lowest ten per capita income rates and again compared them with the property tax dependence stats.
We begin with the states in the top ten:
Chart 5
Source: Bureau of Economic Analysis (U.S. Department of Commerce)
From the outset, we found that four of these states (Connecticut, Massachusetts, New Jersey, and New Hampshire) also were the most dependent on property taxes. That may seem tenuous, but if we take a closer look, we see California is not on the list, likely owing to assessment limitations imposed by Proposition 13. More importantly, however, this again reinforces the idea that states not on the list have well-diversified economies and are more balanced in terms of the proportional funding coming from other sources.
What is also notable here is the top three states most reliant on property tax (New Hampshire, New Jersey, and Connecticut) are all on the list of states with the highest incomes.
Connecting Economic Indicators to Real Estate Prices
Perhaps the most interesting correlation comes when examining the bottom ten states in terms of income. Look closely at the chart below:
Chart 6
Source: Bureau of Economic Analysis (U.S. Department of Commerce)
Of the ten states with the lowest per capita income, a whopping seven (West Virginia, Alabama, Arkansas, Kentucky, New Mexico, Louisiana, and Oklahoma) are least dependent on property tax. This finding tends to demonstrate states least dependent on property tax are not necessarily making some statement about how much they may resist the idea of paying taxes, but maybe something a little more benign.
It seems there are higher correlations between the datasets at the bottom of the list, which might simply be a function of real estate values. Based on this supposition, we finally conducted an analysis of the states with the highest and lowest median values.
Determining the values of non-residential assets can be trickier, so we simply looked at the value of home prices as a proxy. The higher the median prices of real estate, the more likely a greater amount of revenue will be derived from property taxes. These are the states with the highest median home values in the United States:
Chart 7:
Source: World Population Review
This data reveals only two of the ten (Massachusetts and New Jersey) are most reliant on property tax, but when we remove Hawaii as an outlier (more difficult for people to move to other states, which keeps demand high), and California is again limited by Proposition 13, and we look at the top fifteen, that number jumps to five (Connecticut, Rhode Island, and New Hampshire), a loose connection appears.
Finally, let’s examine the states with the lowest median home values. See the chart below:
Chart 8
Source: World Population Review
Five of these states are least dependent on property tax, reinforcing our suspicion that lower real estate values limit the ability to generate the type of revenue states with higher real estate values are more readily able to achieve. Thus, they need to generate proportionally higher revenues from other tax sources.
Ultimately, this suggests that when property values are higher, it is not necessarily a signal that the places where that real estate is situated will generate the highest proportion of revenue from property taxes, but the fact five are in the top fifteen suggests an awareness of the importance of this as a funding source. The bottom ten is more telling, as it confirms that low values lessens the importance of property taxes in the overall scheme of public financing.
Conclusion
Given these findings, are we able to extract the ultimate takeaway? Firstly, it reinforces a common theme that we continually emphasize: there is a great amount of variability in property tax policy that exists from state to state, so this analysis provides a clearer picture as to why such variability occurs. If a particular state possesses a certain degree of economic clout, it has a better ability to generate revenue from other potential sources of income.
With this said, given the value of real estate is often tied to the income and output of a region, it naturally yields higher real estate values. But this isn’t an open invitation for governments to automatically capitalize. Depending on an individual state’s policy toward assessment, those higher-value areas naturally have a better ability to generate revenue from property taxes if they choose to do so, but we must be mindful that when setting policies that are too aggressive, state governments run the risk of alienating themselves from voters (the rationale behind California’s Proposition 13).
Many large institutional portfolio owners have assets in multiple jurisdictions, and meeting property tax obligations encompasses far more than simply making a payment. It is a complex undertaking and this exercise provided a sampling of some of the many variables that come into play when setting policy. In turn, at a high level, this can demonstrate why one state may be more or less reliant on property taxes than another. The data in this case can often become overwhelming unless it is attacked in an orderly and structured fashion.
The same can be said about the way property tax obligations should be optimally managed. Creating a structured methodology can be vital. If an assessment is sent, and the recipient senses that the assessment may not be correct, there may be grounds to initiate a further investigation, but given the complexities and variability, property tax professionals need the type of tool that can provide order, structure, and logic to the process.
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