State Limits on Property Taxes Hamstring Local Services and Should Be Relaxed or Repealed
Beginning in the 1970s, many states adopted new limits that sharply reduced funding for education and other important services by capping property taxes. The time has come for states to reconsider these harsh limits, which have put severe pressure over time on local governments' ability to deliver the services that their residents expect and need, from schools and police and fire protection to city parks and affordable housing initiatives. Property tax limits also hamstring localities' ability to provide services that boost opportunity for their residents. And they increase racial and economic inequities, in part by leading localities to use revenue sources that fall harder on lower-income people. In these ways, property tax limits harm the quality of life of our communities and make it much harder to produce broadly shared prosperity.
States haven't made up the revenue that localities have lost due to property tax limits -- sometimes even when the limits supposedly required them to do so -- and some states have cut local aid.
As a result, local governments have cut services and now rely more heavily on less desirable forms of revenue such as sales taxes and fees. These trends have resulted in less funding for schools and other local services. One study of spending by
The shift to sales taxes and fees also increased income disparities because they are more regressive than property taxes are. Property tax limits appear to increase localities' reliance on fees to fund services, from community college tuition and hospital fees to fees for student athletic participation and occupational licensing. This may be particularly problematic when the fee increases occur in the area of courts and police services, a recent trend that has exacerbated racial inequities and undermined public trust in the criminal justice system. A
Property tax limits also have expanded racial income gaps by providing disproportionate savings to white homeowners, who are more likely than African Americans or Latinos to own expensive homes, in part because past government policies segregated people of color in lower-value areas. And limits have created other problems as well, some of them unintended. In Oregon, for example, similarly valued homes can receive drastically different tax treatment because the state's limits do not reset when a property is sold but instead are permanently attached to the property. Some homeowners in
This report looks at the problems that property tax limits have caused across the country and focuses on four states:
Property taxes are an important component of a healthy state-local revenue system, and limits interfere with this important role. It is helpful for states and localities to use a variety of taxes that exhibit different properties across the business cycle and tax different aspects of residents' behavior. Property taxes have historically been more stable than income or sales taxes; if they do decline in recessions, they usually do so with a lag, even as other revenue sources are recovering. And they are, at least in part, a tax on wealth rather than income or consumption, adding diversity to revenue sources.
As states repeal or reform property tax limits, they can reduce the pressure for property tax increases by strengthening other revenue sources. Possible steps include raising personal income taxes for high-income residents who have gained the most from rising inequality, adopting or expanding state inheritance and estate taxes, closing loopholes that allow profitable corporations to avoid taxes, and other measures that ask the wealthy to contribute at least as much of their income in state and local taxes as middle- and low-income families. The federal government can also help by increasing -- or at least not further cutting -- funding for schools, infrastructure, and other national priorities delivered at the state and local level.
States Constrain Local Property Taxes
The property tax is primarily a local government tax and can be a flexible revenue source to support schools and locally provided public services. In its purest form, it is based on an assessment of the market values of all properties in a jurisdiction. Once these values are established, the jurisdiction applies a tax rate to yield the amount of revenue needed to support the desired level of services. Property tax limits interrupt this calculation. Some constrain the percentage by which assessed values can grow each year, others limit the property tax rate, and still others -- the most severe -- limit the percentage growth in property tax revenue each year. These last are known as levy limits.
Although property taxes are primarily a local revenue source, states largely control the conditions under which they are administered. Property tax limits generally are enacted by states and cover an entire state. Some states have statutory limits enacted by legislatures; others have constitutional limits, which generally required approval by voters.
Property tax limits date far back to the 19th century,(1) but the late 1970s was by far the most significant period for states adopting limits. The number of state-imposed limits nearly doubled in the 1970s and 1980s, as levy and assessment limits first became widespread. Today, 44 states and the
Since the late 1970s, the property tax has shrunk considerably as a local revenue source. Between 1977 and 2015, property tax revenue nationally fell from 50 percent of local governments' own-source revenue to 39 percent, Census data show. (See Figure 1.) Over that same period, local government property tax collections fell from 3.7 percent of personal income to 3.0 percent.(2)
See chart here (https://www.cbpp.org/research/state-budget-and-tax/state-limits-on-property-taxes-hamstring-local-services-and-should-be).
The decline is even more evident in states with long-standing property tax limits, which include three of the four focus states for this report:
See chart here (https://www.cbpp.org/research/state-budget-and-tax/state-limits-on-property-taxes-hamstring-local-services-and-should-be).
States and Federal Government Have Exacerbated Localities' Problems
State property tax limits might have caused less harm to residents if either states or the federal government had made up for the lost local revenue. But that generally did not happen, sometimes even in states whose limits required the state to make up the lost local revenue. To the contrary, federal aid to localities fell from 8.4 percent of total local revenue in 1977 to 3.8 percent in 2015, while state aid to localities dropped from 30.7 percent of total local revenue to 28.4 percent.(4) (See Figure 3.)
See chart here (https://www.cbpp.org/research/state-budget-and-tax/state-limits-on-property-taxes-hamstring-local-services-and-should-be).
In some states, income tax cuts have left inadequate revenue available to sustain previous levels of support for localities. For example, income tax cuts in
Further cuts in federal and state aid to cities, towns, and schools are likely. The federal tax bill enacted late in 2017 limits the deduction for state and local tax payments, which will affect the ability of states (and localities) to sustain or increase their taxes to meet needs. And when a state has difficulty balancing its budget -- whether because of federal actions, a recession, or other reasons --aid to localities typically is among the first places it cuts. In addition, the
The failure of state aid to make up for the revenue lost to local property tax limits is evident in the focus states of this report.
*
See chart here (https://www.cbpp.org/research/state-budget-and-tax/state-limits-on-property-taxes-hamstring-local-services-and-should-be).
*
* Oregon's aid to local governments grew as a percentage of local government general revenue from 1990 (when Ballot Measure 5 was enacted) through 2002 but has since fallen. If state aid in 2015 had constituted the same percentage of local general revenue as it did in 2002, it would have been 14 percent greater.(16)
Limits Have Forced Cuts in Local Services
Constrained by the limits on their ability to raise revenues, local governments and schools have little choice when hitting property tax limits but to cut spending, often with serious consequences for residents.
The result is that
Localities responded to these serious challenges in large part by cutting spending for services. One study of spending by
See table here (https://www.cbpp.org/research/state-budget-and-tax/state-limits-on-property-taxes-hamstring-local-services-and-should-be).
Total spending for
In a
In a 2017
Survey respondents reported that infrastructure -- particularly road repair -- and planning are the budget needs most affected by fiscal stress; cuts to infrastructure, economic development, and planning will have long-term impacts. Localities also reported that they are cutting recreation and elder services (especially in cities, where 41 percent reported cuts). Social services are least likely to be affected by fiscal stress because state mandates require these services regardless of local budgetary limitations. There nevertheless have been significant cuts in social services, as the comptroller's data cited above show.
Localities Have Turned to Less Desirable Revenue Sources
When localities in states with property tax limitations have sought to avoid significant spending reductions, they typically have tapped other revenue sources that may be available to them. These choices have major consequences for lower-income populations and communities of color, since the other major sources of local government revenue -- such as sales taxes and fees -- typically fall harder on those with the least income than do property taxes.
In some states, localities are allowed to institute or raise general sales taxes.(22) These are localities' second-largest revenue source after property taxes, and so a likely option for localities in which harsh limits have been imposed. Indeed, sales taxes increased from 6.9 percent of local government own-source revenues nationally in 1977 (before the "property tax revolt" began) to 9.4 percent in 2015.
Since sales taxes are far more regressive than property taxes, this shift has worsened income inequality, which has already widened sharply over recent decades. As Figure 5 (which uses data from the
Another option generally open to localities is to increase fees for services such as sewerage, trash pick-up, community college classes, and participation in school athletics or other extracurricular activities. Like sales taxes, fees typically fall hardest on those with the least ability to pay. In Oregon, for example, fee increases resulted in a shift in who pays for local services from property owners to users of certain services. As one study of Oregon's complex property tax limits noted:
* Depending on the growth of assessed value, a taxing district's revenue may grow slowly, or even decline, from one year to the next. This was a fundamental component of Measure 50. . . . But citizens, who depend on police, fire, library, public health and education services, continue to depend on those services even when the assessed values within the district decline. Taxing districts across the state with low rates of assessed value growth are caught in the middle, expected to provide the same services as before, even when property taxes are flat or declining.... Districts have responded by implementing more and more user fees, transferring responsibility for paying for certain services from the general property tax system (property owners) to those who use a particular service (citizens). Community college tuition has increased. School districts charge more for participation in athletics, music, and drama.(23)
Indeed, local government fees and charges for services have increased as a percent of local own-source revenues throughout the country in recent decades as property tax caps have proliferated. All three states considered here with long-standing property tax limits have had significant increases in the use of fees since 1977, before the "property tax revolt" began. (See Figure 6.)
Even in the short time
See chart here (https://www.cbpp.org/research/state-budget-and-tax/state-limits-on-property-taxes-hamstring-local-services-and-should-be).
Fees are especially burdensome for low-income residents because they typically are a flat amount for all residents regardless of income and thus represent a larger share of their income. For example, a
See chart here (https://www.cbpp.org/research/state-budget-and-tax/state-limits-on-property-taxes-hamstring-local-services-and-should-be).
For low-income people and people of color, some of the most burdensome fees are connected to criminal justice systems. For example, the unrest in
* Recent years have seen increased attention on the illegal enforcement of fines and fees in certain jurisdictions around the country -- often with respect to individuals accused of misdemeanors, quasi-criminal ordinance violations, or civil infractions. Typically, courts do not sentence defendants to incarceration in these cases; monetary fines are the norm. Yet the harm caused by unlawful practices in these jurisdictions can be profound. Individuals may confront escalating debt; face repeated, unnecessary incarceration for nonpayment despite posing no danger to the community; lose their jobs; and become trapped in cycles of poverty that can be nearly impossible to escape. Furthermore, in addition to being unlawful, to the extent that these practices are geared not toward addressing public safety, but rather toward raising revenue, they can cast doubt on the impartiality of the tribunal and erode trust between local governments and their constituents.
An accompanying press release noted that these practices are "particularly severe for the most vulnerable members of our communities, often with a disproportionate impact on racial minorities."(26)
The harm done by fees and fines in
Evidence suggests that the use of fines and fees as part of the punishment for a criminal offense has been increasing. In 1986, 12 percent of those incarcerated were also fined; by 2004 this number had risen to 37 percent -- and to 66 percent if one also includes fees. For example, the number of states charging fees for probation and parole supervision rose from 26 in 1990 to 44 in 2014.(29)
Limits Reduce Opportunity and Increase Inequities
Property tax limits not only encourage a shift from property taxes to sales taxes and fees, which increases burdens on low-income people and people of color, but also reduce opportunity and increase inequality, making it harder to create a desirable economy and quality of life.
In part because of historical racism and current discrimination, taxing jurisdictions in
Since past government policies helped segregate neighborhoods by race and so are partly responsible for these inequities,(31) it would be appropriate for today's public policies to help overcome the racial bias that remains embedded in today's effective property tax rates. Instead, property tax limits tend to lock in these inequities. For one thing, the dollar savings from a property tax limit typically will be greater for owners of high-value homes, who are more likely to be white (due in part to policies that blocked African Americans from buying homes in higher-value jurisdictions). Those greater dollar savings for white households will increase racial gaps in income and wealth. Further, disparities will grow over time whenever property values rise more quickly in areas with more high-value homes, increasing the relative value of a property tax limitation.
In such circumstances, property limits typically provide more benefit to white homeowners, who are more likely than African Americans and other people of color to own high-value homes. One recent study found that whites received about 89 percent of the total tax savings from property tax limitations nationally in 2011. The authors wrote:
* (M)ost forms of property tax limitation exacerbate racial inequality, providing the greatest reduction in effective tax rates to white homeowners. . . . American homeowners do not benefit equally from property tax limitation because Americans are sorted by race into different wealth classes, and because homeowners are sorted by race and wealth into different taxing jurisdictions with different effective tax rates."(32)
The study estimated that in 2011, property tax limits generated
In addition, cuts in local services stemming from property tax limits may especially harm low-income communities and communities of color. Cuts in human services and public assistance, for example, likely cause additional hardships in low-income communities. Cuts in maintenance for sidewalks, streets, streetlights, and other public infrastructure may add to the difficulty of living in low-income neighborhoods and contribute to increased segregation by income and race as some neighborhoods become less desirable places to live -- as famously occurred in
Property tax limits also have a substantial effect on the funds available for schools. They may directly constrain the growth in property taxes designated for schools, such as in
Indeed, Oregon has not adequately funded education, despite the requirement that the lost funds be replaced. Oregon public schools received 3.3 percent less funding per pupil from state sources in 2015 than they did in 2008, after adjusting for inflation.(35) A report from the
* Older Oregonians will remember that their schools had school counselors, nurses and librarians. Today, many schools across our state lack these basic features of a quality school. The deficiencies of our educational system don't stop there. We have some of the nation's most crowded classrooms, some of the shortest school years, and low graduation rates. Many Oregon schools can't provide students rich course offerings in science, technology, engineering and math -- the "STEM" courses that prepare children for the technological world which they will enter after graduation. Many schools also don't offer much in the way of arts, which help children develop their creativity and cognitive skills.(36)
Underfunding public education can increase inequality and cut off paths to social mobility -- especially for lower-income children of color and newer immigrants, since higher-income families who find the public school lacking can often send their children to a private or parochial school. Also, votes to override property tax limits tend to be more successful in areas with higher-income residents (see below). And if a property tax limit takes effect when funding for schools in lower-income areas lags that of higher-income areas, the limit can lock in that disparity by constraining annual funding growth. For all these reasons, lower-income, minority, and immigrant children may be stuck in sub-par schools.
Limits Have Other Unintended and Harmful Consequences
Constraining property taxes often sets off a variety of other negative consequences. Many property tax limits lock in certain parameters such as assessments, tax rates, or total levies; many also squeeze down local government and school spending over time. When limits have been in place for an extended period, these features may become increasingly inequitable and unworkable, creating problems that policymakers may not have foreseen when enacting them. Here are a few examples:
* Because Oregon's property tax limits do not reset when a property is sold, similarly valued homes can receive drastically different tax treatment. The problem is especially acute in the
* As mentioned above, in the aftermath of the Great Recession,
* Allowing overrides of property tax limits could, in theory, prevent some harmful consequences. But overrides are very limited in
* Many property tax limits sound simple on the ballot but involve a fair bit of complexity when implemented -- especially when the state must reconcile two limits enacted at different times, as in
States Can Adopt Better-Targeted Property Tax Policies
States have better alternatives to relieve property taxes for middle- and low-income taxpayers and seniors, who might have difficulty affording the taxes. Two such alternatives are circuit breakers and homestead exemptions.
Circuit breakers provide a refund from state revenue to households whose property tax payments are deemed unaffordable (usually because they exceed a specified proportion of the household's income). They allow the property tax to continue funding essential services like education while targeting assistance to those who need it.
In 2017 some 14 states and the
Another strategy is to create or expand a homestead exemption in conjunction with relaxing or eliminating a property tax limit. A homestead exemption exempts a flat amount of the value of a property from taxation. Most states provide such exemptions for owner-occupied homes, but the exemptions vary greatly in size and sometimes are restricted to particular groups of homeowners, such as the elderly or veterans. Since homestead exemptions are a flat amount, they relieve a higher percentage of property taxes for middle-income taxpayers with more modest homes than for high-income taxpayers with large homes. Unlike a circuit breaker financed from state revenues, a homestead exemption reduces the revenue available to a locality to finance schools and other public services, but it's better targeted to needy taxpayers than a property tax limit.
States Can Relieve Pressure on Property Taxes
States can couple eliminating or reforming property tax limits with actions to avoid unwarranted increases in property taxes, or in some cases to reduce those taxes States can increase income taxes, especially for high-income residents who have gained the most from rising inequality. Other options include adopting or expanding state inheritance and estate taxes, which typically are paid by the very wealthy; closing loopholes that allow profitable corporations to avoid taxes; and other steps that ask the wealthy to contribute at least as much of their income in state and local taxes as middle- and low-income families. (The bottom fifth of households pay 10.9 percent of their incomes in state and local taxes, according to the
As noted, federal aid to localities has dropped precipitously since the late 1970s, and the
Conclusion
Each of the four states that this report examines --
Most property tax limits were enacted 20 years ago or more. Today's fiscal climate for state and local governments is very different: federal and state aid to localities has declined over time, making localities more reliant on their own-source revenues, and many states are grappling with structural weaknesses in their revenue systems that leave them unable to raise enough revenue over time to cover existing services, which could lead to further cuts to aid for localities. A new round of cuts in federal grants to states and localities could well occur as well.
For all these reasons, it is time for states to repeal or relax existing property tax limits in order to enable localities to afford the services that their residents expect and need. And it would be a mistake for any state to enact additional property tax limits now.
See table here (https://www.cbpp.org/research/state-budget-and-tax/state-limits-on-property-taxes-hamstring-local-services-and-should-be).
Footnotes:
(1) See
(2) State & Local Government Finance Data Query System, https://slfdqs.taxpolicycenter.org/pages.cfm, Urban Institute-Brookings Institution Tax Policy Center. Data from
(3)Ibid.
(4)Ibid.
(5)
(6) Email from
(7)
(8) The federal tax changes enacted at the end of 2017 will increase federal deficits by
(9) The statutory revenue sharing requirement has never been repealed, but the legislature has changed the formulas for distribution and the amount of the distribution many times since 2002.
(10)
(11) Urban-Brookings State and Local Finance Data Query System.
(12) State aid to localities rose from 1981 through 1989, declined in the recession of the early 1990s, and then grew again through 2001.
(13) Unrestricted aid is aid to localities for purposes other than education.
(14) Wise and Rivera, "Income Tax Cuts and the Budget Deficit in
(15) The 2018 Massachusetts budget did increase both local aid and school aid. But the
(16) The general revenue of Oregon localities in 2015 was
(17)
(18)
(19)
(20)
(21)
(22) States control the types of revenues that localities and schools can raise. Local general sales taxes exist in 38 states, although not necessarily in all localities in those states; the other states do not permit them. "Tax Policy Center Briefing Book: State (and Local) Taxes," http://www.taxpolicycenter.org/briefing-book/how-do-state-and-local-sales-taxes-work.
(23)
(24) Aldag et al.
(25) Letter from
(26)
(27)
(28) "Fines, Fees, and Bail: Payments in the Criminal Justice System that Disproportionately Impact the Poor,"
(29)Ibid.
(30)
(31) See, for example,
(32) Martin and Beck, pp. 221, 232.
(33)Ibid. The authors' model implies that white homeowners received 89 percent of the tax savings from property tax limitations, or
(34)
(35)
(36)
(37) John Tapongna and
(38)
(39)
(40)Ibid.
(41) In 2016, there were 112 Proposition 21/2 ballot questions in 78 cities and towns, 37 percent of which passed.
(42)
(43)
(44)
(45)
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