Rising property taxes spur revolt, bonds could be affected

High growth and population shifts in some areas of the country are spiking property taxes, causing taxpayer revolts and potentially endangering funds used to support bond issuance. 

“The property tax won’t win any popularity contests with homeowners, but it still has an important role to play in public finance,” said Jared Walczak, vice president of State Projects at the Tax Foundation. His comments come in conjunction with a report published by the Tax Foundation on Tuesday.

“Policymakers can and should address taxpayers’ legitimate grievances about out-of-control property tax bills, but they should do so without upending a system of taxation that is more efficient, fair, and pro-growth, and better suited to municipal finance, than any of the alternatives.” 

According to the report, “Property values have skyrocketed in recent years, rising almost 27% faster than inflation since 2020, which yields dramatically higher property taxes in jurisdictions that fail to adjust millage rates downward.

Property taxes are a reliable bedrock for paying debt service on municipal bonds. The Tax Foundation is a non-partisan think tank and prominent voice in tax policy.

“Limits on the rate of growth of property tax collections are imposed by many jurisdictions and typically haven’t posed significant issues for the ability to meet bond obligations,” said Walczak.   

“But eliminating the property tax, or substantially curtailing it, even if it’s replaced by some other revenue stream, eliminates the tax against which bonds were issued, and introduces uncertainty and volatility.”  

The Tax Foundation deems property tax to be “relatively economically efficient, worth saving and therefore worth reforming.”  

Cities, counties, and school districts typically set property tax rates, with the scope of their taxing authority varying from state to state, but state legislatures can apply caps, abatements, and limitations. 

Taxpayers in fast-growing states, especially in the Mountain West, have seen large jumps in property values and the corresponding taxes. But reacting by cutting them affects the schools and public services needed to serve the additional new residents.   

North Dakota is deciding on the total elimination of all property taxes in this year’s election.

Nevada is currently operating under an abatement plan by capping taxes on an owner’s primary residence at 3%. Boosting sales tax and fees are used to address any budget shortages which many see as unfair burdens on low-income residents.

In August Nebraska lawmakers passed a slimmed-down property tax relief bill that reduced the burden by about 20%. The state’s Republican governor promised a 50% cut that collided with a budget shortage.

Wyoming capped the tax on single family residences at 4% in May and starting in 2025, senior residents who satisfy residency requirements can apply for a 50% exemption of assessed property values.  

California has been tinkering with its property taxes since 1974.
In 2020 it passed Proposition 19 that increased the property tax burden on owners of inherited property and used the money to provide tax benefits to seniors, disabled homeowners, and victims of natural disasters. 

According to a report from the Pew Charitable Trusts, “As states grapple with the pressing issues surrounding property tax relief, legislators must also consider the implications on the sustainability of local government funding. Although some states have managed to provide temporary relief through budget surpluses, the long-term viability of such solutions remains uncertain as revenues dwindle.”     

Last week, the Tax Foundation issued its findings on state tax competitiveness. The report “ranks, both overall and across five subindices—individual income taxes, corporate taxes, sales, use, and excise taxes, property and wealth taxes, and unemployment insurance taxes.”  

Wyoming, with its capped property tax came out on top in the No. 1 position, with South Dakota, Alaska, Florida, and Montana rounding out the top five. Maryland, Connecticut, California, New Jersey, and New York are judged to be the worst. 

Many states have filled their reserve funds to unseen levels from a combination of federal stimulus money and higher tax collections, both leftover effects of the pandemic.  

The extra money has also led to rebates and cuts to income taxes, which alarms some tax experts. Economic growth is trending stronger in the West, Southeast and Southwest while lagging in the Northeast and Midwest.