State and Local Tax Policy: How do property taxes work?
Jurisdictions in all 50 states and the District of Columbia impose property taxes, which provide local and some state jurisdictions with a stable and reliable source of revenue. Most property tax revenue comes from levies on real property (land and improvements to land) but states often tax personal property (such as noncommercial motor vehicles) as well. The tax equals a percentage (the tax rate) of the assessed value of the property and may be levied in some form at every level of government—state, county, municipal, township, school district, and special district. In 2006, states and localities collected $359 billion, nearly 97 percent at the local level.
- The property tax gives state and local governments a stable and reliable source of revenue. Its base is immobile and, as real property values rise over time, revenue grows with no rate change. Tax jurisdictions could keep revenues constant by lowering rates but they tend to do so only with a lag.
- The property tax is very unpopular among taxpayers. It is highly visible, different assessments for similar properties give a sense of unfairness, and the tax may unduly burden fixed-income property owners.
- The share of total revenue provided by property taxes varies widely from state to state, ranging in 2006 from just 6 percent of general revenue in New Mexico up to 34 percent in New Hampshire.
- The importance of property taxes differs greatly across levels of government.
- In total, local governments – counties, cities, townships, school districts, and special districts – get 28 percent of their general revenue and 72 percent of their tax revenue from property taxes, a total of $347 billion in 2006.
- Independent school districts rely most heavily on the property tax for own-source general revenue, receiving 79 percent from this source. They also receive intergovernmental aid, usually from the state.
- Counties raise 39 percent of own-source general revenue from the property tax, while property tax revenues make up 34 percent of own-source general revenue for cities and townships.
- States get only a small fraction of their tax revenue from property taxes, less than 2 percent in 2006. However, states that lack a sales tax or an income tax (or both) typically rely more heavily on property tax revenue: the levy’s share of total tax revenue exceeds 8 percent in Vermont, New Hampshire, Wyoming, Washington, Montana, Michigan, and Arkansas. Some states, including Michigan, Vermont, and New Hampshire, have recently enacted state property taxes as part of school finance reform.
- Reliance on the property tax has declined over the past 30 years, as state and local collections have dropped from 26 percent of general revenue in 1972 to just 16 percent in 2001. Virtually all of the drop occurred in the 1970s and early 1980s with some increases in reliance on the property tax in the last five years. State and local governments raised 16.4 percent of their general revenue from property taxes in 2006. The revenue share remained relatively constant at the state level, varying between 1.3 percent and 0.9 percent. Local collections, however, fell from 39.5 percent of general local revenues in 1972 to 26.5 percent in 2001. Local reliance has increased slightly since 2001; property tax made up 27.9 percent of general revenue in 2006.
- In recent decades, many states have imposed limits on property tax rates, property tax revenue, or increases in assessed property values, reducing reliance on the property tax as a source of revenue. California, for example, limits the tax rate to 1 percent and annual assessment increases to 2 percent until a property is sold.
- Many states have provisions that reduce property tax burdens.
- Homestead exemptions in 28 states and the District of Columbia reduce the fraction of the assessed property value subject to tax.
- Seventeen states and the District of Columbia use circuit breaker credits to limit the share of income claimed by property taxes.
- Property tax deferrals allow elderly and disabled homeowners to defer payment until the sale of the property or the death of the taxpayer; 22 states and the District of Columbia allow such deferrals but they are not widely used.
State and Local Tax Policy: What are the sources of revenue for state governments?
State and Local Tax Policy: What are the sources of revenue for local governments?
State and Local Tax Policy: How have the sources of revenue for state and local governments changed over time?
Tax Policy Center, State and Local Government Finance Data Query System.
Brunori, David, Local Tax Policy: A Federalist Perspective, 2nd ed. (Washington: The Urban Institute, 2007).
________, State Tax Policy: A Political Perspective, 2nd ed. (Washington: Urban Institute Press, 2005).
Authors: Kim Rueben and Carol Rosenberg
Last Updated: October 9, 2008