This post is the final installment in a series expanding on NLC’s 2016 State of the Cities report.
Mayors have a love-hate relationship with the property tax. On one hand, it is one of the few fiscal tools they have to raise revenue for mounting needs. On the other, accessing this tax can be an uphill political battle. Given these dynamics, it was no surprise that ‘property tax’ was the hottest budget issue discussed by mayors in their 2016 State of the City speeches.
Property tax revenues are driven by the assessed value of residential and commercial property. They typically lag the real estate market due to delays in local assessment practices. For example, the sharp drop in the real estate market that set the recession into motion did not hit property tax rolls until 2010. Cities faced several years of declining property tax revenues following 2010, even though real estate markets across the country were stabilizing. In North Ridgeville, Ohio, Mayor G. David Gillock noted that, “Our real estate tax [revenues] increased somewhat during 2011 and 2012, but due to… reevaluation in 2013, they again dropped precipitously. They are appreciating but are still about $300,000 below where they were in 2012.”
In recent years, property tax collections have begun to rebound, attributed largely to improved values catching up with collections, not necessarily rate hikes. Those with high property tax rates are cities like Bridgeport, Conneticut, or Detroit; these cities have low property values and/or high levels of local government spending as well as no access to sales or income tax.
Since the mid-1990’s, irrespective of economic conditions, the number of cities increasing property tax rates in any given year has always been about the same, about one in five. This is reflective of state- and voter-imposed restrictions on local property tax authority as well as the political challenges of raising property tax rates.
In recent cases of tax increases, mayors have felt the backlash. Despite massive pension and education challenges, the city of Chicago had not had a substantial property tax rate hike in many years… until last year. Mayor Rahm Emanuel made a bold move and increased property taxes for residents and businesses, on average, about 13 percent (or $400 per year).
Given the fiscal challenges facing the city, the increase was overdue, but was not without political consequences. Vocal opposition came strongest from the business community. A Crain’s Chicago Business columnist recently wrote that “in an action unlike any I’ve seen in decades, the Chicagoland Chamber of Commerce sent a letter to nearly 2,000 businesses in the Northwest Side’s 1st and 35th wards asking them to contact their aldermen and unite against these harmful policies.”
Property taxes have been called the scapegoats of the tax world, “a catch-all for gripes about potholes, traffic tickets and anything else that ails a local economy.” A key reason for the blatant disdain of property taxes is that the tax burden is more transparent (annual tax bill) and harder to avoid when compared with sales taxes applied at checkout or income taxes withheld from a paycheck. Case in point: earlier this year, Ferguson, Missouri, voters approved a half-cent sales tax hike for economic development but failed to garner the two-thirds needed to pass a separate property tax hike.
Undergirding much property tax angst is the continued slow and uncertain pace of economic growth. Mayors from cities as diverse as Buffalo, Baltimore, and Carson City, Nevada, touted their efforts to lower property tax burdens, stabilize property taxes and offer rebates and credits to seniors, low income families and city workers. “This year I am proposing to do even more with the creation of a property tax credit for our sworn police officers, firefighters and sheriff’s deputies who own homes in our city as their primary residence. I want to encourage more of our first responders to live in the neighborhoods they are sworn to protect,” said Baltimore Mayor Stephanie Rawlings-Blake.
Mayors also used their speeches to describe the complexities and potential unintended consequences of property tax reductions. While praising recent efforts to lower tax bills to more equitably balance commercial versus residential property taxes, Mayor Steven Adler of Austin, Texas, also noted, “The danger of using the wrong metric to measure whether your government is helping with affordability is not that we’re just measuring the wrong thing – it’s that measuring the wrong thing means we’re not working on what will really have an impact on affordability.” Although property tax reductions are visible, they alone are not the most impactful way to increase affordability within the city. He went on to discuss the importance of transportation, housing and workforce development.
In addition to oversimplifying solutions to complex city goals, property taxes reductions also mean less revenue for city services and the employees who provide them. “Our ability to compensate our employees from year to year depends first and foremost on property tax revenues… the Commission did not approve a cost of living adjustment for city employees for FY16,” said Mayor James Smith of Helena, Montana. “It’s a classic balancing act. It really captures the dynamic tension that exists between government and the private sector of the economy.”
How to Pay
Political challenges often keep local governments from accessing the property tax. This means that the question of how to pay still looms large. One of most common responses is to raise fees for services, which of course brings equity concerns as poorer families pay a larger share of their income for services. Some cities, like Syracuse, New York and Boston, have reengaged nonprofit tax-exempt institutions to contribute more cash and community programming to offset use of city services and provide unique benefits city residents. Some, like New Orleans and Denver, have focused on cost-cutting innovations in service delivery. In most cases, cities are using a mix of strategies to balance their budgets, provide services, tackle broad goals and meet obligations.
To learn more about the performance of the property tax and its impact on city fiscal health, don’t miss the release of NLC’s annual City Fiscal Conditions 2016 report on Thursday, October 13 at 11 a.m. EDT.
About the Author: Christiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.