The Evil of the Residential Property Tax

  • December 22, 2023
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According to the Case-Shiller index, home prices have increased 44 percent since February 2020. That’s just an average, of course, and some markets have seen increases in prices that are far higher. Even in middle-American housing markets, however—where home prices are supposedly more reasonable than on the coasts—prices have soared. In Cleveland, for example, the index is up 40 percent since early 2020. During the same period, the index rose 50 percent in Atlanta and 33 percent in Chicago. This sort of price inflation is not merely a product of the physical supply of housing. Demand for housing has been greatly inflated by nearly fifteen years of historic lows in interest rates, following by immense flows of newly created money during the Covid Panic. As economist Brendan Brown has noted, even as consumer price growth appeared low from 2008 to 2020, the effects of monetary inflation have long been visible in asset price inflation (e.g., home prices).

It is not at all surprising then that property taxes are rising as well. Fortunately for homeowners, though, property taxes have so far not kept up with market prices. According to an April report on property taxes from housing analytics company ATTOM, 

$339.8 billion in property taxes were levied on single-family homes in 2022, up 3.6 percent from $328 billion in 2021. The increase was more than double the 1.6 percent growth in 2021, although smaller than the 5.4 percent increase the prior year.

The report also shows that the average tax on single-family homes in the U.S. increased 3 percent in 2022, to $3,901, after rising 1.8 percent the previous year. 

At the individual state and local levels, some property tax hikes have soared. Michigan, for instance, has raised property taxes by levels not seen in 28 years. Some local governments are hiking property taxes by 20 percent or more.  In many areas, however, property tax increases have not even kept up with inflation. So, if home prices are rising at 40 percent or more on average, why are property tax collections not anywhere close? Much of the reason for these relatively modest increases is the fact property tax assessments are not instantaneous, but are only modified at often lengthy intervals. In other words, many homeowners may find that there is still plenty of property-tax related bad news still to come. reports, for example:

Property tax bills have been rising or are slated to go up as local governments capitalize on the surge in home prices over the past few years. And there is little recourse for homeowners stuck with the higher tabs.

“Most people should expect a property tax increase,” says Carl Davis, a research director at the Institute on Taxation and Economic Policy. “We’re seeing [property] assessments catch up with the market right now. That process will continue to unfold over the next few years.” Local governments are facing rising costs just like everyone else. And the wild price growth during the COVID-19 pandemic has presented municipalities with a golden opportunity to do something about it.

Kiplinger’s notes that state and local governments will be doing everything they can to translate rising home prices into more revenue:

Homeowners in areas that have experienced significant appreciation in home values should be prepared for the possibility that their local jurisdiction will raise rates to match higher assessments—even as home sales have leveled off, experts say. For local governments, inflation has driven up the cost of everything from public employees’ salaries to school supplies. In addition, in the wake of the COVID-19 pandemic, commercial property owners are struggling with a large number of vacancies, which has led to a decline in revenue from those sources.

That last detail is notably ominous: anyone who has been paying attention to real estate knows that commercial real estate is “deteriorating” and more bad news is expected. That means policymakers are likely to turn to residential real estate to fill the gap. 

Another reason that property tax bills have not kept up with home prices is that there is political pressure to not do so. In some jurisdictions, of course, policymakers have a nearly free hand to raise taxes at eye-watering rates. But in many areas, taxpayers will resist heartily if told to ready themselves for a 20 or 30 percent increase.  On the other hand, policymakers can almost always get away with the less-obvious policy of not lowering property taxes, even when home prices fall. We should not place any hope for lower taxes in falling home prices that would come with a recession or financial crisis. This is because “[e]ven if property values decrease, property tax bills usually don’t fall. Instead, governments typically increase the percentage at which homes are taxed to make up for the shortfall caused by the lower values.” 

Property Taxes Are Especially Bad for the Unemployed, Poor, and Elderly

More than one curmudgeonly libertarian has described the residential property tax as “rent you pay to to the government to live in your own house.” This isn’t wrong. Moreover, residential property taxes can be especially devastating in times of economic stress—much more devastating than income taxes. 

For example, as the economy worsens, we can expect unemployment rates to rise, and for real incomes to fall even more than they already have over the past two years. Now, when it comes to income taxes, a falling income generally means a lower income-tax bill. Yet, do our property taxes go down when we lose a job or suffer a pay cut? Almost certainly not. Indeed, if new assessments come on the tail end of an inflationary period, homeowners may be hit with a fresh new increase in property taxes just as employment fortunes are worsening. The next step, of course, may be moving your whole family into your aging parent’s basement. 

Not even your aging parents are safe from property taxes, of course. They are among the most damaging taxes for elderly people on fixed incomes. Retired people rely on savings and investment income, or on government transfer payments  from current wage earners. Retirees’ overall incomes tend to be much lower than during their wage earning years. This translates into income tax savings, but rising home prices and property taxes can force them out of their homes. This phenomenon also leads to more turnover in neighborhoods. That comes with significant documented social costs as property tax refugees leave behind fractured social networks in neighborhoods where residents rely on each other for both social and economic support. Indeed, the Left may decry gentrification, but the Left has no problem with rising property taxes that accelerate gentrification perhaps more than any other single policy. Property tax foreclosures are one sure way to get rid of elderly and low-income residents of a gentrifying neighborhood. 

Some states have introduced “homesteading” laws and similar policies designed to cap increases in property taxes for people over a certain age. These merely lessen the impact of rising property taxes. Even small increases can be disastrous for elderly or disabled people who have few choices in increasing their incomes to keep up with the tax bill. 

There is no Neutral Tax 

None of what I write here should be construed as a claim that property taxes are objectively the “worst” kind of tax. As Murray Rothbard has shown, there is no such thing as a neutral tax and each type of tax comes with its own impoverishing effects. There is no tax that does not lower our utility by taking a portion of our wealth and spending in in ways we would not spend ourselves. 

Nor can we say, however, that property taxes are “better” than, say, income taxes. Income taxes indeed come with their own specific problems. Yet, as we’ve seen, residential property taxes attack one of the most fundamental needs and assets in a person’s life—i.e., housing—in a way the income tax does not. 

Moreover, a focus on state income taxes as the “worst” state tax can lead some to inappropriately downplay the true costs of property taxes. For example, states with no income tax, such as Texas, like to tout this fact as if a lack of an income tax rendered Texas more or less tax free. This, of course, is not remotely true. Texas has the third-highest property tax burden in the nation, behind only New Jersey and New Hampshire, and only slightly better than Illinois. (New Hampshire doesn’t have an income tax either.) This isn’t a recommendation for Texas to adopt a income tax, of course. There are indeed benefits that flow from the lack of an income tax. But every government will fight to get tax revenue from somewhere, and property taxes are likely to be a very lucrative source of tax revenue in coming years. It’s just yet another growing burden we endure in our age of easy money and price inflation.