Home prices in your neighborhood have probably soared since the pandemic began, and you might be worried that a soaring property tax bill will come next.
That isn’t necessarily the case. Nearly all states have passed laws designed to limit property-tax increases. The problem is that some legislation works better than others.
A number of states limit property-tax rates, but that can still result in steep tax increases when assessments shoot up. California, meanwhile, constrains increases in property-tax assessments for existing residents, but not for new home buyers. The result is that two families on the same block with identical houses can pay vastly different tax bills.
Meanwhile, states like Massachusetts and New York have dramatically slowed property-tax increases for homeowners by limiting how fast the levy for an entire community can rise. But local factors can still affect you.
In Clarkstown, N.Y., for example, lenders are trying to foreclose on a mall that pays around 10% of the local property-tax levy for the school district. School officials and residents are worried that if the assessment for the mall drops—or if the mall were to close—local property taxes will have to rise to offset it.
The considerable run-up in home prices across most of the U.S. during the pandemic is likely to result in more laws trying to slow property-tax increases. That was the case in the 1970s and 1980s, when homes prices spiked, and it happened again after the housing bubble of the early 2000s. “These so-called property-tax revolts, when there is a lot of public concern about property taxes, have occurred most regularly when property value are increasing rapidly,” says associate director of tax policy at the Lincoln Institute of Land Policy, a nonprofit in Cambridge, Mass.
Property-tax increases have been relatively muted in recent years, but they are starting to rise faster again in some municipalities as homes are reassessed. Nationally, the average tax on single-family homes increased 3% to $3,901 in 2022, up from 1.8% in 2021, according to Attom, a property data provider.
“Based on the forces that drove the 2022 trends, it is hard not to envision those trends in 2022 continuing into 2023.” Attom CEO Rob Barber said.
The bottom line: You have to do your homework to figure out what is coming down the pike. Barron’s talked to experts around the country to give you a head start.
The first thing to understand is the state of play in your state. There are three main approaches to limiting property-tax increases: rate limits, assessment limits, and levy limits. Each has its own issues. Further complicating things: Many states use more than one of these approaches to control taxes.
Rate limits are the least effective way of stopping tax bills from rising. If your home assessment rises 30%, and the tax rate levied on that assessment remains the same, your property-tax bill will still rise 30%.
“In a situation where property values aren’t rising as they are now, rate [limits] are helpful,” says Janelle Fritts, a policy analyst with the Tax Foundation, a Washington, D.C., nonprofit. “But in today’s market, they aren’t as helpful.”
Property taxes are an issue right now in Wyoming, where homeowners faced big increases because of rising valuations. The average valuation for the state rose 16% from 2021 to 2022. One county, Teton—the home of Jackson Hole—had a 36% increase, according to the Wyoming Department of Revenue.
The legislature and Gov. Mark Gordon approved a constitutional amendment that would create a separate property-tax class for residential property owners, allowing the legislature to provide targeted tax relief for homeowners. It must still be approved by Wyoming voters.
Steven Beazley, CEO of Wyoming Realtors, says his organization has pushed hard for the constitutional amendment. “Why does the government get more money just because the price of homes went up,” he says of the current tax system.
The property tax revolt began in California in 1978 with the passage of Proposition 13 that slashed property-tax bills and limited future annual increases to 2% unless ownership changes or there is new construction.
Prop 13 has been effective in insulating existing property owners. Someone who has owned a $2 million home for decades may only be paying $3,000 or $4,000 a year in property taxes. Meanwhile, a new owner buying that same house might pay roughly $25,000 a year, depending on local levies.
“Assessment (limits) do create these large disparities in property-tax rates based on how long you own the home, and the rate of appreciation you’ve had in your home,” says Langley of the Lincoln Institute.
Levy limits are regarded by many policy experts as the fairest and most effective way of controlling tax increases. These generally limit how much money a jurisdiction can raise from its tax base, and how much that total levy can rise each year.
Individual owners may see their tax bill go up or down based on their valuations, but the total amount collected is limited with levy limits. In a time of soaring valuations, levy limits force tax authorities to lower the tax rate so that the total amount of money collected rises by a set percentage annually.
Massachusetts, once derided as “Taxachusetts,” passed Proposition 2 ½ in 1980, which limited the tax levy for most communities to 2.5% of the assessment, and mandated that it rise by no more than 2.5% a year, not counting new construction. Because property values have risen more rapidly than 2.5% a year in much of the state, the effective tax rate for Massachusetts has fallen to 0.94%, slightly above the national average of 0.83%, according to Attom.
If your state has levy limits, one thing to be aware of is how easy it is to exceed the limit. Both New York and New Jersey passed levy limits around a dozen years ago. New York’s limit has fewer exceptions, and the state’s average property-tax bill in 2022 was $6,673, up 1% from the previous year, according to Attom.
In New Jersey, meanwhile, the average property tax bill in 2022 was $9,490, according to the New Jersey Department of the Treasury. That is the highest in the nation. However, the average bill has risen 25% since the state capped property tax increases in 2010, a substantial decrease from the previous decade when homeowners saw their taxes surge an average of 71%.
“When people move to New Jersey, the first question they ask isn’t how much does the house cost, but what is the property tax, because they will have to pay that as long as they’re here,” says Michael Egenton, chief lobbyist for the New Jersey Chamber of Commerce.
Write to Neal Templin at [email protected]
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