Amid rising home values, cities and states need to provide targeted relief to keep property taxes affordable while avoiding overly broad measures that could undermine the largest source of local revenue, a new report finds. 

In the Policy Focus Report Property Tax Relief for Homeowners, Lincoln Institute scholars Adam Langley and Joan Youngman evaluate more than a dozen common tools for tax relief and explain how state and local policy makers can keep tax systems fair and fiscally sustainable. They recommend a mix of sound tax administration, highly targeted relief, and robust state funding. 

“An approach that includes policies such as circuit breakers, deferrals, sound assessment and collection practices, and well-designed state aid formulas will promote a tax system that is fair and affordable for taxpayers while providing the revenue needed to maintain quality public services,” the authors write. 

The report addresses a challenging aspect of the property tax: higher home values do not always equate to greater cash flow for homeowners. Thus, keeping tax bills stable is essential.  

In an attempt to provide stability, states sometimes enact ineffective measures that destabilize state and local budgets, reduce the quality of public services, and deliver disproportionate benefits to wealthier homeowners. The most common among these are far-reaching limits on local tax rates, revenues, and taxable property values. 

“All state-imposed tax limits reduce local control over budget decisions, and so diminish the capacity of local governments to respond to taxpayer preferences and changing circumstances,” Langley and Youngman write. 

Instead, policy makers can employ targeted approaches that keep tax bills as stable as possible and provide relief to those who need it. 

Regular and accurate assessment of property is critical. Without it, assessed values stay artificially low until they eventually spike after a long-delayed revaluation. Further, if property values increase faster than incomes, policy makers need to reduce tax rates accordingly to stabilize tax bills. 

While sound assessment and rate-setting practices go a long way to prevent financial hardship, targeted tax relief is needed to support some homeowners, such as seniors with fixed incomes, people who have lost their jobs, or lower-income residents of gentrifying neighborhoods, whose property tax bills are still growing relative to their income. 

Langley and Youngman recommend circuit breakers, which provide property tax relief to those whose tax bill exceeds a certain percentage of income—so named because they function like a switch that cuts off an electrical circuit when too much current flows. They also recommend deferrals, which delay taxes until the property changes hands, enabling homeowners or their heirs to use proceeds from the sale of the home to pay off the taxes. Finally, they recommend monthly payment options so that homeowners do not face a large bill once or twice per year.  

While cities and towns can administer such programs, states play a critical role. They need to remove legal barriers that prevent local governments from effectively administering the property tax and provide robust aid to make up for gaps in real estate values among different cities and towns. Adequate state funding ensures that even low-wealth jurisdictions can provide quality local services at affordable tax rates. 

“If policy makers are sincere about providing targeted property tax relief for homeowners that has the fewest unintended or spillover effects, they would benefit from serious study of the concepts and approaches presented in this report,” said Alan Dornfest, property tax bureau chief for the Idaho State Tax Commission. “It could not be more timely or more complete.” 

The report is available for download on the Lincoln Institute’s website.

Image: Mailboxes along Route 66, Arizona. Credit: libre de droit/iStock/Getty Images Plus.

In the face of a mounting housing affordability crisis exacerbated by the COVID-19 pandemic, a group of 20 organizations is urging the U.S. government to do more to make homes affordable to low- and moderate-income families. The Underserved Mortgage Markets Coalition is urging the U.S. Federal Housing Finance Agency (FHFA) to require Fannie Mae and Freddie Mac to improve their performance in serving families that cannot access traditional mortgage markets. 

Fannie Mae and Freddie Mac—both government-sponsored providers of housing finance—are required to serve these sectors by a regulation known as Duty to Serve. In May, they submitted mandatory three-year plans for how they will comply with the regulation. The coalition is asking the FHFA to require substantial improvements to these plans this year before it approves them. 

“Amid a housing affordability crisis that requires bold and aggressive action, Fannie Mae and Freddie Mac have set forth plans that fail to effectively reach those not served or not served well by the conventional mortgage market” the coalition’s members wrote in a letter to FHFA Acting Director Sandra L. Thompson. 

The coalition urges FHFA to make regulatory changes to enable Duty to Serve to function as intended by providing Fannie Mae and Freddie Mac with the flexibility to reach underserved mortgage markets more effectively. 

In addition, the coalition supports FHFA’s new initiative requiring Fannie Mae and Freddie Mac to create plans to reduce racial or ethnic homeownership gaps and reinvest in formerly redlined neighborhoods. 

“Solving our housing affordability crisis requires multiple actions by all levels of government and the private sector, and an invigorated role for Fannie Mae and Freddie Mac is one of them,” said George W. “Mac” McCarthy, president of the Lincoln Institute. “The Underserved Mortgage Markets Coalition seeks to hold Fannie Mae and Freddie Mac accountable and uphold their founding purpose: to bring housing finance opportunities to American families not traditionally served by the private market.” 

Along with advocating for stronger plans and regulations, the coalition will use a new tracking tool to closely monitor the performance of Fannie Mae and Freddie Mac related to Duty to Serve and racial equity. The coalition is also conducting in-depth research to compare the performance of Fannie Mae and Freddie Mac to the broader U.S. mortgage market, which will make it easier for outside experts and advocates to assess the extent to which they are serving their public mission and to inform policy makers going forward. 

“The coalition seeks to work constructively with the FHFA, Fannie Mae, and Freddie Mac to meet the urgent needs of millions of Americans who are locked out of the opportunities that come with safe, stable, and affordable housing,” said Dr. Akilah Watkins, president and CEO of the Center for Community Progress, a member of the coalition. 

The members of the Underserved Mortgage Markets Coalition include: 

• Center for Community Progress 
• cdcb 
• Enterprise Community Partners  
• Fahe 
• Grounded Solutions Network 
• Housing Assistance Council 
• Housing Partnership Network 
• Lincoln Institute of Land Policy 
• Local Initiatives Support Corporation 
• National Council of State Housing Agencies 
• National Community Stabilization Trust 
• National Housing Conference   
• National Housing Trust 
• NeighborWorks America 
• Next Step 
• Novogradac 
• Opportunity Finance Network 
• Prosperity Now 
• RMI 
• ROC USA 

For more background on the Duty to Serve regulation, read the policy brief Duty to Serve: Early Lessons Learned in Underserved Housing Markets. 

Image: Manufactured housing is one of three sectors that Fannie Mae and Freddie Mac must serve under federal law. Credit: Marje / E+ via Getty Images.