Property Taxes and the Great Recession

This paper uses newly collected data on property tax rates, assessed values, and property tax levies between 2000 and 2016 to explore the impact of the Great Recession and falling housing prices on local property tax revenues in 39 states. It specifically studies the role of property tax limits on the tax base, and on the relationship between the property tax base and property tax revenues. Assessment limits reduced the average correlation between changes in home prices and assessed values by almost half, from about 0.65 to 0.36. The analysis finds an average elasticity between the property tax base and property tax levied of about 0.57, with larger changes in tax revenues in response to increases in assessed values (0.61) than decreases (0.47). This is evidence of the property tax being a “residual” tax, where policymakers offset changes in the tax base by adjusting the property tax rate in the opposite direction, with slightly more offsetting when the tax base declines. The combination of assessment and broad rate limits significantly reduced the ability of policymakers to offset changes in the tax base by adjusting tax rates and pushed local jurisdictions toward a rate-driven system, with elasticities for both positive and negative shocks around 0.8. Levy limits reduced the correlation between changes in assessed values and property tax levies, as they do not restrict the ability to offset negative shocks to maintain revenues, and force lawmakers to lower tax rates in response to large increases in the tax base. States with more stringent levy limits had an elasticity between 0.2 and 0.3 in response to positive shocks in the tax base. The paper presents results in four states: California, Massachusetts, Michigan, and Texas to illustrate the interaction between housing markets and state property tax structures and the effects on local property tax revenues.