Public Finance

Amid Falling Revenues, Some Cities Turn to the Property Tax

 

As most major cities grapple with lost revenue due to the pandemic, some are turning toward the property tax as a way of filling the gap. Perhaps nowhere has this decision been more controversial than in Nashville, where the largest tax increase in the city’s history has already survived one attempt to overturn it.

Like other cities that rely on tourism, Nashville has suffered in the wake of the pandemic—most  notably in entertainment and retail tax revenue. More than half of the city’s estimated $280 million in reduced revenue for the fiscal year that started July 1 is due to the sales tax. The city finance department attributes nearly all the lower-than-expected revenue to COVID-19, but a tornado that ripped through the area earlier this year also played a role.

Deputy Finance Director Mary Jo Wiggins said that Nashville’s economy makes it “subject to a higher volatility in our activity taxes.” Meanwhile, the metro region’s property tax rates had been historically low in recent years. “Increasing the property tax rate in fiscal 2021 provides greater stability in our tax revenue base,” she said.

Nashville isn’t the only place trying to lean more on the stability of the property tax in the recession. Houston this year used an exemption for declared disasters—in this case, COVID-19—to set a tax rate that would increase property tax revenue by more than the state’s limit of 3.5 percent per year. 

And in Chicago, the council recently approved Mayor Lori Lightfoot’s proposed property tax increase (among other revenue-raising remedies) to plug a $1.2 billion projected budget deficit. The legislation also includes a plan to raise property taxes each year with inflation, tying it to the consumer price index.

All told, most cities are bracing for revenue shortfalls between 5 and 9 percent, according to research by Andrew Reschovsky, professor emeritus of public affairs and applied economics at the University of Wisconsin-Madison and a former Lincoln Institute fellow. Reschovsky estimates the total revenue loss across all cities at $165 billion.

Lincoln Senior Fellow Joan Youngman notes that the property tax tends to be a more stable source of local revenue, for several reasons. Real property is a long-term investment, and in a downturn its values are generally not as volatile as retail sales or income. Local governments often have some ability to adjust the tax rate in response to changes in the tax base, and a multiyear assessment cycle can allow officials time to anticipate and respond to shortfalls. 

“Revenue from tourism, entertainment, and travel can be subject to much more immediate and dramatic declines,” Youngman said. “That is why a mix of revenue sources on different cycles can be very helpful.”

Still, the pandemic-driven recession has created some unusual revenue scenarios and the property tax is no exception. Assessors in New Orleans and in Cook County, home to Chicago, have taken the unusual step of reassessing properties ahead of schedule to account for business losses from the pandemic. In New Orleans, Assessor Erroll Williams made across-the-board cuts in 2021 assessments for hotels, restaurants, and other commercial properties by as much as 57 percent. And in Cook County, Assessor Fritz Kaegi is planning to reevaluate every property in the county, a move that is also expected to lower tax bills for commercial properties.

Back in Nashville, the circumstances around the consolidated city-county Metro government’s property tax increase were also unusual. The Metro council approved increasing the rate by 34 percent—a large jump by any standard but particularly for a region with a low-tax culture.

But the rate increase came on the heels of one of the lowest property tax rates in decades. Moreover, Nashville residents already paid some of the lowest property taxes in a state that has among the nation’s lowest effective rates. Tennesseans on average pay less than $900 a year in property taxes, compared with more than $1,600 nationwide, according to the Lincoln Institute’s state-by-state property tax database tool.

Bill Purcell, mayor of Nashville from 1999–2007, said the city erred when it did not take advantage of an opportunity to increase revenue after its last four-year reappraisal in 2017, which recorded soaring property values. State law does not allow revenues to rise automatically when the property values increase. After a general reappraisal, counties and municipalities must advertise intent in the newspaper and hold a public hearing before they adopt a resolution or ordinance establishing a tax rate that would generate greater overall tax revenues than were billed in the year before the reappraisal. Nashville did not take this step after the 2017 reappraisal, and instead reduced the tax rate by 30 percent to keep collections level.

Stagnating the city’s largest revenue stream created budget pressure and lawmakers resorted to one-time measures to fix budgets. By 2019, Comptroller Justin Wilson began warning the city of a state takeover unless it could balance its budget.

“The Great Recession had long passed, employees had been promised raises, the city was growing substantially, and there was no adjustment of revenue to meet those needs,” said Purcell, adding that the property tax increase was a politically uncomfortable but necessary move. 

Nashville’s new rate is $4.221 per $100 of assessed value—in line with its 25-year average. And because that rate is only applied to a small portion of the assessed value, it remains one of the lowest effective rates (0.67 percent) among Tennessee's largest cities and counties. 

“It is extremely difficult to raise taxes during a crisis,” said Youngman. “This shows the importance of continual adjustments to keep values and collections current, with appropriate relief measures targeted to taxpayers in need.”

 


 

Liz Farmer is a fiscal policy expert and journalist whose areas of expertise include budgets, fiscal distress, and tax policy. She is currently a research fellow at the Rockefeller Institute’s Future of Labor Research Center. 

Photograph: Nashville, Tennessee, skyline. Credit: Michael Warren/Getty Images.

 


 

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