Property Tax

One of the tax levies most heavily used to finance local public services is the property tax. This assessment differs from income and other taxes in several important ways.

First, the property tax is an ad valorem (or “according to value”) tax. In other words, it is a levy whose basis for taxation is the assessed value of the real estate. Most jurisdictions define a specific relationship between assessed value and market value (e.g., 25%, 50%, 80%, 100%, or others). So the tax burden is based on the market value of the property, and the property tax is a wealth tax rather than an income tax.

Second, property tax receipts are used to fund local needs and public services almost always. Income, excise, estate, and specialized tax collections are used elsewhere; property taxes fund local public schools, police and fire departments, park districts, libraries, senior citizen centers, and so on. In the last half century of the 20th century, the tax burden associated with paying property taxes has grown as demand for local public services has expanded. In the 2000s, the reliance upon property taxes by local governments continues although there is growing resistance to the notion that property taxes must continue to be raised. City and municipal governments continue to search for alternative revenue sources because property taxes can no longer be expected to fund virtually all of local government's growth in expenditures.

Third, the property tax is consistently found to be the most unpopular tax in taxpayer surveys, despite the fact that in the United States, the federal income tax takes a larger percentage of household income on average. With the expansion of state (and sometimes local) income taxes, the income tax burden widened to an even greater extent. The unpopularity of the property tax stems from its “shock value” in collection: It is frequently billed once or twice a year. Even though many households pay escrow funds each month for disbursement upon receipt of the annual charge, the displeasure associated with paying the large sums of property tax bills may be viewed as a measure of how successful the policy of income tax withholding has proven to be.

Fourth, because property taxes are largely used for local government programs, taxpayers probably have more to say about the use of their property tax funds than any other source of taxation. Not only do taxpayers see the impacts of their tax payments in action, they often can have also a direct impact on how much is paid and what the use of the funds are through local political action and direct voting for local officials. The California tax revolt in the early 1970s known as Proposition 13 was led by local activists who viewed the level of property tax burdens and the use of these funds as unacceptable. Income taxes have likely funded more wasteful spending relative to property taxes, but it is more difficult to have the same kind of accountability from the federal government.

New, local movements have arisen in recent years to limit or, in some cases, eliminate the use of property taxes by local governments. These have been met with skepticism for the most part but reflect the unpopularity with the growing burden of property taxes. This seems especially likely given the recent declines in home values; the effective tax rate for property taxes is liable to rise. Appeals are possible but are costly and time consuming. In addition, local [Page 562]governments are likely to struggle to find revenue sources during weak economic periods although demand for services remains high. Cost cutting is frequently on the agenda but cutting popular services is sometimes unpopular.

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