Governments require revenues to be able to deliver services (both necessary and discretionary) to the populace. Income taxes (corporate and personal), franchise taxes, sales taxes, value-added taxes, excise taxes, inheritance taxes, property taxes, capital gains taxes, permit fees, licensing fees, and use fees are just some of the revenue sources. Whether a state or locale collects each of the stated taxes is a function of their respective legislative and governmental authorities.
One tax specifically unique to state and local governments is the property tax. The property tax is not a function of income but rather, in most circumstances, the value of the property. While the federal government taxes capital gains on real estate (which is income and hence and thus a unique form of income tax), it does not do a recurring periodic tax of property. After all, taxing both the underlying asset and the income produced by that asset would equate to double dipping on taxes.
Even after fully paying off the home mortgage loan or paying all cash, there remain what often are substantial recurring costs in homeownership beyond the monthly periodic cost of payment for principle and interest. Property taxes can be a material annual expense as can homeowner association fees, condo fees, property taxes, special assessments, insurance (which is discretionary for unencumbered properties but for most an astute expense), water, sewage and garbage collection fees even when none of these services may be used.
To gauge, compare and contrast the incidence of real estate taxes from state-to-state (including local markets), the NAHB utilized the 2013 American Community Survey, the 2011 Annual Survey of State and Local Government Finances and NAHB estimates for state median home prices.
So in which states are found the greatest annual real estate tax payments? The following table lists the top-10 median real estate tax payments from 2013 as reported in the 2013 American Community Survey.
While property taxes are typically calculated based on the market value of the property, each state and locality have innumerable differences in sources of tax revenues, assessments and exclusions to various types of property. Some states, for example, tax residential properties at lower effective tax rates than non-residential properties. Some states, such as Texas, where I live, have no corporate or personal income taxes and thus must depend heavily on property taxes. And some states, such as New Jersey – ranked number one in median real estate taxes at $7,331 per year, simply spend more money than others whether it be pensions for state and local government employees, services, infrastructure and so-forth. Note that while median home values are greater in Massachusetts than New Jersey ($327,200 versus $307,700), New Jersey’s median real estate tax on homes is almost double in comparison.
Another study that includes five different taxes –including property tax – from the Tax Foundation, ranks New Jersey as the 49th best business environment, with only New York worse. See a summary in a prior blog at http://blog.stewart.com/stewart/2013/11/27/best-state-business-tax-climates-in-2014/
The NAHB study also ranked real estate taxes based on the effective real estate tax rate, as shown in the following table of the top-10 states. Once again New Jersey went to the top.
Note: The previous table is based on the median tax rate as observed in the individual rates per state and is not calculated by dividing the median real estate tax by the median home value.
Another contributing factor to the level of property taxes is the reliance of each state and the respective locales on real estate taxes for government revenues. The next table lists the top-10 states based on a percentage of revenues that real estate taxes make up of total government revenues.
To read the entire NAHB report click http://eyeonhousing.org/2014/10/real-estate-taxes-by-state-2013/
Several times in past blogs I have referred to an outstanding land economics professor than I had while at Texas A&M University. He was the first person to sensitize me to business axioms, that is truths regarding finances, motivations and incentives. He favorite axiom was “When most people get a raise, they are simply broke at a higher level.”
Unfortunately that same statement is likely true for many state and local governments today. Regardless of the needs of local and state government, they will almost always spend more dollars than are collected.
To most, tax is a four letter word.