As part of my job, I travel to national meetings and visit with legislators from all over the United States about tax policy in their state. Recently, I was invited to speak at the National Conference of State Legislatures in Boston for their seminar on property taxes. This isn’t just a northwest Kansas issue or even just a Kansas issue – homeowners all over the country are seeing their property taxes rise over the past five years.
~ Adam Smith
How we got here, who is to blame, and what we can do to fix it
Part I: The Property Tax Crisis
Part II: Property Tax 101
Part III: Property Tax Fix
Albert Einstein is credited with the quote, “If you can’t explain it simply, you don’t understand it well enough.”
When it comes to tax policy proposals, it can be challenging to simplify the analysis and still adequately explain all of the potential impacts on each taxpayer. With a multitude of factors that impact property taxes, it’s my earnest desire in the following exposition to provide a basic understanding of how we got here, why people hate property taxes more than any other tax, who is to blame, and what we can do to make things better.
Be forewarned, however… I’m no Albert Einstein!
PART I – How did we get here??
Home values skyrocket post-COVID
Residential property taxes are based on an estimated fair market value of your home each year. I say estimated because you’re obviously not selling your home each year to determine the actual market value, so county appraisers across the state use computer software to analyze sales of comparable homes in your area to calculate the most accurate estimate. As you know, the housing market across the nation exploded post-COVID. The cost of building new homes rose sharply due to heightened demand for building materials, labor shortages, and supply chain problems. Subsequently, existing homes were getting offers that exceeded the initial listing price within hours of being on the market. This caused the estimated value of all homes to skyrocket accordingly.
Additional Information:
Why did Housing Costs Explode During the Pandemic?
Bloomberg, Sept 8, 2022
Pandemic-Induce Remote Work and Rising House Prices
National Bureau of Economic Research July 1, 2022
Reshaping the housing market: The enduring effects of the pandemic
Centre for Economic Policy Research Apr 11, 2024
Inflation also hit local governments
Typically, as new structures are being built and existing structures increase in value, the property tax base grows faster than inflation which allows local governments to reduce the property tax rate (referred to as a mill levy) and still generate enough revenue to fund their budgets. In an ideal year, the valuation goes up and the tax rate goes down and the net result is only a slight increase, if any, to your actual tax bill.
Unfortunately, the steep inflation impacted government as well. Property and health insurance premiums went through the roof, labor shortages forced many critical services to raise wages to retain or fill necessary vacated positions, and the cost for expenditures like fuel, concrete, and other general supplies suddenly exceeded planned budgets. Many government entities found their budget requirements increasing even after cutting back services and projects. Total local government tax receipts grew by 6.65% in 2024, which is the highest they have grown since 2007. In the past decade, receipts averaged around 3.3% increase in 2014-2021, and in the past three years are now averaging over 6% and growing.
Full Document: Kansas Legislative Research 2024 Tax Facts
PART II – Why are property taxes the “most-hated” of all taxes?
Most folks realize that a certain amount of tax is necessary to fund the essential services that government provides. Elected officials try to spread that out between sales, income, and property taxes to balance the costs of providing those services, and in Kansas that “three-legged” stool is balanced surprisingly well with property tax at 30.94% of total state and local tax receipts, sales tax at 28.86% and income tax at 28.85%. (See above table)
However, property taxes are still the most hated. Why?
Property tax is relative / proportionate
For one thing, property taxes function completely differently than any other tax. They are proportionately shared based on the value of your property. Income and sales tax isn’t that way… what you pay in income tax doesn’t depend on the size of your neighbor’s paycheck, and what you pay in sales tax doesn’t depend on how much your neighbors spend when they go shopping. But the property taxes you pay absolutely depends on the value of the other homes in your neighborhood, in addition to other variables such as that shopping center/office complex down the street, the railroad or pipeline that goes through the area, the horse farm across the road, and any other real estate property.
Your property tax bill depends on these things because for each tax district (city, county, school, library, township, etc), the assessed value of your property compared to the total assessed value of ALL property in the district is the amount of that district’s budget you are billed in property tax.
For example, if the value of your home is 0.02% of the total city valuation, and the city adopts a budget of $4 million dollars, your tax bill would be $800 to the city.
It’s also important to understand the types of real property within your various tax districts. In addition to residential, there is also commercial, public utility, agricultural land, oil and gas production, personal property, and several other minor classes of real property. These all follow completely different market factors that impact their value, and subsequently a different impact on your property tax bill.
Property tax is billed all at once
A huge reason people hate property taxes is because you get the bill for them all at once. Imagine getting your tax bill for the entire year all at once for income tax and sales tax… you would quickly come to hate those as well!
Many households spend more on sales tax than on their property taxes, but it’s done in small increments in each transaction throughout the year and consumers rarely pay much attention.
Income tax is no better, with the majority of it taken out of your paycheck through withholdings. You never even see it! That has to be the most deviously clever scheme the government has ever concocted… take the taxpayers’ money before they even get it and they’ll never miss it!
If you think that’s ridiculous, can you tell me how much your household paid in income tax or sales tax last year? Most can’t.
Property tax is based on unrealized valuation gains
Similar to your homeowner’s insurance, your home’s taxable value is based on the current value, rather than what it originally cost to build or purchase. This is not something you have any control over, and it is also not anything you benefit from unless you are actually selling! Many homes that were bought years ago now have families frustrated with the current value because they are not even thinking about selling. Mathematically, with an average increase of 4%, a property will still double in value about every 19 years. Most homeowners don’t mind a gradual, stable increase that can be predicted and budgeted, but it certainly is frustrating when you are receiving no actual benefit from that increase until you decide to sell your home.
Bah-Humbug Timing
Last, but not least, that dreadful tax statement arrives and is due at the most financially inconvenient time – the holidays!
The local budget process takes time… developing the budget from each department, local officials debating priorities and funding, issuing required notices and holding public hearings, adopting and finalizing the budget, certifying the tax roll, and preparing and printing tax statements. Those statements usually get mailed late November to early December with no Black Friday discounts ever offered to my knowledge, and they are due right before Christmas.
Ebenezer Scrooge would be proud… the insensitivity of burdening families with such a bill at the end of the year when some households are struggling to make ends meet.
Most folks will have a good approximation of what their tax will be, but that doesn’t make it any easier to save up throughout the year if you’ve had unexpected expenses.
PART III – Who should we blame for these high property taxes?
This will not be a satisfying answer for someone looking for a single place to point the finger of blame, because there are three main groups of people that share responsibility for your property taxes.
State Legislature
Some legislators will say property taxes are a problem with local government spending. While it’s true that local budgets account for the vast majority of your tax bill, the legislature tends to overlook the actions in the statehouse over the years that have intensified the problem.
In the past, the legislature has tried to provide tax cuts through exemptions for certain types of property (i.e. machinery & equipment personal property, 2006) or reduction/elimination of fees paid to local governments (i.e. mortgage registration tax, 2014). While the policy successfully lowered the taxes & fees paid, it also reduced the tax base and revenue for local governments. This required them to raise the mill levy to compensate for the lost revenue and resulted in a tax burden shift on to everyone else still paying property taxes. Any future policies that impact the tax base will have a similar effect.
State and Federal governments also have a habit of passing unfunded mandates – forcing new regulations onto local units of government without any funding to help pay for these requirements. These are too numerous to count, and they span the scope from emergency services, law enforcement, elections, education, health care, and many more essential services. Perhaps the regulations are necessary… but the burden of paying for these new requirements often falls completely on the property owners.
Legislators also can’t escape the reality that demand transfers – statutory promises to appropriate state general funds back to local governments – have been suspended for years. Whether or not these transfers actually reduced property taxes or if local budgets were simply inflated when they knew extra funds were coming, the fact is that every dollar paid by the state would have been a dollar not billed to property tax.
Local Government
Some local elected officials will blame the state legislature for your high property taxes for the exact reasons stated above. However, some of those officials tend to overlook the fact that the single most important factor in determining the property tax due is the size of their budget.
As a former county commissioner, I always felt the budget process was highly unfavorable to the taxpayer. With income tax and sales tax, the rate is set and whatever revenue comes in is all that can be appropriated.
That is not the case with property taxes!
Local elected officials build the budget and determine how much they want to spend in the upcoming year, then calculate the tax rate necessary to fund that budget.
When they get to choose how much to spend, government is not forced to “live within its means” when it comes to property taxes. How many of you build your own household budget for the year, then tell your employer how much they will be paying you to meet that budget?
Local elected officials that are sensitive to the tax burden will do their best to keep budget increases as small as possible. Unfortunately, the expectations in today’s society of what government should provide are very high. Which brings me to the third group…
Voters and Constituents
Since I’ve probably upset all the state legislators and elected local government officials, I might as well make everyone else angry with me, too.
Quite frankly, all elected officials – in the legislature and local government – are accountable to their voters and constituents. The policies and budgets that are passed at every level are in response to the needs and concerns of the people advocating their cause.
People expect more from the government than ever before. It’s rare at any level of government for the budget to truly contain only the essential and critical services.
A good example of this is ballot questions. Whether it’s a school or a hospital or a project the city or county is considering, 49.9% of the voters could oppose it and everyone will still have to pay for the project. Sometimes these ballot questions fail, but most of the time they pass.
I have also participated in local government meetings where people request support for certain community concerns, then when the tax bills arrive some of those same people are the ones complaining about the taxes.
If we want our property taxes to be lower, we must balance our expectations of what we want our local governments to provide.
Part IV – What can we do?
The property tax frustration is happening all over the United States and it didn’t happen overnight. If the solution were easy, it would have been done already. Fair property taxation needs a stable tax base with reasonable spending focused on the most important public services. There are several ways to take steps toward that goal. The solution will have to be the shared responsibility of all three groups.
Legislature
The legislature needs to focus on policies that promote or complement the stability of the tax base without restricting or removing the opportunity for growth or disrupting the free market. A growing tax base is a healthy tax base that will allow for rate reductions. Broaden the base and lower the rate – it’s a well-known adage in tax policy for a strong and competitive economy. When done in combination with reasonable budgeting, the result is property taxes that are more predictable and affordable each year. Government interference in the free market, while usually well-intentioned, can have unintended consequences and often end up exacerbating the problem. Additionally, assistance for unfunded state mandates should be considered by the legislature. If the state cannot afford the funding, perhaps those mandates should be reevaluated.
Local governments
Local governments need to be able to do the job their voters elected them to do, but they must also keep an eye on their fiscal growth in comparison to their tax base. If the spending is out-pacing the tax base growth, they must focus on prioritizing the most essential services. Sometimes you have to say “no” or at least “not right now” when the requests for spending confuse the difference between what is merely “wanted” and what is truly “needed”. Some constituents may be unhappy with you at the moment, but everyone else will appreciate your financial discipline when those tax statements arrive.
Voters and Constituents
On average, we citizens are engaged very little in the public meetings regarding the decisions and discussions within our cities, counties, and schools. As a county commissioner, I witnessed many times when no citizens attended the budget meetings to listen to the discussion surrounding each topic, and very few would show up to the hearings when the final budget was approved. Many meetings are livestreamed and archived these days – we don’t have to always attend in-person to stay up to date!
Accountability is key, and the voters should have a method of checks-and-balances if we feel the spending is growing faster than the tax base can support… a method more responsive than an election every four years.
Lastly, we as citizens need to communicate to our elected officials what we truly believe are the most critical and essential services. It may look different in each community. The competition for limited funds is one of the most difficult decisions for state and local officials to navigate, and is often what leads to the over-spending that causes higher taxes.