🏢Urban Fiscal Policy Unit 6 – Property Tax and Assessment in Cities

What's Property Tax?

• Property tax is a levy imposed by local governments on real estate owners based on the value of their property
• Serves as a major source of revenue for cities and municipalities to fund public services and infrastructure
• Typically assessed annually and paid by property owners to their local government
• Applies to various types of real estate (residential homes, commercial buildings, land)
• Calculated by multiplying the assessed value of the property by the local tax rate
• Considered an ad valorem tax, meaning it is based on the value of the property rather than a fixed amount
• Differs from other taxes like income or sales tax as it is tied to property ownership and value
• Provides a stable and predictable revenue stream for local governments compared to other tax sources

Why Cities Love It

• Property tax is a reliable and consistent source of revenue for cities, as property values tend to be more stable than other tax bases (income, sales)
• Allows cities to fund essential services (police, fire protection, schools, parks, infrastructure maintenance) without relying heavily on state or federal funding
• Provides a direct link between the benefits property owners receive from city services and the taxes they pay
• Encourages property owners to maintain and improve their properties, as higher property values lead to increased tax revenue for the city
• Enables cities to have more control over their budgets and fiscal policies, as they can adjust property tax rates to meet their financial needs
• Captures value from non-resident property owners (absentee landlords, commercial property owners) who benefit from city services
• Promotes local autonomy and self-sufficiency, as cities can generate their own revenue rather than depending on external sources
• Helps to ensure that the costs of city services are distributed among property owners who directly benefit from those services

How Property Gets Valued

• Property valuation is the process of determining the assessed value of a property for tax purposes
• Typically conducted by local government assessors or appraisers who estimate the market value of the property
• Market value is the price a property would sell for in an open, competitive market between a willing buyer and seller
• Assessors consider factors (location, size, age, condition, recent sales of similar properties) to determine market value
• Mass appraisal techniques are often used to value a large number of properties efficiently
  • Involves statistical modeling and analysis of property data to estimate values for groups of similar properties
• Some jurisdictions use a percentage of market value (assessment ratio) to calculate the assessed value for tax purposes
  • For example, a city may assess properties at 80% of their market value
• Property owners can appeal their assessments if they believe the value is inaccurate or unfair
  • Appeals process varies by jurisdiction but may involve providing evidence of lower market value or pointing out errors in the assessment

Who Pays and How Much?

• Property owners are responsible for paying property taxes on the real estate they own
• Tax liability is based on the assessed value of the property and the local tax rate
• Homeowners pay property taxes on their primary residences and any additional properties they own (vacation homes, rental properties)
• Businesses pay property taxes on commercial real estate (office buildings, retail spaces, factories, warehouses)
• Landlords may pass on the cost of property taxes to their tenants through higher rent prices
• Property tax bills are typically sent out annually or semi-annually by the local government
• Payment options may include lump-sum payments, installment plans, or escrow arrangements through mortgage lenders
• Failure to pay property taxes can result in penalties, interest charges, and potential legal action (tax liens, foreclosure)
• Some jurisdictions offer property tax exemptions or reductions for certain groups (seniors, veterans, low-income households, non-profits)

Tax Rates and Revenue

• Property tax rates are set by local governments and can vary widely across jurisdictions
• Rates are typically expressed as a percentage of the assessed value of the property (millage rate)
  • For example, a tax rate of 1% means that a property owner would pay $1,000 in taxes for every$100,000 of assessed value
• Cities may have different tax rates for different types of properties (residential, commercial, industrial)
• Tax rates can be adjusted annually by local officials to meet budget needs or respond to changes in property values
• Higher tax rates generally lead to higher tax revenue for the city, but may also increase the tax burden on property owners
• Property tax revenue is a major component of a city's overall budget and helps fund a wide range of public services and infrastructure
• Cities may also use property tax incentives (abatements, tax increment financing) to encourage economic development or redevelopment in specific areas
• Changes in property values or tax rates can have significant impacts on a city's revenue and budget planning

Challenges and Controversies

• Property taxes can be a contentious issue for both property owners and local governments
• Some property owners may feel that their tax bills are too high or that the assessment process is unfair
• Gentrification and rising property values can lead to higher tax bills for long-time residents, potentially displacing them
• Disparities in property values and tax rates across neighborhoods can contribute to inequality and segregation
• Limitations on property tax increases (Proposition 13 in California) can constrain local government revenue and budgets
• Exemptions and incentives for certain groups or developments can shift the tax burden onto other property owners
• Disputes over property valuations and appeals can be time-consuming and costly for both property owners and local governments
• Economic downturns or housing market crashes can lead to significant declines in property values and tax revenue
• Critics argue that property taxes disproportionately burden low-income households and seniors on fixed incomes

Impact on Urban Development

• Property taxes can influence land use decisions and urban development patterns
• Higher tax rates may discourage development or redevelopment in certain areas, while lower rates or incentives may attract investment
• Tax increment financing (TIF) can be used to fund infrastructure improvements and encourage development in targeted areas
  • TIF captures the increased property tax revenue generated by new development to pay for upfront costs
• Property tax abatements or exemptions can be used to attract businesses or incentivize affordable housing development
• Differences in property tax rates across jurisdictions can influence where people choose to live or locate their businesses
• High property taxes may contribute to urban sprawl as people seek lower-cost housing in suburban or rural areas
• Conversely, high taxes in desirable urban neighborhoods may lead to gentrification and displacement of lower-income residents
• Property tax policies can be used to support smart growth, transit-oriented development, or historic preservation goals

Future of Property Taxes

• Property taxes are likely to remain a significant source of revenue for cities in the future, but may face challenges and reforms
• Increasing property values and rising tax bills may lead to calls for tax relief or limitations on tax increases
• Efforts to promote affordable housing and prevent displacement may lead to new exemptions or incentives for low-income households and seniors
• Reforms to the assessment process (more frequent reassessments, improved data and technology) may help ensure greater fairness and accuracy
• Shifts towards remote work and e-commerce may impact commercial property values and tax revenue in some cities
• Climate change and natural disasters may affect property values and tax bases in vulnerable areas
• Alternative revenue sources (local income taxes, user fees, value capture) may be explored to supplement or replace property taxes
• Greater coordination and sharing of property tax revenue across jurisdictions may help address regional inequities and challenges
• Balancing the need for stable revenue with concerns about equity and affordability will continue to be a key challenge for property tax policy