Why are property taxes higher in some places than others (United States)?

Question

The new tax law in the United States, which limits the deductibility of property taxes, has highlighted just how much property taxes can vary. (This site offers some hard numbers comparing median property taxes between states.)

I'm wondering why property taxes vary so widely. I used to think it had to do with population density. The cost of maintaining e.g., a public road is more or less the same no matter how many people use it, and so if you have lots of people living and paying taxes on a street, each person should not have to pay much to maintain it. But that theory does not seem right because most densely populated states (e.g., New Jersey) also tend to have the highest property tax rates.

I sense that another factor is the way local governments are organized. I used to live in the South, where the only municipal government was the county. There was only one police department, one school district, etc. for everyone in the county. I assume that part of the reason my taxes were lower under that model is that the municipal agencies were larger than they are where I currently live, where each town or village tends to have its own police department, fire department, etc. If everything is organized at the county level, you only need to pay one school superintendent, one police chief, etc.

That said, I doubt that the size and architecture of municipal governments can fully explain tax rate variations. If that were the only reason why people in some locations pay taxes that are ten times higher than those elsewhere with homes worth the same amount, then you'd think there would be enormous pressure to solve the inefficiencies by reorganizing the municipal governments.

Obviously, the level of services provided by local governments also affects tax rates. If you don't have a professional fire department or a public library, for example, your taxes can be lower. But here again, this different doesn't seem large enough to explain the enormous variability in tax rates. (It's not as if no one living in low-tax states has public libraries or fire departments.)

What other factors are at play in driving property tax rates? Why do some states and regions seem to have such difficulty keeping property taxes affordable?

(Note that I'm asking about local property taxes, which could also be interpreted to include income taxes and sales taxes that are imposed by a local municipality. State income tax rates are a somewhat separate question.)

Answer 1

What other factors are at play in driving property tax rates?

Almost anything can affect it. It's a public policy decision that's subject to just about every influence that can affect public policy decisions. To list just a few:

1. It depends what other kinds of taxes local governments can and do levy. For instance, if local governments can impose sales taxes, they have the option of raising revenue that way. In some states, local governments can also impose their own income tax on residents.

2. However, it also depends not just on what taxes local governments can levy, but which taxes they do levy. This choice may depend, for instance, on how much commercial activity is taking place in the jurisdiction versus property values. For instance, in a wealthy enclave where rich people have ranches or mansions to get away from the hoi polloi, there may be high property values but not much in the way of sales to tax. (But if the values are high, a low rate may be sufficient to generate enough revenue.)

3. Also, nearby municipalities may sometimes compete with one another on different taxes to some extent. People have more practical ability to choose where to be taxed on sales, so sales tax "arms races" can indirectly influence property taxes. (It's fairly easy to drive to the next town over to save sales tax on an expensive purchase, but moving there to save on property taxes is not so simple.) Some places can take such competition to an extreme by designing themselves for a particular "market", such as the "exclusively industrial" city of Vernon, which essentially designed itself specifically to appeal to business interests, so that more than 40,000 people have jobs there but only about 200 live there.

4. In some states (notably California), ballot measures have placed legal restrictions on what property tax rates localities are allowed to set. This forces them to turn elsewhere for revenue.

5. Somewhat related to the above, states differ in how large a role the state government plays in funding local services like schools and public health facilities. This loosens the coupling between "level of service" and local property taxes, since cities may have services that are subsidized by state funds.

6. Like anything, it is often influenced by the history of previous policy decisions, and corresponding attitudes that people develop. For instance, particularly egregious property tax rates in some particular city may lead to a "revolt" in which anti-tax advocates sweep into control of local government and ratchet the taxes back. Things like California's Proposition 13, which capped property tax rates statewide, can become so entrenched and intertwined with other policy decisions that it's difficult to change the property tax rate without overhauling the entire tax system. Inertia can make it politically infeasible to raise taxes once people become accustomed to low rates, but other kinds of inertia (e.g., ballooning pension liabilities) can make it difficult to lower rates as certain kinds of costs become difficult to escape.

In short, it's complicated.

Answer 2

Generally, Property taxes are the taxes used by the local level as the state is exclusively income tax (and possibly impose sales taxes) while the Federal level is almost exclusively income taxes as well.

Property taxes are typically assessed based on what is the fair market value for the property and a the given rate of taxation for property. Thus your taxk would be X * Y where X is the fair market value and Y is the decimal percentage value usually no greater than 0.04 or 4% for private homes. Other factors such as development and commercial equipment may also factor in.

Tax is determined by the reasonable price you would sell your land for (given other properties in the area) and the established tax rate. While you aren't wrong in your initial population density idea, this more has to do with the value of land in densely populated areas than actual density itself.

In some jurisdictions, the property can be taxed twice: Once by the city and once by the county the city resides in, so property taxes in say Los Angeles might be high not because of one set rate by the City of Los Angeles but the County of Los Angeles might also assess a tax rate.

Answer 3

One factor is population density. The more people that live in one place, the more the community has to expend on social services. More police, more schools, larger sewers, more extensive emergency services, etc...

However, more people doesn't necessarily translate into higher property taxes, as a lot more people live in the same space, as compared to more lightly populated areas. When the number of people rise, but the real estate size remains the same, then the tax rate will go up to account for the higher expenditure. True that the value of the property also rises, but it doesn't keep up with the expense to the city of the higher number of people.

Consequently, NYC, which is very densely populated, will have a higher percentage property tax, on top of the property being valued higher, than, say, Cincinnati, because the population density is quite a bit higher, placing far greater demands on the city services.

Answer 4

The State and local governments set the rates, so they call the shots. In addition to the factors mentioned in the other answers, it can also depend on:

• How much money the government in question spends. This is the endless left-right debate in the US, which is ultimately a trade-off. If the gov't has more money, it can do more things, but it also has to collect more taxes. Thinly populated states probably need more revenue per capita, regardless of party.

• Assessed property values. These are sometimes similar to market prices; other times not. In any case, the higher the assessed value, the more money the government can raise at the same rate. Hence, if values are higher, the rate may be lower. A state with low rates may actually be a higher-property-tax place than a state with high rates, depending on how the assessed values are set.

• Other revenues available to the government. For example, some States raise a lot of money through sales and/or income taxes.