Local dependence on property tax revenue
Posted on November 3, 2021 by Toby Burke and has no comment
Every local government in the United States must operate with a balanced budget where incoming revenue equals outgoing expenditure. The National League of Cities has referred to this local budget as “political instrument(s)” which regulates public policy priorities, finances public services and programs, establishes spending constraints, and establishes a level of transparency and accountability in the application of revenue.
The source of local income may vary by city and province based on economic conditions, rate structure, property appraisals and other income-generating methods. The Municipal Institute has a initiative which provides an overview of state and local revenue prior to the pandemic. Their assessment of the 2018 US Census Bureau Summary of State and Local Government Tax Revenues found that property taxes generated most of the general revenue, excluding transfer funds from federal and state governments. Specifically, the overview showed the following breakdown of the local general income:
- Property tax – 30%
- Costs (water, sewage, parking fees for example) – 18%
- General Sales and Gross Receipt Taxes – 5%
- Miscellaneous (real estate sales, interest on investments) – 5%
- Alcohol, motor fuel and tobacco products – 2%
- Individual income taxes – 2%
- Other (hotel tax, restaurants for example) – 2%
- Wire Transfer – 35%
- Federal government – 4%
While state and federal government transfer income can contribute the most, they often come with obligations or for a specific purpose or project. Property taxes are the largest source of revenue that for the most part remains under the direct control of local governments. Transfer income may also be subject to fluctuations based on policies and policies emanating from Capitol Hill and within state capitals.
The COVID-19 pandemic has impacted local revenues by imposing home orders and business restrictions. Intra-city revenues from certain sectors of the economy, such as tourism, hospitality, restaurants, retail and the entertainment industry, were certainly lower. however, the Reason Foundation believes that revenue declines have remained “modest” in most cities due to their reliance on property taxes, which are protected from economic slowdowns. The surge in sales tax collections on online purchases may also have helped offset revenue shortfalls associated with loss-making economic activity.
The federal government has also stepped in to provide additional assistance to local governments during the pandemic. According to the White House, the federal government paid out $829 billion in aid to state, local, tribal and territorial governments last year. This aid was followed up earlier this year with the passage of the US bailout law, which provides states and local governments with an additional $350 billion in federal funds. Of the $350 billion, cities and counties received $110.7 billion to support local relief efforts and boost economic activity.
Some characterize these federal funds as a windfall for local governments to expand government services and programs, both related and unrelated to the pandemic. The question for local governments, once the one-time infusion of federal funds is mandated and spent, becomes whether the expanded services and programs should be continued or reduced. It will be both a public policy issue and a political issue, including raising taxes, especially property taxes, to supplement federal dollars.
The commercial real estate sector is not voting, so the concern is that the sector will be the target of real estate tax hikes by local governments to replenish depleted federal dollars. The concept of picking and raising property taxes only on commercial properties over other properties is commonly referred to as split roll.
To be clear, the debate over raising property taxes is not based on or driven by the pandemic or the loss of federal aid. It can occur at any time. A 2022 ballot initiative has been filed with the California Attorney that, if passed, would impose a 1.2% surcharge on all properties — residential, multi-family and commercial — with estimated valuations in excess of $4 million. The proceeds of this initiative, known as “Housing affordability and 2022 tax cutwould go to increasing property tax exemptions and providing “comparable” tax credits to income-qualified renters within the state. While California voters may have rejected Prop. 15, an effort to lift property protections for CRE, proponents argue last year for greater equity in the state’s housing market.
Real estate appraisals and tax increases will continue to be a central part of the discussion as a source of revenue to fund government services and programs. Commercial real estate and the private sector will need to stay engaged and at the table with policy makers to ensure a fair and balanced approach that avoids unintended consequences of hindering economic development and job creation.
Toby Burke is the Senior Director of State and Local Affairs for NAIOP.