Report: With Rising Home Values, Property Tax Breaks Shift Burden to New Home Buyers

In San Diego, the owner of a newly purchased, median-priced home paid more than $9,000 in property taxes last year, about $3,400 more than somebody who has owned an identical home for 14 years, the average duration of home ownership in the city, according to a new study from the Lincoln Institute of Land Policy and the Minnesota Center for Fiscal Excellence.



A result of the assessment limit contained in California's Proposition 13, the disparity in tax bills for new and longtime homeowners in San Diego grew by $600 last year alone as property values increased, and it has grown by more than $2,000 in five years, according to the 50-State Property Tax Comparison Study.

Assessment limits restrict the growth in the assessed value of a home for tax purposes, usually allowing a property to be assessed at its full market value only after it is sold. Over time, as the value of a home increases, its owner receives an increasingly large tax break. New and recent homebuyers make up for these tax breaks by paying higher bills. San Diego is one of 29 large cities with assessment limits analyzed in the study. In these cities, longtime homeowners receive an average tax break worth $1,600, a 30 percent discount compared with tax bills of new homeowners. You can calculate your payments by using online calculator.

Produced annually, the 50-State Property Tax Comparison Study provides the nation's most comprehensive analysis of local property tax rates by calculating the effective tax rate—the tax paid as a percentage of market value—for 74 large U.S. cities and a rural municipality in each state. The study considers property tax exemptions, credits, the accuracy of assessments, and other factors to provide meaningful comparisons of tax rates and bills for residential, commercial, and industrial property. It also analyzes the key factors that drive differences in tax rates among cities.

One of the main drivers of variation in tax rates is the extent to which each city relies on the property tax. In Bridgeport, Connecticut, for example, residents pay one of the highest effective property tax rates on a median-valued home, but they pay no local sales or income taxes. Birmingham, Alabama, by contrast, has some of the lowest effective property tax rates, but its residents pay significantly more in total local taxes than Bridgeport's—$3,201, per capita, compared to $2,221 in Bridgeport—because Birmingham also relies on local sales and income taxes.

A second major driver of variation in tax rates is the difference in property values in different markets. Cities with high property values can collect the same revenue with a lower rate than cities with low property values. For example, to collect $3,424—the average amount collected for a median-valued home in the study—the effective property tax rate would need to be 20 times higher in Detroit, which has the lowest home values in the study, than in San Francisco, which has the highest home values.

Other factors in the variation of property tax rates include differing levels of local government spending, and differences in how various classes of property, such as residential, commercial, and industrial, are treated relative to each other.

The study found that among the largest cities in each state, the average effective tax rate on a newly purchased, median-valued home was 1.3 percent in 2021, with wide variation across cities. Three cities had effective tax rates that were at least double the national average, and eight had rates that were less than half the average.

Highest and Lowest Effective Property Tax Rates on a Newly Purchased Median-Valued Home (2021)

Highest Property Tax Rates				Lowest Property Tax Rates
1	Detroit (MI)	3.27 %	Why: Low property values	49	Charleston (WV)	0.59 %	Why: Low property tax reliance, Classification shifts tax to business
2	Newark (NJ)	3.23 %	Why: High property tax reliance	50	Denver (CO)	0.53 %	Why: Low property tax reliance, classification, high home values
3	Aurora (IL)	3.11 %	Why: High property tax reliance	51	Boston (MA)	0.51 %	Why: High home values, Classification shifts tax to business
4	Portland (OR)	2.62 %	Why: Assessment limit shifts tax to newly built homes	52	Charleston (SC)	0.49 %	Why: Classification shifts tax to business, High home values
5	Milwaukee (WI)	2.48 %	Why: Low property values	53	Honolulu (HI)	0.30 %	Why: High home values, low local gov't spending, classification

The study also finds significant variation in effective tax rates for commercial property such as office buildings. In 2021, the average tax rate on a $1 million building was 1.9 percent in the largest city in each state. Detroit and Chicago had the highest rates, at more than double the national average, and Cheyenne, Wyoming, and Seattle had the lowest rates, at less than half the national average.

Highest and Lowest Effective Property Tax Rates on $1-Million Commercial Property (2021)

Highest Property Tax Rates				Lowest Property Tax Rates
1	Detroit (MI)	4.21 %	Why: Low property values	49	Boise (ID)	0.97 %	Why: Low local gov't spending, High property values
2	Chicago (IL)	3.78 %	Why: High local gov't spending, Classification shifts tax to business	50	Birmingham (AL)	0.88 %	Why: Low property tax reliance
3	Providence (RI)	3.53 %	Why: High property tax reliance	51	Charlotte (NC)	0.87 %	Why: Low property tax reliance
4	Des Moines (IA)	2.91 %	Why: Low property values, High property tax reliance	52	Seattle (WA)	0.82 %	Why: High property values, Low property tax reliance
5	Kansas City (MO)	2.84 %	Why: Low property values, High property tax reliance	53	Cheyenne (WY)	0.69 %	Why: Low property tax reliance

The report is available for download on the Lincoln Institute website: https://www.lincolninst.edu/publications/other/50-state-property-tax-comparison-study-2021

The Lincoln Institute of Land Policy seeks to improve quality of life through the effective use, taxation, and stewardship of land. A nonprofit private operating foundation whose origins date to 1946, the Lincoln Institute researches and recommends creative approaches to land as a solution to economic, social, and environmental challenges. Through education, training, publications, and events, we integrate theory and practice to inform public policy decisions worldwide.

The Minnesota Center for Fiscal Excellence was founded in 1926 to promote sound tax policy, efficient spending, and accountable government. As a non-profit, non-partisan group supported by membership dues, the center pursues its mission by educating and informing Minnesotans about sound fiscal policy; providing state and local policy makers with objective, non-partisan research about the impacts of tax and spending policies; and advocating for the adoption of policies reflecting principles of fiscal excellence.

SOURCE Lincoln Institute of Land Policy