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Impact Fees Grow as Property Taxes Decline

State and local governments are relying less on residential property taxes for their revenue, according to NAHB housing policy economists, but that can be a mixed blessing when new impact fees on housing become an alternative revenue source.

For example, California’s Proposition 13, which freezes the assessment of a home’s value until the property is sold, has also helped create some of the highest fees on housing in the country, according to many analysts.

Although most of the large statewide property tax reforms were adopted before 1985, a few states revisited the issue in the 1990s. In 1994, Michigan enacted Proposal A, which shifted a large share of the burden for local government finances in the state from the property tax to the sales tax.

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An article in the December 2002 issue of NAHB’s Housing Economics report contains some interesting background information on residential property taxes:

• Annual operating costs of homeownership, excluding mortgage payments, average about 4.5% of the home’s value. More than a quarter of this — 1.3% of the value  — consisted of property taxes.
• Property taxes are generally the largest single source of the revenue of local governments. In 1997, property taxes accounted for about 46% of local government revenue (excluding revenue from government-owned gas, electric or transit utilities, and liquor stores).
• More than 95% of property taxes are collected directly by local jurisdictions. In 1997, local governments collected $209 billion in property taxes, according to the Census of Governments.
• The extent to which jurisdictions rely on property taxes to fund local services varies from state to state. Property taxes account for well under 20% of local revenue in Alabama, but more than 80% in Connecticut, New Hampshire, Rhode Island and Vermont.
• Even adjusted for inflation and increases in the population, property tax payments doubled between 1960 and 2000, from $448 to $896 per capita in 2001 dollars.
• However, property tax revenue has declined from more than 38% of state and local government receipts in 1960 to a little more than 20% in 2001. During that time along with household income, government revenue from all sources was on the rise. Also, state and local governments turned increasingly to other sources of revenue, particularly income taxes and various fees.

For further information, e-mail Paul Emrath or call him at 800-368-5242 x8449.

For information on NAHB's monthly Housing Economics publication, click here.

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