The burden of property taxes occurs several ways. The first is their cost. Others are relative–what someone pays in relationship to theoretical value of their homes. Another is the percent a homeowner pays of the assessed value of their homes in taxes. These valuations often are several years out of date. Many assessments almost certainly are too high in the current housing environment, meaning many people are paying way too much in property taxes.
The greatest property tax burden is, usually, the percent of a person’s total income that goes toward his property taxes. The load can be fairly light, as it is in states where property taxes average under 3%. Or, it can be backbreaking as it is in New Jersey and New Hampshire, were the figure is closer to 7%. And, the rate often fluctuates considerably from community to community within the same state. 24/7 Wall St. has elected to measure the weight of property taxes based on this measure of average property tax as a percent of median income measured on a statewide basis.
The ratio of property tax-to-income only offers a glimpse of its impact. It can be compounded by the income of the homeowner. In theory, someone who earns $1 million a year could afford a 5% property tax more easily than someone who makes $50,000. The richer person usually has more discretionary income than someone of more modest means.
Another critical factor to determine how onerous a property tax is involves the amount a home’s value has fallen since the real estate market collapsed. Imagine paying 4% or 5% on your income on a property that has lost a quarter or more of its value. The property tax is a burden, but so is the cost of a mortgage which may well be underwater. The house cannot be sold without the owner taking a loss, perhaps a big one.
24/7 Wall St. looked at data from The Tax Foundation, the Bureau of Labor Statistics, and the Bureau of Economic Analysis. Our goal was to find a formula to decide the affordability of property taxes. We could not find one. The only reasonable way to see if the tax is too high is to combine the percent of income that the tax is in a state where property values have fallen, unemployment is well above the national average,and median income per capita is low. The formula hardly yields a perfect result, but it does indicate how easily most people can pay property taxes by state.
People who have to pay high property taxes have two immediate options to lower their obligations. The first is to appeal their assessment, which is becoming increasingly popular. In fact, the backlog at Michigan’s Tax Tribunal is 18-months and there is no guarantee that a homeowner — even with a strong case — will prevail. Even if the assessor favors a given homeowner, odds are against them getting a break. Local governments are under pressure to increase property tax revenues to cover expenses. Moreover, homeowners who convince bureaucrats to set the values of their properties lower may find that their tax rate has risen.
The 24/7 Wall St. “The Ten States With The Worst Property Taxes” is an analysis of how the weight of home ownership grows in a home market which may be years from financial recovery.