No Job Name

The Property Tax Base and

The Great Recession

by Catherine Collins and Geoffrey Propheter

The Great Recession left its mark on nearly every

aspect of state and local governments — from rev-

enue and spending

to budgeting

to employee com-

pensation.

Property taxes were no exception. Local

governments were forced to increase their reliance

on property tax revenues as state assistance and

other local revenues were adversely affected.

Re-

cent empirical work has demonstrated that property

tax revenues were generally unaffected by falling

home prices, since local policymakers offset the

shrinking tax base with higher tax rates.

This review looks at the housing bubble expan-

sion and collapse in the context of much longer-term

property tax trends. While data on the tax base

nationwide are not fully available for the entire

trend line, Figure 1 nonetheless illustrates the dra-

matic effect of the Great Recession, reversing over

60 years of continuous tax base expansion. From

calendar years 1956 to 2008, regardless of the busi-

ness cycle, the growth in the tax base remained

positive.

At the time when most jurisdictions were

preparing their tax assessments based on values as

of January 1, 2008,

the economy had just entered

the recessionary period. Not surprisingly, the prop-

erty tax base peaked at this time at $22.4 trillion (in

2010 dollars), a 36 percent increase over 2003 levels,

when housing prices began their price run-up.

This

dramatic increase is the second greatest growth in

the last 60 years, eclipsed only by the 49 percent

growth between 1976 and 1981.

By 2009, the Great Recession had made a notice-

able, albeit small, impact on the tax base. The

nationwide base showed its first recorded contrac-

tion since the mid-1950s, declining $708 billion.

Within two years, the base shrank an additional

$1.6 trillion. Over these three years, the taxable

base had lost over a tenth of its value.

Ever since the U.S. Census Bureau discontinued

publication of taxable property value reports in the

early 1990s, tracking the property tax base’s perfor-

mance across states has been a challenge. An alter-

native data source did not exist before the joint

efforts of the Lincoln Institute of Land Policy and

Howard Chernick, Adam Langley, and Andrew Reschov-

sky, ‘‘The Impact of the Great Recession and the Housing

Crisis on the Financing of America’s Largest Cities,’’ Regional

Science and Urban Economics 41(4): 372-381 (2011).

James K. Conant, ‘‘Introduction: The ‘Great Recession,’

State Budgets, and State Budget Deficits,’’ Public Budgeting

& Finance 30(1): 1-14 (2010).

Helisse Levine and Eric Scorsone, ‘‘The Great Recession’s

Institutional Change in the Public Employment Relationship:

Implications for State and Local Governments,’’ State and

Local Government Review 43(3): 208-214 (2011).

James Alm, Robert D. Buschman, and David L. Sjoquist,

‘‘Rethinking Local Government Reliance on the Property

Tax,’’ Regional Science and Urban Economics 41(4): 320-331

(2011).

Byron F. Lutz, Raven Molloy, and Hui Shan, ‘‘The Hous-

ing Crisis and State and Local Government Tax Revenue:

Five Channels,’’ Regional Science and Urban Economics

41(4): 306-319 (2011).

For most states, calendar years and tax years are contem-

poraneous with taxes payable for the following fiscal year.

While January 1 is the most common assessment date,

other dates often used are April 1, July 1, October 1, and

December 31.

Federal Housing Finance Agency, House Price Index.

Georgia, Rhode Island, and South Carolina are not in-

cluded in the 2011 (fiscal 2012) values because data were not

available at the time of publication. In the 2010 assessment

year, these states accounted for less than 2 percent of the

property tax base nationwide.

Catherine Collins is a senior research associate at the

George Washington Institute of Public Policy. Geoffrey

Propheter is a doctoral student at the George Washington

University Trachtenberg School of Public Policy and Public

Administration.

The institute partners with the Lincoln Institute of Land

Policy in Cambridge, Mass., in a joint venture creating

Significant Features of the Property Tax. This web-based

data set includes extensive multiyear information covering

a wide range of property tax topics.

State Tax Notes, August 12, 2013 445

the George Washington Institute of Public Policy in

the mid-2000s to create and maintain a database of

property tax laws, programs, and statistics. The

Significant Features of the Property Tax database

currently contains annual tax base data for each

state from calendar year 2005 (fiscal 2006, gener-

ally) to 2011 (fiscal 2012).

The combination of

recent data from the Significant Features database

and historical data from Census Bureau reports,

supplemented with data for interim years from

additional research, has helped produce a clearer

picture of the tax base nationwide over the last half

century.

The national view shows a relatively symmetrical

growth and decline during the housing bubble ex-

pansion and collapse. Yet, the picture for each state’s

property tax base varied substantially. These differ-

ences are evident in Figure 2. The percentage

change in each state’s base during the run-up of

prices (2003-2007) and the decline (2008-2011) are

displayed, arranged by the percentage change be-

tween 2008 and 2011. During the Great Recession,

the three states with the steepest declines — Ne-

vada (-47.2 percent), Arizona (-33.0 percent), and

Florida (-29.9 percent) — each experienced declines

more than four times the national average. In con-

trast, the best performing state, North Dakota,

experienced no decline, but rather an increase in

real terms (14.3 percent) that surpassed its growth

in the previous period — the only state to do so. In

fact, the growth in North Dakota was about twice

that of the next two fastest-growing states, Ne-

braska (7.3 percent) and Iowa (6.3 percent).

In the Significant Features database, the property tax

base is defined as the value of property liable to taxation,

which implies that exemptions have been deducted.

Because states report their property tax base data dif-

ferently, the reported aggregate (nationwide) taxable value

for all states is only an estimate of the actual taxable value.

Some states, for instance, only report assessed values (before

exemptions are applied) rather than taxable values (after

exemptions are applied). Other states report equalized base

value rather than assessed or taxable values. However, since

most states report base data net of exemptions, the nation-

wide estimate’s variance is presumed to be minimal.

Figure 1.

Property Tax Base Nationwide, Calendar Years 1956-2011

$4.6

$6.8

$10.7

$12.9

$16.5

$17.3

$18.6

$20.3

$21.4

$22.4

$21.7

$20.6

$20.1

$2.2

$2.6

$3.3

$3.7

$9.2

$10

$15

$20

$25

1956

1961

1966

1971

1976

1981

1986

1991

1998

2003

2004

2005

2006

2007

2008

2009

2010

2011

Tax Year

Note: Values expressed in trillions of 2010 dollars. Georgia, Rhode Island, and South Carolina omitted in 2011 due to

unavailability of data. Those states combined to make up about 2 percent of the property tax base nationwide in 2010.

1956-1976 values: 1977 Census of governments: Taxable property values and assessment/sales ratios, Table A.

1981-1991 values: 1992 Census of governments: Assessed valuations for local general property taxation, Table A.

Sources:

Special Report

(Footnote continued in next column.)

446 State Tax Notes, August 12, 2013

Figure 2.

Percentage Change in the Property Tax Base by State

-60% -40% -20% 0% 20% 40% 60% 80% 100%

2008-2011 2003-2007

Special Report

State Tax Notes, August 12, 2013 447

States that experienced the greatest housing con-

tractions (those at the bottom of the chart) in gen-

eral were not the states that experienced the great-

est housing growth during the bubble expansion.

Only six of the top 10 states with the largest

contractions were also in the top 10 with the largest

expansions: Arizona, Florida, Hawaii, Idaho, Ne-

vada, and Washington. Contraction in three of the

four other states — Michigan, Minnesota, and Illi-

nois — may be explained in part by general eco-

nomic decline within these states, with Utah being

the fourth.

Despite the property tax base declining during

the Great Recession, the 2011 base remained greater

than the base in 2004, when housing prices began to

rise.

The four-year contraction brought about by

the housing market collapse (2008-2011) was, on

average for the states, 7 percent. This contrasts with

the average four-year expansion between 2004 and

2007 of 27 percent. In real terms, the aggregate

property tax base declined $2.3 trillion from 2008 to

2011 but it grew $4.1 trillion from 2004 to 2007.

The recession’s adverse effect on the property tax

base is still not clear. While the tax base comprises

more than just housing, the residential sector makes

up the largest component. Therefore, what happens

to housing prices drives the tax base. National

housing price index data indicate that annual price

declines arrested in the first quarter of 2012, with

the remainder of the year showing minor price

increases (Q2 = 0.02 percent; Q3 = 0.36 percent; and

Q4 = 0.64 percent). Thus, because most states’

assessments take place in the first quarter of each

calendar year, the aggregate property tax base is

likely to show further contraction in 2012 assess-

ments (generally, fiscal 2013). With home prices

showing a much larger annual increase in the Q1

2013 (2.01 percent), property tax base expansions

are not expected to be visible until the 2013 calendar

year. Whether the recession’s effects extend beyond

2013 assessments (fiscal 2014) — that is, if there is

a double dip — will depend on the performance of

housing prices for the remainder of this year. ✰

Federal Housing Finance Agency, House Price Index.

Special Report

448 State Tax Notes, August 12, 2013