Understanding the Impact of Property Taxes Is Critical for Effective Local Policymaking (2024)

Property taxes are the financial backbone of local governments. They account for nearly three-quarters of local tax collections and are a significant local revenue source for financing K–12 education, police and fire departments, parks, and other services. Property taxes also shape local housing markets by influencing the costs of buying, renting, or investing in homes and apartment buildings. Understanding how changes in property taxes affect households and community development, therefore, allows local jurisdictions to more effectively design their tax systems.

The best way to understand the impact of any existing or proposed property tax initiative is to examine the property-level impacts in a community. But this is hard to do because every county reports property-level tax payments data differently, and it is difficult to accurately identify owner-occupied properties.

At a recent Urban Institute event, two researchers shared how they tackled these challenges in their work with property records data. Their case studies shed light on the interplay between property taxes, housing supply, and residential mobility.

Property tax records show how California’s Proposition 15 may affect the state’s housing supply

In 1978, California passed Proposition 13, which reduced property taxes by locking local property assessments to 1975 market value levels or the most recent purchase price and by restricting increases on assessments to no more than 2 percent each year. This has significantly restricted an important source of tax revenue for local governments, as property values have increased considerably over the past decades, while property tax increases have been severely limited.

The proposed tax ballot, Proposition 15, creates a split-roll property tax system in which residential property and commercial property would be assessed and taxed under different regimes. Commercial property would be reassessed to market price every three years, while residential property would continue to be taxed under the rules of Proposition 13.

Sarah Strochak, a research analyst in the Urban Institute’s Housing Finance Policy Center, and her coauthors examined whether converting to this split-roll system would create incentives that would increase or decrease housing supply in California. Using First American property records data in California, they combined information on property taxes, assessment values, and zoning codes. Because zoning codes are not standardized across jurisdictions, the authors also selected four case study cities (Berkeley, Chula Vista, Fresno, and Los Angeles) to represent different types of communities.

They found that very few parcels are viable for conversion from residential use to industrial or commercial use, while many parcels are eligible to be converted from commercial or industrial use to residential use. Their analysis showed that “long-term incentives for owners and developers to build/convert to residential uses are much stronger than for municipalities to rezone under medium and high price appreciation scenarios.”

On balance, split-roll tax reforms are more likely to increase the housing supply in California than constrain it. But it is unlikely that the reform will solve California’s extreme housing shortage or affordability challenges without additional policies and reforms.

Property tax records reveal the displacement impact of a new tax program

Gentrification—when a large group of high-income households moves into a previously low-income neighborhood—can displace financially vulnerable, long-term homeowners. As high-income households move into a neighborhood, home values and property taxes often rise.

Lei Ding, senior economic adviser at the Federal Research Bank of Philadelphia, and his coauthor used property tax records to determine whether a 2014 property tax overhaul (the Actual Value Initiative) caused existing homeowners in gentrifying neighborhoods to move out of their neighborhood. The researchers used property records data to gather information on property owner occupancy status, property assessment, and tax payment history, including tax abatements and exemptions.

Ding and his coauthor found that “gentrification increases property values, property taxes, and the delinquency risk on property tax bills.” But there has been no sign, five years later, of displacement among elderly and financially disadvantaged homeowners, which the researchers attributed to protections offered by well-targeted gentrification tax relief programs in Philadelphia.

Despite the challenges of working with property-level tax records, researchers can use these records to learn how well local taxes achieve various policy goals. With careful analysis, these records can help policymakers more effectively design their tax systems.