Income-Adjusted Property Tax System Would Foster Homeowner Equity

The changing landscape of property ownership and occupation didn’t start with the Covid-19 pandemic, but it’s become more pronounced since then. The municipal property tax base is eroding as more retail spaces stand empty. States are attempting to provide property tax relief to address economic challenges rooted in income stagnation and inflation.

The commercial tax base and effective residential rates can’t both decline without also hurting tax revenue. Implementing a property tax system that accounts for taxpayer income would be the most equitable solution—and it may also be necessary to offset the regressive effects of rising property taxes.

Property Tax Problems

Property values can climb, driven by housing market forces, even as homeowner income stagnates or falls. And as US homeowners stay in their homes longer, there’s a diminished connection between the value of their property on paper and actual liquidity.

Property tax hikes create financial distress. A 2020 study from the National Bureau of Economic Research found that a $50 monthly property tax increase caused a 9% uptick in mortgage delinquency.

This makes the prospects of a straight property tax—one uniform rate applied to property valuation linked to fair market value—difficult or impossible to administer without a relief valve somewhere.

Property tax relief has traditionally been deployed through across-the-board property value reassessments, reimbursements, or ad-hoc property tax appeals. Each of these methods poses inequity risks, as generalized reassessments may provide relief to high-income taxpayers who can afford to pay their full property tax bill.

Also, reimbursements and individual property tax appeals require a certain level of sophistication to even apply for the programs, much less retain a tax attorney and pay for an expensive appeal.

Income-Adjusted Relief

An approach that more equitably allocates tax liabilities is necessary. Property tax can continue to be based on the fair market value of properties, without non-market adjustments and with the addition of tax credits based on homeowner-taxpayer income. This would scale the tax burden to one’s financial ability to pay.

Linking property tax relief to income rather than property value alone would add some progressivity, as effective property tax rates would be higher for those with higher income and lower for those with lower income. An income-adjusted approach would negate the need for appeals or lengthy application processes for relief programs, and it would ensure the property tax system is regularly applied.

Formally connecting an individual’s ability to pay at the assessment level would ensure property tax is adjusted to financial capacity rather than purely property ownership—this would reduce discrepancies and enhance fairness. Property tax assessments would be made already factoring ability to pay, with no appeal process required.

From a tax compliance standpoint, a more understandable and visibly fair property tax system would help foster greater trust. Property tax has been identified in surveys as Americans’ “most hated” tax for a number of years, owing at least in part to its blindness to ability to pay.

If property taxes continue to underpin municipal budgets, they must get a facelift. Otherwise, they will continue to be winnowed or outright gutted due to their political unpopularity.

Challenges to Relief

Income-adjusted property tax relief brings challenges in practice. The ever-present requirements of political will and bipartisan support for major policy reform make it a tough task—but not an impossible one.

Property tax relief as a political project doesn’t fall along party lines, as few people are excited to pay more in property tax to demonstrate their party loyalty. Older Americans are often beneficiaries of property tax relief, and property tax revenue funds most public services.

This may be both a negative and a positive: Because no one party sees property tax reform as a core party plank, perhaps neither party sees opposing property tax reform as a political necessity.

Incorporating an income-adjustment system requires either substantial investment in methods to verify taxpayer income at the municipal level or—more feasibly—connecting the property tax and state income tax systems to grant the former access to taxpayer income information from the latter.

This could cull resistance from stakeholders, such as high-income taxpayers who benefit from property tax relief policies, or tax administrators and property assessors who are wary of the additional administrative burden.

Perhaps the most significant challenge will be the requirement, under many state constitutions, for uniform property tax rates. This is why many relief efforts focus on adjusting the assessed value of a property—the tax base—rather than the percentage levied—the tax rate.

That approach makes sense constitutionally—cutting the assessed value of a given piece of property can have the same effect as reducing the rate, but it doesn’t run afoul of uniformity requirements. But it makes little sense if we view assessments for property tax purposes as having any bearing on market realities in terms of property valuation.

If property tax systems are integrated with state income tax policy and infrastructure, property tax rates can remain the same. Property assessments can be keyed to fair market values, and property tax relief policies can also use refundable tax credits.

The millionaire and the middle-income employee can both have their property assessed to fair market value—without any adjustments—and be taxed at the same rates. And progressivity can be injected into the system through refundable income tax credits given to the latter but not the former.

Reemphasizing fair market valuation with the addition of income-sensitive credits ensures an equitable tax policy while steering clear of contentious and unfair practices of valuation manipulation.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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