Where do my property taxes go?
One of the more sobering realities of homeownership is paying property taxes. Depending on where you live, this portion of your monthly payment can range from trivial to stressful. For example, Hawaii’s average property tax rate is roughly .27% of home value, whereas that of New Jersey is 2.44%.* This means that for a $400,000 property, the Hawaiian homeowner pays $1,080 annually while the New Jersey resident has to cough up $9,760.
This $8,680 difference begs two questions: what do property taxes pay for and why are they so different geographically?
What do property taxes pay for?
Property taxes ensure a number of basic societal functions. These can be summarized by the “Five S’s”:
Public schools are funded by property taxes and often take up the lion’s share of annual revenue. Some states like Michigan and Indiana, however, are shifting away from school funding via local property taxes in favor of funding through state-levied taxes.** Ideally, state governments will allocate more funds to schools in poorer communities to help level the education playing field. But the system is complex and rarely perfect, and there is ongoing debate across the country over the best method for school funding.
Property taxes also pay for the salaries and supplies of police officers, firefighters and emergency medical technicians, or EMTs. The pensions of public safety workers, as well as legal payouts for misconduct, personal injury, etc., are also covered by property taxes.
Like to jog, bike and hike in your off-hours? Unless funded by the state, private donors or the U.S. Government, public parks and recreation facilities are usually built and maintained with property tax revenue.
Road construction and maintenance probably take up a big chunk of your property tax bill. Safety and smooth surfaces are the trademarks of solid infrastructure, and as anyone from the Midwest and New England can attest, streets need some TLC after years of repeated freezing, thawing and baking.
Street cleaning, trash collection and sewer and storm-water management fees may appear on your tax bill either as separate items or wrapped into the total amount. In some municipalities these services are billed separately, but they are still levied only on homeowners, so in effect they qualify as property taxes.
Why do property taxes vary so much by location?
The simple answer is that some municipalities and states are in better shape financially than others, and this contributes to different levels of spending.
Average home values
Your property tax bill is based on the fair market value of your home. Consider two communities with the same population, one affluent and one working class: revenue from property taxes—or the “tax base”—will differ significantly between the two because of their different collective home values.
When disaster strikes, homeowners with damaged properties may receive property tax relief. For local governments, this could justify future tax rate increases to make up for the shortfall.
When government leaders get greedy, property taxes go up. Unethical practices by people in power are a financial drain on the community and can result in years or decades of increasing property taxes as the only way to pay for the malfeasance.
Wonder why Hawaii’s property taxes are so low? The Aloha State can bank on the money it receives from travelers and tourists and give its residents a break. This, in turn, encourages them to stay and spend more on the local economy.
Businesses make up a big percentage of an area’s property tax revenue. Towns and cities anchored by restaurants and retailers usually have a healthy tax base, and thus enjoy the resulting social benefits.
Though your property taxes might feel like a financial burden, rest assured that you’re doing your part to improve schools, upgrade infrastructure and beautify your community every time you make a payment!
*“2019 Property taxes by state.” Wallethub.com
**National Conference of State Legislatures. NCSL.org
Guaranteed Rate does not provide tax advice. Please contact your tax adviser with any tax related questions.