Published in 2014
by Patrick L. Dugan, Everett, Washington
Property taxes are the lifeblood of local government. In every state, local governments use property taxes to a significant degree to fund local governmental functions and services. The property tax is also one of the most controversial of taxes. The property tax is a very complex tax system that varies substantially from state to state. Instead of being conscious of the differences, we instead tend to think that property taxes are similar to the system in our own state because that is the one we know. However, that is far from the case.
Study of Tax Rates
I recently encountered an in-depth study by the Lincoln Institute of Land Policy which is prepared annually for the Minnesota Center for Fiscal Excellence to compare the Minnesota tax system with the tax systems in other states.1
Each state uses a unique system of determining taxable values and tax rates that make it impossible to directly compare each state’s stated or nominal tax rate with that of another state. In order to resolve this problem, the Institute developed an Effective Tax Rate (ETR) based on a consistent methodology. These ETRs are an estimate of the actual taxes paid per unit of real value — ignoring the nominal tax rates or the stated assessed value that may be given in each state’s own tax system. While the actual calculations for the ETR are complex, in simple terms, the ETR seeks to be an estimate of the actual tax revenue collected divided by total real value of property. The Lincoln study estimated this ETR for residential, commercial and industrial uses, in rural and urban areas.
Although each state’s tax system is generally set by state law, each taxing jurisdiction within a state sets the property tax rate for its jurisdiction. This results in a range of tax rates within a state, making it difficult to compare between states. To deal with this problem, the Lincoln Institute study estimated the ETRs within each state’s largest city2 and a “representative” rural community. In order to compare urban vs. rural tax rates, the rural community in each state was selected using the rural-urban classification continuum developed by the U.S. Department of Agriculture, and each rural city was a county seat with a population of between 2,500 and 10,000.
Although the study provides a wealth of information, unfortunately, it is somewhat dense. I have taken the liberty of summarizing the findings of the study and simplifying some of the data to facilitate state by state comparisons.
Differential Tax Rates
I had always assumed that the Washington State approach to taxing residential, commercial, and industrial property all at the same tax rates was the common approach. As it turns out, Washington is more the exception than the rule. In most of the states, commercial and industrial uses are taxed at higher effective tax rates than residential uses. While the Lincoln Institute study compared tax rates on a range of different types of uses, I will only describe the comparison they made between urban single family residential uses (what they call “homesteads”) and commercial uses in the largest city of each state to illustrate the range of taxing practice found among the states.
The study found that commercial properties paid the same effective rate as residential properties in major cities of only seven states (Washington, Oregon, Wyoming,3 North Carolina, New Jersey, Vermont and Connecticut). In four other states (Maryland, Nevada, and Virginia), the commercial rate was less than the residential rate. Since relatively small differences between tax rates may be due more to the way the study applied its methodology than to more tangible differences, the tax rates for another ten states may be considered comparable to each other (commercial uses were taxed less than 1.1 times the residential rate). Effective tax rates then for residential uses were nearly equal to or less than tax rates for commercial uses in 20 states, leaving 30 states where property tax rates on commercial property was significantly higher (10 percent higher) than residential uses. (Lincoln Institute, 2013, p. 9)
The difference in some of these 30 states was substantial. The highest ratio was in New York, where commercial uses paid five times the rate of residential properties.4 In 18 states, commercial uses paid property taxes at over twice the rate of residential properties. The average for all states indicated that commercial rates were 1.8 times higher than residential rates. (Lincoln Institute, 2013, p. 9)
The differences between commercial and residential tax rates may be created by a range of potential factors. For example, in Arizona and Colorado the difference appears to be due to the taxable assessed value being a higher percent of the full market value for commercial than for residential uses. In contrast, in Utah a portion of the residential value is exempt from taxation while all of the commercial value is taxed. In Idaho, the difference is probably created by a “homeowners” exemption.
Map 1 illustrates the geographical distribution of these different tax rates. As shown, there is no clear pattern. A state with a low difference may be a neighbor to one with a high difference.
Variation Between States
Another assumption that many people may make is that property tax rates are roughly similar from state to state, or that their state has higher rates than most. Again, for most states, this is a misconception: tax rates vary substantially from state to state.
In the Lincoln Institute study, effective property tax rates for residential dwellings (valued at $300,000) in urban areas ranged from a high of 3.334 percent of the value in Detroit to a low of 0.302 percent in Honolulu. The national average for the surveyed cities was 1.486 percent (Lincoln Institute, 2013, p. 15). The study found that, for various census regions, the average ETRs on a residential property valued at $300,000 varied significantly: 1.053 percent in the West, 1.190 percent in the South, 1.319 percent in the Southwest, 1.634 percent in the Mid-Atlantic, 1.869 percent in New England and 1.951 percent in the Midwest.(Lincoln Institute, 2013, p. 1)
The differences were as dramatic, but with a significantly wider range of rates, for commercial properties, ranging from 4.238 percent in Providence to 0.664 percent in Cheyenne on property valued at $1,000,000. (Lincoln Institute, 2013, p. 18) The average ETR for various census regions was as follows: New England 2.590 percent, Mid Atlantic 2.397 percent, South 1.8 percent, Mid-west 2.812 percent, Southwest 1.807 percent and West 1.427 percent, with a national average of 2.140 percent. (Lincoln Institute, 2013, p. 4)
In order to compare tax rates between states, I developed Map 2 from the detailed data presented in the study. The map is intended to portray the general level of taxing in each state for residential property; it does not identify the specific tax rate within each state. Since the tax rates in large urban areas tend to be high relative to the typical rural areas examined by the Lincoln Institute study, the map presents the average rate between the urban rate and the rural rate for each state.
As illustrated on Map 2, residential tax rates in the western part of the United States are substantially less than those rates found in most northeastern and north central states, with some rates in the west being less than half the rates in the northeast. Southern states are a mix of ranges generally falling between the northeast and the West.
Each state has evolved its own, somewhat unique system for taxing property. Since these systems were usually forged by the interplay of various interests in a controversial environment, it may not be surprising that there is little consistency and logic between states or even how different types of property might be taxed within a state.
Because of these differences, any analysis regarding the fiscal impact of land use patterns, such as urban sprawl, should be used with caution when applying the results of that analysis in another state. For example, the income generated by a development in Virginia would be substantially less than a similar development in Pennsylvania. Unfortunately, this caution is seldom exercised.
Patrick L. Dugan has held various financial and planning positions in cities, counties, and regional agencies in three states over the last 30 years. Now a private consultant in Washington, he can be reached at email@example.com.
The Lincoln Institute of Land Policy’s website has extensive information on the property tax in all 50 states and the District of Columbia. Visit https://www.lincolninst.edu/subcenters/significant-features-property-tax/.
- Lincoln Institute of Land Policy, 50-State Property Tax Comparison Study, 2013; http://www.lincolninst.edu/subcenters/significant-features-property-tax/upload/sources/ContentPages/documents/Pay_2012_PT_%20Report_National.pdf (Data for 2012.)
- The study used the two largest cities in New York and Illinois, although I use only the largest for those two states in this discussion.
- The study’s estimate for commercial tax rates in Cheyenne was actually a very small amount (0.005%) above the residential estimate.
- Although, it might be noted that single family residential tax rates in New York City are very low.