Written by: Patrick Price

Property taxes are indeed a problem in many areas. Therefore, it is politically popular for elected officials to target them. Unfortunately, many of those same people either don’t understand property taxes or worse; some employ strategies that they know don’t address the root of the problem but convey to the electorate that they are trying to solve them. 

The issue with property taxes is in the amount of money being spent by local government – out-of-control budgets and the tax rate that is being applied to property valuations. 

Although we have witnessed an unprecedented market of rising property valuations—and the residential market has never been hotter, despite the pandemic— that means that many property values have increased dramatically. However, that alone is not what dictates the trend of rising property taxes. Instead, it merely redistributes or reallocates the pro-rata share of the total tax burden. 

Other forms of tax are based on income or consumption. In a progressive income tax system, those who earn more, pay more. In our sales tax environment, those with more disposable income who spend more on the consumption of goods and services, typically pay more in sales tax. But the property tax has long been one of the most consistent, fair, and transparent systems of taxation. Those who own more expensive property pay more than those who hold less valuable property, in direct correlation with their property wealth. A common outcome of caps and freezes is a breakdown of this intended distribution of the overall tax burden. 

Who Benefits the Most from a Cap or Freeze on Property Assessments? 

Generally, it will be those who own more valuable property in the most affluent areas—areas with rapid price appreciation. 

Who Benefits the Least from a Cap or Freeze on Property Assessments? 

Those in less affluent areas or distressed sub-markets with less market appreciation or price increases benefit the least from a cap or freeze on property assessments. Yet, the story is always the same – we are told this is intended to help the poor or oppressed segments of the market. In fact, it often has the exact opposite impact. If you are a property owner in one of these states promoting tax caps or freezes, be aware that the ones who will benefit the most are typically the holders/owners of the best, most expensive properties in the area. All others will somehow end up paying for their tax break or favorable treatment. This is the result of annual, artificial caps on assessment values. 

What Happens to Equitable Taxation? 

In such an environment, the old guard avoids tax while the newbies foot the bill. Consider a case in which two identical houses on the same street are subject to a “sale-price, plus freeze” tax environment. One neighbor’s taxes are artificially reduced because they bought their house 20 years ago. You, on the other hand, are paying three times as much property tax as your neighbor, simply because you bought your house last year. Identical property wealth, same property value—yet one neighbor is paying 3x in property taxes compared to the other. That is neither fair nor equitable. You could view it as the young paying the elders’ taxes, or the relocated employee paying the tax of the legacy resident. However you envision it, that is a very poor system indeed. 

Finally, we see this play out in moves to bifurcate or segment the tax burden among asset classes. In some states, for example, you do have caps that can mitigate assessments if the rate of inflation is greater than the targeted amount. Homeowners’ assessments, for example, can increase by no more than 3% per year. While at the same time, commercial property assessments also have a cap, but one in which the rate of inflation is never likely to exceed 10% per year. This means commercial property assessments almost always track and keep up with market pricing; while in hot markets, the residential base is appreciating at rates higher than the assessment cap. Thus, while creating a suppressed assessment base for residential (assessed values are lower than market values), commercial property assessments are at market. This is a thinly disguised redistribution of the tax burden from residential owners to business owners. The kicker is that when retail property taxes go up, or apartment property taxes go up, or manufacturers’ property taxes go up, the costs to local residents are increased to cover those expenses. You’ll simply pay more at the store, or you’ll pay more for a service (so the business can cover their rent and still make a profit), or you’ll pay more as a renter for that apartment. Those taxes are simply passed-through to the occupant, user, or consumer—it’s just now far less transparent. 

What is the Key Takeaway? 

The moral of the story is that property taxes are one of the most transparent, equitable, stable, and consistent forms of revenue for funding local government services, schools, and infrastructure. 

Keep it transparent and keep it fair.  

The purpose of the assessor is to perform periodic reappraisals or revaluations, so we know who holds what percentage of the total jurisdiction’s property wealth. It is not to increase taxes, nor does that process increase taxes by definition. It simply establishes what proportionate share each property owner should pay of the total amount collected. Any legislation that seeks to break that system—by capping, freezing, or otherwise distorting the relationship between value and assessment—will ultimately do more harm than good.  

What is the Answer? 

The most obvious answer is simple, yet the most difficult: property taxes are too high in many areas because the government spends too much money and is fraught with waste. Sincere politicians looking to solve these problems must first target and eliminate that waste and defunding unnecessary bureaucracy and special interests that are now reliant on property tax is perhaps the most difficult thing they could ever do. 

Yet, if you want to control or mitigate rising property taxes, the culprit that should be in the legislators’ focus is the government spending and tax rates (not values). A good example of this is making revaluation or reappraisals “revenue-neutral,” like the State of Tennessee. 

When a TN county performs its periodic revaluation (every 4 years), you have a higher valuation of the total tax base, and perhaps a reallocation of where that value resides or who holds it; but by default, it cannot result in an increase in the total property tax collected. Other than new construction, the reappraisal of all property must result in a reduction of the tax rate, so that the amount of tax collected is the same as the prior year (before the reappraisal). This means that if the local government wants more revenue from the tax base, it will not happen simply because market prices appreciate. Rather, they must increase the property tax rate and be subject to the public attention and scrutiny that is warranted. 

Working around property tax caps and freezes can present many challenges—especially when working without the assistance of an expert property tax consultant. Contact us today to learn more about how we can help you through your property tax revaluation. 


Contact us today to learn more about how we can help you through your property tax revaluation.

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