How Should We Measure Property Tax Increases?
Property taxes are rising—but by how much?
The answer matters as policymakers evaluate measures for property tax relief, but it’s not straightforward. Tax collections have risen dramatically in recent years, but this did not happen in a vacuum: the population rose, total floor space increased, and people increasingly opted for more expensive homes. It’s not just that all home values appreciated—though most did, substantially—but also that there are more households, and that homeowners increasingly demanded larger, more expensive homes in more desirable neighborhoods.
Property tax critics often default to nominal property tax increases when reporting rising tax burdens. They sometimes argue that inflation adjustments are unnecessary or inapt because owners’ income (including retirement income) isn’t guaranteed to rise with inflation. But governments’ costs of providing services rise over time, and ignoring inflation dramatically overstates the increase in property taxes. When critics do concede the necessity of inflation adjustments, they rarely go any further.
Any long-term evaluation of property tax burdens must be inflation-adjusted. But a question then arises: which measure of inflation is best? The “standard” measure of inflation is typically the Consumer Price Index for All Urban Consumers (CPI-U), based on a U.S. city average, though sometimes versions specific to particular metropolitan statistical areas are used for state- or region-specific calculations, e.g., CPI-U for Cincinnati-Hamilton OH-KY-IN.
Increasingly, the federal government uses Chained CPI-U, particularly for longer time horizons. Whereas traditional CPI uses a fixed basket of goods to measure price changes in time, Chained CPI accounts for a greater level of substitution: if beef prices go up disproportionate to other meats, consumers might buy more chicken. This is a good measure for some things, but probably not for property or for local government services.
Finally, state and local government officials often prefer the Implicit Price Deflator for State and Local Government Purchases (IPDSL), which yields the highest inflation rates and thus the lowest rate of real growth in property tax collections.
The goods and services that governments purchase differ in composition from the typical basket of consumer goods, and many undergo greater cost increases. To the extent that this effect derives from the mix of goods (e.g., all construction costs are rising faster than CPI-U and construction costs are a greater share of governmental than household budgets), accounting for that through a governmental measure is reasonable. But to the extent that governments are less efficient than the private sector and operate in markets with less competition, using an inflation measure that captures rising governmental costs is probably a bad way to contain those costs.
Additionally, the Implicit Price Deflator combines state and local government expenditures, and thus includes the rapidly rising costs of health care and social welfare services largely delivered by state governments, which are less pertinent for local governments and thus less relevant to the property tax debate.
Because of this, my preference is to use the Consumer Price Index rather than the Implicit Price Deflator, but—where revenue constraints are imposed, like with property tax levy limits or other tax and expenditure limitations—to build in some fixed growth factor above CPI to account for its limitations. Just using the Implicit Price Deflator gives too much away.
With a standard inflation adjustment, property taxes rose 70 percent in real terms between 1995 and 2023.
Of course, inflation adjustments are not the whole story, though many analyses treat them as such. The population is also growing, while families are shrinking. A larger population means more housing, and at least theoretically, smaller families mean more distinct housing units proportional to population.
Interestingly, however, I see little evidence that declining household size was significant in aggregate. Part of this seems to owe to an example of Simpson’s paradox: household sizes are declining across most demographics, but the fastest-growing populations have larger (if still declining) household sizes. Immigration and increased ethnic diversity appears to be stemming the tide on the average household size. Later marriages and fewer children, moreover, may be partially offset in the data by more 20- and 30-somethings living with roommates.
Household size may not matter as much as expected, but population growth certainly does. Simply inflation-adjusting property tax collections over time cannot capture this, and thus dramatically overstates the increase in property tax burdens. After adjusting for population growth, the real increase in property tax burdens was 34 percent between 1995 and 2023.
Even that may not tell the whole story, because the composition of that property has changed. Houses are getting larger even though families are getting smaller. Floor space has increased by almost two-thirds since 1995, with large increases in both residential and commercial property. (Industrial square footage has fluctuated, but current square footage is similar to 1995 levels.) And that’s just one possible metric, just one way that properties have become more valuable.
So should we adjust for floor space or other ways that properties have improved over the decades? That’s a tougher question than the population adjustment, because while it makes sense to tax each property on its market value relative to other properties, it’s not necessarily the case that property taxes need to rise because real property get more expensive in aggregate—even when the greater expense is due to genuine improvements, like larger or more up-to-date homes.
Certain government services may cost more to provide to nicer homes, and people in wealthier neighborhoods may demand more or better government services. Still, the cost of schools, roads, and courts doesn’t change just because people’s houses got larger.
If you use floor space as a proxy for qualitative improvements in real property, the real increase in property taxes between 1995 and 2023 drops to a mere 5 percent. I think this is far too low for the reasons stated above, but it’s still a potentially valuable data point that might prompt us to apply some discount to the 34 percent real growth indicated by population and inflation growth alone.
Another way to think about property tax burdens is to express them as a share of income. As people become wealthier, they may purchase more expensive housing, which will cause aggregate property tax burdens to rise. But if income rises faster than housing prices, property taxes as a share of income can still fall.
During periods of robust economic growth, we would expect to see property tax burdens decline as a share of income, because even though demand for pricier housing might increase, there are upper limits for most purchasers: someone with a net worth of $10 million probably lives in a much more expensive house than someone with a net worth of $500,000, but it’s likely not twenty times as expensive.
Indeed, this is what we see in the data: property tax collections rose as a share of income during the housing bubble of the 2000s but have been declining ever since. That doesn’t tell us that property taxes are at the right levels, but it does offer some good news: overall, ability to pay is improving despite rising property tax bills, because income is rising even faster.
None of this tells us the “right” level of property taxation, and by any reasonable measure, property tax burdens have risen considerably faster than inflation. But how we measure the increase matters. The data tells a story, but selective or inadequately considered use of data can give the wrong impression.
Rising property tax burdens are a real issue, and one that demands real solutions. But our sense of what policy solutions are appropriate will be influenced by our sense of the breadth of the problem—meaning that it matters how we measure.
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