Will the booming housing market boost municipal taxes? It’s complicated

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Municipalities dependent on property taxes are likely to benefit from a jump in US home prices, but not immediately and not equally, according to a Monday report.

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The Fitch Ratings report said that while national gross gains in home prices have remained in the double digits through the pandemic, some sectors have performed better than others.

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In addition, home prices and property taxes do not move in a precise ratio, given the long time lag for property tax changes based on valuation data and local policies, the impact on municipal revenues can be reduced or delayed. Is.

In most cases, the report explains, “the completion of the property tax revenue cycle reduces home price trends 18-24 months.”

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The way local governments raise their money needs to change

“Many states have tax regimes that reduce the impact of home price volatility on property tax receipts,” the report said. “It reduces the tax burden on homeowners in times of strong rise in home prices, while protecting the government’s financial flexibility at times of decline in home prices.”

The report captures the historical relationship between a backward house price index and property tax collections for all municipalities by state.

Florida has the strongest correlation between prices and taxes, followed by Hawaii, while South Dakota and Nebraska show the weakest.

According to the Bureau of Economic Analysis, more than 95% of state and local property taxes are received by local governments, Fitch analysts wrote. And for most local governments, residential property taxes are “by far the major revenue source” within all forms of tax revenue, “often over 60%,” notes the report.

Again, the national aggregate hides some large local differences: 70% of the revenues of municipalities in New Hampshire, Vermont and Maine came from property taxes, compared to less than 20% of revenue in Missouri and Kentucky.

Fitch developed a proprietary “tax boost” index that takes into account home price trends, property taxes as a percentage of total revenue, and the historical correlation between home prices and property taxes.

Hawaii, Connecticut and Florida are likely to have the highest growth in tax collection, while Alaska, Maryland and Nebraska are at the bottom of the list.

Read next: 3 out-the-box options for home buyers in a tough housing market


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