July 13, 2024

Escalating Property Taxes Can Devastate the Housing Market

Many Americans are leaving cities with expensive property taxes and moving to areas like Tennessee, where rates are lower. They’re doing this to lower the often overlooked home ownership costs.

A recent study by the Laffer Associates and the Committee to Unleash Prosperity reveals that more individuals are moving away from places like Ohio, Illinois, and western Pennsylvania. Instead, they’re choosing states like Tennessee, where the average property tax rate is as low as 0.6%.

From 2013 to 2020, the number of people living in Cleveland went down by 1.2%, and in Chicago, it went down by 0.8%. Meanwhile, Pittsburgh saw a tiny increase of only 0.8%. Conversely, Nashville experienced a remarkable 7.3% growth during this time. It’s important to note that Tennessee stands out because it doesn’t have a state income tax, unlike Pennsylvania, Ohio, and Illinois.

Cities like Cleveland, Pittsburgh, and Chicago carry some of the nation’s highest property taxes. A report from Construction Coverage, a California research company focused on construction software and insurance, found that their effective rates are 1.7%, 1.9%, and 1.4%.

“If the level of taxation of the classic Cleveland suburbs applied across the country, the average American homeowner, and indirectly the average renter as well, would be shelling out a thousand dollars a month in property taxes,” the Laffer Associates study said. “Not in mortgage interest, insurance, and property taxes, but in property taxes alone. And who knows if these taxes will not increase still further in the near future?”

In cities with high property taxes, the prices of homes have adjusted accordingly.

After the housing bubble reached its highest point before the 2008 financial crisis, home prices in Cleveland increased by 40%. However, in Tennessee, home prices have more than doubled since then.

“Low property taxes spur home-price appreciation, and high property taxes spur home-price stagnation,” the analysis said. 

Art Laffer is a former adviser to President Ronald Reagan who developed the theory of supply-side economics and founded the Laffer Associates. They suggest that owning a home in a place with low taxes gives homeowners a very different and positive financial experience.

The group suggested homeowners in Cleveland are required to “plow megabucks” into the yearly tax payments while the property stagnates in value over the long term. In Tennessee, that same homeowner pays a comparatively “light tax bill every year while the property appreciates in value at a healthy rate.”

Because of this, the Laffer Associates proposed that when property taxes are high, homeowners might feel discouraged from making improvements to their homes since those upgrades would also be taxed at a high rate. On the other hand, when property tax rates are lower, more houses can attract buyers and offers, motivating current homeowners to keep upgrading their homes. 

The issue is that home prices have been consistently increasing this year because there aren’t enough homes for sale. This means that property taxes are increasing in actual terms, especially in places like California and Colorado, where the rates aren’t explicitly reduced or limited.

“Some places, like Cleveland and Connecticut, are now in something akin to a death spiral,” the Laffer Associates study said. “They have raised property tax rates so much that a modestly priced home carries a huge annual tax price tag. Even with much higher effective property tax rates, the decline in home values and lack of price appreciation has depleted the coffers of local governments.”

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