(Bloomberg) — Home prices are rising in many areas of the U.S. Hawaii may be the state that benefits most.
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Local governments in the Aloha State are likely to reap the biggest property tax boost, followed by those in Connecticut and Florida, from the significant growth in home prices since the onset of the pandemic, according to a Fitch Ratings index.
The index factors in the portion of states’ total revenue made up by property taxes and the historical relationship between property taxes and house price trends. Though Idaho ranks first in home price growth between February 2020 and June 2021, its correlation between historic property tax revenue and house price trends is among the lowest.
“Strong home price growth during the pandemic and subsequent economic recovery is supportive of increased property tax revenues, but local governments in some states are better positioned to benefit,” according to a report by Fitch analysts Olu Sonola, Sarah Repucci and Michael Rinaldi.
Residential property taxes are the dominant source of revenue of local governments, making up more than 60% of their tax base. More than $350 billion municipal bonds are backed by a local government’s pledge to levy taxes on its residents to repay debt, according to data compiled by Bloomberg.
Surging Prices
U.S. home prices have increased by almost 20% since the beginning of the Covid-19 pandemic in Feb. 2020 and this year’s second quarter, fueled by low interest rates and a severe imbalance between demand for homes and a tight supply of inventory in many parts of the country. Pandemic-fueled migration to less densely populated areas also boosted prices.
Surging home prices don’t necessarily result in booming property tax revenue. The relationship depends on appraisal practices and tax policies, which vary across municipalities and states. In addition, property tax rate changes may be enacted independent of price movements.
For example, Maryland’s home prices rose by about 80% in the few years leading to the Great Recession, but property taxes increased by just 6%, according to Fitch. The main reason: Maryland’s revaluation cycle.
Every Maryland property is revalued once every three years. Once assessed, that value is set for the next three years. Any increase in the new assessment over the last cycle is phased in over the next three years in one-third increments,whereas a decrease is realized immediately.
“The way they treat upside moves in home prices is quite different than the way they treat the downside,” Sonola said in a phone interview.
Levy Caps
Maryland is ranked second-to-last in the Fitch property tax boost index, behind Alaska and ahead of Nebraska.
Appraisal practices and levy caps dampen the impact of home price appreciation or depreciation, easing the burden on homeowners in times of strong price growth while ensuring governments have a stable source of revenue when prices fall.
U.S. property tax revenue rose by around 3% between the fourth quarter of 2019 and the second quarter of 2021, according to the Bureau of Economic Analysis, reflecting relatively modest home valuations before the pandemic, according to Fitch. U.S. gross domestic product increased by about 5%.
Typically, property tax revenue lags home price trends by 18 to 24 months.
Related: San Francisco Leads Monthly Gains in U.S. House Prices: Redfin
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