Why your property taxes went up more than mine

A lot of folks have talked to me about their property taxes going up and so I've been looking into this issue.

Here's what I've learned.

The really short explanation

The results of a 2016 legislative bill drastically shifted who was on the hook for paying our property taxes. The change shifted the responsibility for taxes away from commercial and investment property owners to homeowners. I own three rental properties, which means that I have benefitted, while homeowners have paid the price.

The bill changed the property tax break that homeowners get. Homeowners get a tax break to make it easier to own a home and to encourage home ownership. Prior to 2016 the homeowners only had to pay property taxes on 50% of the value of their home up to a maximum amount that fluctuated every year along with property values. When property values went up the max went up, when property values went down the max went down.

The 2016 bill changed the homeowners tax break. Now homeowners pay taxes on 50% of the value of their home up to a maximum of $100,000. So no matter how much our property values grow, the amount that homeowners have exempt from property taxes is stuck.

As a result homeowners' taxable values have gone up at a much faster rate than commercial or investment property owners. This faster rate of growth in the taxable value makes a very big difference in how much each property owner pays.

Below is a simplified example that shows just how much the responsibility for our property taxes can shift now that the homeowners exemption does not adjust with the housing market.

A simplified Example

Let's say we have three groups of properties.

Group 1 is homeowners who own and live in their houses that are assessed at $100,000.

Group 2 is homeowners who own and live in their houses that are assessed at $200,000.

Group 3 is commercial property owners or investors who own properties assessed at $200,000.

Group 1 and Group 2 get a Homeowners tax break where some of the value of their property value is exempt from property taxes. Group 3 does not get the tax break on their properties because they don't live in them.

Let's say there are 16,000 properties in Groups 1 and 2 and 15,000 in Group 3.

Year 1

The tax break that the homeowners in Groups 1 and 2 get is half of their property value up to $100,000. So, Group 1 gets a $50,000 exemption and Group 2 gets a $100,000 exemption. This makes the Taxable Value $50,000 for Group 1, and $75,000 for Group 2, while Group 3's taxable value stays at $200,000.

The total taxable value of all the property is $5 billion. This is our total tax base.

Let's say we need to collect $5 million in property taxes. To spread this evenly over the tax base we divide the $5 million across the $5 billion which means all the groups owe $1 for every $1000 of taxable value they own.

This means the property owners in Group 1 pay $50 each, those in Group 2 pay $100, and those in Group 3 pay $200.

And as a whole, Group 1 is paying 16% of the total tax burden of $5 million, Group 2 is paying 24%, and Group 3 is paying 60%.

Ok so far.

In year 2 everyone's property values go up at the same rate of 25% and our tax burden stays the same at $5 million.

In year when this happens nothing changes. Each group still owes exactly the same amount and as a whole is paying the same percent of the tax burden.

Note that none of the homeowners in Groups 1 or 2 have hit the max homeowners exemption yet, so their taxable values are going up at the same rate as everyone else's - this year it was 25%.

Year 2

Everyone's Taxable Values are up the same rate, 25%.

So, everyone owes the exact same amount as in year 1.

Ok, still just fine.

In year 3 property values go up 25% again and we have the same $5 million tax burden. Now is where things start to get different. Group 2 hits the max of the homeowner's exemption - $100,000.

As a result while Group 1 and Group 3's taxable values increase by 25%, Group 2's taxable values go up by 43.3%. This uneven increase in taxable values changes who owes what. Group 2 is on the hook for more than they were before.

Group 2s payment goes up from $75 to $83. Meanwhile Group 1s payments go down from $50 to $48 and Group 3s payments go down from $200 to $193.

Year 3

Groups 1 and 3 see the same 25% increase in their taxable value from year 2, but Group 2 sees a 43% increase.

So, now Group 2s payments go up from year 2 and everyone else's payments go down.

Ok, we are starting to see the effects of fixing the homeowner's exemption amount instead of letting it fluctuate with the market.

Let's jump to year 5. The property values went up another 25% in year 4 and now again in year 5 and we have the same tax burden of $5 million.

Group 1 and Group 2 are seeing much faster rates of growth in their taxable value than Group 3. Group 1s taxable value grew 25% in year 4, but then 47.6% in year 5 once they hit the $100,000 max. Group 2s taxable value grew 43.6% in year 4 and 38.0% in year 5. Meanwhile, Group 3s taxable value grew steadily at the much slower rate of 25% each year.

As a result, Group 1s payment has jumped up above even their year 1 payment to $52, Group 2s payment has jumped up to $96, and Group 3s payment has hit an all time low of $176.

Fast Forward to Year 5

Groups 1 and 2 see big increases in their taxable value while group 3 stays steady at 25% a year.

So, now Groups 1and 2 have higher payments and Group 3 has lower payments.

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