Property Taxes

Property taxes are one of the largest sources of revenue for local governments. They help fund public schools, roads, police and fire departments, as well as other essential services that people 50-plus rely on. 

However, the property tax can be burdensome for many individuals. Long-term homeowners have little control over their property tax liability. The assessed value of their home is determined by decades of unforeseeable market dynamics. If their home’s value increases significantly, they might have difficulty paying their subsequent higher property taxes. This is particularly true for those with low and moderate incomes and older adults on fixed incomes with limited retirement savings. However, the consequences of not paying property taxes can be severe, including losing one’s home. Renters also can be affected by the property tax. Landlords may pass the tax on to them in the form of higher rents.

States are responsible for setting the parameters and practices for assessing the tax. They also play a key role in creating property tax relief programs. These programs are often targeted to those who have the most difficulty paying the tax. The most common include:

• Circuit breakers prevent property taxes from exceeding a certain share of the homeowner's income. They take their name from the mechanism used to relieve an overloaded electrical circuit. The threshold is typically equal to a percentage of income to benefit residents with low and middle incomes.
• Homestead exemptions (or homestead credits) reduce the amount of owner-occupied property value that is subject to taxation (or the amount of taxes owed). Flat exemptions or credits (set at a flat amount, not increasing with the value of the property) tend to be progressive but less so than circuit breakers.
• With property tax deferrals, homeowners can postpone payment of property taxes until the sale of the home or the owner's death and help homeowners with low liquid income stay in their homes. Many states limit their deferral programs to older homeowners or those with disabilities.
• A monthly payment option allows homeowners to pay their bills on a monthly basis instead of as a large, lump-sum payment. It does not reduce the amount of tax liability but instead helps budget for it.

Some states also have imposed property tax limitations. These limitations apply automatically, without any action on the part of the homeowner. There are three main types of limitations: levy limits, rate limits, and assessment limits. These also may be referred to as caps. Levy limits restrict the growth of overall property tax collections. For example, a levy cap may limit increases in local property tax revenue to the lesser of the rate of inflation or 3 percent. Rate limits set a cap on property tax rates. This is usually a certain percentage of the home’s value, e.g., 1 percent. Assessment limits cap increases in a property’s assessed value. In 1978, California enacted the most significant assessment limit, known as Proposition 13. This restricts annual growth in assessed values to the lesser of the rate of inflation or 2 percent. Freezes are a more restrictive form of limits that lock-in levies, rates, or assessments at current values.

While these limitations constrain the growth of property taxes for individuals, they also constrain local governments. They reduce policymakers' ability to respond to changing circumstances and meet the growing needs of communities. In addition, they restrict how much property tax revenues local governments receive. If such amounts are insufficient, local governments may need to cut services or look for alternative sources of revenue, such as user fees.

Assessment limits have additional drawbacks. They create inequities among owners of similar properties. Long-term homeowners become "locked in" their homes because moving triggers a large property tax increase. Moreover, these caps benefit homeowners who are experiencing rapid appreciation. Homeowners whose property is experiencing little to no growth receive no benefit.

In 2023, the U.S. Supreme Court ruled in Tyler v. Hennepin County, 598 U.S. 631 (2023) that it is unconstitutional for a local government to take a property in a tax foreclosure and keep the surplus after the tax debt and costs are paid. This means that municipal and county governments can only recover the amount they are owed. Several states have been reevaluating and updating their property tax foreclosure laws to comply with this decision.