From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for December 7th, 2019

Tax burdens and real estate

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I’m not paid to be an apologist for California.  I’ve enjoyed visiting there many times, have had a few profitable projects there, and I can speak very highly for their wine (although Washington will give them a run for their money).  That said, I’ve heard California slammed recently for its supposedly onerous tax burden, and the impact that supposedly has on property values.  Somehow, this doesn’t resonate — yes, California has a somewhat higher tax burden than other states, but by how much?  And how does that impact their overall economy and property values?

I’ve gathered a bit of data, and I’ll be honing this into a more formal study in the coming weeks, but I thought I’d give you a bit of a peek into what I’m finding.  First, California does not have the worst tax burden in America.  According to information I’ve gathered from the Tax Foundation, the overall average tax burden in California from 1977-2012 was 10.95%.  It actually declined significantly over that period.  To put this in comparison, the highest average tax burden among the states during that period was New York (12.53%) and the lowest was Alaska (6.61%).

The question of course is, do these local taxes have an impact on property values and the economy in general?  I’m still crunching the numbers, but it appears that there is little if any linkage.  For example, as noted, California’s tax burden has actually dropped over the 35-year period in this study, but incomes have increased by 43.5%, and property values increased by 192.67% from 1991 to 3rd quarter 2019 (yes, this takes into account the up and down of the recession).  In New York, where the highest local taxes were recorded, incomes increased 78.31% over the 35-year study period and property values have increased 154.19% since 1991.

In the lowest tax state (Alaska), incomes increased 1.56% over a 35-year period (yes, you read that right) but indeed property values increased 167.7% from 1991 to the present.  Among the 50 states plus DC, the average property value increase from 1991 to the present was 262.59%, while the average tax burden was 9.75%.  Ironically, this means that California, at 10.95%, was only 1.2 percentage points higher than the national average for local tax burden.  The average per-capita income, averaged by states, grew by 31.19% over the 35-year study period.  Thus, both New York and California had measurably above average increases in per-capital incomes, despite having somewhat higher local tax burdens.  However, property values in those states, while they increased, increased at a somewhat slower rate than over states.

By the way, my adopted home state, Washington, had above-average property value increases over time (286.24%), above average income increases (59.84%) and a slightly below average local tax burden (9.41%).

There is w-a-a-y more to be done on this.  I’ll keep you posted as I know more.

Local tax burdens are a function of state income tax rates, local property taxes, sales taxes, and other state revenues paid by individuals.  Property values are based on the Federal Housing Finance Authority All-Property Index.  Per capita income comes from the Census Bureau.  Tax and income data is lagged to 2012 in order to forecast later year home values.  Averages are based on 5-year increments over a 35-year period from 1997 to 2012.

Written by johnkilpatrick

December 7, 2019 at 5:14 pm

Posted in Uncategorized

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