From a small northwestern observatory…

Fair and Equitable is the monthly journal of the International Association of Assessing Officers, the primary professional group for tax assessors around the U.S. In the current edition, there is a striking article about rising property taxes due to COVID. In summary, it’s not very good news.

In most towns, cities, and counties, one of the primary sources of operating budgets is property taxes. However, many, and perhaps most cities also rely on sales taxes, tourism taxes, and sometimes even local option income taxes. All of these latter sources of revenues have gone in the tank since the onset of the COVID recession. A study out of the U. of Wisconsin indicates that the shortfall for 2020 is $165 Billion across all cities. Many cities which are highly dependent on tourism — Nashville, New Orleans, and Las Vegas immediately come to mind — are particularly hard-hit.

Many states have hard caps in property tax increases, although some do provide exceptions for emergencies. Houston, for example, has an annual tax increase limit of 3.5%, but may exceed this in the case of declared emergencies.

For the uninitiated, the property tax bill you receive every year is the product of two things — the property ‘assessment’ (determined by the local property assessor or appraiser) and the ‘tax rate’ (sometimes somewhat archaically called ‘millage’), set by the taxing authority, such as the city, county, or school district. This gets particularly cumbersome during recessions because, arguably, the assessed values of some properties, particularly in this case commercial properties (such as restaurants, bars, or such) may decrease even as the local taxing authority needs to raise more money. Hence, to get a 5% increase in tax revenues when some properties are declining in value, the local county council may need to actually raise the tax rates by 10% or 20%. Nashville, for example, just raised tax rates by 34%. Notably, Tennessee has been historically less dependent on property taxes as a source of revenue, with the average tax bill in that state about 40% below the national average. As a result, Tennessee tax payers may feel some very real sticker shock in 2021.

What’s more, if some properties go down in value more than others (as is happening now), the burden of higher taxes falls disproportionally on property owners who are still solvent.

Property owners are advised to take a very serious look at tax assessments in light of the potential declines in property values. Some assessors are trying to get ahead of the game. For example, New Orlean’s assessor Erroll Williams has made pro-active, across the board cuts in the values of hotels and restaurants by as much as 57%. Cook County, Illinois, Assessor Fritz Kaegi is in the midst of a re-evaluation of every commercial property in his jurisdiction.

All in all, a phone call to your friendly, neighborhood real estate appraiser is probably warranted. If and as we can be of any assistance, please let me know.

John A. Kilpatrick, Ph.D., MAI — john@greenfieldadvisors.com