Property taxes are different from income and sales taxes. They do not depend on how much money you earn or on how much you spend. Property taxes are based entirely on how much the property you own is worth — a determination belonging to the tax assessor. Because property taxes are collected locally, taxpayers are relatively acquainted with the services their property tax bills are funding.
A range of government bodies, including cities, counties, school boards, safety departments, and utility commissions rely heavily on property tax collections. Across these governments and municipalities property taxes are levied in a variety of ways. The share of real property values collected in taxes also varies considerably between states.
> Effective property tax rate: 1.0%
> Median home value: $299,800 (5th highest)
> Per capita property tax collections: $1,504 (17th highest)
> Median household income: $75,847 (the highest)
Using data from the Tax Foundation, 24/7 Wall St. reviewed property taxes levied in each state as a percentage of home values. The effective property tax rate is as high as 2.11% in New Jersey, and as low as 0.28% in Hawaii. The average rate across the country is 1.20%.
Property tax collections serve as the principal source of income for local governments and typically directly fund functions such as fire and police departments as well as public schools. Generally speaking, higher effective property tax burdens across a state reflect greater demand services as well as more services provided by local governments.
In an interview with 24/7 Wall St., Scott Drenkard, director of state projects at the Tax Foundation, explained that the reasons for high property taxes can also vary substantially. The difference between New Jersey and New Hampshire — the states with the highest and second highest effective property tax rates — is one example. According to Drenkard, New Jersey’s nation-leading effective property tax rate is largely due to the high number of local municipalities, which increases the cost of local services for local residents. State and local governments in New Hampshire, by contrast, rely disproportionately on property tax revenue because the state levies no income or sales tax.
The difference between a high property tax rate in one state and a low rate in another also partially depends on what residents are willing to pay. “There are all sorts of things people are willing to pay slightly higher taxes for,” Drenkard said. While the high number of municipal governments in New Jersey may strike some as inefficient, others may prefer the quaint, small-town atmosphere that tends to result from such local government models.
The presence of major metropolitan areas, which tend to contain a range of benefits for businesses and individuals, from smooth-running utility systems to good restaurants, also contributes to higher property taxes. The high property tax burdens across New Jersey, New York, Texas, and Illinois — all in the top 15 highest property tax states — are likely largely due to the metropolitan centers of New York City, Chicago, and Houston.
States with high property tax rates tend to collect more in property taxes per capita. Nationwide, states and municipalities collect approximately $1,500 per capita annually on average. In states with property tax rates below the national average of 1.2%, per capita collections exceed the national average in only one state, Wyoming. In 16 of the 25 states with relatively high property tax rates, per capita collections exceed the national average.
This pattern is due partially to high home values in states with high property tax rates, although plenty of states with low property tax rates have very high home values. Hawaii, for example, has the lowest property tax burden but the highest median home value, at $566,900.
To identify the states with the highest and lowest property taxes, 24/7 Wall St. reviewed 2014 calendar year average effective property tax rates on owner-occupied housing in each state from the Tax Foundation. To calculate the effective rate, the Tax Foundation divided all property taxes paid by the total value of all owner-occupied housing units. Taxes paid by businesses, renters, and others were excluded from the Tax Foundation’s calculation. Total property tax collections per capita from 2006 through 2013, the sources of tax collections by tax type for 2012, and state and local tax burdens as a percentage of state income for each state in 2013 also came from the Tax Foundation. Household median income and median home value came from the U.S. Census Bureau’s 2015 American Community Survey.