Property taxes are generally the most hated of all taxes, and with good reason. As they pay their property-tax bills each year, owners are forced to cut a check and realize the cost of government. From the small-business owner who is struggling to make payroll to the millennial attempting to make his first home purchase, high property-tax burdens affect everyone. In some cases, retirees on fixed incomes can tragically be taxed out of their homes as property-tax bills steadily increase.
Addressing the issue of excessive property-tax burdens can be an extremely challenging endeavor at the state level since most real property taxes are levied at the local levels of government and are thus based on the spending levels set by those local governments. However, in our view, state lawmakers in Topeka, Kan., have just perfected the recipe for states across America to address this problem.
After passing in the Kansas House and Senate by overwhelming, bipartisan margins, Democratic governor Laura Kelly recently signed the “Truth in Taxation” property-tax reform into law. While Governor Kelly vetoed a similar bill last year during the COVID-shortened session, she likely saw the writing on the wall, with massive margins in support of the reform again this year.
The new Kansas Truth in Taxation law reduces the mill levy so that new property valuations produce the same dollar amount of property tax to cities, counties, and school districts as it did the previous year. If local officials want to raise the revenue-neutral mill levy, they must notify citizens of their intent, hold a public hearing to take comment, and take a recorded vote on the entire tax increase. These new requirements thereby close the honesty gap; local officials can no longer pretend to “hold the line” on property-tax rates while taking in large increases from valuation changes.
This common-sense policy is based on the American Legislative Exchange Council (ALEC) model policy and the successes of Utah and Tennessee. Under Utah’s Truth in Taxation law, the effective property-tax rate declined 7.5 percent between 2000 and 2018; during that same period, the Kansas effective tax rate jumped 22 percent. Hardworking taxpayers in Kansas can now expect lower effective property-tax rates and a more honest discussion around property-tax burdens in the future.
State policy-makers are frequently reminded by their constituents of the painful symptom of high property-tax burdens, but they often misdiagnose the underlying cause: spending growth in cities and counties. Due to decades of unintended consequences, many states originally adopted personal income taxes to “buy down” local property-tax burdens with state revenues.
Lest we forget the tale of New Jersey, which in 1965 remarkably had neither an income tax nor a general sales tax. By 1976, it had adopted both, at least in part to reduce local property taxes. Today, after failing to control local spending in towns across New Jersey, the Garden State has some of the highest income-tax rates and sales-tax burdens in the nation — and the third-highest-property-tax burden in America.
The status quo is, indeed, a great political deal for progressive local units of government. Spend liberally, and then when the bills come due, send a portion of it to the state capitol — along with your taxpayer-funded lobbyists — and ask for additional revenue sharing from state taxpayers to help socialize the costs. When those localities with tax-and-spend proclivities do not receive the state aid they seek, they can conveniently direct the anger from property taxpayers toward the state capitol.
Considering principled and long-term strategies for reducing high property tax-burdens is essential. When policy changes are implemented successfully, states can dramatically improve their economic competitiveness, as well as remove a crushing burden from individual and business property owners who are concerned with the escalation in their property-tax bills.
Before Kansas’s recent reforms, Utah and Tennessee received the most attention for their property-tax transparency measures. Since its enactment in 1985, Utah’s Truth in Taxation law has helped the Beehive State maintain a low property-tax burden. As former Utah senator Howard Stephenson, who led the Utah Truth in Taxation effort, said: “Local governments should not receive an automatic 12% revenue increase simply because property valuations increased 12%.”
When the law was passed, Utah had the 24th lowest property taxes in the country, but thanks in large part to its Truth in Taxation law, the state has improved to 14th lowest today. This has been one of the policy reforms that has kept Utah at the top economic outlook in America in all 13 editions of the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index.
The Lincoln Institute of Land Policy’s annual survey puts this in perspective. A commercial property in Richfield, Utah, valued at $1 million with $200,000 in fixtures, paid $16,177 in property tax in 2019. That same property in Iola, Kan., paid $52,830. That’s the power of the transparency and honesty principles of Truth in Taxation.
Other states are likely to follow suit as they realize the incredible benefits of having a more predictable and transparent property-tax system that enhances economic competitiveness. In particular, we are watching developments in Lincoln, Neb., where legislators are pursuing their own version of Truth in Taxation this session.
Kansas is the latest state to adopt the “gold standard” model to increase accountability and transparency and to address escalating property-tax burdens on behalf of their constituents. More states should follow the lead of Kansas and Utah so they can avoid the fate of New Jersey and other high-tax states.
Jonathan Williams is chief economist and executive vice president of policy at the American Legislative Exchange Council. Dave Trabert is the chief executive officer at Kansas Policy Institute.