Why Do Real Estate Taxes Keeping Going Up When House Values Keep Going Down?
I’ve been asked that question a lot by my clients ever since the 2008 financial crisis. The answer is simple. Sort of.
If you look at your real estate bill or assessment notice you’ll probably see two different assessment amounts. The first, usually called an “assessment value” or “market assessment” is the value that tax assessors come up with and usually bears at least some resemblance to the market value of your home. In most states market values serve as an upper or maximum assessment limit, but it’s not what your real estate taxes are actually based on.
The second amount, the important one, is the “taxable assessment”. Most state start with the “market assessment” when a house is first built or purchased, then add an amount each year to establish the “taxable assessment”. The amount added is often dictated by state law. I live in Maryland, and in my county the added amount has been 4% a year for a long, long time. During times of real estate inflation, such as the one which lasted about 30 years until the market crash in 2008, taxable assessments will lag further and further behind market values as time goes by. In my neighborhood, for instance, a typical house that in 1977 cost $40,000 or so was worth $300,000 or more by 2007. Yet the taxable assessment, at 4% per year, would’ve been only $130,000. So even if the market value dropped by 30 or 40 percent in 2008 and 2009, the taxable assessment would keep going up.
State & Counties set real estate tax rates with the taxable assessments in mind, not with market values in mind. It’s good for them because it provides for stable or even increasing tax revenues in times of recession. It’s also good for long-term homeowners whose real estate taxes can only increase very gradually so long as they don’t move.
New home buyers, of course, get screwed. They start out paying tax based on current market values even though their neighbors, with similarly valued homes, may be paying only half as much. Those who bought house at the peak of the real estate boom, between 2003 and 2007, were paying the most real estate tax when the recession hit and 2008 and will be the first to see their taxes go down as market assessments dip below taxable assessments.