Q&A of the Day – The Impact of Property Taxes on Rent Rates
Each day I feature a listener question sent by one of these methods.
Email: brianmudd@iheartmedia.com
Social: @brianmuddradio
iHeartRadio: Use the Talkback feature – the microphone button on our station’s page in the iHeart app.
Today’s Entry: Mr. Mudd, I always find it interesting when folks speak about Property Tax and Homestead exemptions. Only if you live there, not for landlords. What people never discuss... this hurts renters the most. Guess what... when property taxes go up, so do rents! Often, renters can afford this the least. People always think they are sticking it to the big rich real estate tycoons. Guess what... landlords pass on their costs!
Maybe the government should stop drooling at the home price increases with higher valuations while hiding behind a small millage drop. Taxes still went up almost 25% on my one property.
I'd love to hear you discuss this on one of your daily Q&A's.
Bottom Line: You’re right that the relationship between rent rate increases and property tax increases are seldom discussed, though as the case happens to be it’s a topic I have covered on occasion and it’s a topic that’s extremely relevant to current housing affordability conversations. A recent study by DePaul University surmised: Property taxes are one of the most significant annual costs for homeowners. Property tax increases can disproportionately impact modest-income households, and there are concerns that this is intensified in neighborhoods with rapidly rising house prices. Increased property taxes can be particularly burdensome for long-term owners and modest- or fixed-income households and can also contribute to affordability and displacement pressures as homeowners contend with increased housing costs and landlords pass the tax burden onto tenants through higher rents. It was just over two years ago that I provided a local analysis of this concern along with a proposed solution. I’ll start there.
As noted in my October 5th, 2021 Q&A – entitled What’s Florida’s Biggest Issue Now? - in which I noted housing affordability as that issue, I broke down all of the related affordability trends and data. Related to property taxes specifically I offered this analysis: If you’re forced to pay taxes for the property you own or the government takes away your property, do you really ever own it? Aside from that philosophical argument, I believe property tax increases should be tied to inflation as opposed to property assessed values. The cost of operating a city, a county, our schools doesn’t change based on property values. They change based on inflation. Prior to this year (2021), the total five-year inflation rate was 8.9%. During that same five-year period South Florida’s property taxes increased about 35%. And that's just the past five years.
I also noted this... For as long as I’ve been doing this, I’ve advocated checking your property tax assessment annually when you receive your proposed property taxes. Much like federal income tax withholding, property taxes for those with mortgages often aren’t fully understood as the money is allocated via escrow. This is also true of those who rent and thus don’t have to directly pay for property taxes, but certainly are as part of monthly rent payments.
So, what’s changed over the past couple of years? Significantly higher property values and significantly higher property taxes as well of course! Here’s an update to those five-year inflation vs. property tax trends.
- The five-year inflation rate from 2018-2022 totaled 20%
- The five-year property tax increase in Palm Beach County during that time totaled 39.5% (2018’s average tax bill $5,394, 2022’s average tax bill $7,525 across all property types)
Even through this period of extraordinary inflation, the highest in over 40 years, we see that the average property tax assessment has risen at a rate over the past five years that is essentially double the rate of inflation. Homestead property owners have been shielded from the full effects of that increase, with the annual 3% limit on non-School District taxes. However, business owners and landlords certainly haven’t been, and it plays precisely into the point of today’s Q&A. If property taxes have increased by 40% for non-homesteaded properties over five years, what’s the expected impact on rent rates resulting from property tax increases?
Now, to the credit of the Palm Beach County Commission they’ve reduced the mileage rate in response to this, as noted by the listener, though the impact of the reduction is nominal compared to the assessment increases with average savings this year of $85 over what bills would otherwise have been without the decrease. The net result is record high property taxes for all property owners across the area. And in terms of affordability... Palm Beach County is ranked 166th out of 3,143 counties for property taxes as a percentage of income – which means the burden of those taxes relative the ability of the community to afford them is only outdone by 5% of the counties in the country. And this takes us back to the study I cited at the open. It disproportionately impacts those with modest incomes. Many rent because they can’t afford to buy, yet with rent rates pressured in part by rising property tax rates which continue to rise faster than incomes, those renting most often find that it only becomes less affordable to rent with time. And that’s independent of the burden of property insurance payments and inventory supply challenges which have driven prices higher as well.
My summation to my analysis a couple of years ago was this: I’d like to see reform passed tying maximum property tax rate increases to inflation as opposed to the increase in property values. We should always error on the side of homeowners over government. Had we done that, the rate of increase in property taxes across all property types would have been half of what it’s been, which would equal about $1,065 in annual savings per property most recently. This also gives you an idea of just how sizeable the windfall tax revenue has been for local taxing authorities. And this is yet another reason why I remain fully committed to efforts to limit the growth of property taxation. We’ve been rapidly growing our local governments at the literal expense of those who live in our communities. And yes, no one commonly feels the burden more than business owners and landlords/renters.