Dave:
Can a state just get rid of property taxes? Well, Florida is apparently testing the feasibility of this bold idea. And other states like Wyoming, Kansas, Montana, North Dakota, have also been exploring ideas to either limit or completely abolish property taxes. And if these things pass, they would of course have a huge impact on the way the housing market works. So today we’re going to explore this idea. Is it feasible? Why do it, what could the impacts be? And could this be coming to a state near you anytime soon? Hey everyone, it’s Dave Meyer, head of real Estate Investing at BiggerPockets, and today we’re talking about one of the hottest topics and one of the biggest challenges in real estate today, which is property taxes. If you own property already, you’ve probably noticed a big, potentially huge increase in property taxes in the last several years, and we don’t yet actually have 2024 tax data reminder.
Those are due soon, but we do have data up through 2023. And if you look at the change in property taxes between 2019 and 2023 across the whole us, the median property tax went from about 2300 bucks to 2,800 bucks. That’s a 24% increase in just four years. And while this isn’t the only reason, by any means that housing is getting less affordable, you also have to blame high mortgage rates, soaring insurance costs, higher property values, all contributing to lower affordability. But this tax issue is a significant component of higher housing costs in general. And as such, many state and local governments are looking for ways to improve home affordability. And property taxes is actually a very logical place for governments to start looking because it is the element of housing affordability that they actually have some control over. Insurance is private, mortgage rates are driven by big macroeconomic forces.
Supply quantities are really complex and they’re very slow moving taxes though those can actually be changed relatively quickly if there is a government willing to do that. And if the government does implement or change a policy, those changes can go into effect actually pretty quickly as well. So it makes sense that state and local governments are examining whether lowering or eliminating property taxes is a viable solution, and that’s why we’re here talking about it today. It’s also why Florida in particular has been in the news so much and why they’re introducing some pretty bold ideas to lower taxes. Now you probably know this, but Florida has been hit particularly hard in the housing affordability arena. It’s also experiencing one of the larger corrections in terms of prices across the country. Now I want to keep that in context. The state of Florida has declining home prices, but it’s one, two, 3%.
It’s nothing like a crash, but it is worth calling that out. Now, other states are experiencing similar dynamics, but I do want to just pick one state for this episode to just use as an example. And because Florida represents a lot of the issues and a lot of the potential solutions that we’re going to be talking about today, it sort of fits as a good example. So we’re going to be following Florida most closely. Now let’s just talk about what’s going on in Florida since the pandemic property values have just exploded. It was one of the fastest growing states in terms of appreciation. In fact, we saw 66 0% increases in home price value across the state from the end of 2019 to today. So that is just massive appreciation even relative to all of the appreciation that we saw during the pandemic. This was one of the fastest growing states.
This for people who already owned property, was great for your equity value and growth, right? But it is not good for housing affordability for people who are trying to buy homes now or maybe trade up to a different home or just move to a different part of the state, it’s not very good for that. In addition to property values, taxes went up in a corresponding way. Most property taxes are based on the value of properties, and so when properties are appreciation, taxes go up. For example, we’ve seen taxes in Tampa. One of the hottest markets in Florida have gone up 57% since 2019. In Miami, they’re up 48%. And you see similar numbers all across the state. One of the unique things that’s happening in Florida as well, that’s really just hammering housing affordability is home insurance. The premiums have just been going crazy. This is sort of this double whammy that’s happening in Florida because premiums have gone up 72% over the last five years.
So that’s even faster than home price appreciation, and that is more than most states. I think it’s actually the most out of any state. Alabama and Louisiana are also up there, but this is another reason why Florida is seeing such a big hit to housing affordability and why they are probably being aggressive in terms of exploring the idea of limiting or eliminating property taxes to help take some costs off the table for Florida homeowners. So just all in all, to me, it makes sense why they were looking into this because housing has gotten so expensive. It’s a key component to any state’s economy and GDP to quality of life, to the desirability for people to move there, for business to move there. There’s so much to the housing market. So it makes sense to me why Florida is actively looking into ways to make housing more affordable.
And I’m sure at least on paper, to anyone who owns property in Florida, this sounds like a great idea, less taxes, but we have to remember that there are a lot of trade-offs and considerations here. So we need to dive in a little bit deeper if this actually makes sense and if it’s actually feasible. The first thing we need to look at are how high are Florida property taxes in the first place? Now, it’s important to remember that it does vary locally. Different cities, different counties will have different property taxes, but when you look across the state in general, it averages 0.8% of home values. That probably means nothing to you, but just relative to other states, it’s right about in the middle. The highest states are in New Jersey, which is 2.2% Illinois, 2.1%. Then you have other states like Massachusetts, New York, and Texas all around 1.6%.
So those are all double or more than Florida’s property taxes. The lowest is Alabama with 0.38% property taxes. So actually, if you’re looking for the median, Florida is not that far off 0.81%. It’s about normal, and it’s important to note that this actually isn’t what changed. So you have to remember here that Florida didn’t increase its tax rate. That’s not why people’s taxes are going up. It’s just because property values appreciate so much. So it used to be 0.8% of a $200,000 house. Now it’s 0.8% of a $400,000 house. And so obviously that’s good for equity, but it hurts people’s cashflow, right? Or your savings rate because maybe you’re building equity in your property, but you might not have access that might not be liquid assets that you can use to pay those taxes or that increasing insurance costs. So that is what is going on with property taxes today in Florida. But I think there’s actually some bigger questions that we need to dive into. How much total tax is the state collecting and what different buckets do they collect those taxes in? Because property tax is just one of those buckets. There’s also sales tax, there’s also income tax, and you have to look at this bigger picture to figure out and realize is this actually feasible in any state? Is it a good idea? And which states might actually be able to pull something like this off? We’ll get into all that right after this break.
Welcome back to on the market. We’re here talking about capping or eliminating property taxes as is being discussed in Florida and a couple of other states right now. And before we left off, we talked about what was going on in property taxes in Florida, but I said that I think there’s sort of two other questions that we need to be talking about. The first is how much total revenue a state government is collecting. And then the second is the mixture, the bucket. The second is the mixture or buckets by which they collect that tax. It’s not just property tax, it’s also income tax, sales tax, corporate taxes, all that because at the end of the day states they need income, they need revenue, and they generate that through taxes. And I’m sorry, I know there are some people out there who say that tax is theft.
No, it is not. I fully disagree with that. Taxes are the price that you pay for living in a civilized society. Personally, I want roads. I want airports. I want schools, a strong military, a police department. I want hospitals and those things, they cost money and taxes are how you pay for them. Taxes to me are not theft. It is like you’re subscription free for society, right? If you want music without ads, you pay a subscription to Spotify or YouTube Premium, you want to civilized society, you pay a subscription in the form of taxes. Now, of course, don’t get me wrong, there are a lot of worthy debates about the right amount of taxes and the right sources of taxes, what taxes should be spent on how efficient the government uses those tax revenue. Those are all great questions and topics of debate. So I know there are those fringe folks that say all taxes, theft.
That makes no sense to me as one of our founding fathers, Benjamin Franklin said, in this world, nothing can be said to be certain except death and taxes. And I totally agree. So what we should be talking about is how much total revenue should they be collecting and what are the best ways to collect those taxes. So because taxes are inevitable, but there’s different philosophies on how much revenue you need to collect and how you should collect that. Revenue states have very different ways of collecting taxes. Like I said, the primary ways are property tax, income tax, sales, tax and corporate taxes. There are other things like permits and fees, but those tend to be smaller sources of revenue. So we’re just going to focus on the bigger buckets today. Now there’s actually a cool chart. I will link to this if you’re watching this on YouTube or we’ll put it in the show notes if you’re listening on a podcast, there’s a cool chart put together by the tax foundation that I was doing when I was researching the show that shows how each state collects taxes.
And it’s super interesting really to see how states do it really differently from one another. I just picked out two as examples. Kentucky and Oklahoma, they have a very balanced approach. They have about 25% from each bucket, from sales tax, income tax, property tax, and other taxes. Some states like Texas or New Hampshire, for example, are super weighted towards property taxes. Many states have no income tax at all states like Tennessee, Washington, Texas, Nevada, Wyoming, and of course the example we’re talking about today, Florida. So we need to consider this mix, how much revenue it generates and how it impacts an individual person’s total tax burden, right? Because a lot of people look at Florida and they say, Hey, there’s no income tax. It’s a low cost state. And that might be true, but it’s not necessarily true because maybe they have a low income tax, but super high property taxes, that’s true In Texas for example, they have a really high property tax or a state like Washington has no income tax, but they have a super high sales tax.
So they’re just getting you in different ways. It’s not necessarily a low tax state. So you actually have to look at what’s combined. The total tax burden for each state and where each state falls the lowest in the country is Alaska at 4.9%. That is very, very low. The highest is unsurprisingly New York at 12%. Then Hawaii, and I know California gets a really bad rap for having really high taxes, and it does have a super high income tax that actually goes up to 13% just for state income tax, which is wild. But that’s actually a tiered system. And the data I’m measuring with today is what the average person plays. So California is still high 10.4%, but it’s actually not the highest. So let’s get back to our discussion of Florida. Now, I said that Florida has no income tax, but that doesn’t necessarily mean it has a low overall tax burden, but it actually does it have a low overall tax burden?
In fact, it has the fourth lowest tax burden in the entire country. The average taxpayer in Florida just pays about 6.05% of their total income to state and local governments each and every year. Again, that’s about half of what the highest one is in New York. And one thing that I think is really interesting is that Florida, despite collecting relatively low amounts of tax from its taxpayers, seems to be relatively efficient with its taxes. Because if you look at the US News and World Report, it comes in 20th in terms of state rankings for total infrastructure for schools. It’s somewhere in the middle as well. There’s a lot of different sources for this, but it came somewhere between 15 and 25% for public schools. So it’s not at the top, but given that it has the fourth lowest tax burden, but it is in the middle in terms of infrastructure and education, I think you could easily argue that Florida is relatively efficient with taxes when it comes to education and infrastructure, which are two very important functions of the government.
But I think the thing here that really matters is going back to that sort of mix. So they don’t collect a ton of revenue, but 38% of the state’s total income comes from property taxes. So just off the bat, you have to think that that’s a little bit crazy. Eliminating nearly 40% of the state’s operating budget seems a little farfetched. But one thing that you need to know here is even though that they’re operating relatively efficiency, just based off a couple of different data points here, there’s tons of different ways to measure government efficiency. I’m just giving you some examples here. But the thing that you should know is despite collecting a relatively low amount of tax revenue per taxpayer, about 38% of the total revenue from the Florida budget comes from property taxes. So the question is, if Florida already has one of the lowest overall tax burdens and nearly 40% of their revenue comes from property taxes, does it actually have room to go lower?
Right? That seems to me to be the big question because they’re already pretty low, and that would be eliminating 40% of their revenue. And again, I get it. I know that a lot of Florida homeowners like this idea, but sort of the question becomes how low is too low? At what point do services and infrastructures start to decline because things obviously cost money, or might they just shift the tax burden? Maybe they keep that total 6% tax burden that we were talking about, but shift it away from property taxes and more towards an income tax or more towards a higher sales tax. Now, I feel like one of the things that has really made Florida a popular place for migration and businesses moving it is that they don’t have an income tax. So I am highly skeptical that they are going to introduce any towards some income tax.
Could they increase their sales tax? I mean, if they implemented a total ban on property taxes, which I’ll let you know in a little bit if I think that’s likely, but if they did that, I think they would have to increase sales tax. That is already the biggest piece of the pie. I actually found some data that breaks down Florida’s total revenue. And yes, they have seen increases in corporate tax revenue, which is great. It grew actually a huge percentage, 72% in just two years. But corporate taxes are still just sort of a drop in the bucket. Sales tax, at least according to the data I’ve seen, is 10 times more than corporate tax. So even though there are companies moving to Florida, it’s not going to be a big enough difference to offset just eliminating property taxes. I think it would probably have to go to an increase in sales taxes or just collect total revenue, but that would probably come with budget cuts. But could this actually take hold? And if so, what does it mean for the housing market? We’ve talked a lot about Florida, their revenue, how they collect taxes. Do I actually think that this is going to happen? And if so, how could this all play out? We’ll get into that right after this break.
Hey everyone, welcome back to On the Market. It’s Dave here talking about property taxes and some states’ efforts to limit or eliminate entirely property taxes. So far we’ve talked about how states collect revenue, what it means to them, what they do with those tax dollars, but now let’s shift our conversation to could this actually take hold and if so, what would happen to the housing market? So overall, and again, this is just my opinion, could this take hold? I think so. I think that when you look at what’s being discussed, there’s a very broad spectrum, right? Some states are talking about capping increases or lowering the percentage of property taxes relative to their value. I think those are going to gain steam in the next couple of years because frankly, I have a hard time believing that housing affordability is going to get a lot better anytime soon.
I think it will get better, but it’s going to be gradual. And caps on increases could help play into that. So those caps, I think that might come into play in certain states, the complete elimination of property taxes, I think that’s a little farfetched right now. Some people might propose it, but just think about that. Think of Florida as a business. If someone came in and said, we’re going to eliminate 40% of our revenue, that would be crazy. So maybe they would do that and they would shift the tax burden elsewhere. My guess, and this is just following housing policy for quite a long time, my guess is that they’ll start with more modest measures like caps on increases or putting more dollars into homeowner assistance programs. Because actually right now if you look at Florida, they put about 14 billion per year towards homeowner assistance programs.
And so they might just increase that or find other ways to improve housing affordability without completely eliminating property taxes. Now, what states and where could this happen? My guess is that they will be more popular in states where property taxes is already a smaller share of total tax revenue. So these are states like New Mexico, Delaware, Kentucky, Louisiana. We also have West Virginia, Tennessee, Alabama. Because a state like that, it’s not going to impact their revenue as much as a state like let’s say New Hampshire where 45% of their income comes from property tax. So if New Hampshire wants to limit or eliminate their property taxes, they’re going to have to basically rebuild their entire tax code, whereas a state like New Mexico or Kentucky can make modest adjustments to property taxes and not have it change their entire state budgeting. So that’s my estimation of what we’re going to see over the next couple of years is probably efforts by state and local governments to improve housing through revisions to their property tax policy.
I don’t think the complete elimination of property taxes across entire states is very likely, at least not yet. I think they’ll probably try more modest approaches before they go to that. What I think is sort of an extreme measure now in the states that I think that this could happen, and if they do happen, what does that actually mean? Well, for real estate investors, there are some potential things that you should be thinking about. First and foremost, I think for out-of-state investors, it could be a net potential benefit or actually for people who own multiple properties. But let’s start talking about out-of-state investors. Let’s just go back to our example of Florida. If you live, let’s just say in Ohio and you invest in Florida, that’s going to have a net benefit on your bottom line. That’s going to increase your cashflow each and every month.
But if the state decides just to shift the tax burden elsewhere, say to an income tax or a sales tax, by being an out-of-state investor, you’re not going to be impacted by that. I mean, I guess you would be impacted a little bit if there’s sales tax on repairs or maintenance, but not for everyday expenses, not when you go out to eat, like the sales tax isn’t going to impact you because you’re living in Ohio, but you’ll be disproportionately benefited by having a decrease in that property tax. And sort of that same line of thinking, at least for me goes through when owning multiple properties. Because even if you live in Florida, yeah, your sales tax might go up, but you would get a proportionate benefit because if you own multiple properties, right, you’re going to have your tax burden come down across those multiple properties.
And yeah, some of your everyday expenses will go up because a higher sales tax, but that might be offset or more than offset by the cumulative total reduction of property tax. So those are the two ways I could see this impacting investors and just strategy. So what would actually happen to the housing market in these areas where these things might get passed? Could they actually change supply and demand dynamics? I actually think that they might. I calculated an example just to look at this and start thinking this through. So just let’s just imagine that you bought a median price home of about $400,000. You take out a mortgage for 80%, that’s $320,000. If you had six and a half percent interest, and if your normal tax right now would be about $3,000 a year, insurance is about the same. Your monthly payments each and every month would come out to about $2,600 per month.
Now, let’s just say that they go full bore. They just completely eliminate property taxes. In this same scenario, all things being equal, other than property taxes, your payment would go down to $2,350 a month. That is a reduction of $250 a month. Or in other words, reducing your monthly payment by about 10%. That is a lot. That has a very measurable impact on affordability, and we’ve never really seen this done before, but I would have to think that this would get some demand into the market. If you look at corollaries, if you look at modest decreases in mortgage rates that improve affordability, you do see demand come back into the market. And so I would have to imagine if all of a sudden houses got 10% more affordable in terms of monthly payments because of an elimination of property tax, I think that could drive demand.
So this is something you definitely should be keeping an eye out for in your state and local government news because I do think it has real impacts for investors and the housing market in general. But again, as I said, I don’t think that total elimination is the most likely scenario. I think instead we’ll see some states introduce caps to increases. Maybe we’ll even see some reductions. We might see more affordability programs. Like I said, Florida has a lot of programs to improve homeowner affordability. We see that across a lot of states and states might, instead of eliminating or eliminating revenue, just offer more tax credits as an example. Those measures, all of them could help affordability, but probably not to that 10% tune I was just talking about before. So I do think it will probably be more modest, but I still think it could at least marginally increase demand.
I think it could help with buyer confidence, right? I think if I were considering buying in some market where taxes have been going crazy, it would be nice to know that the state or local government was considering ways to limit that ever increasing liability. And of course, those laws could always change in the future, but it might at least get some buyer confidence back into those markets and drive some demand. So again, my general feeling is that it’s not going to be these huge swings. It’s going to be more modest, incremental efforts that would help, along with what I’ve been talking about for years now, other ways that the housing market is likely to probably get more affordable, but gradually. So these improvements in property tax prices might also help go along with slower appreciation rates, lower mortgage rates, increasing wages, all those things combined could and hopefully will improve housing affordability over the next couple of years. So that’s it. That is my take on what’s going on with property taxes in the news right now. But I would love to hear your take. If you are watching this on YouTube, drop us a comment and let us know. Or if you are listening on the podcast, I always appreciate personal comments that I get either on Instagram or on BiggerPockets, so make sure to drop me a line there. Thank you all so much for listening to this episode of On The Market. I’ll see you next time.