Should our government rely on property taxes?

Issue Facts

By: Daphne Kenyon

This issue concerns the real property tax, which falls on land and buildings, and not personal property taxes or real estate transfer taxes.

New Hampshire is one of the few states in which both the state and local governments levy property taxes.
Property tax rates are applied to the assessed value of a property.  In practice assessed values can be above or below market value even though the standard of assessment in New Hampshire is 100 percent of market value. 

Tax rates in New Hampshire vary by town and have four components: town tax rate, local education tax rate, state education tax rate, and county tax rate.

New Hampshire tax rates are expressed as tax liability per $1,000 of equalized assessed local valuation (“value”).  Municipal property tax rates for 2008 ranged from $4.68 for the Town of New Castle to $32.59 for the Town of Claremont. The median total tax rate was $18; at this rate, taxes due on real estate assessed at $200,000 would be $3,600.

Because not all towns assess properties at 100 percent of market value, it is important to distinguish between nominal and effective or full value rates.  Full value rates adjust property tax rates to take differing assessment/market sales ratios into account.  In 2007, the latest year available, full value tax rates ranged from $3.49 for Hale’s Location to $31.93 for Berlin.

In 2006, total assessed value in the state was $15 billion.  Residential property accounted for the largest portion of assessed value (79 percent) followed by commercial and industrial property (16 percent).

All different kinds of property in New Hampshire are taxed uniformly, that is, at the same rate per $1,000 of value. For example, a single-family home is taxed at the same rate as an apartment building, a commercial building or industrial property.

Property taxes are used predominantly by local governments to finance schools, police and fire protection, trash collection, street maintenance, and public recreation, among other local services.  The state property tax is used to fund K-12 education. New Hampshire derives 61 percent of its total state-and local taxes from property taxation, compared to 31 percent for the average state.

The burden of real estate taxes on New Hampshire citizens, when compared to other states, is a matter of considerable debate, because this burden can be measured in various ways.  When effective property tax rates are considered, Manchester New Hampshire ranks between 13th and 45th among the each of the 50 states’ largest cities, depending upon the type of property considered. When compared to personal income, in 2005 New Hampshire had the third largest property tax burden per capita at $2,034 per capita and the highest property tax burden as a share of personal income in the nation at $54.11 per $1,000 personal income.

A community’s property tax rate is not a good measure of the property tax burden faced by the residents.  A new entrant into a community typically pays less for a home with a high tax rate.  This phenomenon is known as “tax capitalization.”  Thus two homeowners in different communities can face very different tax rates, but the same cost of housing.  One homeowner can have high mortgage payments but a low property tax bill, while the other homeowner has low mortgage payments and a high property tax bill.

Some communities may have high property tax rates because they zone out commercial and industrial property and other communities have high property tax rates because they vote for more expansive government services.
Although widely assumed to be regressive, researchers agree that the property tax is not generally so, and, to the extent that it is a tax on capital, it can be progressive. Furthermore, the property tax is more progressive than the sales tax.

Average property tax burdens in New Hampshire today are similar to those of 40 years ago, constituting 5.4 percent of personal income in 2005, only slightly higher than 5.3 percent in 1962. Property tax burdens were highest in 1972 and 1992, when property taxes as a percent of personal income exceeded 6 percent.