Unfair Property Taxes and What to Do About Them

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Public Finance Update - July 19, 2022

Welcome back to another edition of Route Fifty’s Public Finance Update! I’m Liz Farmer and this week’s newsletter is about property taxes: The bread and butter of local government revenue but a system that’s riddled with inequity. Legacy cities like Detroit and Cincinnati tend to struggle the most with this issue as they navigate paying for services across a vast area as their population and tax base shrink.

This week, I look at an effort in Baltimore to make the city’s high property tax rate more fair and what research says about property tax equity and promoting economic growth. As always, send feedback and tips to: publicfinanceupdate@routefifty.com.

Baltimore has the highest property tax rate in Maryland and homeowners in the city pay nearly twice the rate of their counterparts in surrounding counties. It’s a perennial issue—and complaint—and many believe it’s keeping Charm City from realizing its full economic potential.

What’s more, the city’s high tax rate has a disproportionate impact on certain residents. According to data from the University of Chicago’s Municipal Finance Research Center, Baltimore has one of the most inequitable property tax regimes in the country. (The center’s research also found that property taxes across the country have an inequitable impact.) On average, Baltimore homeowners of the lowest value properties are overcharged by $315, or 42.7% above the fair tax rate. Meanwhile, homeowners of the most expensive properties underpay by $14,903, or 69.9% below the fair tax.

The city has grappled for decades over its property tax rate. One of the reasons cutting it has been problematic is that the revenue makes up a substantial portion of the city budget. Property tax revenue accounts for about 40% of the city’s general fund revenue, while the national average for counties is one-third, according to the National Association of Counties. (Baltimore operates as a city and county.) In cities, property taxes account for one-quarter of general fund revenue, according to the Lincoln Institute’s Fiscally Standardized Cities, or FiSC, database.

While this also means that Baltimore relies less on regressive fines and fees than other cities, the overall effect is that the city’s tax revenue structure still depends on a system that disproportionately affects those who can least afford it.

Tax Cut Push in Baltimore

In 2015, as part of a 10-year fiscal sustainability plan, Baltimore did cut the rate from $2.268 down to $2.248 per $100 in assessed value. But it amounted to nibbling around the edges and did little to provide actual tax relief, particularly to the city’s low- and moderate-income homeowners.

Now, a group of current and former residents—including three economists—want to go much further and are gathering signatures for a ballot initiative that would cut the city’s rate almost in half over six years.

Anirban Basu, an economist and the treasurer of Renew Baltimore, said cutting the property tax rate would create a more fair system, stop residents from leaving (the city's population shrank by about 35,000 people between 2010 and 2020, according to census data) and attract more growth. That growth, according to the group’s modeling, would ultimately pay for the tax cut.

“Right now, the biggest population flight we have from our city is that of the Black middle class,” Basu said. “In Boston, to really ‘make it’ means you live in the Back Bay; in New York City, you move to Manhattan. But not Baltimore. When you ‘make it’ in Baltimore, you move to the suburbs. In my perspective, that’s not equitable.”

But city leaders strongly disagree. According to a spokesman for Democratic Mayor Brandon Scott, the proposed reduction in taxes would be a $455 million cut to the city’s budget over six years, or $75.9 million on an annual basis.

“Renew Baltimore dresses up its proposal with language such as ‘economic justice’ and ‘equity,’ but the reality is that its proposal would require a drastic reduction in city services and would acutely affect the most vulnerable residents,” spokesman James Bentley told The Baltimore Sun.

Looking Beyond Tax Rates

Much of the charges around inequity in property taxes is due to how they are assessed. Other cities have tried to tackle this issue with varying degrees of success but perhaps the most dramatic effort took place in Boston. 

In the late 1970s, a Massachusetts ballot measure drastically cut property tax rates statewide and forced cities to overhaul their property assessment practices. Boston, looking for a more efficient way to reassess properties annually, turned to computer-assisted mass appraisal, which uses statistical modeling to help assessors do their work. It was calibrated using market sales, and is more precise and efficient than sending assessors, who may have subjective opinions about property values, out all over the city.

Although not perfect, regressivity levels in Suffolk County, where Boston sits, are far below average while home values are in the top 10% nationwide, according to the University of Chicago (which does not have separate data on Boston available). The regime has also offered tax stability, which is good for attracting developers. Between 1979 and 2009, Boston’s property taxes have risen much more slowly compared with the rest of the country: 14% versus 60%.

But that type of economic success usually creates a different kind of pressure on moderate-income homeowners in that they get priced out of their neighborhoods. Atlanta is one city that is trying to address this problem with an anti-displacement program that gives money to “legacy” homeowners in places where property values are rapidly rising to help them cover future increases in their property tax bills.

And then there’s the notion that cutting property taxes might ultimately have very little to do with Baltimore’s long-term success. New research published by the Brookings Institution shows that “quality of life” measures like good schools and recreational opportunities— not low taxes—are the key ingredients for economic growth. 

In Texas, for example, one-third of the population growth is happening in places that have higher tax rates than California counties. It shows that tax rates don’t drive decision-making, but rather the amenities those taxes pay for, said Michael Hicks, an expert on regional economics and coauthor of the research project. 

“I’ve been an economist for over 25 years now and … this is the most interesting and evocative finding of my career,” he said.

But it means that for legacy cities like Batimore, slashing high property tax rates isn’t a silver bullet for sparking growth. But, Basu argues, the city has to start somewhere. 

“Baltimore has all these things going for it: proximity to D.C., the Port of Baltimore, the Inner Harbor, major league sports,” he said. “How we have underperformed so miserably up to this point is beyond me.”