When the subject of property taxes comes up, local officials are apt to bring up Utah’s Truth in Taxation law. As the name of the law implies, Utah’s Legislature created the law as a means of ensuring transparency to decision-making about taxes. But one practical effect of the law was to limit local governments’ ability to reap windfalls from increasing property values. And from the perspective of some local officials, the law has stunted revenue growth.
To get to the bottom of this issue, Utah Foundation has issued a new report, "The Essential Tax: Property Taxation in Utah."
Property taxes in Utah are older than Utah itself, dating back to 1849, the year after the U.S. gained this area from Mexico. Since antiquity, property taxes have been a primary means of paying for the services and infrastructure provided by government. While several states lack income or sales taxes, no state lacks property taxes. In short, property taxes may be the most expected taxes on earth.
In Utah, property taxes are on the low side. A 2015 Tax Foundation analysis of tax rates on owner-occupied housing ranked Utah 41st in the nation. Neighboring Idaho, Wyoming, Colorado and New Mexico all ranked similarly low. But Utah Foundation dug deeper, measuring the impact taxes have on Utahns by analyzing their tax burden (how many dollars Utahns spend on taxes for every $1,000 earned). Utah’s current property tax burden is $25.27 per $1,000 of personal income, near its long-term average of $26.24 per $1,000 of personal income. Utah’s tax burden ranks 34th among states.
Property taxes may be relatively low in Utah, and people may expect them — but that doesn’t make them popular. In the 1980s, after a period of rapid increases in property values, some local governments began to reap windfalls as tax revenues increased much faster than the actual cost of governance and local services. This situation raised questions about transparency and accountability, as local governments could bring in more cash without having to justify it to the citizens they served.
As other states had done, Utah created a mechanism to limit such windfalls through two basic means: First, the “Truth in Taxation” law shifted the basis for taxation from a fixed rate to a fixed revenue amount (with an upward allowance for population growth); the rate must be adjusted downward to reflect increases in total property valuation (or upward if property values decline). Second, Truth in Taxation required local government entities to notify the public and hold hearings if they intended to take in additional revenue.
Some have argued that Truth in Taxation has stunted revenue growth, failing to account for inflation. Utah Foundation examined this question on a statewide level by examining population growth and inflation combined during the past 30 years.
The results were mixed. Property tax collections for school districts, which receive more than half of all property tax revenues in Utah, appear to be significantly outpacing population growth and inflation combined, particularly during the past 10 years. Local and special district revenues appear to be growing similarly well. Cities and towns, meanwhile, are collectively keeping pace with population growth and inflation. And counties have actually lagged behind.
At the end of the day, the outcomes will vary from jurisdiction to jurisdiction, and each local government entity and the population it serves must decide whether they have enough revenue to meet needs. Luckily, Truth in Taxation creates a mechanism for that: public notice and hearings. And from what Utah Foundation learned, at least some local governments have been able to convince their constituents over the years that, as unpleasant as taxes may be, sometimes the government just needs more money.