NMHC Research Notes: Apartments and Property Taxes
Date: May 1, 2005

Contact Name: Rich Levy
Contact Phone: 202/974-2343
Contact E-mail: rlevy@nmhc.org

One of the most common misperceptions about apartment residents is that they do not pay local real estate taxes. This point of view often appears in letters to the editor of local newspapers opposing some proposed apartment development. The opinion reflects a belief that apartments do not pay their own way in communities and contributes to a policy bias in favor of single-family housing in jurisdictions nationwide.

Evidence from various national surveys shows that property taxes are one of the largest expense items for apartments and that apartments pay property taxes at a much higher rate than do single-family homes. When combined with the fact that apartments, compared to single-family houses, put fewer claims on the public services financed through local property taxes -- schools and roads in particular -- it appears that in many jurisdictions apartment residents are subsidizing their single-family neighbors.

The Cost of Property Taxes to Apartments
Local real estate taxes are one of the biggest costs of operating multifamily rental housing. Data from the Institute of Real Estate Management’s 1998 Income and Expense Report for Conventional Apartments indicate that property taxes account for 15.5 percent of total operating expenses for elevator apartment properties and 17.0 percent for garden apartments. The median property tax per apartment was $617 for elevator buildings and $451 for garden apartment communities. Regional variations in taxes are substantial. For garden apartments, the median per unit tax ranges from a low of $315 in the Plains states to a high of $877 in the Northeast.

Residents, Not Apartment Managers, Pay the Tax
Another misperception is that the apartment owner, and not the resident, pays the property tax. While the property owner or manager writes the check, ultimately the resident pays. Like any other cost of providing housing, property taxes are borne by the users of the housing. Market competition may keep property managers from immediately passing on higher tax costs by raising rents, but if rents do not cover the costs of providing that housing, some suppliers will withdraw from the market and new construction will slow. As a result, rents will increase until they once again cover the property tax and other costs.

Apartments Are Taxed More Heavily Than Houses
Housing taxation is complicated. Owner-occupied houses and rental properties are subject to various provisions of the federal tax code and many state tax laws. At the local level, the property tax is the principal vehicle for taxing real estate. Property taxes normally are administered by local governments and the proceeds are spent by them.

There are as many methods of setting and administering property taxes as there are local taxing authorities. Methods of determining property value differ, as do ways of computing the tax once that value is set. The bottom line, however, is how much tax is paid relative to the market value of the property (i.e., what it would sell for). Market value is a summary measure of the flow of housing services provided by that structure and location. Just as with a single-family home or a condominium unit in a multi-unit structure, a value can be assigned to individual rental apartments. The value of the apartment property is the sum of the values of these individual apartments. The ratio of tax to market value measures the tax paid relative to the amount of housing being "consumed."

By this measure of tax paid as a percent of market value (which is commonly called the "effective tax rate"), several national surveys document that apartments are taxed at a significantly higher rate than are single-family structures. The U.S. Census Bureau’s 1995-96 Property Owners and Managers Survey reports a median tax to value of 1.3 percent for multi-unit rental properties and 1.1 percent for single-unit rental properties, based on respondents’ estimates. Due to very high tax rates on some multifamily properties, the difference in mean tax rates is much greater than the difference in medians. Earlier, the Census Bureau’s 1991 Residential Finance Survey found a similar discrepancy between owner-occupied single-family homes and rental apartments. In that national survey, the median effective tax rate was 1.0 for both property types, but the mean tax rate for apartments was 3.2 percent, nearly double the 1.7 percent mean for owner-occupied homes.

Big Differences in Some States
Evidence of the higher tax burden borne by apartments comes from a study by the Minnesota Taxpayers Association (MTA)[1].  The MTA study also documents the wide variation in tax practices across the country. In the largest urban area in each of the 50 states, the MTA utilized local tax experts to estimate what the tax would be on an apartment property with a market value of $600,000 and a single-family home with a value of $70,000. MTA then divided the tax by the property value to calculate the effective tax rate (ETR) for each property. For apartments, the ETR averaged 1.83 percent, ranging from a high of 4.3 percent in New York to a low of 0.32 percent in Hawaii. For single-family homes, the average ETR was a much lower 1.30 percent, with a high of 3.2 percent in Michigan and a low of 0.09 percent in Massachusetts. MTA found apartments to be taxed more heavily than houses in every state.

The table at the end of the report shows the relative taxation of apartments and single-family homes. In New York, for example, each dollar of market value of apartments is taxed 14.91 times as heavily as each dollar of market value of houses.

Should Apartment Residents Pay More?
The real estate property tax is a significant part of the revenue available to local governments. In 1999 and 2000, 23 percent of local government revenue, and 71 percent of local tax revenue was from property taxes.[2]

Property taxes finance a range of municipal services, but two of the biggest expenses are schools and roads. In 2000, education accounted for 38 percent of total expenditures by local governments. Roads were an additional four percent.[3]

Apartments place lower demands on both schools and roads than do single-family houses. As of 2003, only 17 percent of all occupied apartments have one or more children of school age (5 to 18); and of those households with children, the average number is 1.6. Among owner-occupied single-family homes, 30 percent have school age children; and of those households that have children, the average number is 1.7. Similarly, apartment residents average only 1.0 motor vehicles per household, while owner-occupied houses average 2.1 vehicles[4]. In some other big-ticket categories of local government expense, apartments make claims no greater than those of single-family homes. Water, sewer, and waste management are examples. Even in these categories, the clustering of apartments arguably makes them less expensive to service than are single-family homes.

These national surveys document that apartment residents are taxed more heavily than homeowners for the housing they "consume," but make fewer claims on key local services. Part of the reason for this inequitable outcome is the misperception of what apartment renters pay and what they get from local governments. Perhaps the more direct reason for the disproportionate taxation of apartments is that, in most local jurisdictions, homeowners outnumber apartment renters at the ballot box.

 

Ratio of Apartment Effective Tax Rate (ETR)
to Single-Family Home ETR

State

City

ratio of ETR's

Rank

 

State

City

ratio of ETR's

Rank

Louisiana

New Orleans

17.60

1

 

Ohio

Columbia

1.22

28

New York

New York City

14.91

2

 

Kansas

Wichita

1.19

29

Massachusetts

Boston

11.79

3

 

New Mexico

Albuquerque

1.19

30

Iowa

Des Moines

2.53

4

 

Maine

Portland

1.18

31

Illinois

Chicago

2.52

5

 

California

Los Angeles

1.17

33

Indiana

Indianopolis

2.50

6

 

Colorado

Denver

1.16

34

District of Columbia

Washington

2.44

7

 

North Dakota

Fargo

1.12

35

Georgia

Atlanta

2.36

8

 

Kentucky

Louisville

1.10

36

Alabama

Birmingham

2.36

9

 

Wisconsin

Milwaukee

1.10

37

Minnesota

Minneapolis

2.32

10

 

Maryland

Baltimore City

1.10

38

Mississippi

Jackson

2.27

11

 

Missouri

Kansas City

1.09

40

South Carolina

Columbia

2.15

12

 

Nebraska

Omaha

1.07

42

West Virginia

Charleston

2.11

13

 

Montana

Billings

1.05

43

Idaho

Boise

2.03

14

 

Nevada

Las Vegas

1.05

44

Hawaii

Honolulu

1.84

15

 

Alaska

Juneau

1.05

45

Tennessee

Memphis

1.66

16

 

Washington

Seattle

1.05

46

Rhode Island

Providence

1.65

17

 

North Carolina

Charlotte

1.05

47

Florida

Miami-Dade

1.65

18

 

Connecticut

Bridgeport

1.05

48

New Jersey

Newark

1.58

20

 

Oregon

Portland

1.05

49

Arkansas

Little Rock

1.45

21

 

Wyoming

Cheyenne

1.05

50

Texas

Houston

1.41

22

 

Utah

Salt Lake City

1.05

51

South Dakota

Sioux Falls

1.39

23

 

Delaware

Wilmington

1.00

52

Michigan

Detroit

1.33

24

 

New Hampshire

 

n/a

 

Arizona

Phoenix

1.31

25

 

Vermont

 

n/a

 

Virginia

Richmond

1.27

26

 

Pennsylvania

 

n/a

 

Oklahoma

Oklahoma City

1.22

27

 

 

 

 

 

 



[1]Minnesota Taxpayers Association. January 2005. 50-State Property Tax Comparison Study: Payable Year 2004, pgs. 14, 17, 26.

[2]US Census Bureau; "Government Finances 1999-2000;" issued January 2003, https://www.census.gov/govs/estimate/00allpub.pdf;(accessed 16 June 2003).

[3]US Census Bureau, Government Finances, annual. See also https://www.census.gov/govs/estimate/00allpub.pdf (released September 2003).

[4]National Multifamily Housing Council tabulations of 2003 American Housing Survey microdata.

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