Research News

Commercial Properties Provide Most Real Estate Taxes
Property taxes generated from real estate remain the linchpin of county government revenue. It might surprise many taxpayers to learn that commercial, not residential property, accounts for 57 percent of real property revenues. Homeowners paid only 43 percent of the real property taxes collected in 1996.

The share of taxes generated by real estate has remained basically the same for the last 10 years. Local governments in the United States collected nearly $178 billion in taxes on commercial and residential real estate; $75.5 billion from owner-occupied homes and $101.7 billion from other property.

Although the most immediate source of revenue on real estate that comes to mind is property tax, many other revenues are generated by real property.

Income taxes and sales taxes on real estate owners represent about 23 percent of the total taxes collected by local governments. Owners of income-producing real estate paid about 30 percent of their income in taxes and the nation's corporations, large holders of real estate, are taxed at the higher corporate rate.

In counties with rapidly growing economies, speculative construction usually drives growth in revenue and in the value of real estate. Construction-related jobs in these communities can account for between 9 to 15 percent of the job base. In more mature counties, the value of real estate is tied to the general health of the community and construction related jobs usually account for 2 to 4 percent of the job base.

Fluctuations that governmental economies faced after the huge growth in the mid 1980s, followed by a decline in the early 1990s have caused local governments to develop new policies to meet their continuing financial needs.

Loudoun County, Va. experienced tremendous real estate growth in the early 1980s. Construction activity became a major component of the county's economy. At its peak in 1989, construction and construction-related jobs accounted for 15 percent of the job base and 16 percent of the wage base.

As the bottom fell out of new development in the county, construction- related employment dropped to 9 percent in the early 1990s and resulted in lower growth levels in sales and income taxes.

Property taxes represented 70 percent of the county's general revenue and the decline in the value of assessed property, because of the slowdown, caused the county to have to make changes. It cut its workforce by 10 percent, reduced its capital improvement plan by $114 million and increased its property taxes by 18 cents. The county also instituted new development fees and increased business and professional license fees.

Riverside County, Ca., is another example of a county that had to cope with an economic decline in the early 1990s.

After having enjoyed a thriving economy for a number of years, the county suddenly was faced with a business slowdown and a steep decline in jobs. In the construction industry jobs nose-dived from a high of nearly 70,000 positions at its peak to 37,000 by 1994. The decline sent retail sales down and unemployment up to nearly 12 percent by 1993. County officials say that 75 percent of the lost jobs were related to the construction industry. By 1994, Riverside County was looking at property assessments reduced by $3.4 billion.

The county is recovering from the residential and commercial overbuilding of the 1990s, but the pace is slow. Current assessments are growing by less than one-half percent a year. Service cutbacks continue as the county faces taxable property that has dropped in value by nearly $7 billion since the late 1980s.

Like Riverside, the economies of most local governments have been connected to the taxable value of their real estate and to the building and construction economy. Many governments are now taking moves to diversify their tax bases, by using many different ways to raise revenue, such as special development districts, user fees, optional sales taxes, hotel occupancy and amusement taxes, professional fees and business licenses. This diversification is designed to help make local governments less vulnerable to the vagaries of real estate.

(Research News was written by Jacqueline Byers, research director.)