Property taxes are an expense many homeowners like to grumble about, but they serve an important purpose. Property taxes give cities and towns funding for things like schools, roadwork, and other public projects and facilities. And when cities lose out on tax revenue, local services can suffer, which can actually cause home values to decline.
The tricky thing about property taxes is that they have the potential to climb over time. In fact, many homeowners may be wondering whether they'll be in for a property tax hike in 2021. And while there's no way to say for sure, there is a good chance property taxes will rise across the board next year in the wake of the coronavirus pandemic.
Why many Americans could see their property taxes rise
Cities don't just collect revenue from property taxes. They also get money via the taxes businesses pay to operate there. And when that tax revenue declines, it can impact municipal budgets in a very meaningful way.
For this reason, many people might see their property taxes go up in the coming year. Thanks to the pandemic, thousands of small businesses have been forced to permanently close their doors. When businesses shut down, that tax liability goes away, leaving cities with less money.
But it's not just small businesses that have been impacted by the pandemic. Over the past eight months, dozens of well-known retailers have filed for bankruptcy and are making plans to close down stores. If that continues, it'll have the same impact: less local tax revenue.
Similarly, a number of malls are in danger of dying out in the near term due to the number of retail tenants they're losing. Malls and shopping centers are said to provide $400 billion in local tax revenue annually, according to the International Council of Shopping Centers, and losing them could drive property taxes upward when cities are forced to compensate.
Now to be fair, the impact of small business, retail, and mall closures may not be felt by homeowners immediately in 2021. But another big reason why property taxes are likely to rise is that they're calculated by taking a home's assessed value and multiplying it by its local tax rate. Home values have soared this year during the pandemic, despite the economic distress that's plagued the country since March. Low mortgage rates and limited inventory have created a huge surge in demand that's driven values up. If municipalities get aggressive in reassessing homes in light of this trend, higher property values will translate into higher taxes and a greater burden on individual homeowners, many of whom may be reeling from job or income loss themselves.
Homeowners can fight back
Homeowners who aren't happy with a property tax hike can always try appealing it. But they'll need to prove that their homes are overassessed, and given the housing market today, that could be a difficult task.
Of course, higher property taxes won't just impact regular homeowners; they'll also impact real estate investors who own income properties or vacation homes. But given everything that's happened since March and the state of the housing market today, higher taxes are something it makes sense to gear up for.