All about local taxation

In Connecticut and Massachusetts, Inflation Hits your Local Tax Bill

In the past ten years, more residents moved out of Connecticut and Massachusetts than moved in(1), due in part to high taxes and the prospect of higher taxes in the future. Connecticut experienced a dramatic uptick in migration outflow that peaked in 2019 and has since levelled off. Massachusetts’s outflow was less pronounced but peaked in 2021 and has since levelled off as well. The uptick in outflows were likely due to COVID, but now that COVID is behind us, what has happened to the taxes that caused so many to move away?

At Pality, publisher of TownScoreReport.com, we examine the change in local taxes paid by residents in Connecticut and Massachusetts from 2018 to 2023. This period covers the time from before COVID to after COVID. We capture all taxes and fees paid to local governments, such as property taxes, including those on cars and other personal property, special assessments, other taxes, fees and other government revenue derived from taxpayers.

We measure the change in taxes and fees in three ways: First, in dollars per household, and we compare this to inflation to observe whether the taxes increased in “real” terms, meaning on an inflation-adjusted basis.

Second, we measure “tax burden,” which is taxes and fees as a share of taxpayers’ income, to observe if local governments are taking more or less out of their taxpayers’ wallets.

And third, we measure taxes and fees as a percent of the market value of the median home in the city or town, which we call the “effective” property tax rate.

We aggregate the experience across households in the 169 cities and towns in Connecticut and across the 351 cities and towns in Massachusetts. The aggregation illuminates the local tax experience of the average taxpaying household in each state. Any given household’s experience can deviate significantly from the average. For example, one’s property assessment can rise more than average or one’s income can rise less than average, either of which will make the impact from taxation more severe than the averages presented here.

Which state had the largest increase in local taxes?

Percent Change in Local Taxes and Fees, Dollars per Household, 2018 to 2023:

Connecticut:  + 23.0%

Massachusetts:  + 27.8%.

From fiscal year 2018 to fiscal year 2023, households in Connecticut and Massachusetts saw significant increases in local taxes, rising 23% in Connecticut and 28% in Massachusetts. During this period, inflation was also at historical highs, with the price level increasing 21%. In “real” inflation-adjusted terms, local taxes and fees per household increased only slightly in Connecticut but nearly seven percent in Massachusetts. In both states, the absolute dollars paid per household rose considerably, outpacing the historically high inflation and compounding the impact of higher prices for everyday goods and services shouldered by households.

Which state had the largest increase in tax burden?

Percent Change in Local Taxes and Fees, Share of Household Wallet, 2018 to 2023:

Connecticut:  – 8.0%

Massachusetts:  – 10.3%.

While the total dollars that cities and towns collected from their residents increased in both states, in the aggregate and per household, average household incomes rose even faster during the period. In Connecticut, household income rose by 34% while taxes and fees flowing to the local governments grew somewhat less, by 23%. As a result by 2023, the local tax burden decreased by 8%. That is, local taxes and fees took 8% less out of the average Connecticut taxpayer’s wallet compared to 2018.

In Massachusetts, household incomes rose even faster over the five-year period, at 43%. This increase comfortably outpaced the 28% growth in local taxes and fees, resulting in local taxes and fees taking about 10% less out of the wallet of the average Massachusetts taxpayer than in 2018. Note that while incomes rose considerably in both Connecticut and Massachusetts, on an annualized basis, after adjusting for inflation, real household incomes rose in the two states by 2.1% and 3.5%, respectively.

Which state had the largest increase in the effective property tax rate?

Percent Change in Local Taxes and Fees, as Percent of Home Value, 2018 to 2023:

Connecticut:  – 11.0%

Massachusetts:  – 10.9%.

Since 2018, median house prices increased 38% in Connecticut and over 43% in Massachusetts, significantly outpacing inflation. Local taxes and fees, while also rising more than inflation, increased by less than home values. As of 2023 in both states, local taxes and fees represent a smaller percent of the market value of homes compared to 2018. This “effective” property tax rate fell by about 11% in both states.

 

Summary

In summary, the local tax experience for the average taxpayer in Connecticut and Massachusetts has been mixed.

In both states, the total amount of dollars paid to local governments increased by even more than the historically-high inflation, so in real terms, households now pay more. On top of higher prices for everyday goods and services, taxpayers also have to pay more to their local governments. Moreover, in both states, absolute dollars of local taxes and fees ought to have declined or at the very least, risen more slowly than they did given that schools represent the biggest component of local government spending in the two states. School enrollments fell by 3.9% in Connecticut and 3.6% in Massachusetts during the period, while the populations in each state rose by only 1.2% and 1.4%, respectively, notwithstanding net migration outflows.

And while local taxes and fees fell as a percent of average household income, taxpayers whose income growth did not keep pace with the average, such as retirees on fixed incomes, saw their burdens increase. Similarly, while home prices have increased faster than local taxes, a higher market valuation of one’s house does not pay the tax bill in either state. As for how local governments in Connecticut managed their tax impact compared to local governments in Massachusetts, the two states are at parity. Connecticut cities and towns performed less onerously than Massachusetts cities and towns because the absolute dollar amount of taxation rose by less. At the same time, tax burdens declined more in Massachusetts, but this was largely due to higher income growth, which is independent of the management of city or town, at least in the short run.

(1) https://www.unitedvanlines.com/newsroom/movers-study-2023.

Source: Pality, other than what is noted above. Copyright, Pality, 2025.

By |2025-01-02T17:20:13-05:00December 31, 2024|Homeownership, State and Local Finance, Taxation|Comments Off on In Connecticut and Massachusetts, Inflation Hits your Local Tax Bill
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Property Taxes in Rhode Island Hold Steady

In 2017, Rhode Island began attracting new residents faster than existing residents were moving out of state, also known as “net migration inflow.”(1) This contrasts with its New England neighbors, Connecticut and Massachusetts, where more residents moved out than moved in, due in part to high taxes and the prospect of higher taxes in the future. Were newcomers to Rhode Island enticed by its beautiful and extensive coastline or did local taxation play a role? And now that COVID is behind us, what has happened to the local tax burden in the Ocean State in the past five years?

At Pality, publisher of TownScoreReport.com, we examine the impact of local taxes paid by residents in Rhode Island over the period from 2018 to 2023, that is, before COVID to after COVID. We capture all taxes and fees paid to local governments, including property taxes, which is the largest local tax item, special assessments, other taxes, fees, and other revenue derived from taxpayers.

We measure the change in taxes and fees in three ways: First, in dollars per household, and we compare this to inflation to observe whether the taxes increased in “real” terms, meaning on an inflation-adjusted basis.

Second, we measure “tax burden,” which is taxes and fees as a share of taxpayers income, to observe if local governments are taking less or more out of taxpayers’ wallets.

And third, we measure taxes and fees as a percent of the market value of the median home in the city or town, which we call the “effective” property tax rate.

We aggregate the experience across households in the 39 cities and towns in Rhode Island. The aggregation illuminates the local tax experience of the average taxpaying household in the state. Any given household’s experience can deviate significantly from the average. For example, one’s property assessment can rise more than average, or one’s income can rise less than average, which will make the impact from taxation more severe than the averages presented here.

 What was Rhode Island’s change in Local Taxes and Fees per Household?

Percent Change in local Taxes and Fees, Dollars per Household:  + 4.4%

In Rhode Island, taxes and fees increased overall by 4.4% per household during the period. Overall, taxes and fees increased 9% from fiscal year 2018 to fiscal year 2023, but the number of taxpaying households grew at about half this rate of 4.5%, making local taxes and fees paid per household grow by only 4.4%. Given that inflation increased over the same period by 21%, the “real” inflation-adjusted impact of local taxation declined considerably for Rhode Island residents.

What was Rhode Island’s change in Local Tax Burden?

Percent Change in local Taxes and Fees, Share of Household Wallet:  – 23.8%

In Rhode Island, the local tax burden fell over the five-year period by nearly 24%. Household incomes increased by 37% over the five-year period. Concurrently, local taxes and fees per household grew by only 4.4%. As a result, the share of the average Rhode Island taxpayer’s wallet used to pay local taxes and fees declined.

What was Rhode Island’s change in the Effective Property Tax Rate?

Percent Change in local Taxes and Fees, as Percent of Home Value:  – 32.1%

In Rhode Island, the local effective property tax rate fell by 32%.  This means that taxpaying households paid 32% less in local taxes as a percent of the market value of properties than they paid in 2018, for the median-priced home. Median house prices surged by nearly 54% over the period, significantly outpacing the 4.4% increase in dollars per household paid to local governments.

Summary

In summary, the local tax experience has improved in several ways for the average taxpayer in Rhode Island. However, while local taxes and fees declined as a percent of average household income, taxpayers whose income growth did not keep pace with the average, such as retirees on fixed incomes, saw their burdens increase. Similarly, while home prices have increased much faster than local taxes, a higher market valuation of one’s house does not pay the tax bill.

As for how Rhode Island’s local governments managed their tax increases compared to local governments in Connecticut and Massachusetts, Rhode Island cities and towns did far better for taxpayers. Population in the state has grown by 3.6%, triple the Connecticut growth rate and more than double the Massachusetts rate. Yet, like its Connecticut and Massachusetts neighbors, school enrollments have been falling. Since 2018, enrollments have declined by 3.9%, the same decline as in Connecticut and somewhat higher than the 3.6% decline in Massachusetts. However, while tax revenue increased, at least the rate of increase was significantly less than inflation. As a result, “real,” inflation-adjusted taxation fell rather than rose.

Perhaps this trend is already understood by homeowners and homebuyers alike as the state, unlike its two neighbors, continues to experience a steady stream of net migration inflows.

  1. https://www.unitedvanlines.com/newsroom/movers-study-2023

Source, Pality. Copyright 2025, other than noted above.

 

By |2025-01-02T17:26:20-05:00December 31, 2024|Education, Homeownership, Taxation|Comments Off on Property Taxes in Rhode Island Hold Steady
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What States have the Lowest Taxes?

In a prior blog Post on Insights, What State has the Lowest Cost of Living? – TownScoreReport, states were ranked based on total state-levied taxation. These rankings included all taxes and fees levied by the state and its agencies, such as income taxes, sales taxes, state-levied property taxes, excise taxes, property transfer taxes, estate taxes, and the numerous types of fees collected by states, for probate, car registrations and so forth. States were compared based on both (1) state-levied taxes and fees as a total dollar amount for the median-income household and (2) state-levied taxes and fees as a percent of the median household income, or “burden.”

That Post highlights the fact that, besides house prices, state-level taxation is the biggest driver of cost-of-living differences across states. However, even house prices themselves are not as big of a driver of differences in cost-of-living across states as one might think. So, if you are searching for the best places to live in the US, you must consider your location-based expenses, namely, state and local-levied taxes and fees because these make up the lion’s share of your annual expenditures.

First, even though house prices vary state by state, that expenditure item is largely under one’s control. Second, your home is a one-time purchase, so the impact of house prices on your wallet is immunized relative to inflation. In fact, your mortgage payment declines in real terms with inflation, so owning a home offers an inflation hedge. While all of this is good news, there is one aspect of your location-based expenditures that is impacted by inflation: the taxes associated with your location. Both your local and state taxes and fees have a huge impact on your total housing expenses, and the longer you own your home, the bigger the absolute and relative impact these taxes and fees have.

Upon closing, your housing expenses are roughly 1/3 mortgage payment, slightly more than 1/3 state-levied taxes and fees, and slightly less than 1/3 local taxes and fees. This means that your total housing expense is 2/3 taxes and fees, and only 1/3 mortgage, and again, that’s at the time of closing. Over time, your mortgage payment comprises a smaller amount of total expenditure, because this is fixed, whereas your taxes and fees rise over time. And unlike the price of the house you bought, which is largely under your control–since you chose it over other houses, your location-based taxes and fees, meaning all state and local taxes, are largely out of your control. You cannot fight city hall. Or the statehouse.

How local taxes impact your total expenditures does vary state by state and town by town, and this analysis is addressed elsewhere on TownScoreReport.com.

How do states compare in terms of the amount of state taxes and fees residents pay?

Below we show selected pairings of states. In the first table, we show how much the median household pays in one state, such as California, Connecticut, Illinois, Massachusetts, New Jersey, and New York and compare it to the amount paid in other states, such as Colorado, Florida, Georgia, Idaho, Nevada, New Hampshire, North Carolina, South Carolina, Tennessee, Texas and Vermont. The comparisons are based on the median household income in each state.

How Much More the Median Household Pays in all State-Levied Taxes and Fees

 

CALIFORNIA Residents Pay their State More than Residents in
COLORADO $3,925 more
IDAHO $4,922 more
NEVADA $7,721 more
TEXAS $5,112 more

 

CONNECTICUT Residents Pay their State More than Residents in
FLORIDA $6,200 more
GEORGIA $3,797 more
NEW HAMPSHIRE $5,836 more
TENNESSEE $5,100 more

 

ILLINOIS Residents Pay their State More than Residents in
GEORGIA $1,676 more
NORTH CAROLINA $321 more
TENNESSEE $2,979 more
TEXAS $2,396 more

 

MASSACHUSETTS Residents Pay their State More than Residents in
NEW HAMPSHIRE $9,834 more
FLORIDA $10,197 more
GEORGIA $7,794 more
TENNESSEE $9,098 more

 

NEW JERSEY Residents Pay their State More than Residents in
FLORIDA $7,173 more
GEORGIA $4,769 more
NORTH CAROLINA $3,415 more
TENNESSEE $6,073 more

 

NEW YORK Residents Pay their State More than Residents in
FLORIDA $9,981 more
GEORGIA $7,578 more
VERMONT $1,290 more
SOUTH CAROLINA $5,917 more

Source: Pality.

Next, we calculate how much the median household would save—or not save– from moving out of one state and into another, taking its income and assets along with it. For example, in the above tables, we show how much more the median household pays in Illinois versus how much the median household pays in Tennessee. In the tables below, we show how much the median household in Illinois would save annually if it picked up and moved to Texas. In this way, we can assess if you would really save money by moving from one of these “outbound” states to another, “inbound” state.

 

Savings by Moving from CALIFORNIA to
COLORADO $5,228 in savings
IDAHO $3,314 in savings
NEVADA $9,927 in savings
TEXAS $4,332 in savings

 

Savings by Moving from CONNECTICUT to
FLORIDA $5,310 in savings
GEORGIA -$2,226 (negative) savings
NEW HAMPSHIRE $6,492 in savings
TENNESSEE $113 in savings

 

Savings by Moving from ILLINOIS to
GEORGIA -$190 (negative) savings
NORTH CAROLINA -$3,409 (negative) savings
TENNESSEE $2,148 in savings
TEXAS $2,853 in savings

 

Savings by Moving from MASSACHUSETTS to
NEW HAMPSHIRE $5,593 in savings
FLORIDA $11,105 in savings
GEORGIA $3,569 in savings
TENNESSEE $5,907 in savings

 

Savings by Moving from NEW JERSEY to
FLORIDA $9,233 in savings
GEORGIA $1,697 in savings
NORTH CAROLINA -$1,522 (negative) savings
TENNESSEE $4,035 in savings

 

Savings from Moving from NEW YORK to
FLORIDA $15,689 in savings
GEORGIA $8,153 in savings
VERMONT -$5,945 (negative) savings
SOUTH CAROLINA $2,463 in savings

 

Some savings are not savings at all. Our analysis suggests that the median household would spend more by moving from Connecticut to Georgia, New York to Vermont, or from Illinois to North Carolina and from New Jersey to North Carolina. The differential would not be significant, for example, moving from Connecticut to Tennessee or Illinois to Georgia. The table reinforces what people are already observing and acting upon, namely that a California resident may save considerably from moving to Nevada, a Connecticut resident to Florida, an Illinois resident to Tennessee, a Massachusetts resident to New Hampshire, a New Jersey resident to Florida, and a New York resident to Georgia. The cost of living related to state-levied taxes and fees is available on State Score Reports for all 50 states on www.TownScoreReport.com.

Source: Pality. Copyright Pality 2024.

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By |2024-03-22T10:37:53-04:00February 19, 2024|Homeownership, Taxation|Comments Off on What States have the Lowest Taxes?
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Tax fairness and free-ridership

Progressive or Regressive?

Tax fairness usually addresses whether tax burdens are progressive or regressive. With a progressive tax, the share of one’s income paid out as taxes rises as income rises, which is considered fair. With a regressive tax, the tax burden falls as income rises, which is considered unfair.

Generally, property tax is seen as progressive because high-income earners are more likely to own more expensive property and pay higher property taxes. Low-income earners are more likely to be renters, and depending on the strength of the rental market, landlords may not be able to pass through some of the property tax to their renters. Many cities and towns also have property tax exemptions for low-income households. Sales tax is thought to be the most regressive because not only does it tax the first dollar of spending, but it also burdens low-income earners disproportionally, who spend most of their income on basic needs. Income tax is progressive to the degree that the marginal tax rate rises with income, and the first dollars of income are tax-exempt.

Free-Ridership

Tax fairness also relates to who pays the taxes and who reaps the benefits of the services that the taxes fund. An imbalance between those who pay and those who benefit results in what is known as “free-ridership” or “free-riding.” Typically, this is a local taxation issue and is not identical to the concepts of redistribution or regressivity.

A city or town reliant on property taxes may have a free-ridership problem. Consider a city that has big box stores. These stores attract residents from surrounding communities who bring cars, which cause road wear and tear, as well as the need for traffic control, street lighting, garbage collection, police and ambulances, and other city services. But that city may be funded solely by the property taxes of the city’s residents. Although commercial establishments also pay property taxes, and their customers pay prices that capture the cost of taxation in turn, those taxes are not well aligned with the utilization of city-provided services. Further, not only do residents of larger cities and towns bear the tax burden, but they also absorb many negative externalities, such as noise pollution and reduced public safety from the transient population. Is it fair that residents of these cities pay for services used by “out-of-towners” who do not contribute to the cost?

Tax Burden and Population

Free-ridership may also be regressive. Not only do larger cities have more free-riders, but generally, tax burdens are also higher in larger cities. Using a broad sample of more than 100 cities with populations greater than 100,000, the correlation between the local tax burden, which is local taxes as a percent of income, and population size was observed to be 58%. So, unless there is a corrective cash redistribution from state funds to the local level, larger cities will continue to experience unfairness from free-ridership and potentially additional unfairness should their residents have fewer economic resources relative to out-of-towners.

Tax Burden and Population

Correlation coefficient = 58%.

Source: Pality.

Tax-Exempt Organizations

Tax-exempt property associated with non-profit institutions further compromises tax fairness. As an example, hospitals and universities, which are tax-exempt, invite free-ridership as they draw residents to utilize their services from well beyond the reach of a city’s taxing arm. Even when states provide relief through payments-in-lieu-of-taxes, these transfers rarely make the cities and towns whole from the foregone revenue associated with tax-exempt property. Yet again, the city’s residents must cover both direct costs, such as more traffic control, as well as indirect costs, such as noise pollution and reduced public safety. On top of this, they are shouldering the direct and indirect costs with fewer tax resources.

Can tax fairness be restored in cities and towns experiencing free-ridership?

If a state provides direct transfers of revenue from state-levied income and sales taxes to cities and towns experiencing free-ridership, fairness can be restored. However, if the state levies new taxes to fund these transfers, unintended consequences may arise, such as economic distortions and tax avoidance schemes. Further, once a tax is established, it is difficult to remove or reduce it. Finally, even if it is neutralized at the onset with a lower local property tax, the overall tax burden may creep up over time.

Written by Joseph Cahill.

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Copyright 2023 Pality.

By |2024-03-21T12:20:47-04:00November 3, 2023|Taxation|Comments Off on Tax fairness and free-ridership
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Just how diversified are taxes?

What is Tax Diversification

Within the context of public finance, a government that is tax-diversified is one that levies a wide array of tax types. Tax diversification is a policy goal of many governments, as a lack of diversification may disproportionately burden certain groups of taxpayers or expose a government to economic shocks.

Facts versus Headlines

Governments, particularly state governments, are far more diversified than headline statistics suggest. Take New Hampshire, which has neither a sales tax nor a personal earned income tax. Is New Hampshire undiversified? The state government’s largest source of revenue is fees collected and revenue earned from governmental and business-type activities. These fees and revenue comprise 35% of total revenue, surpassing total tax revenue, which makes up only 27% of total revenue.

Now consider Florida, Texas, and South Dakota, three states with no personal income tax. Each state’s sales taxes comprise more than 80% of total tax revenue. When viewed alone, this might suggest that these states are undiversified, but in fact, tax revenue comprises less than one-third of their total revenue, like New Hampshire. All US state governments have not only a mixture of tax types but also a blend of additional revenue from business-type and component unit activities, as well as grants and transfers from federal and local governments.

Local governments are also more diversified than headline statistics suggest. Even a local government whose only source of tax revenue is property tax will collect fees and earn revenue from business-type and component unit activities, and may also receive transfers from the state, all of which are revenue diversifiers.

Tax Revenue Diversification

On average, a state’s income and sales taxes constitute 83% of total tax revenue. In counties, 66% of tax revenue comes from property taxes, 24% comes from sales taxes, 8% comes from other taxes, and income taxes contribute 2% to tax revenue. In cities and towns, 63% of tax revenue comes from property taxes, nearly 23% comes from sales taxes, and the remainder comes from income taxes and other taxes at 6% and 7%, respectively.

Source: Pality

Revenue Diversification

While each jurisdiction type has one or two predominant tax types, for all jurisdiction types, tax revenue comprises less than half of total revenue. In a typical state, tax revenue makes up 34% of total revenue. In a typical county, tax revenue comprises 46% of total revenue, and in a city or town, it makes up 44% of total revenue.

State governments, on average, earn a variety of fees and revenue from business-type and component unit activities. Together, these sources comprise 37% of total revenue, which is greater than the revenue that taxes contribute to total revenue. Transfers and grants, net of outflows to and inflows from cities, counties, and the federal government, make up the balance of about 28% of total revenue.

County governments earn a variety of fees and revenue from business-type and component unit activities as well, which together comprise 39% of total revenue on average. Transfers and grants, net of outflows and inflows, amount to 16% of total revenue.

The average revenue composition in cities and towns is like the revenue composition in counties, with a variety of government fees and revenue from business-type and component unit activities comprising 39% of total revenue and net transfers and grants comprising 17%.

Source: Pality

Tax Diversification for the Taxpayer

Even if a state or local government’s tax revenue composition is not well-diversified, a taxpayer’s tax burden is well-diversified when viewed in the aggregate. Excluding federal government taxes, the composition of the combined state and local tax burden on taxpayers is quite balanced on average, with sales taxes comprising 35%, property taxes comprising 32%, income taxes comprising 26%, and other taxes comprising 7% of total taxes paid.

If federal taxes are considered, income taxes play an even bigger role. Income taxes comprise 60% of all taxes collected by federal, state, and local governments, excluding payroll taxes. Combined across all jurisdictions, sales taxes comprise 19% of total tax revenue, property taxes comprise 17%, and other taxes account for 4%.

Share of Total Tax Revenue by Type of Tax

Source: Pality

Discussions surrounding tax diversification should address total revenue in addition to tax revenue and focus on diversifying the Tax & Fee Burden on taxpayers.

Written by James Galasso.

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Copyright 2023 Pality.

By |2024-03-21T12:18:26-04:00October 13, 2023|State and Local Finance, Taxation|Comments Off on Just how diversified are taxes?
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