The Big Squeeze

Sixty-three-year-old Ruth Wohlforth lives in a "very, very tiny house" near New Jersey's Atlantic coast, but her property taxes are so high she may not be able to afford to stay there much longer.

With a one-bedroom, one-bath house smaller than some RVs, Wohlforth's 2005 property tax bill for her Ocean View, N.J., home is $3,478. Compare that to the $250 tax bill she paid 30 years ago when she took over the home from her parents. With a fixed income of less than $8,000 a year from Social Security and a few bonds, her numbers don't add up.

Situations like Wohlforth's are playing out across the country. The housing bubble, with its red-hot real estate values, has sent property taxes soaring, making taxpayers mad as hell. From Maine to California, from Texas to Minnesota, rebellious homeowners are squeezed, and politicians are scrambling to try to accommodate them. At the same time, local governments fear that trimming the taxes could cripple schools, police, fire and other essential services dependent on that revenue.

Property taxes are levied by counties and municipalities (and by a few states). They are the biggest source of revenue for local governments, since most other taxes—income, sales and so on—go to federal and state governments. U.S. Census Bureau statistics for the year ending in 2004 show that property tax collections grew by 24 percent nationwide, while sales tax revenue grew by 12 percent—income tax collections actually shrank by a percentage point.

Not since 1978, when California voters revolted against high property taxes and approved Proposition 13 to slash them, has a tax issue so galvanized taxpayers. "Few types of taxation have stirred more people into anger and outrage recently than the property tax," says Pete Sepp, spokesman for the National Taxpayers Union, a Virginia-based group that tracks taxes and works to lower them.

"The taxes are driving people out of their homes," says James Dieterle, director of AARP's New Jersey office, which has been a leader in the state for property tax relief. "One resident whose house is paid for said her property taxes now are higher than her mortgage payments and taxes were combined."

An escalating property tax is particularly tough on people whose homes have risen sharply in value while their incomes have not. "It's very hard on seniors," says Myron Orfield, a property tax expert at the University of Minnesota Law School in Minneapolis. "Many seniors live in older, declining suburbs where taxes are shifted [from businesses] more to homes. If you have a commercial base, that shifts property taxes away from homeowners."

Ruth Wohlforth certainly feels the pinch. "It's not fair or equitable to raise property taxes on citizens who no longer have the opportunity to raise their income level," she says. "I shouldn't have to worry every year whether I will have my home."

Wohlforth managed to stay in her home this year because of a state program that helps older residents with escalating tax bills. But as New Jersey, like many other states, grapples with budget strains, Wohlforth worries that the tax abatement program might be cut.

She and others in New Jersey have urged elected officials to hold a constitutional convention to address the property tax issue, but so far no luck. Still, the crisis has affected politics. It's playing an influential role in the governor's race, and property tax watchers will be looking to see how it plays out in November.

In Maine, Gov. John Baldacci, D, is still dealing with the fallout from a failed effort in last fall's election to limit property taxes. Voters overwhelmingly rejected a referendum proposal to cap tax rates at 1 percent statewide and annual increases in property values at 2 percent, with no option for local overrides.

The cap would have cut revenue by half a billion dollars a year, and opponents successfully argued that such a reduction would devastate local services. In response, Baldacci and the Maine legislature expanded property tax relief programs for homeowners and capped property taxes levied by counties and municipalities. They also raised the state's share of school costs.

For Brad Quickel, 51, of Yarmouth, Maine, it was not enough. He says a $74,000 tax bill forced his family to sell a 102-acre saltwater farm nine years ago. He kept a house and 18 acres, and his property tax bill dropped to about $5,000. But now it's back up to $17,000. "You're going to see this issue come up again," says Quickel, a general manager in a wholesale lumber company. "All you have to do is drive up Route 1 and see all the for-sale signs along the coast."

"The property tax is a big issue with farmers along the coast," says Jon Olson, executive secretary of the Maine Farm Bureau Association, "but it's even a bigger issue with commercial fishermen. Often they have lived in homes right on the ocean they have inherited generation to generation, and now the taxes are so high they can't pay [them]."

Many other states besides Maine and New Jersey are feeling the heat of rising property taxes. Orfield says they're going up particularly in those where state governments don't contribute much to local schools, such as Pennsylvania, Ohio and Connecticut.

While many states are considering relief programs and caps on property taxes or assessments, Orfield helped Minnesota develop a revenue-sharing plan that spreads property tax income across the state.

But experts say the best-laid plans could go awry if the housing bubble bursts and home values fall. Then revenue from property taxes, as well as from sales and income taxes, will take a hit as people rein in spending.

Even so, the search is on for ways to fund local services without bleeding homeowners. In many places, there are no easy answers. "If there were any obvious good alternatives to property taxes," says Andrew Chamberlain of the Tax Foundation, a research organization in Washington, "you would hear people talking about them."

To order black-and-white reprints of this article, call (866) 888-3723.