Wisconsin home values, property taxes higher than before. As are the inequalities that results

This week had the type of mundane government release that I find interesting. The state's Legislative Fiscal Bureau is changing how they figure out what is the “typical-priced home in Wisconsin.”

At the time of the 2000 decennial census, the U.S. Census Bureau did not provide statewide median value home estimates beyond the decennial census estimates. Since 2005, the U.S. Census Bureau has been conducting an annual American Community Survey (ACS), in which the Census Bureau derives an annual statewide median value home. Going forward, this office will begin to use the ACS annual estimate produced by the US Census Bureau as the base year for any statewide estimate. This change in methodology will produce a more up-to-date estimate of the median home value in Wisconsin. The ACS statewide median value home estimates are released in May of each year for the previous calendar year. For example, the most recent estimate available is for calendar year 2019, while the median home value estimate for 2020 will be released in May, 2021. Therefore, after the Governor's budget introduction, using the 2019 ACS Wisconsin median value home as our base value, this office will provide estimates of the median home value for the 2020(21), 2021(22) and 2022(23) property tax years. This analysis also looks at the relationship between value changes in the residential class of property compared to other property classes, due to the potential for property taxes to shift among classes of property based on the relative value growth in each class. In order to derive the estimated tax bill on a median value home, estimates of property tax levies under the Governor's budget recommendations will also be provided. Once the biennial budget is enacted, using these same statewide median home value estimates, the tax bill estimate on the statewide median value home will be updated to reflect any legislative actions that impacted property tax levies.

The primary reason for making this change in methodology is that the statewide median home value estimate produced by this office has diverged from the home values reported by the U.S. Census Bureau over the past ten years. Figure 1 below shows that while the two estimates were initially very similar, they began to diverge in 2008(09), and have continued to diverge since that time. The Census figures are based on the results of a survey that is administered annually, which is likely more reflective of the new and existing housing stock in the state. Moreover, because the base year for this office's ongoing estimate had been the median home value derived in the 2000 decennial census, there is a concern that the divergence between our estimate and the annual values reported by the Census Bureau is likely to persist, and could increase, over time.

Among the most significant reasons for the divergence between the two measures shown in the graph is that the estimates produced by this office have likely undervalued newly-constructed homes. New construction tends to be higher in value than the existing home stock. While the pace of new home construction declined somewhat during the Great Recession and its aftermath, it has consistently increased following the recovery. Moreover, according to the ACS, since 2012, the change in the value of newly-constructed homes has outpaced the change in the statewide median value for all homes. Fully accounting for the value of newly-constructed homes results in higher statewide median home values.

The LFB’s note also includes this chart showing the differences between these two methods.

Because the property value of the median Wisconsin home is higher under this metric, it means that the property taxes on that median home were revised higher. In fact, the LFB now says that property taxes on the typical Wisconsin home have gone up 8 of the last 9 years measured. The one exception is the result of a $406 million “tax trade” on the state’s Technical College System that was done by Scott Walker and WisGOP, where state tax dollars were spent to replace the property tax dollars that previously went into the Tech Colleges.

This means that Scott Walker’s oft-repeated claim of “I lowered your property taxes” between 2010 and 2018 wasn’t true (although your mileage may vary). What is true is that property tax rates have gone down in every year after 2013. This reflects both the rising property values and limitations put in place by Walker and WisGOP which limited the ability of local governments to grab some of the extra tax base that was available as those property values rose.

An interesting variable going forward on Wisconsin property taxes is that communities can generally raise the total amount of taxes by the amount of “net new construction” added to the tax base – basically the value of new buildings as a % of the total. This number can be exceeded by going to referendum, which many Wisconsin school districts did 2 weeks ago, with most of them passing (as the Wisconsin Policy Forum recently pointed out), but those levy limits may be getting loosened up in the near future anyway.

That’s not just because Tony Evers is the governor and has asked for more flexibility for local governments, but also because of 2020’s rock-bottom interest rates and a COVID World desire by some to get away from large-unit, communal housing. A couple of reports that came out this week shows that the US is clearly jumping into a new housing Boom/Bubble. On Thursday, the National Association of Realtors showed that existing homes are being snapped up like it's the mid-2000s, with prices jumping accordingly.

Tight inventory is being pointed to as a reason for the large jump in home prices, but that may be relieved soon, as there was a big jump in housing starts reported this week.

U.S. homebuilding increased more than expected in October, suggesting the housing market continues to be sustained by historically low mortgage rates even as the economic recovery shows signs of strain amid a resurgence in new Covid-19 infections. Housing starts rose 4.9% to a seasonally adjusted annual rate of 1.530 million units last month, the Commerce Department said on Wednesday. Data for September was revised up to a 1.459 million-unit pace from the previously reported 1.415 million.

In addition to the overall increase, what’s interesting in the report is that home-building has had a clear shift into single-family homes and away from multi-units.

Year-over-Year Change, Housing Starts, Oct 2020 (annual rate)
Total +42 (+2.8%)
1 unit +191 (+20.6%)
2-4 units +12 (+25.0%)
5+ units -161 (-30.7%)

This will likely mean some serious changes in what makes up the tax base, more than how much property can be taxed in itself, as more single-family homes and fewer multi-unit homes may offset themselves. Especially after we start to account for all of the store closings and vacant properties that have already started, and likely will accelerate with a COVID winter.

A major concern I have is that not only might the increase in home values lead to higher property taxes in Wisconsin, it also could increase our already-unsustainable levels of economic inequality, as richer people are more likely to be able to own homes and grow wealth from this Bubblicious growth. And as the Wisconsin Budget Project points out, the increase in economic inequality would also increase racial inequality, as white Wisconsinites are much more likely to be homeowners than Wisconsinites of other races.

In addition, the Budget Project notes that the state's tax code favors middle and upper-class homeowners, which also adds to racial and social inequality.

The exclusion of so many people of color from home ownership prevents them from benefiting from two of the largest federal and state tax breaks—the income tax deductions for property taxes and mortgage interest. The systemic bias in the tax code against people of color can also be seen in Wisconsin’s two largest property tax credits, the School Levy Credit and the Lottery Credit, which together reduced Wisconsin property taxes by $1.2 billion in 2019. Because of policy choices made by Wisconsin lawmakers, they didn’t reduce property taxes equitably for people of different races.

Both the School Levy Credit and the Lottery Credit exclude renters from directly receiving the credit. Renters can benefit indirectly from the School Levy Credit, which reduces property taxes for all owners of property located in Wisconsin, including landlords who rent out residential property. That means that some portion—but only a portion—of the School Levy Credit flows through to renters, to the extent that landlords reduce the rent they charge to take lower costs into account. The Lottery Credit doesn’t provide any benefit to renters at all, as it only reduces property taxes for homeowners on their primary residence.

Even though renters pay property taxes, Wisconsin lawmakers have created a system of property tax credits that predominantly benefit homeowners and largely blocks renters from directly benefiting. However, one property tax credit—the Homestead Credit—reduces property taxes more equitably by benefiting both homeowners and renters. Unfortunately, policy choices made by state lawmakers have sharply reduced the amount of relief provided by the Homestead Credit.

These are items to look at as Governor Evers develops and unveils his 2021-23 budget over the next 3 months, because all of these factors have increased the danger of a property tax spike in this Winter or the next one. It also raises the concerns of unaffordable housing and a lack of demand for it if we fall into a double-dip recession due to a COVID-induced slowdown.

So while we may think that rising home values in recent years are big boost to wealth, it also could lead to things getting worse if we get too far out over our skis, and causes an already-struggling Main Street economy in Wisconsin to go to a worse place in 2021.