State property tax collections grew by just 0.4% in fiscal year 2022, according to data released by the Department of Revenue last month. That’s the smallest annual increase going back to at least 1998, but it comes after four years that recorded the highest growth in collections. During the high growth period, the state property tax growth limit was suspended.

In FY 2022, total state tax collections grew by 11.6%, retail sales tax collections grew by 12.4%, business and occupation tax collections grew by 14.5%, and real estate excise tax (REET) collections grew by 36.2%.

Although neither the Senate-passed nor House-passed operating budget proposals include general tax increases, bills have been introduced this year to increase the property tax growth limit and the REET. Sen. Pedersen told the Center Square this week that the state property tax growth limit bill (SB 5770) will not be part of the final budget negotiations. It’s possible the REET bill (HB 1628) will be.

State Property Taxes

Under current law, property tax collection growth is limited by statute to the lesser of 101% or 100% plus inflation (as measured by the implicit price deflator), plus the value of new construction (and certain other increases in assessed value).

As part of the McCleary decision on school funding, the Legislature added a second state property tax, effective calendar year 2018. The new tax was exempt from the growth limit through CY 2021. The original property tax was exempt from the growth limit for CY 2019 through 2021. (For more on the tax changes related to the McCleary decision, see this report.)

Chart 1 shows the impacts of the additional state property tax plus the suspension of the 101% growth limit. From fiscal year 2000 through 2022, state property tax collections increased by 234.9%, compared to 181.7% for all state taxes. Most of the growth in state property tax collections occurred from FY 2018 through 2021, after years of relatively slow but steady growth.

SB 5770, which was introduced last week, would increase the property tax growth limit for state and local property tax collections. Under the bill, property tax collections growth would be limited to 100% plus population change and inflation, up to 103%. (The value of new construction and other increases in assessed value would still be added on top of this.)

The measure of inflation would change from the implicit price deflator (IPD) to the consumer price index (CPI). CPI tends to be higher than IPD; thus, this change would mean that property taxes would grow faster (up to the 103% cap). In FY 2022, the state population grew by 0.3%. Annual state population growth has been less than 2% since FY 1992.

Finally, SB 5770 would exempt certain senior citizens from 25% of the original state property tax. (They are already exempt from the entire second state property tax.) This exemption would not decrease property tax collections; it would shift taxes to other taxpayers.

According to the fiscal note, the bill would increase state revenues by $191.0 million in 2023–25 and $598.0 million in 2025–27. It would increase local revenues by $239.0 million in 2023–25 and $736.0 million in 2025–27.

(Note that HB 1670 is currently in the House Rules Committee. It would increase the property tax growth limit—for local governments only—to 100% plus population change and inflation, up to 103%.)

Real Estate Excise Tax

Meanwhile, 2SHB 1628 was approved by the House Finance Committee on Friday. The bill would make several changes to the REET rates, including increasing the top rate to 3.5%. (I wrote about the bill in depth here.)

In 2019, the Legislature changed the REET from a flat rate to a graduated rate, effective Jan. 1, 2020. In FY 2021 (the first full fiscal year in which the graduated rate was in place), REET collections grew by 47.6%. In FY 2021, the REET overtook the motor fuels tax as the state’s fourth-largest tax source.

From FY 2000 through 2022, REET collections grew by 475.3%. Chart 2 adds REET collections to Chart 1. Clearly, the REET is a volatile tax source. The March 2023 revenue forecast estimates that, going forward, growth in taxable activity generally will be lower than had been expected in November, “and the expected decline in real estate excise taxes is much steeper. The slowdown in general activity stems from lower expected state personal income and construction activity. The accelerated decline in real estate excise taxes, which have been coming in below the forecast, is due to higher mortgage rates.”

Chart 3 shows the history of sales subject to the REET compared to the amount of collections.