The Property Tax Conundrum

Editor's note: As a special feature for April, TheStreet.com offers a series of 20 stories on everything you need to know about real estate. Today's installment is Part 7.

Property values shot up all over the country during the recent housing market boom, and so did property tax bills. The increased burden is fueling homeowner outrage, prompting reform efforts that could drastically alter tax policies in many states.

Even though housing prices in many parts of the country are now cooling, property tax hikes are unlikely to slow, making a bad situation for homeowners even worse.

According to the nonpartisan Tax Foundation, inflation-adjusted per capita property taxes jumped 12% during the height of the housing boom from 2000 to 2004. That's nearly double the rate of income growth during that same period. Thirty-nine percent of Americans consider property taxes unfair, more than any other form of taxation.

Local governments prize property taxes for their predictability. A county or municipality is able to assess the value of property in an area and come up with a tax rate that guarantees the right amount of money will be raised. Unlike income or sales taxes, there is little chance of a shortfall.

In theory, there should also be no windfall. When property values increase due to appreciation or development, the government should be able to reduce tax rates and generate the same revenue. In reality, Tax Foundation economist Gerald Prante says "many governments end up pocketing the money," keeping rates the same or even raising them.

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