Introduction

Among government funding mechanisms, property taxes loom large. Like other kinds of taxes, levies on property are generally structured as a rate that is charged against the underlying value being taxed. In the case of property taxes, that rate is assessed against the value of the property in question. For example, a local government might set a rate of .1% which would create a tax liability of $400 against a home worth $400,000. Importantly, the general structure of such taxes is to set the tax rate directly just like is done with a sales tax or an income tax.

In the case of property however, this structure creates a subtle problem. Property, particularly real property, tends to appreciate in value over time. Mostly, this is a good thing for the owner of the property since they can leverage the appreciated value for whatever purposes they deem worthwhile. They might borrow against the higher value, liquidate it by selling the property, or benefit from a number of other more complex financial products. However, in the event that the owner prioritizes retaining ownership of their property, such as when a homeowner chooses to keep their house after the mortgage is paid off, a property tax which is structured as an explicit policy rate creates a situation wherein the tax liability continually increases as the property appreciates in value.

This can be problematic for two reasons. First, it in effect raises taxes on a regular basis. The reason being that with a fixed rate, tax burden rises as value appreciates. If the home from the previous example were to increase in value to $500,000, the tax on it would rise to $500. This is different from something like a sales tax where, when the rate is held constant, aggregate liability would rise due to an individual choosing to increase consumption. With property taxes, fixed rates cause tax liability to increase almost automatically. Second, in general over a life, an individual's wealth increases over time until an inflection point where one's wealth begins declining. This pattern is driven by individuals on net building wealth over the early and middle decades of life by earning income and accumulating assets, and drawing down that wealth in the decades following retirement. As a consequence, there comes a point in the typical wealth profile where one's ability to pay increasing property tax liability diminishes at the same time that tax burden continues increasing due to value appreciation.

In recognition of these issues, Utah structures property taxes differently by making a small but critical change. First enacted in the 1985 general session with the Tax Increase Disclosure Act (HB 388), a process called 'Truth in Taxation' constrains property taxes at all levels of government. It takes the ordinary tax paradigm and flips it on its head. The basic concept behind Truth in Taxation is to set the revenue to be raised, rather than setting the rate to charge. More specifically, property tax rates float up and down in response to changes in the underlying taxable value in order to maintain the same revenue year-to-year. At a basic level, this floating action is achieved by summing all the taxable property within a district and computing a tax rate which would generate the same revenue as the prior year. As such, if the aggregate value of property within a district increases, then the applied tax rate would decrease in response and vice versa.

Truth in Taxation has several obvious advantages over a rate-based system. First, residents do not need to bear increases in their tax liability merely because their property increased in value. Instead, Truth in Taxation aims at keeping one's tax liability constant or near constant year-to-year. This is not always accomplished perfectly due to complexities in the administration and dynamics within the underlying tax base. Second, it increases transparency and accountability in local taxation. It does this by requiring that any proposed increase in tax on residents must be explicitly approved by a legislative body with reasonable opportunity for input from the public. Under a rate-based system by contrast, increases in tax liability would occur near automatically due to increases in property values with no opportunity for public debate on if the increased revenue was warranted or not. Third, it provides stability for both taxpayers and local governments. For taxpayers, Truth in Taxation ensures that one's tax liability does not swing sharply from year to year merely due to fluctuations or trends in the real estate market. As such, they can be assured that their liability will be relatively constant year-to-year, and any substantial increases will come with ample notice. For local governments, it ensures that they can count on steady revenues when budgeting rather than worrying about the risk of property values changing suddenly in the event of an economic shock. Consequently, local governments face relatively smaller ranges of uncertainty when assessing their financial needs and planning how to provide services to their residents.

Analysis

High-minded tax theory is all well and good, but how do we know that the system is actually working? More importantly, how effective has it actually been at constraining the growth of property taxes? In order to answer these effectively, let's look to Tooele City as an example of how Truth in Taxation operates in practice. Below are a pair of charts comparing the tax rate the city applied relative to the total value of property it taxed and the revenue it collected.

Notice in the graph on the left that the tax rate shown in green and the value shown in black move in opposite directions with the exception of 2018-2019. This is Truth in Taxation in action. As the total value of property within Tooele City has grown over the past decade, the tax rate has fallen in response. Taxing entities retain the power to raise their property taxes however, which is what happened here in 2018 and explains the spike in the tax rate between 2018 and 2019. Even so, the very next year, the applied rate began to decline again given the trend of growth in the tax base.

Taking the rate and the base together produces the revenue shown in green on the right chart. The notable features here are the two plateaus of stability on either side of the tax hike in 2018. Revenues were effectively flat between 2014 and 2018 at just under $3 million. Following the tax increase, revenues were flat at a little under $6 million between 2019 and 2022. In an ideal case, this is exactly how Truth in Taxation is supposed to work.

Of course, this does not explain the uptick in collections seen after 2022. The reason for this increase hints at the true underlying complexity of administering Truth in Taxation. Specifically, there are many sources of variation that influence the rate calculations and can result in year-to-year fluctuations, or trends year-over-year. These include accounting for new growth, the valuation of personal property, updates to assessed values, changes to central assessment and apportionment, and taxpayer appealing valuations just to name a few. Fortunately, since these complexities all have the net effect of slowing the descent of the tax rate in response to value appreciation, we can hold them aside for the purpose of this analysis.

Now that we have seen how the system works qualitatively, let's turn to estimating how effective Truth in Taxation has been at constraining property taxes. In order to do that, we need to determine what tax rates would have been if it were not in place to drive them down. Constructing this simulation is conceptually simple. By carrying forward the existing tax rate (and adjusting it up when an increase occurs), we can model what rates would have been in the absence of Truth and Taxation. After all, if we assume that taxing entities would not have lowered their rates voluntarily, then the only mechanism to decrease them is Truth in Taxation. Computing that simulation yields the scenario shown in the charts below.

In the left chart, the purple line shows the simulated rate of .25% from 2014 until the city raised taxes to .33% in 2018, whereafter the rate remains at the higher value for the remainder of the timeframe. By contrast, under Truth in Taxation, the rates got as low as .19% in 2018 and .24% in 2023. The difference between the rates themselves is one way to measure the effectiveness of Truth in Taxation. For Tooele City in particular, the tax rate in 2024 is about two-thirds as high as it would have been without Truth in Taxation. However, a better measure of effectiveness would be directly comparing the difference in aggregate tax liability experienced by taxpayers. For that, we can look to the chart on the right. It depicts the base revenue collected by the city shown by the green line compared to what the city would have collected if the rate had not been lowered in purple. Note that this assumes the growth trends in the underlying tax base are independent of the rate.

The difference between the base revenue and the simulation revenue is shown by the black line. Since this difference is the benefit derived from Truth in Taxation, we can call this value for any given year the 'Truth Dividend'. In essence, it measures how much savings are accrued to taxpayers over time due to the ratcheting down of tax rates. It would be equally accurate to describe this value as the revenue forgone to the taxing entity due to Truth in Taxation. In the case of Tooele City, residents are estimated to have paid $3.3 million less in 2024 property taxes than they would have otherwise relative to the 2014 baseline. In other words, Tooele City taxpayers received a Truth Dividend in the amount of $3.3 million in 2024 (relative to the 2014 baseline).

Naturally, fortunes vary by which taxing entity happens to be at issue. The magnitude of the dividend experienced by taxpayers will depend on which entities they are taxed by, whether and by how much those entities have chosen to raise their revenue, the underlying dynamics of the particular tax base in question, among other factors. To explore how the Truth Dividend varies, see the sandbox at the top of this page which outputs this analysis for any tax entity one might select.

In order to assess how effective Truth in Taxation has been statewide, we can add up the Truth Dividend for each taxing entity across the state. By adding up all the entities in this way, we can estimate the aggregate difference between existing tax liability and where liability would be without Truth in Taxation. When we compute that value, we discover that relative to the base year of 2014, total tax liability in 2024 would be $2.3 billion higher today but for Truth in Taxation.