press release: http://www.prweb.com/releases/property_tax/assessment_limits/prweb1130504.htm
The Lincoln Institute of Land Policy in Cambridge, MA, published recently a new study entitled "Property Tax Assessment Limits: Lessons from
Thirty Years of Experience." In 44 pages, it lays out rather well the problems with California's Proposition 13 and Florida's "Save Our Homes" assessment caps, which have led to, among other things, high land and housing prices and high foreclosure rates -- the boom-bust cycle that hurts most of us and helps only the land speculators.
It doesn't speak particularly to the injustices involved, or to the virtues of a portion of the property tax -- the part that falls on land value -- for creating a vibrant economy and a just society, which are suppressed when assessments are not up to date and consistent with market valuations, for all. This is an important omission.
Nor does it point out that utilizing the property tax allows us to avoid wage and sales taxes which deaden the economy.
It does, however, suggest some alternative forms of property tax relief -- homestead exemptions, classified tax rates, circuit breakers, and tax deferral programs -- though to my mind, it does not weigh in heavily enough in favor of the one I think it far superior to the others (the option to defer some portion of the property tax, with interest, as a lien against the property). [For more about that, see Bill Batt's article, Property
Tax Relief Measures: Answers to the "Poor Widow " Argument -- also available in PDF here.]
A few important lifts from the Lincoln study:
Executive Summary:
During the 30 years since California adopted the groundbreaking tax limitation measure known as Proposition 13 in 1978, there has been continual pressure for states to adopt various forms of property tax relief. These pressures often intensify during times of extremely rapid housing price inflation such as many states experienced between 1998 and 2006, but they remain a constant feature of the fiscal landscape in periods of both rising and declining values. The anniversary year of Proposition 13 in 2008 provides an opportunity to evaluate various statesf experiences with a limitation on assessed property values, which has become one of the most popular instruments for tax reduction.
The evidence shows, however, that limits on assessed values, while favored by many homeowners, are a deeply flawed means to counter rising property taxes. They are offered in hope of reducing tax bills and slowing the shift in tax burdens to residential property, but in fact they can result in higher taxes for the very homeowners they are intended to assist and can cause unpredictable new shifts in tax liabilities. By severing the connection between property values and property taxes, assessment limits impose widely differing tax obligations on owners of identical properties, reduce economic growth by distorting taxpayer decision making, and greatly reduce the transparency and accountability of the property tax system as a whole.
Better alternatives exist for timely and efficient aid to needy taxpayers.
- Circuit breaker programs reduce taxes that rise above a given level of income, thus targeting assistance to those whose tax liabilities are out of proportion to their ability to pay.
- Truth in taxation measures lower the likelihood of invisible tax increases when property values rise but nominal tax rates stay the same.
- Deferral options allow qualified taxpayers to delay property tax payments and remain in their homes.
- Partial exemptions on owner-occupied or homestead properties and classified tax rates benefit residential taxpayers without distorting the market value tax base.
Fashioning timely and targeted assistance for those facing difficulty in meeting their property tax obligations is an ever-present challenge to state legislators. As economic conditions, demographic trends, and housing values change, so will the appropriate instruments for extending such aid. This report is designed to inform this process by identifying the lessons offered by three decades of experience with assessment limits as a vehicle for tax relief.
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Rising property tax bills result from some combination of two factors:
(1) rising local spending, which would require higher collections and higher tax rates even if the tax base were unchanged; and
(2) shifts in relative property values, which would increase some tax bills even if collections and rates were unchanged.
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The connection between rising property values, increased assessments, and higher property taxes seems so self-evident that many observers are surprised when calls for tax relief persist even in declining property markets. In fact, the root causes of rising tax bills -- increases in government spending and shifts in tax liabilities across properties -- can occur in either a rising or a declining market.
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Table 1 identifies the 20 states with assessment limits and summarizes their programs.
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An assessment freeze -- an extreme version of an assessment limit -- prevents any increase in assessed values from year to year until the property is sold. Georgia allows counties this option, and 19 of its 159 counties have chosen to freeze residential values. Delayed or infrequent reassessments can have the same effect as an interim freeze between revaluations. Twenty-seven states do not require annual reassessment and thereby impose an implicit assessment limit of zero percent if no inflation adjustments are made to assessed valuations in nonreassessment years.
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It can be difficult to measure the loss in taxable value caused by assessment limits, because jurisdictions may not calculate what the taxable values would have been in their absence. For example, California assessors no longer have any incentive to maintain a record of the market value of property. Under Proposition 13, this information is only relevant in a year in which a property is sold or in which market values drop below the adjusted acquisition value. At other times, assessed values are determined by increasing the previous year's value by 2 percent (or the rate of inflation, if lower).
A comprehensive study of the effects of Proposition 13 compared the assessed value and market value of a sample of properties sold in 1992 (O'Sullivan, Sexton, and Sheffrin 1995a). The study found that total assessed value was approximately 56 percent of market value -- i.e., Proposition 13's 2 percent assessment reduced the tax base by 44 percent that year, from $2.9 trillion to $1.6 trillion.
Think what that percentage must be now, after the extreme run-up in housing prices.
The popularity of assessment limits is due, in part, to the perception that they will prevent sudden increases in property tax bills and correct inequities in the distribution of the tax. Voters fear that the elderly, especially those on fixed incomes, will be forced from their homes, and that homeowners in general will shoulder an unfair share of the tax burden compared to commercial and industrial property owners. In reality, assessment limits do alter the distribution of property taxes, but not always as intended. They may cause similarly situated taxpayers to bear very different tax burdens. In addition, an acquisition value system discourages households from moving. This distorts economic decision making and reduces welfare through an inefficient allocation of resources.
(Other than that, Mrs. Lincoln, how was the play?)
The tax burden is thus shifted from protected properties to those that are not eligible for the limit, and from limited properties with rapid appreciation to those with slower growth or no appreciation. Even some protected properties whose appreciation is above the limit, and appear to benefit from the limit, actually pay higher taxes because of it.
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Again, assessment limits shift the tax burden from eligible to ineligible properties, and among eligible properties from those with high rates of appreciation to those appreciating more slowly or not at all.
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California's relative shortage of entry-level homes, caused in part by the lock-in effect of Proposition 13, has resulted in higher rates of inflation for smaller, less expensive residences.
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A popular misconception assumes that the tax distribution will not change over time if a low assessment cap is accompanied by a rate cap and applies to all property in the jurisdiction. However, an acquisition value system puts residential properties at a tax disadvantage because homes typically change ownership more frequently than do businesses. If the assessment limit applies to all types of property, the burden will shift toward residential property as its aggregate assessed value increases more rapidly due to turnover.
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Horizontal equity -- the idea that taxpayers in similar situations
should face similar tax burdens -- is a core principle of sound tax
policy. Acquisition value systems abandon this principle by taxing
long-time owners less than new owners of similarly valued properties.
Under an acquisition value tax system, horizontal inequities among property owners are inevitable. When a property is sold, it is assessed at market value, but assessed value will be less than market value in the future if the property appreciates at a rate greater than the permitted ceiling. That gap will grow over time if appreciation continues to outpace the annual assessment limit. The sale of a property triggers reassessment at its full market value, so households in identical dwellings will face different tax liabilities, with a recent buyer paying higher taxes than an owner who has remained in the same dwelling for some time (see box 6).
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Box 6: Example of Horizontal Inequities Created by an Aquisition Value System Imagine three identical California houses that each sold for $100,000 in 1975 (see table 3). After Proposition 13 their 1978 assessed values were set at their 1975 market values of $100,000. Assume that their market values have increased 7 percent per year since 1975. House A has not been sold since 1975, House B sold in 1990, and House C sold in 2005. Table 3 illustrates what has happened to the market and assessed values of each of these properties, and compares their 2005 property taxes and effective tax rates under an aquisition value system with a maximum 2 percent annual increase. In 1990 and 2005, market values of all three houses are identical and reflect the 7 percent annual appreciation since 1975. The 1990 assessed values differ because when House B is sold its assessed value is set at its new 1990 market value. Houses A and C have the same assessed values in 1990, with a 2 percent increase each year since 1978. In 2005, the assessed values of all three houses differ. House A's 1990 assessed value continues to grow at 2 percent per year. House B's 2005 assessed value represents 2 percent annual growth in its 1990 assessed value. The assessed value for House C is reset to its 2005 market value when it sells in 2005. The disparity ratios, which measure the proportion of market value to assessed value, vary from 1.00 to 4.46 in 2005. The stated 2005 tax rate is 1 percent, but the effective tax rate, the ratio of the tax bill to market value, varies from 0.22 percent to 1 percent. House A, which has not sold since 1975, has the highest disparity ratio, the lowest tax, and the lowest effective tax rate. These properties face very different tax obligations simply because of when they were last sold.
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These disparities, and their subsidy for established homeowners, can distort the tax price of local services.the amount that voters perceive as their cost. This in turn distorts voter decision making, causing established residents to demand more local services and amenities than they would be willing to pay for if they faced a tax price that reflected their proportionate share of the actual cost.
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Financier Warren Buffett (2003) used his own property taxes to illustrate the inequities resulting from California's acquisition value system. He explained that he paid $2,264 in property taxes in 2003 for a home he purchased in the 1970s. In 2003 that property was worth $4 million. He purchased a second house in the same neighborhood in the mid-1990s. The second house was worth roughly half the value of the first, but his 2003 property tax bill on the second house was $12,002. The effective tax rate on the second house (0.6 percent) was 10 times higher than that on the first (0.056 percent).
Documenting these kinds of disparities, O'Sullivan, Sexton, and Sheffrin (1995a) found that California homeowners who had resided in their current homes in Los Angeles County from 1975 to 1991 (a group that constituted 43 percent of all county homeowners) were, on average, underassessed relative to market value by a factor of five. This meant that actual market value had increased to a level five times that of assessed value, and that the property taxes due on two identical homes would differ on average by a factor of five if one of the homes were to sell. The authors show that the primary beneficiaries in California have been lower-income and senior homeowners, because they move less frequently than other groups.
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Acquisition value assessment discourages mobility (sometimes called a lock-in effect) because taxes can rise dramatically upon a change in ownership, even if the market value of the owner's new property is the same or less than the old one. Growing families may choose not to move to larger houses, which limits the supply of affordable starter homes -- an effect seen in California.and older adults may not move to smaller homes when their children leave the household. Homeowners may not move if their job location changes, even if they face a longer commuting time. These kinds of individual choices result in inefficient resource allocation and decreased economic welfare.
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California allows homeowners age 55 and older in some situations to take their assessed value with them to their new homes, thereby eliminating the moving penalty. Ferreira (2004) found that in 1990, 55-year-olds in California were 25 percent more likely to move than 54-year-olds. He also reported that homeownership rates in California, which are barely half the national average for young families, actually rise to the national level as homeowner age increases, a phenomenon not found in other states or in pre-Proposition 13 California.
(It's is actually worse than that, according to more recent data I've looked at: California's homeownership rate is the 4th lowest in the US -- about 55% compared to 69% (a couple of years ago). But among seniors, California's homeownership rate was actually HIGHER than among their counterparts in the remainder of the US! Think about what that means for California's young families -- and California's children.)
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The mobility penalty also affects business decisions. Like households, businesses will be less likely to move, even if their markets shift or their current quarters are no longer appropriate, if a change in location increases their property taxes. Moreover, existing businesses that have occupied their structures for a long period will have a tax advantage over new entrants, potentially reducing economic growth.
Not to mention that the new business would be paying a huge mortgage on their new quarters, far more than what its competitors are paying on a mortgage taken out 10, 20, 30 years ago. What a way to set up barriers to competition! A steeply tilted playing field -- and the powers that be think it is just fine, thank you! Aleve!!
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A limit on individual tax payments would ensure that tax bills did not rise by more than the specified percentage. Nevada recently instituted such a cap at 3 percent for homestead properties.
However, maintaining the existing distribution of the tax burden may violate principles of equity. If relative tax bills are unchanged while some properties rise in value and others fall, taxpayers face effective tax rates that depend on the rate of appreciation of their properties. This replicates a situation common in earlier decades when many assessors failed to update valuations even when required to do so by law. Over time, this lack of revaluation placed the highest tax burden on residents of poorer and declining neighborhoods, and the lightest burden on the more affluent residents of areas that had risen most in value.
Hey! Wasn't that the plan? Shh! Don't rock the boat. We like it just fine thank you! Aleve! Trickle down economics at its finest!
Tax deferral programs offer another means of targeting property tax relief to needy households. They allow homeowners to delay the payment of taxes until the home is sold or the owner's estate is settled. The unpaid tax, together with any interest charges, is secured by a lien on the property. Deferral programs are primarily targeted to the elderly and disabled, often with income or residency requirements. Twenty-five states and the District of Columbia had some type of tax deferral program in place in 2005 (Baer 2005).
Washington State enacted a program in 2007 that offers homeowners with incomes of $57,000 or less the option to defer half of their property taxes each year, up to a maximum of 40 percent of the equity in their home. Senior citizens with incomes of $40,000 or less can defer all property taxes up to a maximum of 80 percent of their home equity. Any deferred taxes must be repaid with interest when the property is sold.In the past, relatively few homeowners chose to defer their taxes, but that trend may be changing. Before the recent popularity of home equity loans, encumbering a residence was often viewed as imprudent. Antitax activists would prefer to lobby for tax reduction or elimination rather than to improve payment options for an existing tax.
States have not generally publicized their deferral programs, so many taxpayers are unaware of them. However, interest in reverse mortgages, by which home equity is liquidated into a series of cash payments, has grown rapidly in recent years, particularly among senior citizens. More than 132,000 elderly homeowners took out reverse mortgages in 2007, a greater than 270 percent increase in two years (Duhigg 2008).
Expanded tax deferral programs might find ready applicants in the future. Like phased-in revaluations, they could offer short-term assistance to all homeowners, not just seniors who are facing large one-year increases in tax payments. Moreover, these programs could improve public debate on tax reform by helping to ensure that citizens, especially the elderly, will not be dispossessed for unpaid property taxes. If this threat were eliminated, then a more complex weighing of public needs and appropriate tax levels would be possible.
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Conclusions and Recommendations
Assessment limits are often put forward as a means of combating two problems popularly associated with rapidly appreciating property values: increasing tax bills and the redistribution of tax burdens. In fact, 30 years of experience suggests that these limits are among the least effective, least equitable, and least efficient strategies available for providing property tax relief.Assessment limits benefit those whose property values have increased rapidly, with the greatest tax reductions going to those whose property has risen fastest in value. At best, these limits restrict aid to those who have increased property wealth and provide no relief to those whose values are stagnant or declining. Yet even taxpayers whose assessed values have been reduced by these caps can face higher property taxes as rates rise to compensate for a diminished tax base. Rather than redressing shifts in tax burdens, these limits themselves cause substantial tax reallocations and unpredictable differences in effective property tax rates.
Better methods exist for addressing taxpayer discontent. The combination of truth in taxation measures and a circuit breaker program for low-income taxpayers could go a long way toward protecting those truly in need. Truth in taxation programs require local governments either to reduce tax rates when property values rise or to obtain approval for an undisguised tax increase. Circuit breaker credits are simple, direct, and targeted toward taxpayers who most need protection from rising tax bills.
Comparatively few states have truth in taxation programs or offer circuit breakers to the general population, and existing circuit breaker programs rarely offer adequate relief because income and benefit limits are set too low. A truly robust combination of truth in taxation and circuit breakers would constitute an innovative step toward assisting needy taxpayers without distorting the transparency of a value-based tax or introducing inefficiencies that impede economic growth.
Other instruments available to fashion effective property tax relief include homestead exemptions and credits, classified tax rates, deferred payment options, and the phase-in of new assessments. Homeowners facing large and unexpected increases in their tax liability have a legitimate expectation of government assistance. With these alternative tools legislators can respond to calls for property tax reform without the distortions, inequities, and unintended consequences of assessment limits.
Interesting. You would think that these tax changes would have happened by now. There is no other way to help stimulate the economy. I have been watching property in Bradenton and it does look like things are starting to stabilize. Buyers and Investors are starting to buy again. I guess only time will tell.
Posted by: Carrie T | July 25, 2008 at 06:08 PM