Overview of Property Tax Overview of Property Tax LimitationsLimitations

““Towards a Better Understanding of Property Taxes and Proposed Towards a Better Understanding of Property Taxes and Proposed Policies”Policies”

Fiscal Research Center Fiscal Research Center Andrew Young School of Policy StudiesAndrew Young School of Policy Studies

September 11, 2008September 11, 2008

Mark HavemanMark HavemanExecutive DirectorExecutive Director

Minnesota Taxpayers AssociationMinnesota Taxpayers Association85 East 785 East 7thth Place, Suite 250 Place, Suite 250

St. Paul, MN 55101St. Paul, MN 55101

mhaveman@mntax.org

Property Tax Limitations Are:Property Tax Limitations Are:

► PopularPopular► PervasivePervasive

As of 2006 only 5 of 48 states in the As of 2006 only 5 of 48 states in the continental continental U.S. have U.S. have nono explicit limits on some explicit limits on some form of form of property taxation (Anderson, 2007)property taxation (Anderson, 2007)

► Unique Unique

Ability to structure limits differently and Ability to structure limits differently and combine combine strategies creates tremendous diversity strategies creates tremendous diversity across across the statesthe states

Categorization of PT Limitations Categorization of PT Limitations

• Assessment limitsAssessment limits

• Rate limitsRate limits

• Levy limitsLevy limits

Universe of limitation strategies is much larger when PT system design features are also included in the definition (e.g. split roll systems, aids and credits, direct relief measures, etc.)

Assessment LimitsAssessment Limits

Used in 20 statesUsed in 20 states

• Differ by:Differ by:Coverage (all but 4 are statewide)Coverage (all but 4 are statewide)

Eligible propertyEligible property

Parcel value vs. aggregate assessment Parcel value vs. aggregate assessment (all but 2 are parcel based)(all but 2 are parcel based)

Treatment upon sale (most limits Treatment upon sale (most limits removed on sale)removed on sale)

Eligibility with respect to taxable Eligibility with respect to taxable appreciation (all over the map)appreciation (all over the map)

Assessment Limits – The AppealAssessment Limits – The Appeal

• PredictabilityPredictability• Ability to payAbility to pay• A perceived “insurance policy” A perceived “insurance policy”

against rising property taxesagainst rising property taxes

Assessment Limits – Effects on Assessment Limits – Effects on Local GovernmentsLocal Governments

Erosion of property tax base and Erosion of property tax base and local local

revenuesrevenues

• Magnitude is a function of trends in Magnitude is a function of trends in property value, new construction, and property value, new construction, and limit levellimit level

• Some examples of tax base reductionSome examples of tax base reduction• CA, 1995: 44% ($1.3 trillion)CA, 1995: 44% ($1.3 trillion)• FL, 2007: 17% ($398 billion)FL, 2007: 17% ($398 billion)• MN, 2006:MN, 2006: 7% ($32.5 billion) 7% ($32.5 billion)

• Only when combined with rate limits are Only when combined with rate limits are revenues assured of being restrained (15 revenues assured of being restrained (15 of 20 states)of 20 states)

Assessment Limits – Effects on Assessment Limits – Effects on Local GovernmentsLocal Governments

Erosion of local controlErosion of local control

• When revenues are restricted local When revenues are restricted local government government options are:options are:

Cut servicesCut services Find alternative revenue sourcesFind alternative revenue sources Look to the state -- strings attached Look to the state -- strings attached

Prop 13 approaches make local property tax Prop 13 approaches make local property tax effectively a state tax since state effectively a state tax since state apportionment formulas dictate who gets apportionment formulas dictate who gets whatwhat

Assessment Limits – Effects on Assessment Limits – Effects on TaxpayersTaxpayers

Possibility of “Phantom” Tax Possibility of “Phantom” Tax ReliefRelief

• Assessment limits by themselves only Assessment limits by themselves only redistribute tax burdenredistribute tax burden

•Burden is shifted from protected to non Burden is shifted from protected to non protected properties and/or from fast protected properties and/or from fast appreciating properties to declining, stable, appreciating properties to declining, stable, or slowly appreciating propertiesor slowly appreciating properties

•BUTBUT the increase in tax rate can offset the increase in tax rate can offset comparatively small reduction in taxable comparatively small reduction in taxable value. value.

• Result: The appearance of property tax Result: The appearance of property tax relief where none actually exists.relief where none actually exists.

MN Limited Market Value Study:What if Assessment Limits Did Not Exist?

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Estimated Homeowner Tax Change in Dollars by Elimination of LMV

950,000 homeowners would pay, on average, $100 less tax. Median change is $72.

440,000 homeowners would pay, on average, $227 more in tax. Median change is $135.

Source: MN DOR

MN Limited Market Value Study:MN Limited Market Value Study:What if Assessment Limits Did Not What if Assessment Limits Did Not

Exist?Exist?

Of the 950,000 (68%) homeowners would pay $95 million less tax; 27% of those 950,000 had some value withheld.

Or to put it another way, over a quarter million Minnesota households were led to believe they are getting a tax relief from LMV when they are actually paying more under this policy

Assessment Limits – Effects on Assessment Limits – Effects on TaxpayersTaxpayers

Potentially Significant Equity Potentially Significant Equity ProblemsProblems

• The common acquisition value feature (reset The common acquisition value feature (reset upon sale) creates an effective subsidy for upon sale) creates an effective subsidy for existing ownersexisting owners

• Disparity ratios up to 5:1 for similar Disparity ratios up to 5:1 for similar homesteads not uncommonhomesteads not uncommon

• Besides fundamental issue of fairness, Besides fundamental issue of fairness, subsidy creates tax price distortion affecting subsidy creates tax price distortion affecting decision making on types and levels of local decision making on types and levels of local servicesservices

Rate LimitsRate Limits

Used in 34 statesUsed in 34 states

• Usually used in conjunction with revenue Usually used in conjunction with revenue limits (23 of 34 states) or assessment limits (23 of 34 states) or assessment limitslimits

• Can be specific (particular taxing Can be specific (particular taxing jurisdictions or fund) or general in naturejurisdictions or fund) or general in nature

• Establishes maximum value for ratio of Establishes maximum value for ratio of revenue to total tax baserevenue to total tax base

• If tax base changes are small or If tax base changes are small or infrequent it may constrain property tax infrequent it may constrain property tax burdensburdens

Levy LimitsLevy Limits Used in 29 statesUsed in 29 states• Often limited to rate of inflation or some Often limited to rate of inflation or some

other percentageother percentage

• Changes in tax base composition can still Changes in tax base composition can still cause tax burdens to rise in a levy limit cause tax burdens to rise in a levy limit environmentenvironment

• May be riddled by exemptions (which can May be riddled by exemptions (which can make the levy limit more of a politically make the levy limit more of a politically cosmetic exercise – MN has 22 special cosmetic exercise – MN has 22 special levies exempted from limit provisions)levies exempted from limit provisions)

• Are levy limits a floor or a ceiling?Are levy limits a floor or a ceiling?

Levy Limits - Are They Good Levy Limits - Are They Good Policy?Policy?

Depends if local government is an Depends if local government is an “insatiable beast” or the “insatiable beast” or the

expression of the average voterexpression of the average voter

• One researcher’s conclusion based on One researcher’s conclusion based on literature review – net societal benefit literature review – net societal benefit IFIF accompanied by an override provision accompanied by an override provision (McGuire, 1999)(McGuire, 1999)

• Others argue overrides make great Others argue overrides make great theory but lousy reality:theory but lousy reality:

Too blunt a tool for complex budgetary Too blunt a tool for complex budgetary decision makingdecision making

Some limitations are designed to impede Some limitations are designed to impede overridesoverrides

Cities aren’t that homogenous with respect to Cities aren’t that homogenous with respect to desired levels of servicesdesired levels of services

Some Conclusions about Some Conclusions about LimitationsLimitations

• They are never as straightforward as They are never as straightforward as they may seem on paperthey may seem on paper

• Have unintended consequences – both Have unintended consequences – both short term and long termshort term and long term

• States need to be aware of interactive States need to be aware of interactive effectseffects

• Direct and targeted relief is a preferable Direct and targeted relief is a preferable strategystrategy

Where Does Georgia Rank?Where Does Georgia Rank?Atlanta, Payable Year 2007Atlanta, Payable Year 2007

  National  Rank (ETR)Homestead 150k 22Homestead 300k 19Median Homestead 28   Commercial $1 million 30Commercial $25 million 31   Industrial $1 million * 17Industrial $25 million * 17   Commercial to Homestead   ETR Ratio  (1.132) 33

* assumes 60% personal property

50 State Property Tax Comparison Study50 State Property Tax Comparison Study for Taxes Payable 2007 for Taxes Payable 2007

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