Overview of Property Tax Limitations

1. Overview of Property Tax Limitations “Towards a Better Understanding of Property Taxes and Proposed Policies” Fiscal Research Center Andrew Young School of Policy Studies September 11, 2008 Mark Haveman Executive Director Minnesota Taxpayers Association 85 East 7th Place, Suite 250 St. Paul, MN 55101 mhaveman@mntax.org

2. Property Tax Limitations Are: • Popular • Pervasive As of 2006 only 5 of 48 states in the continental U.S. have no explicit limits on some form of property taxation (Anderson, 2007) • Unique Ability to structure limits differently and combine strategies creates tremendous diversity across the states

3. Categorization of PT Limitations Assessment limits Rate limits Levy 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.)

4. Assessment Limits Used in 20 states Differ by: Coverage (all but 4 are statewide) Eligible property Parcel value vs. aggregate assessment (all but 2 are parcel based) Treatment upon sale (most limits removed on sale) Eligibility with respect to taxable appreciation (all over the map)

5. Assessment Limits – The Appeal Predictability Ability to pay A perceived “insurance policy” against rising property taxes

6. Assessment Limits – Effects on Local Governments Erosion of property tax base and local revenues Magnitude is a function of trends in property value, new construction, and limit level Some examples of tax base reduction CA, 1995: 44% ($1.3 trillion) FL, 2007: 17% ($398 billion) MN, 2006: 7% ($32.5 billion) Only when combined with rate limits are revenues assured of being restrained (15 of 20 states)

7. Assessment Limits – Effects on Local Governments Erosion of local control When revenues are restricted local government options are: Cut services Find alternative revenue sources Look to the state -- strings attached Prop 13 approaches make local property tax effectively a state tax since state apportionment formulas dictate who gets what

8. Assessment Limits – Effects on Taxpayers Possibility of “Phantom” Tax Relief Assessment limits by themselves only redistribute tax burden Burden is shifted from protected to non protected properties and/or from fast appreciating properties to declining, stable, or slowly appreciating properties BUT the increase in tax rate can offset comparatively small reduction in taxable value. Result: The appearance of property tax relief where none actually exists.

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

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

11. Assessment Limits – Effects on Taxpayers Potentially Significant Equity Problems The common acquisition value feature (reset upon sale) creates an effective subsidy for existing owners Disparity ratios up to 5:1 for similar homesteads not uncommon Besides fundamental issue of fairness, subsidy creates tax price distortion affecting decision making on types and levels of local services

12. Rate Limits Used in 34 states Usually used in conjunction with revenue limits (23 of 34 states) or assessment limits Can be specific (particular taxing jurisdictions or fund) or general in nature Establishes maximum value for ratio of revenue to total tax base If tax base changes are small or infrequent it may constrain property tax burdens

13. Levy Limits Used in 29 states Often limited to rate of inflation or some other percentage Changes in tax base composition can still cause tax burdens to rise in a levy limit environment May be riddled by exemptions (which can make the levy limit more of a politically cosmetic exercise – MN has 22 special levies exempted from limit provisions) Are levy limits a floor or a ceiling?

14. Levy Limits - Are They Good Policy? Depends if local government is an “insatiable beast” or the expression of the average voter One researcher’s conclusion based on literature review – net societal benefit IF accompanied by an override provision (McGuire, 1999) Others argue overrides make great theory but lousy reality: Too blunt a tool for complex budgetary decision making Some limitations are designed to impede overrides Cities aren’t that homogenous with respect to desired levels of services

15. Some Conclusions about Limitations They are never as straightforward as they may seem on paper Have unintended consequences – both short term and long term States need to be aware of interactive effects Direct and targeted relief is a preferable strategy

16. Where Does Georgia Rank?Atlanta, Payable Year 2007 * assumes 60% personal property

17. 50 State Property Tax Comparison Study for Taxes Payable 2007 Contact MTA for More Information