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_at_mntax.org

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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

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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.)
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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)

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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)

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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

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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.

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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
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MN Limited Market Value StudyWhat 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
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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 51 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

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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?

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Levy Limits - Are They Good Policy?

• Depends if local government is an insatiable
  beast or the expression of the average voter
• One researchers 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 arent that homogenous with respect to
  desired levels of services

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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

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Where Does Georgia Rank?Atlanta, Payable Year
2007
  National
  Rank (ETR)
Homestead 150k 22
Homestead 300k 19
Median Homestead 28
   
Commercial 1 million 30
Commercial 25 million 31
   
Industrial 1 million 17
Industrial 25 million 17
   
Commercial to Homestead  
ETR Ratio (1.132) 33
assumes 60 personal property
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50 State Property Tax Comparison Study for Taxes
Payable 2007
Contact MTA for More Information