It can result in different tax bills for identical homes. Families may be reluctant to move - even if they need more space or would like to be closer to work - if a tax based on acquisition value will rise dramatically with a change of ownership. And it undermines the transparency and accountability of the property tax system as a whole.
Cambridge, Mass. (Vocus) July 22, 2008
Property tax assessment limits such as California's Proposition 13 are a flawed instrument for property tax relief, resulting in higher taxes for some, distortions in taxpayer decision-making, and reduced household mobility, according to a new report by the Lincoln Institute of Land Policy.
Property Tax Assessment Limits: Lessons from Thirty Years of Experience by Mark Haveman and Terri A. Sexton (44 pages; ISBN 978-1-55844-167-5) is the latest Policy Focus Report published by the Lincoln Institute. It comes as California marks the 30th anniversary of the passage of Proposition 13, and other states consider similar limitation measures, in response to growing complaints about the property tax.
The property tax continues to roil homeowner constituencies in Florida, Georgia, Idaho, Massachusetts, Nevada, New Hampshire, New York, Pennsylvania, and other states. Many jurisdictions are mulling assessment limits, but there are better alternatives, the report says.
"Severing the connection between property values and property taxes creates a new set of problems," said Joan Youngman, senior fellow and chair of the Department of Valuation and Taxation at the Lincoln Institute. "It can result in different tax bills for identical homes. Families may be reluctant to move - even if they need more space or would like to be closer to work - if a tax based on acquisition value will rise dramatically with a change of ownership. And it undermines the transparency and accountability of the property tax system as a whole."
"It is important to identify tax relief measures that benefit needy homeowners while minimizing economic distortions and maintaining tax equity," Youngman said.
During the 30 years since California adopted its groundbreaking tax limitation measure, there has been continual pressure for states to adopt various forms of property tax relief, particularly during periods of housing price inflation. Efforts for tax relief have continued during the current downturn in the property market, as homeowners react to the dual stress of economic decline and inflation. The California approach of limiting assessed property values has become a popular instrument for tax reduction.
The evidence shows, however, that limits on assessed values are a deeply flawed remedy for 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 who have been promised relief. An assessment limit benefits homeowners in neighborhoods with fast-growing values, but does little for those where values are stagnant or declining. Reduced assessments are no guarantee of lower bills if rates increase to make up for the diminished tax base.
"Thirty years of experience suggests that these limits are among the least effective, least equitable, and least efficient strategies available for providing property tax relief," Haveman and Sexton conclude.
Instead, the authors recommend better alternatives to aid taxpayers in need, including:
- Circuit breaker programs that reduce taxes that rise above a given share of income, thus targeting assistance to those whose tax liabilities are out of proportion to their ability to pay.
- Truth in taxation measures to combat so-called "invisible" tax increases that occur 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.
- Exemptions on owner-occupied or homestead properties and classified tax rates that benefit residential taxpayers without distorting the market value tax base.
Copies of the report can be downloaded at http://www.lincolninst.edu. To obtain print copies or to interview the authors, please contact Anthony Flint at anthony.flint @ lincolninst.edu.
About the authors
Mark Haveman is executive director of the Minnesota Taxpayers Association. He joined the organization in 2002 to help revitalize its research and education arm, the Minnesota Center for Public Finance Research. He is co-author of the association's 50 State Property Tax Comparison Study - an annual state ranking of residential and business property tax burdens.
Terri A. Sexton is professor of economics at California State University at Sacramento, and associate director of the Center for State and Local Taxation at the University of California at Davis. Her research on the economic and fiscal impacts of various state and local taxes includes a comprehensive study of Proposition 13.
About the Lincoln Institute
Founded in 1974, the Lincoln Institute of Land Policy is a leading resource for key issues concerning the use, regulation, and taxation of land. The Lincoln Institute conducts research, holds conferences, provides education and training, undertakes policy evaluations, and publishes books and reports to improve the quality of public debate and decisions in land policy.
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