Dangers of property tax exemptionsHere's another one from Otis White's Urban Notebook on a topic I've written about a few times before:
Unfortunately, this article doesn't do a good job articulating the other negative consequences. One is that houses stop selling and start renting as the tax discrepancy gets larger and larger (why pay extra money to the government when it can stay between two private parties?), and owners make for stronger communities and better upkeep than renters. This is a chronic problem in California.
How to Kill a Community - Pay Up, Stranger
When cities are healthy, they’re buzzing with change. Newcomers are moving in, old-timers are moving out, new housing is built, old housing is rehabilitated, and streets that rarely saw a baby carriage in the past are suddenly chockablock with strollers. Want to kill all that? Enact a “welcome stranger” law.
What’s a welcome stranger law? That’s what they call special property-tax exemptions for longtime residents in the Atlanta area. They work by freezing property assessments, slowing their rise or simply granting ever-larger tax exemptions to homeowners — until they sell their houses. Then the new owner pays taxes on the full value.
These tax breaks are harmful — they penalize new residents, who are the lifeblood of communities — and blatantly discriminatory. How discriminatory? The Atlanta Journal-Constitution looked at two houses in the same suburban Atlanta neighborhood with vastly different tax bills, even though both were valued at about $400,000. One, owned by an old-timer, paid $970 in county taxes; the other, owned by a newcomer, paid $2,798.
So why do we have these harmful and discriminatory tax breaks? Because they’re wildly popular with voters. Georgia’s legislature permitted voters to enact welcome stranger laws in 2000; five years later, 24 counties have voted them in and another five are voting on them later this year. As the Journal-Constitution observed, “Approval is a near certainty.”
Fortunately, they may not last for long in Georgia. A former county commissioner from rural Dade County has filed a lawsuit challenging the constitutionality of the welcome stranger laws. Like other states, Georgia’s constitution requires that taxation “be uniform upon the same class of subjects,” and some legal observers believe that the uniformity principle applies to all residents, no matter how long they’ve lived in a community.
As for the man filing the lawsuit, Chuck Blevins has two objections. First, he believes the exemptions hurt communities. “It’s going to be the ruination of us,” he told the Journal-Constitution, “not now but five or six years down the road.” Second, he thinks the tax breaks are unfair. “Most people know when something is just plain wrong,” he said, “but if these people are saying, ’I don’t care if my neighbor is paying higher taxes,’ then fine.”
The other problem is that as local governments need more money, they're forced to squeeze more and more of it out of newcomers, which discourages growth and can lead to stagnation.
Finally, it can be almost impossible to correct the problem after going down this road. Look at California. Warren Buffett pointed out how screwed up their tax system is, but it's impossible for voters to agree to a steep increase in their property taxes, especially since many have now bought the most house they can possibly afford on a cash flow basis, so the money just isn't available to handle the tax increase (i.e. low property tax assumptions are built into housing values and mortgage payments).
Let's hope Texas and Houston never end up being tempted down this road. I'd love to hear other stories and thoughts on this topic in the comments if you have them.