Thursday, January 11, 2007

The Wrong Way to Reform Property Taxes

Property tax reform has been a regular topic on this blog, including very recently as the Governor's reform commission sent their recommendations to the Legislature. I've also passed along a lot of Otis White's posts from his Urban Notebook blog. Well, he's retired from blogging as of the beginning of this year (Governing is working on a replacement), but he did a wonderful farewell post that summed up his insights over the years (I don't fully agree with all of them, but that's grist for a future post). One of his final posts on property tax reform does a great job at summing up the arguments (still lacking permalinks, so posting in full). Let's hope the Texas Legislature listens very carefully and doesn't walk off the same essentially-irreversable cliff as California or Florida, among others.

Dumdum Laws
The Wrong Way to Reform Property Taxes

Said it before, say it again: The vast majority of efforts to reform property taxes makes things worse — sometimes much worse. Perfect example of lunkheaded reform: Florida’s disastrous “Save Our Homes” law.

A review for those who came late to class: Property taxes may be the most unloved levy in America, but they’re actually the homeowner’s friend. Reason: They reward local governments for doing the right thing. Think about it. The surest way of increasing government revenues without raising tax rates is ... what? Answer: Do things to raise the value of real estate, including owner-occupied housing. Hence, services like public safety, sidewalks, parks, playgrounds, tree plantings and litter control can be seen not as expenses but investments in an improving tax digest.

Property tax “reforms” sever this feedback loop between government actions and tax receipts. (At some point, city officials say to themselves: We keep putting money into neighborhood parks but see nothing in return.) But some of these dumdum laws are far more damaging: They actually punish homeowners who improve their property and cement others into their houses, often to their own and their neighborhood’s detriment.

Florida has one of these truly stupid laws, its 1995 “Save Our Homes” act. To see how stupid, you have to go to the street level, as the Tampa Tribune did recently. The newspaper picked a single street in south Tampa, Corona Street, a nicely mixed, older area with young couples and retirees living side by side. There you’ll find Charles and Glenda LaFaye, who’ve owned a home on Corona since the 1970s. Not long ago, the LaFayes tore down their house and built a 3,900-square-foot “dream home” in its place. Their reward: A tax bill that soared from $3,275 a year to $14,821. Charles, who’s 74, works part time as a bailiff. But, he told the Tribune, “I’m looking for a full-time job because I can’t afford the taxes.”

Wander down the street to where Mary Fultz lives. A 72-year-old widow, she lives in the house she and her husband bought 35 years ago. Her tax bill: $1,098 a year. “My daughter wanted me to sell and get a condo,” she told the newspaper, “and I said no.” The reason: she would end up paying more taxes.

So there you have it: One senior citizen who gets walloped for improving his house (and the neighborhood as a whole), another who’d like to leave but fears doing so. The reason is the cap that the Save Our Homes law put in place. Under the act (which was modeled after the granddaddy of brain-dead property tax reforms, California’s Proposition 13) assessments cannot increase more than 3 percent a year, no matter how fast actual property values are rising, unless the house is sold or substantially changed. Then the tax bill skyrockets, punishing young couples moving onto Corona Street and older owners, like the LaFayes, who want a bigger and better house.

Not all property types are protected from rising assessments by the Save Our Homes law, and these land uses are getting slammed in Florida. Commercial real estate, in particular, is being stuck with the tax bill homeowners aren’t paying. Take the funeral home at one end of Corona Street. Its property tax bill has risen more than $9,800 in the last three years, to $24,835, the Tribune reported. “Who is going to pay for that?” the owner asked the newspaper. “If you can’t get it from the homeowner, you get it from the business owner. And if the homeowner doesn’t pay for it themselves, they’re going to pay for it eventually through the services you use, through the funeral home, the hotel next door to me, the dry cleaner.” Keep this in mind the next time you visit Florida and buy a souvenir or pay for a three-night hotel stay. A growing part of the bill you pay goes to subsidizing a favored group of homeowners.

Another ironic twist: Laws like Save Our Homes and Prop. 13 make governments less willing to zone for owner-occupied housing, since it’s such a drain on the treasury. Many bad things happen when land use is distorted, but one of the first is the disappearance of affordable housing. And what is Florida suffering from these days? You guessed it, a roaring affordable-housing crisis.

To paraphrase Shakespeare, the fault, dear Floridians, is not in your stars but in your statutes. Repeal Save Our Homes, and you might just save your homes, as well as your neighborhoods and cities.

In a section of his final farewell post, Otis sums up his thoughts on property taxes:

Save the property tax. Al Gore has global warming; I have the property tax. Turns out, Gore was right about climate change, and I think time will prove me right about the value of taxing property — including owner-occupied housing.

As you know, though, we are marching in the wrong direction. From coast to coast, state governments are restricting localities’ ability to tax homesteads, with disastrous consequences.

The three greatest: These simple-minded “tax limitation” laws punish newcomers or those improving their property, as this column explains. They encourage governments to restrict owner-occupied housing, as this column explains, fanning our affordable-housing crisis. And they reward governments that pursue land uses that make up the shortfall. One of my favorite illustrations of what some call “cash-box zoning” is from Phoenix, where a suburban mayor said that the way cities in his region battled over retailers reminded him of “two fat kids fighting over a single piece of chocolate cake.” To learn what the fat kids of Phoenix were fighting over, click here.


At 9:25 PM, January 11, 2007, Anonymous Anonymous said...

I've been brainstorming a little and can't come up with a real problem with level homestead exemptions. Any thoughts on distortions from them?

What if we charged a higher rate on the land than on the improvements? Obviously this would be a distortion, but wouldn't this encourage density? Might this reverse the trends of holding vacant lots near downtown to minimize taxes? Any negative side effects come to mind?

At 10:08 PM, January 11, 2007, Blogger Tory Gattis said...

I don't see a problem with homestead exemptions either. Either rates should be rolled back, or exemptions increased (good for homeownership for the poor). But non-market appraisals are a bad idea.

I saw this article recently with the same idea about taxing raw land, but haven't gotten around to posting on it. I also think it might be a good idea, since it incentivizes improvements. But loopholes would be a problem. If they pave over a lot and allow parking on it, is that an improvement? Are there other annoying uses they could do to get around it?

At 7:04 AM, January 12, 2007, Anonymous Anonymous said...

Just to clarify: I wasn't suggesting that we tax raw land differently than developed land. I was suggesting that we have a higher rate for the appraised value of land over the rate on the appraised value of improvements. If my memory serves me right my property tax appraisal lists the value of both separately, but charges the same rate.

Charging a lower rate on improvements would create some economies of scale to building bigger and denser, because the land value could be thought of as a fixed cost, and the marginal dollar of improvements would bring down the effective rate for the entire property.

Under the system you mentioned I think it would mostly manage to encourage the cheapest improvements possible, like a used trailer or a parking lot like you mentioned.

At 8:03 AM, January 12, 2007, Blogger Tory Gattis said...

Here's the downside: the taxes would be lower on a $300K suburban house on $50K of land than a $150K urban core house on $200K of land. The first family is probably upper middle class, while the second may be a poor family that has owned in a gentrifying neighborhood a long time.

At 1:59 PM, January 12, 2007, Anonymous Anonymous said...

Brian and Tory, you both make some good points. Whether Brian's idea to tax land at a higher rate would lead to increased density in the inner city (as Brian believes), or lead to further flight to the suburbs, we can't yet know. But it suggests that that making a change like this could lead to unintended consequences.

At 10:22 AM, January 21, 2007, Anonymous Anonymous said...

Most all real estate taxes are counter productive and make no sense! A local government should abolish such taxes and institute a system of fees that are transparent to anyone interested. These fees would support all of the services that are part of the government's operations. The fees would vary depending on the exposure that the government has to cover for a particular property, and of course all of the activities that are common to the community. This system also necessitates the reduction of fees for those whose ability to pay is dimimished.
For those of you who think thhis is a bad idea, consider the fees that many of us now pay for services provided by the community that cover not only the individual service, but also the common good.
This system will be much more fair than the very arbitrary real estate tax.


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