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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 7 th Place, Suite 250

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overview of property tax limitations

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

property tax limitations are
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

categorization of pt limitations

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.)

assessment limits

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)

assessment limits the appeal

Assessment Limits – The Appeal

Predictability

Ability to pay

A perceived “insurance policy” against rising property taxes

assessment limits effects on local governments

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)

assessment limits effects on local governments7

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

assessment limits effects on taxpayers

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.

slide9

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

mn limited market value study what if assessment limits did not exist
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

assessment limits effects on taxpayers11

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

rate limits

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

levy limits

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?

levy limits are they good policy

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

some conclusions about limitations

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

50 state property tax comparison study for taxes payable 2007
50 State Property Tax Comparison Study for Taxes Payable 2007

Contact MTA for More Information