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Impacts of the Residential Property Tax Value Limitation and Overview of Possible Alternatives Richard Anklam, Executive Director Tom Clifford, Research Director N.M. Tax Research Institute Presented to Revenue Stabilization and Tax Policy Committee November 20, 2007
Background • 3% Limitation was adopted by HB 366 (2000 Legislative Session) in response to 1998 Constitutional Amendment • Other provisions limiting property taxes: • 20-mill limit on non-voter approved levies; • Yield Control on operating levies; • Total debt limits for different purposes; • Value limits for low-income homeowners who are over 65 or disabled (Section 7-36-21.3). • 25 states have some form of limit on the growth of property tax revenue. • 5 limit the growth of total revenue collections to a maximum percentage (AZ, ID, KY, MA, WV) • 3 limit total revenue growth to no more than the inflation rate (CO, MI, MT) • 6 limit growth to the lesser of a fixed percentage or the inflation rate (CA, IL, MO, NM, SD, WA) • In most states, limits exclude new construction and can be overridden by voters
Role of the 3% Limitation in the Property Tax System • Limit applies only to existing properties that do not change hands; does not apply to new properties, improvements or to properties for which the use or zoning has changed. • Properties subject to the limit are part of the “valuation maintenance” calculation for applying Yield Control to determine operating tax rates. By limiting valuation increases, the 3% limit leads to operating levies that are higher than they would be otherwise. • Valuation maintenance can increase by more than 3% in total because it includes the existing properties that have been re-sold, which are not subject to the limit. • Debt service levies are also higher than they would be otherwise because the same total revenue must be generated by the smaller tax base.
Tax Policy Issues Raised by the 3% Limitation • Are house prices rising faster or slower than 3% -- i.e. is the limitation binding? • What are the impacts of the 3% limitation on total Property Tax revenue? • Has the 3% limit caused a shift of the tax base from residential to non-residential taxpayers? • How does the 3% Limit affect operating and debt service levies? • Has the 3% limit caused a shift of the tax base from existing property owners to new owners? • Does the limit cause economic inefficiency in the housing market?
Is the 3% Limitation Binding? Home prices have risen sharply since 2000. Increases have exceeded 3% in 11 of the last 17 years. Source: U.S. Office of Housing Enterprise Oversight.
Net Taxable Value Growth Since 2000 Residential Net Taxable Value has grown by more than the 3% limit in every year since 2000. Source: NMTRI calculations using information from “Property Tax Facts” publication of N.M. Taxation and revenue Department.
Average Property Tax Rates Average Tax rates have increased despite rising property values Source: NMTRI calculations using information from “Property Tax Facts” publication of N.M. Taxation and Revenue Department.
Trends in Property Tax Revenue Property Tax obligations have grown by more than 50% as of tax year 2006, a compound rate of almost 7%. Residential tax liabilities have grown faster than non-residential. Source: NMTRI calculations based on information from the N.M. Taxation and Revenue Department.
Residential vs. Non-Residential Property Values Residential taxable value has increased relative to Non-residential. Without the 3% Limit, this trend would have been more pronounced. Source: NMTRI calculations using information from “Property Tax Facts” publication of N.M. Taxation and Revenue Department.
Impacts on Property Tax Rates • Under the Yield control formula lower assessed values due to the 3% limit lead to higher tax rates for operating purposes • Debt service rates will also increase in response to lower assessed values due to the 3% limit. • For existing homeowners, lower values will offset the higher rates. The net effect depends on the magnitude of each. • For new property owners the higher rates will cause tax liabilities to be higher.
Impact on Operating Tax Liabilities of Existing Homes Increased tax rates appear to have offset much of the benefits of the 3% limit for existing property owners. Assumes average house price inflation of 5% per year and turnover of 5% per year. Source: NMTRI calculations
Existing vs. New Property Owners Price inflation above the 3% level causes new owners’ values and liabilities to increase above those of existing owners. Source: NMTRI calculations.
Potential Impacts on the Housing Market • Existing homeowners: • Prospect of higher taxes if they move may cause them to hold on to their properties, reducing turnover, increasing tenure and reducing the supply of existing homes. • Reduced supply leads to higher prices and lower total sales. • These effects grow over time as the tax liability difference grows. • New homeowners: • Face higher taxes because limit pushes up both debt and operating levies. • Higher “tax price” for the same public services may reduce their demand for those services; e.g. more likely to vote against new debt issues. • New construction: • Face higher taxes because limit pushes up both debt and operating levies. • Discourages demand for new construction; • Raises the tax price of public services for new homeowners.
Summary: Impacts of the 3% Limitation • Are house prices rising faster or slower than 3% -- i.e. is the limitation binding? • Yes over the first 5 years – probably not for the next few. • What are the impacts of the 3% limitation on total Property Tax revenue? • Small so far. Values have risen quickly and rates have remained stable or risen. • Has the 3% limit caused a shift of the tax base from residential to non-residential taxpayers? • Has not prevented residential values from increasing faster than non-residential.
Summary: Impacts of the 3% Limitation (cont.) • How does the 3% Limit affect property tax rates? • Both operating and debt service rates will be higher, but the effect is small as long as turnover of existing homes is strong. • Has the 3% limit caused a shift of the tax base from existing property owners to new owners? • Yes, but more data are needed to quantify this effect. • Does the limit cause economic inefficiency in the housing market? • Yes, but more data are needed to quantify. • Conclusion: 3% Limit does not have a major impact on revenues generated by the property tax. It does create inequity between existing and new property owners.
Possible Alternatives Modify the Yield Control statute: • Eliminate the 3% limitation • Lower the allowed 5% growth rate of total operating tax liabilities from existing properties Pros: • Eliminates inequity between new and existing property owners. Cons: • Reduces revenue growth from existing properties • Revenue would continue to grow due to new construction Notes: Potential impacts of this proposal can be simulated using existing property tax information.
Possible Alternatives (cont.) Tie debt service levies more closely to voter approval: • Debt service levies should adjust automatically downward in response to higher property values, but aggregate debt service levies have not decreased despite sharp increases in values. • Why are these levies not adjusting? • A study of debt service levies could be undertaken to illustrate whether the process is sufficiently transparent to prevent “sticker shock” for voters. • Study could recommend ways to tie the levy impositions more directly to voter actions. Pros: • Provide a clear picture of forces driving property tax rates.
Possible Alternatives (cont.) Increase Head of household exemption: • Exemption – currently $2,000 – has not been increased in many years Pros: • Property tax relief would be targeted at lower-income households, although all home-owning households would derive some relief Cons: • Renting households would not receive relief
Possible Alternatives (cont.) Expand the state’s “circuit breaker” program: • Provides property tax relief through the personal income tax • State – rather than local governments -- bears the fiscal burden Pros: • Targets relief at lowest income households Cons: • “Cash flow” problem because property taxes must be paid 2 to 3 months before income tax refund is available.
Possible Alternatives (cont.) Other measures or hybrids of existing alternatives- Limiting residential valuation limitations by differing rates (i.e. 2% or 4%) will result in greater inequity and more protections, or vice a versa, depending on the policy objectives. For example the poorer could be more protected with a “circuit breaker” and/or increased homestead exemption, while the valuation limitation could be increased to smooth inequities and speed current and correct valuations. As is some other states, valuations could be limited to primary residences rather than all residential property Other revenues could be used to offset residential tax limitations; however, they would come with a cost as well.