How Property Tax Caps Increase Your Tax Burden
"Attacks on the property tax continue. Yet as the table indicates, during the past five years, property taxes have risen no more rapidly than the average of the three tax areas.."
Complaints about the burden of ever increasing property taxes are a common refrain. Many property tax reform efforts miss the mark, however, and set the stage for greater inequity from misguided attempts to cap valuations.
In New York state, which has seen strong debate over capping property tax growth, the Senate passed a provision to cap property taxes at 4 percent, while several gubernatorial candidates are touting a 2 percent limit. New Jersey recently passed a 2 percent cap on property tax increases. Voters in Colorado, Louisiana and Indiana will consider tax caps or rollbacks this November.
Attacks on the property tax continue. Yet as the table indicates, during the past five years, property taxes have risen no more rapidly than the average of the three tax areas. (Property tax represents 30 percent of all taxes, sales tax 33 percent and personal income tax 22 percent).
While one of the most popular efforts is to limit or cap increases in taxable property values, this argument diverts attention from more meaningful budget and spending discussions. Texas, for example, has experienced several unsuccessful attempts to restrain value increases as a means of limiting property tax growth.
A report published by the Lincoln Institute of Land Policy in 2008, titled "Property Tax Assessment Limits: Lessons from Thirty Years of Experience," concluded that, "assessment limits are often put forward as a means of combating two problems popularly associated with rapidly appreciating property values: increasing tax bills and the redistribution of tax burdens.
In fact, 30 years of experience suggests that these limits are among the least effective, least equitable and least efficient strategies available for providing tax relief."
Equality of taxation is one of the foundations of a tax system, and sound public policy recognizes that valuation caps are an ineffective limitation on property taxes. The reasons for this are numerous.
Like all artificial limits, a cap creates grossly unequal values within and among different classes of properties. An appraisal cap creates disparities between a property valued at market and another valued with a cap, so that two identical properties are treated unequally. A cap placed on residential shifts the tax burden from residential to commercial property. If both residential and commercial are capped, there will be a long-term shift from commercial to residential, because homes change hands more frequently.
Caps create unfair competitive advantages as well. Properties that lose a value cap—including newly built, purchased or remodeled assets—will be at an economic disadvantage. On the commercial front, where retail and office leasing is highly competitive, new owners that do not benefit from a cap will likely be forced to reduce their profit rather than quote a higher rental rate than competitors. And an investor may decide not to develop in a market where competing properties receive a cap, rather than compete directly with landlords that can charge less rent to make the same profit.
Moreover, caps increase taxes for owners of personal property, and here is why: Caps seldom apply to personal property at manufacturing plants, refineries, chemical plants or utilities, so a cap shifts the tax burden to these types of properties. Typically, local governments raise tax rates to balance the budget shortfall created by the cap on real property. That means personal property taxpayers will pay based on full market value, and at higher tax rates.
There is also a direct effect on land use that can work against personal property taxpayers in a different way. Communities that limit property value increases compete for retail properties that can generate sales tax income. New housing and non-retail properties become undesirable because they provide less tax growth and increase infrastructure demands.
If there is no limit on tax rates, the cap will simply shift the variable in the property tax equation from the property's value to the taxing unit's tax rate. At best, the property owner's tax bill will remain where it was. At worst, the bill will increase significantly if the taxpayer purchases or improves a property, because they will then lose the benefit of the cap and be required to pay at full market value and at a higher tax rate. In 2010, it is painfully clear that a cap impairs a local government's ability to pay for critical services when state and federal revenues wane and local mandates increase. This shifts governmental control from the local level to the state. Caps impair infrastructure development and result in the imposition of a wide number of local fees and charges to replace property tax revenue. Thus, artificial limits on appraised value have unintended negative consequences. Taxpayers and government alike are better served by pursuing more effective and fairer mechanisms for property tax relief.