Tax Revolt Simmers Amid Housing Slump, Rising Property Levies

BY PAUL KATZEFF
INVESTOR'S BUSINESS DAILY
Published: November 8,2007

"Tax revolts are erupting all around the U.S.," said Pete Sepp, vice president for policy and communications of the National Taxpayers Union.

That agitating has helped push populous states such as New Jersey and Florida into legislative reforms. Virginia also moved on reforms.

Texas voters passed four statewide tax-relief initiatives on Nov. 6. Fights are under way in at least three states — Arizona, Nevada and Utah — to put tax-cut initiatives before voters. That doesn't count the numerous campaigns for local property-tax reforms around the U.S.

Behind the outcry are property taxes that keep rising even as housing prices slump.

Property tax collections by states and localities hit $388.5 billion for the 12 months ended in June. That was an increase of 6.8% vs. the comparable period a year earlier.

Yet housing prices are off. The median price of existing homes in September was down 4.9% from 2006.

"Taxpayers see this disconnect between falling home values and rising property tax bills," Sepp said.

One culprit is that localities use outdated data — assessments set before home values began to fall. Lag times are typically three years, says Myron Orfield, a property tax expert at the University of Minnesota law school. Another reason is tax rates that get jacked up — enough to raise whatever budget the tax authority has in mind.

Ravenous For Revenue

Behind it all is local authorities' hearty appetite for revenue.

"Most states have a constitutional requirement for balanced budgets," Sepp said. "When the economic slowdown of 2000 through 2002 slashed tax revenues from personal income, many states balanced budgets by slashing local aid. But when that happened, localities raised property tax rates."

The trouble: Too few localities reversed rate hikes when the economy rebounded. That produced revenue windfalls for many localities.

"Local governments created spanking new programs when they were flush," Sepp said. "Now they don't want to cut them as the economy slows."

Taxpayers are pushing back. In many states, they're using a battering ram — the initiative petition.

"In states that allow it, citizens are using statewide petitions and referenda to put measures on ballots that would change local property taxes," Sepp said.

Some target the residential home assessment process. Others target tax rates. Still more battle the bottom line — the size of tax bills.

Mark Goldstone is part of an Arizona group attacking two of those features with separate petitions.

Multiple authorities, such as schools, counties and fire fighting districts, tax Arizona homeowners.

One ballot measure seeks to reform the valuation process. Starting in 2010, it would roll back valuations to what properties were worth in 2003. Yearly increases since then would be capped at 2% plus the value of improvements. In 2011, the first 2% or less could be added to the value.

"Most of the inflation-driven property value increases came after 2003," said Goldstone, chair of Arizona Tax Revolt (ATR), which is organizing the ballot initiative. "So this would take housing inflation out of the equation for property taxes."

The second petition would limit the size of levies imposed by tax entities. The measure would use a carrot-and-stick approach.

Tax entities will adopt their 2008 budgets — and thus their tax needs — shortly before voters act on the levy petition. That means it can't be binding on 2008 taxes. It will seek to influence taxes for 2008 by offering tax entities an incentive for fiscal restraint.

Tax entities will know that voters are about to cast ballots on the tax edict. Each entity that limits its increases vs. 2007 to 2% plus the tax paid by new growth will be rewarded. In 2009, they can make their levies equal to the average of their tax levies in the prior four years.

That will result in their levies being rolled back. But entities that exceed the 2% plus growth for 2008 will get steeper rollbacks in 2009. Their levies will be their 2005 levy.

"Tax entities that show some discipline and respect for taxpayers' interests would get more money," Goldstone said.

In addition, the levy petition would put in place a new tool to help taxpayers themselves lower their own taxes.

Petition Option

Ten percent of voters in a jurisdiction could challenge a tax by petitioning the entity to cut the levy limit by up to 20% of the previous year's amount. If the entity does not cut its tax by at least as much as the petition would within two months, the proposed cut would go before voters in the next November election.

"This would give 50%-plus of the voters a chance to cut their own taxes," Goldstone said.

If voters want to raise money for some purpose, the ATR petitions would allow several safety valves. One would let voters raise taxes with a two-thirds vote by voters in the tax entity's jurisdiction in a November election.

Goldstone likens the ballot petition process to a fourth branch of government. "But the legislature likes having sole purview over taxes, so it made it hard to pass an initiative petition," he said.

His group needs more than 230,000 signatures on each petition. It is aiming for 300,000.

Initiative petitions aren't the only weapons taxpayers are using to wage war against property taxes. Voters will get final say over proposals in a number of states.

On Oct. 29, the Florida legislature forwarded to voters a constitutional amendment that would beef up the state's homestead exemption. It also would let some homeowners transfer exemptions to new homes. The plan offers a 10% cap on annual assessment increases to second homes and commercial property.

Enactment requires approval by at least 60% of voters on Jan. 29.

But the final version of the proposal would save homeowners only an annual average of $240 on property taxes via the homestead exemption. Other tax-cutting provisions were scaled back or cut.