February 28, 2006

Delaware: A Property Tax Reform Everyone Can Agree On

Every now and then you hear a silly argument made that doesn't seem silly on its face-- until you think about logical extensions of the argument. For those still trying to understand why it's not smart to put caps on the allowable growth of homeowner assessed value, the Washington Post connects the dots for us here by looking at the extreme experience of Rehoboth, Delaware.

It turns out that Rehoboth property tax administrators have not reassessed area homes since 1968. Not surprisingly, a lot of houses are worth more now than they were in 1968--but tax administrators don't care. Delaware is one of a very small number of states in which local governments don't have to regularly reassess properties-- so Rehoboth isn't doing it.

City officials are quite candid about admitting this makes no sense. Here's City Manager Greg Ferrese:
"It's crazy. Everyone knows it's crazy... Something like this could go for up to $5 million today," Ferrese said, nodding toward a small mansion with a blue-tiled roof and glass windows all along its oceanside view. The home last sold for $3.1 million in 2001, but as far as the city's concerned, it is still worth $143,680.
Imagine if your income tax bill for this year was based on your income in 1968 (or, for the younger set, 1995). This would seem unfair to most of us, since our past earnings have little or nothing to do with our ability to pay taxes in 2006. But that's exactly what Rehoboth has done with its property tax. The changes in home value that have happened since 1968 have generated big-time windfalls for long-time Rehoboth homeowners who have cashed in. But the property tax system ignores these windfalls, instead asserting that every Rehoboth owner is about as able to pay property taxes as they were in 1968.

The property tax is notoriously insensitive to "ability to pay" considerations-- if you lose your job, your income (and income tax) will go down, but your property tax may not drop at all. The value of your house can be a deceiving measure of your ability to pay taxes for this reason--but an accurate measure of your home's value has to be the starting point for a fair property tax. When you don't reassess properties regularly, you're not even getting to this starting point.

When lawmakers and anti-tax advocates propose capping the allowable growth of assessed values, they're making an argument that sounds good: just because your home value goes up 30% doesn't mean your ability to pay taxes went up by the same amount. But capping assessed value growth is not the best solution to this problem, because it creates a gap between a home's actual value and its taxable value that's just like what we see in Rehoboth. All tax caps lead toward an inequitable, Delaware-style outcome.


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