March 20, 2007

Can Nevada Offer Property Tax Reform lessons for Other States?

(For those who don't feel like reading below the fold, the quick answer to the title question is:no. At least, not good ones.)

Property tax debates are a striking regularity in states around the nation. But what's equally striking is that no one seems to be able to point to an example of a state that has confronted property tax reform in a universally acceptable way.

But the Miami Herald's Lisa Arthur thinks she's found the solution to states' property tax woes: just do what Nevada did back in 2005. To hear Arthur tell it, Nevada eliminated pretty much every property tax inequity one could think of:
Issue: Homeowners were about to be taxed out of their houses.
Solution: Tax bill annual increases were capped at the lesser of 3 percent or the rate of inflation -- no matter how high a home's value climbs.
Issue: Commercial property owners would shoulder an unfair tax burden without a cap. And as values on their properties and their taxes rose, they would pass the cost to renters.
Solution: Tax bill increases were capped at 8 percent annually for commercial property, including rental property. If a landlord could prove rents are at or below the fair market value set by the federal government, they get the 3 percent cap.
Issue: Snowbirds with second homes would get slammed unfairly if they didn't get the same tax breaks as full-time residents.
Solution: As long as they don't own another home in Nevada, out-of-staters with second homes get the same 3 percent cap as full-time residents. If they rent the home part of the year, the cap goes to 8 percent. If the rent meets the affordability definition, they get the 3 percent cap.
Issue: Newcomers to the state and first-time home buyers who bought into a hot market with escalating home prices would get hit with much higher tax bills than longtime homeowners in the same neighborhood.
Solution: In Nevada, the tax break stays with the property. The new home buyer inherits the seller's tax bill no matter how high the value of the property has climbed or what it sells for.
Put this way, Arthur's got a point. Pretty much every property owner in Nevada has protection against large tax hikes (where "large" means more than 3 percent a year). But Arthur is setting the bar pretty low for a successful property tax reform. Her benchmark appears to be that there's a mechanism restricting the growth of everyone's property taxes to something resembling the growth rate of inflation. Such an oversimplified benchmark overlooks two equally compelling (actually, even MORE compelling) objectives of property tax reform:
1) preserving adequate revenues. Capping everyone's property tax growth at 3 percent will make taxpayers happy, but only until they notice their schools don't have new textbooks anymore.
2) targeting property tax breaks to those who need them. Arthur recognizes the universal refrain of people "being taxed out of their homes," and clearly thinks preventing this is a good goal, but says nothing about the fact that simply capping the growth of everyone's property taxes is a remarkably blunt instrument for achieving this goal. If you're a fixed-income Nevada homeowner whose property taxes were unaffordable before 2005, the 2005 reforms don't help you.

Arthur is right in one important respect: if you cap everyone's property taxes, inequities in property taxes between different property owners will be less noticeable, and complaints about higher property taxes will likely diminish. But the part of the story she misses is that this goal comes with a price: a tax system that is more inadequate over the long run, and one that is even more divorced from ability-to-pay considerations than property taxes normally are. Fairness and adequacy are both important goals-- and the tax cap approach amounts to abandoning both of these goals.

It's understandable that Arthur, and other Floridians, are grasping at straws. Florida's property tax situation seems to be deteriorating by the hour. But here's hoping policymakers in Florida and around the nation check with a few Nevadans before they adopt Arthur's recommendations.


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