Florida: The Case of the Missing Tax Break

In the past year, Florida lawmakers (and voters) have ratified a couple of measures designed to reduce property taxes, by forcing local government tax rates downward and expanding homestead exemptions. So one would expect homeowner taxes to "drop like a rock" (to steal a phrase from Governor Charlie Crist) in the wake of these changes, right?

Well, no. As the Pensacola News-Journal's Michael Stewart points out, for many homeowners part of the tax savings from the previously enacted tax cuts is getting eaten up by an arcane "recapture rule." In a nutshell, the recapture rule says that if a home's market value falls, its assessed value will still rise by up to 3 percent.

If this rule sounds screwy, it's not-- or, at least no screwier than the "Save our Homes" tax break that is entirely responsible for it.

Here's the problem: since 1995, Florida has had in place a cap on the amount by which a home's assessed value can grow each year. It's 3% or inflation, whichever is less. This cap is known popularly (and with a touch of drama) as "Save Our Homes."

Of course, when market values are growing and the assessed value is not allowed to grow along with it, the result is a gap between what a home is really worth and what the tax system says it's worth. This gap is an inequity-- it takes the tax system further away from being fair and measuring things properly. The recapture rule is designed to undo this inequity. Simple as that.

An example: suppose you bought your house in 1995 for $100,000. Between 1995 and 2006, your home value doubles to $200,000. A properly functioning tax system would take account of the fact that your home is worth a lot more. But Florida's tax system only allows your home's value to grow at 3 percent a year. At this rate, the assessed value of your home in 2006 would only have risen to $138,000.

So in this example, your home is worth $200,000 and the tax system is treating it as if it were worth $138,000-- the tax system is basically pretending one-third of the value of your home doesn't exist. And all you've done to "deserve" this tax break is to not sell your house. Doesn't matter if you're rich or poor. Doesn't matter who you are, just that you didn't sell your house.

If you treat this $62,000 as basically an unearned, incorrect tax giveaway, then a mechanism that reduces the size of that giveaway seems like a good idea.

And that's what the recapture does.

Palm Beach County Appraiser Gary Nikolits knows this perfectly well, which is why it's a laughably political move when he writes a letter to the governor expressing shock that this sort of thing could happen. As Stewart reports:

“Can you imagine the outcry when they open their (tax notices) in August to find that while their market value may have decreased, their taxable value increased?” Nikolits stated in the letter.

Nikolits (and other appraisers around the state) have plenty of reason to be politically nervous about the impact of the recapture rule, but that doesn't make this rule wrong.

Put another way, anyone who thinks the recapture rule is "unfair" has got it exactly backwards. The true "unfairness" is in the Save Our Homes break, which creates a huge gap between market value and assessed value. The recapture rule is a perfectly acceptable way of mitigating that unfairness.

This lesson holds true, of course, in any other state that has similar caps on assessed value. Caps inherently create inequities, and require mechanisms like the Florida recapture to help reduce these inequities. Complaining about the recapture process amounts to missing the forest for the trees. That means you, Michigan!