Overview of Property Tax Limitations
“Towards a Better Understanding of Property Taxes and Proposed Policies”
Fiscal Research Center
Andrew Young School of Policy Studies
September 11, 2008
Mark Haveman
Executive Director
Minnesota Taxpayers Association
85 East 7th Place, Suite 250
St. Paul, MN 55101
mhaveman@mntax.org
Property Tax Limitations Are:
► Popular
► Pervasive
As of 2006 only 5 of 48 states in the continental
U.S. have no explicit limits on some form of
property taxation (Anderson, 2007)
► Unique
Ability to structure limits differently and combine
strategies creates tremendous diversity across
the states
Categorization of PT Limitations
•
Assessment limits
•
Rate limits
•
Levy limits
Universe of limitation strategies is much larger when
PT system design features are also included in the
definition (e.g. split roll systems, aids and credits,
direct relief measures, etc.)
Assessment Limits
Used in 20 states
• Differ by:
 Coverage (all but 4 are statewide)
 Eligible property
 Parcel value vs. aggregate assessment (all but
2 are parcel based)
 Treatment upon sale (most limits removed on
sale)
 Eligibility with respect to taxable appreciation
(all over the map)
Assessment Limits – The Appeal
Predictability
• Ability to pay
• A perceived “insurance policy”
against rising property taxes
•
Assessment Limits – Effects on
Local Governments
Erosion of property tax base and local
revenues
• Magnitude is a function of trends in property
value, new construction, and limit level
• Some examples of tax base reduction
• CA, 1995: 44% ($1.3 trillion)
• FL, 2007: 17% ($398 billion)
• MN, 2006:
7% ($32.5 billion)
• Only when combined with rate limits are
revenues assured of being restrained (15 of 20
states)
Assessment Limits – Effects on
Local Governments
Erosion of local control
•
When revenues are restricted local government
options are:



Cut services
Find alternative revenue sources
Look to the state -- strings attached
Prop 13 approaches make local property tax
effectively a state tax since state apportionment
formulas dictate who gets what
Assessment Limits – Effects on
Taxpayers
Possibility of “Phantom” Tax Relief
Assessment limits by themselves only redistribute
tax burden
•
•Burden
is shifted from protected to non protected
properties and/or from fast appreciating properties
to declining, stable, or slowly appreciating
properties
•BUT
the increase in tax rate can offset
comparatively small reduction in taxable value.
Result: The appearance of property tax relief
where none actually exists.
•
MN Limited Market Value Study:
What if Assessment Limits Did Not Exist?
400
350
300
250
950,000 homeowners
would pay, on
average, $100 less
tax. Median change is
$72.
440,000
homeowners would
pay, on average,
$227 more in tax.
Median change is
$135.
200
150
100
50
1,
00
0
2,
00
0
3,
00
0
5,
00
0
50
0
30
0
20
0
10
0
50
0
-5
0
-5
00
-3
00
-2
00
-1
00
-5
,0
00
-3
,0
00
-2
,0
00
-1
,0
00
0
Estimated Homeowner Tax Change in Dollars by Elimination of LMV
Source: MN DOR
MN Limited Market Value Study:
What if Assessment Limits Did Not Exist?
Of the 950,000 (68%) homeowners would pay
$95 million less tax; 27% of those 950,000 had
some value withheld.
Or to put it another way, over a quarter
million Minnesota households were led to
believe they are getting a tax relief from
LMV when they are actually paying more
under this policy
Assessment Limits – Effects on
Taxpayers
Potentially Significant Equity
Problems
The common acquisition value feature (reset upon
sale) creates an effective subsidy for existing
owners
•
Disparity ratios up to 5:1 for similar homesteads
not uncommon
•
Besides fundamental issue of fairness, subsidy
creates tax price distortion affecting decision
making on types and levels of local services
•
Rate Limits
Used in 34 states
• Usually used in conjunction with revenue
limits (23 of 34 states) or assessment limits
• Can be specific (particular taxing jurisdictions
or fund) or general in nature
• Establishes maximum value for ratio of
revenue to total tax base
• If tax base changes are small or infrequent it
may constrain property tax burdens
Levy Limits
Used in 29 states
• Often limited to rate of inflation or some other
percentage
• Changes in tax base composition can still
cause tax burdens to rise in a levy limit
environment
• May be riddled by exemptions (which can
make the levy limit more of a politically
cosmetic exercise – MN has 22 special levies
exempted from limit provisions)
• Are levy limits a floor or a ceiling?
Levy Limits - Are They Good Policy?
Depends if local government is an
“insatiable beast” or the expression of
the average voter
• One researcher’s conclusion based on
literature review – net societal benefit IF
accompanied by an override provision
(McGuire, 1999)
• Others argue overrides make great theory but
lousy reality:
Too blunt a tool for complex budgetary decision
making
 Some limitations are designed to impede overrides
 Cities aren’t that homogenous with respect to
desired levels of services

Some Conclusions about Limitations
• They are never as straightforward as they may
seem on paper
• Have unintended consequences – both short
term and long term
• States need to be aware of interactive effects
• Direct and targeted relief is a preferable
strategy
Where Does Georgia Rank?
Atlanta, Payable Year 2007
Homestead 150k
Homestead 300k
Median Homestead
National
Rank (ETR)
22
19
28
Commercial $1 million
Commercial $25 million
30
31
Industrial $1 million *
Industrial $25 million *
17
17
Commercial to Homestead
ETR Ratio (1.132)
33
* assumes 60% personal property
50 State Property Tax Comparison Study
for Taxes Payable 2007
Contact MTA for More Information