Property Taxes - A Quandry

According to the New York Times, real estate taxpayers in several states, including Florida and New Jersey, are looking for ways to reform the way those taxes are levied. The common complaint is that the amount levied and how it is determined is unfair, resulting in taxes that are too high. We all want services and government benefits but hate paying for them. Citizens complain to elected officials, who enact reforms and laws and, for the most part, make matters worse. Florida serves as a case in point.

There is no personal income tax in Florida so revenue that the state and localities collect is from sales taxes, real estate taxes and use fees. Fifteen years ago, people were complaining that they were being driven from their homes due to rising property taxes. The solution was the "Save Our Homes" amendment to the Florida state constitution which limited the annual amount that actual property taxes could increase to the CPI or 3%, whichever is less. This applied to residents who were living in their homes full time and had filed the necessary paperwork to qualify for the homestead exemption. Part time residents, businesses and renters could not take advantage of this provision.

Further, whenever there was a sale of a home, the new owner was assessed on approximately 75% of the price he/she paid. For example, if I buy 905 East 5th Street for $400,000, my taxes will be based on an assessed valuation of $300,000. If the mill rate is 1.3% then my real estate taxes for the year after I buy and take occupancy would be $3900. If I am a full time resident, then my taxes will be capped at that number with yearly increments of never more than 3%.

Several years go by, and 903 East 5th Street, a house identical to mine, is sold for $800,000. My new neighbors assessed valuation is will be $600,000. To allow for an ease in comparison, let's assume that there has been no increase in inflation or any need to raise the mill rate due to government spending. Under this scenario, I would be paying the same $3900 and my new neighbor would be paying $7800. But, if the owner of 903 East 5th Street is only a part time resident, he/she would also be ineligible for the cap. If, in several years, the market value goes to $1,000,000, he/she would now be paying on an assessed value of $750,000, resulting in taxes of $9750.

The "fix" did what it was intended to do. It did allow people to remain in their homes even when the home increased substantially in value because property taxes for those residents remained artificially low. The problems that the state is having now are directly attributable to the consequences of the "Save Our Homes" amendment. Existing residents, especially the elderly, are penalized for moving. If a couple who has owned a large home for many years decides to downsize to a smaller home or a condo, their new tax bill is likely to be higher than what they were paying for their larger home. This will occur because the property tax advantage for homesteaded Florida residents is not portable to their new home. The new property taxes will be based on 75% of the market value of the new residence and then capped going forward from the purchase date of that home. And, a young couple just starting out can't buy a house -- not because they can't afford a mortgage but because they cannot afford the real estate taxes.

Second home buyers are now looking in other states because they can no longer afford to have a part time Florida home that costs more than their full time residences to maintain. Businesses and renters are being forced to pay outrageous rents because of the inequitable way real estate taxes are calculated. Further, local governments have no incentives to limit spending since the amount of any increase spending is borne by the non-voting real estate owners.

The Florida governor and legislature are debating all types of complicated schemes and ideas to keep this system afloat. Swap the tax on homesteaded properties for an increase in the sales tax. Portability of the assessed amount from property to property in the state or within an existing county. Roll back local government spending to 2006 or 2004 or 2000 levels with percentage increases for the future. The politicians are proposing everything but a common sense solution.

Florida should once again begin assessing all property within the state by the value of the asset alone. Real estate taxes are supposed to be "ad valorem" taxes. This concept goes back thousands of years. Real estate is assessed and its value is taxed equally. It doesn't matter if the owner is old, young, rich or poor. The state could, however, provide some relief for low-income residents. For example, Florida could keep a $25,000 exemption for full time residents. This means that their assessed valuations would be reduced by $25,000. If you meet certain economic guidelines, you could receive further exemptions which would decrease the amount of tax owed. However, anything more than the initial exemption given to all residents should be needs tested -- not based on age or veteran status or being a widow. There are many wealthy widows, seniors and veterans that do not need the help.

While taxes certainly would rise for those in residence the longest, it will result in lower tax bills for the vast majority of real estate tax payers. Further, by making all voting residents fully responsible for the spending of their elected officials, government budgets will be more closely monitored.

Sometimes the easiest fixes are the best. Simplicity has its own rewards.