How to Make Property Taxes More Fair

Wouldn’t it be nice if you could significantly reduce your property taxes? Lowe’s found a way. The company recently targeted states around the country with lawsuits challenging their property appraisals. Lowe’s argued that the stores should not be valued based on what they paid to build the locations, but based on what they could theoretically sell the store for if they were to close down. The store designs, tailored for Lowe’s, have comparatively low market value since they base it off what Lowe’s has sold shuttered locations for. Other companies have also challenged their appraisals, resulting in a drastic reduction of property taxes collected. There are law firms and consulting firms dedicated to reducing corporate property taxes.

You can also challenge your home property tax appraisal. If you live in Montgomery County, just go here and complain to County Auditor Karl Keith. However, unlike Lowe’s, don’t expect to get your property taxes reduced to a fraction of what you originally owed unless you have a team of lawyers on standby ready to take the issue to court. Although property taxes are supposed to be based on the value of one’s property, the sad truth is that those who contribute the most to our property taxes are not the ones with the most valuable pieces of property.

Even among homeowners, an appeal is more likely to be successful for more valuable piece of property. The Chicago Policy Review argues that this uneven revaluation appeal process has made property taxes regressive, meaning that people pay a smaller share of the tax as they accumulate more wealth. Even without the slanted revaluation appeal processes, property taxes in general are often characterized as regressive because low-income homeowners must spend a far greater proportion of their income to pay for their home than high-income homeowners. Evidence exists to suggest that Ohio property taxes are regressive. This view isn’t universal. The opposite can actually be argued, especially if renters are taken into consideration. According to a report by the Organization for Economic Cooperation and Development, whether property taxes are regressive, progressive, or neither is largely a matter of perspective:

Those who view taxes on residential real property as essentially taxes on housing services tend to think that property taxes are inherently regressive, since housing usually constitutes a relatively larger share of consumption for poorer people. Those who view property taxes as essentially a tax on capital tend to think that such taxes are inherently progressive, since income from capital constitutes a relatively higher share of income for richer people. Those who view the portion of the tax that falls on land as being paid out of economic rent consider it to be inherently equitable to tax ‘unearned increments’ that often arise from public actions. Those who view property tax as essentially a benefit tax see no more sense in asking if the ‘price’ of local public services (the property tax) is regressive than in asking if the price charged for anything else is regressive: voluntary exchange (imposing property taxes as generalized user charges for services) does not, in their view, raise any question of incidence.

Any changes to property taxes will result in winners and losers. Did you participate in a neighborhood revitalization project that helped to improve a local park? You may have inadvertently raised your property value, thus raising how much you pay in taxes. Buy a new roof recently? Not only do you pay for your new roof, you now also have to pay even more in taxes because of the new roof. Even if you do nothing to your house, your neighbor might go hog wild with home improvements and living next to them will increase the value of your house.

In big cities these effects have sparked concerns that gentrification might displace homeowners by pricing them out of their own neighborhoods. The argument goes like this: a neighborhood revitalization can raise the property values so much that existing homeowners will no longer be able to pay their taxes. So far, statistical evidence does not appear to back up this argument. (First hand evidence in South Park has seen long term neighbors displaced by higher home values as investors swoop in) Homeowners are more likely to hang on to their property despite a financial squeeze and gentrification. While clearly increasing the cost of living, gentrification does not necessarily make neighborhoods completely unaffordable for existing homeowners. That does not mean that gentrification and its accompanying increases in property taxes do not harm property owners. The elderly in particular are vulnerable to financial difficulties when gentrification and reappraisals take place. Ohio has a homestead exemption for the low-income elderly, but reappraisals can still be difficult for the middle class elderly. These individuals often live on a fixed income and have owned their homes for many years. This means that regular reappraisals will reduce their quality of life and perhaps even force them to accept tax deferrals that will fall on their heirs. While tax policy experts find a deferral system to be optimal, many homeowners dislike the idea of placing a lien on their property.

Here in Dayton efforts are underway to revitalize historic neighborhoods. This is a good thing, but improvements will likely make property taxes increase. Such projects can create a gentrifying snowball effect as rents rise and existing citizens see their cost of living rise. What can we do about it? Is there a way to both enjoy neighborhood revitalization without penalizing existing residents? Below we look at some options that could help.

overloaded circuit

If your bill to income ratio looks something like this, a circuit breaker can be a lifesaver.

Circuit Breakers
One way to prevent gentrification from disproportionately harming existing residents is to apply “circuit breakers” to property taxes. This is a mechanism that ensures that property taxes do not exceed a certain percentage of an individual’s income. Like an electric circuit breaker, once an individual is “overloaded” by their tax burden, the circuit breaker kicks in to prevent the property tax from collecting more than the individual can afford.

Circuit breakers can be a tremendous help to low income residents who live in neighborhoods that are experiencing rapid rises in valuation. The problem with circuit breakers is that they are usually not automated, meaning that an individual must know that they exist and apply for them. That does not mean that circuit breakers cannot be automated. County treasurers have access to all the information they need to automate this process. Like your home circuit breakers, it’s only useful if it works automatically.

Anti-Windfall Provision
Allegheny County, Pennsylvania has implemented an “anti-windfall provision” to prevent the county from effectively raising taxes through appraisals. This is essentially a “levy limit,” which prevents the local government from increasing revenue by more than a certain percentage when the tax rate remains the same. For Allegheny County, this limit is 105%, meaning that even if a house increases in value, the owner will pay no more than 5% more in taxes.

Ohio has some forms of levy limits that prevents the amount collected by a levy from increasing. This means that if the local school board has a $5 million levy and property values increase, the school can still collect no more than the $5 million. That does not necessarily mean your taxes will stay the same. How much you are taxed will be determined by the property fluctuations within the entire district. It most circumstances, Ohio’s levy limits will prevent any drastic changes to the amount an individual property is taxed. However, the law is not well known, transparent, or easily understood.

Allegheny County’s anti-windfall provision provides a nice template for other communities to maximize fairness and transparency. Other states, like New York, have similar limitations to prevent property taxes from quickly increasing with inflation or as property values rise.

Assessment Limits
Ohio has rate and levy limitations but not an assessment limitation. Assessment limits can come in different forms. Some function much like the Allegheny County anti-windfall provision, but apply to reappraisals rather than the taxed amount. New Yorkers are considering a more radical approach where the market value as determined by the purchase price is used to replace the appraisal process. The media has called this a “gentrification tax” as the goal is to close loopholes that allow gentrifying property owners to avoid paying the majority of the taxes they would normally owe.

For New Yorkers, a tax based on a property’s market value would be beneficial because it would require millionaires who hardly pay any in taxes to contribute their fair share. If such a system were implemented in Ohio (or a local area such as Montgomery County), it would have a different effect. Looking at Dayton, a purchase price assessment limit would help to encourage home ownership and to motivate individuals to improve their properties and neighborhoods. If a prospective homeowner knows they can lock in a low value in a developing neighborhood, it would inspire them to move to that neighborhood and contribute to its growth rather than move to a suburb where they will be taxed more. Such a system would also remove the concerns about the fairness of appraisals or the need to appeal appraisals. It would also block commercial properties—remember Lowe’s?—from using the courts and the reappraisal process to snag a lower rate.

Treat Rentals More Like Commercial Properties
Another thing that could benefit Dayton residents is to use rental fees to determine how much to tax rental properties. This would prevent revaluations from forcing landlords to increase rent. It would allow the market to drive rental values without placing an external strain from appraisers driving up costs.

Keep Things Fair
Changes to property taxes can be controversial because there will inevitably be winners and losers. Local governments will be concerned that such changes could reduce revenues are force them to cut services. This is true and may require that the property tax rate increase. But doing so would not necessarily increase the effective tax rate—what you actually pay. This system would also simplify the tax process so that the auditor’s office would no longer have to deal with a flood of appeals. According to Ohio law, the auditor must revaluate property every six years, but that doesn’t mean that we cannot change how property taxes are collected. One of the reasons the county must collect so much in property taxes is because things are run so inefficiently. By consolidating services, departments, and administrators we can reduce the amount of taxes that must be collected.

We also must consider the fact that housing bubbles artificially inflate the prices of houses and appraisals will often be swayed by these bubbles. For example, currently houses in Dayton are approaching the average value before the previous housing bubble reached its peak in 2006 (data thanks to Zillow). While appraisals are not arbitrary, as they are often criticized for being, they can be overvalued or undervalued depending on market conditions. That’s not fair for homeowners and it’s not fair for our school systems and other public institutions that depend on property taxes.

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  1. Property Taxes: An Example of Everything Wrong with Local Government | Reconstructing Dayton - […] the past Reconstructing Dayton looked at how the revaluation process is susceptible to the whims of housing bubbles but…
  2. Let’s Flip the Script on the County Auditor | Reconstructing Dayton - […] taxes, income taxes, or develop some alternative form of local funding. We’ve already gone over what’s wrong with property…

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