Wednesday, May 30, 2007

Florida and property taxes

This article in the WSJ talks about Florida's plans to cut their property tax. Rising real estate prices in the state have jacked up people's tax bills, but they have no more paper money than they did before, so they are complaining.
Across the nation, the rise in home values in recent years has boosted property-tax bills sharply. The average annual property-tax burden in the U.S. stood at $1,132 per person in 2005, up 13% from 2000 in inflation-adjusted terms, according to data from the Commerce Department. Residents of Wyoming and Washington, D.C., saw the largest rises: Their tax bills went up by 49% and 42%, respectively. New Jersey had the nation's biggest property-tax bills, at $2,206 per capita, up 13% from 2000.

In many areas, housing prices in recent years rose too quickly for local tax assessors to keep pace with them. Now, tax assessments are catching up just as market prices are slumping.

Responding to an outcry from taxpayers, politicians in some states have come up with plans to ease the pain. This year alone, New Jersey, New York, Indiana and Montana have cut property taxes in one way or another, says David Brunori, professor of public policy at George Washington University and vice president of Tax Analysts, a nonprofit tax-information company in Falls Church, Va. Pennsylvania did the same last year. None of those measures, however, compares in size and scope to Florida's.

"This is the biggest tax break being considered anywhere since Proposition 13 in California," says Prof. Brunori, referring to the 1978 initiative that radically slashed property taxes in that state.
Prop 13 in California basically said that property tax would be set at the value of the home when it changed hands, and then remain at that level until it changed hands again. The consequence of this is that you have a $2M home paying pennies on the dollar, while a $800K home across the street pays through the nose, since one is owned by old owners, and the other by new owners. It also means that it is very expensive for Californians to move from one home to another within the state, as their property taxes would then reset at a higher rate.

Cutting the property tax, however, is a windfall for current homeowners, as the consequence of that cut gets factored into the purchase price. If you lower the property tax, you will at the same moment increase the purchase price by the net present value of that tax cut. This is great for the home owner, but lousy for the person who does not own a home, but may want to own a home in the future. Given the recent gains in home prices, I'm not sure it's good policy to be transfering wealth from people who do not own homes, to people who own homes.


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