“… There will eventually be dramatic differences in the assessed values of identically valued homes.” “… Property-tax payments will be effectively shifted from homestead properties that have not been sold recently to properties recently sold and to non-homestead properties such as businesses and rental units.” “Over time, the changes may work to limit (economic) growth, to slow down new construction, and to decrease sales in the real-estate market.”
These prophetic words were written in October 1994 by Professor Dean H. Gatzlaff of Florida State University and published by Florida TaxWatch in its Ideas in Action series. Dr. Gatzlaff’s article was titled “The Save Our Homes Amendment Could Cause Some Problems.” Little did many of us know that a constitutional amendment narrowly passed by 53.6 percent of voters in 1992 with the intent of keeping residents from being taxed out of their homes would, by 2007, be a contributing source of tax inequity and a potential impact on the vibrancy of Florida’s economy.
Amendment 10 to the Florida Constitution, commonly known as “Save Our Homes,” was designed to limit the annual change in assessed property values for property tax purposes. It was a response to rapidly rising property values and the associated hefty increases in property taxes. The idea was that by capping assessed values, property tax liabilities would also be constrained, and residents would not face the chronic risks of sharply escalating property taxes.
Enacted in 1995, the cap applies only to all homestead, owner-occupied properties. Business properties, rental units, and non-homestead-exempt properties such as second homes were not covered. The cap was set at the lesser of either 3 percent or the previous year’s rate of inflation, as measured by the Consumer Price Index. Upon resale, properties that retained the homestead exemption were reassessed at market value.
According to Florida TaxWatch research, the Save Our Homes Amendment removed roughly 28 percent, or about $350 billion of residential real-estate value, from property taxes in 2005. Taxes on the shielded property were reduced by an estimated $6.8 billion. But while some property taxes have been capped, others have been sharply increased. As Dr. Gatzlaff predicted, taxes have been shifted from homesteaded properties to commercial, rental, and residential properties without the homestead exemption. Numerous cases abound of homes with nearly identical market values having significantly different assessed values on their property tax bills, simply because one house possesses the homestead exemption and protection of Amendment 10.
On a very fundamental level, the tax treatment of individuals and businesses embedded in Amendment 10 fails the two basic economic principles of taxation. The first is the benefit principle, which states that taxes should be based on the benefits received from the public service. In theory, if an individual obtains no benefits from a public service, he should not be taxed to finance it. User fees for services, such as public boat ramps, are an application of the benefit principle of taxation.
The concept behind the benefit principle is analogous to that in markets for privately provided goods and services. In the private sector, individuals who place the highest subjective value – that is, receive the highest benefits – from a product will be willing to pay the most for it. To a greater degree than in private markets, however, individuals may be able to masquerade and understate the benefits they receive from some public services, such as national defense. If enough taxpayers deliberately understate the benefits they receive, then the public service will not be adequately provided. This free-rider problem limits the use of taxes based on the benefit principle.
In this regard, it is difficult to see how those who have borne the tax burden of Amendment 10 – second-home owners, renters, those who have recently moved within a metropolitan area and owners of business properties – necessarily receive greater benefits from the public services they help finance than individuals who have homestead exemptions. Indeed, second-home owners may obtain lower total benefits than full-year, homestead-exempted residents, yet pay substantially higher property taxes.
Ability to pay is the second basic principle of taxation. In its simplest form, this means that taxes should be based on an individual’s ability to pay for public services. The progressivity of the federal income tax system is derived from this principle.
Clearly, all of those bearing higher taxes because of Amendment 10 do not necessarily possess a greater ability to pay. For the less affluent, such as renters and first-time home buyers not shielded by Amendment 10, tax increases may actually be regressive – a higher rate of tax on a lower income base. By contrast, more affluent homeowners who have resided in the same homesteaded residence for an extended period may be paying lower tax rates at the margin and receiving implicit subsidies from the less affluent. Moreover, since property taxes are generally recognized to be capitalized in a home’s price, Amendment 10 may unwittingly be exacerbating the affordable housing issue in Florida.
Regardless of whether the tax is benefit-based or ability-to-pay based, tax neutrality is viewed by many economists as a desirable feature of taxation. Neutral taxes do not cause changes in behavior and the use of resources. Neutral taxes are thought to be the most economically efficient, in part because they produce the least unintended consequences.
Save Our Homes does not meet this criterion. Second-home owners may move to other states. Business owners may under-invest in commercial property; they either pass higher taxes along to consumers through higher prices or suffer higher costs in absorbing the higher taxes. Local governments at their state tax-rate limit may seek other sources of tax revenues. Subsidized homeowners, on the other hand, may seek an expansion of local government services, realizing that others may bear a disproportionate share of the cost, while being less vocal about tax increases. All of these things appear to be occurring in Florida.
One of the challenges in democratic societies is that the political process has an inherent bias toward providing benefits to specific, identifiable voting groups, while spreading costs over large numbers of diffuse, not-easy-to-identify, and expensive-to-organize groups. The Save Our Homes amendment may be such an example. Advocates argue that it has diminished the likelihood of people being taxed out of their homes.
But given the unintended consequences, there may be more effective means of accomplishing this.
Taxing people out of their homes is certainly a valid reason for considering preventive measures, such as Save Our Homes. The critical issue may not be how to pay for local government as much as how to control local government spending, so that ever-higher taxes are not necessary. Save Our Homes may have been well-intended in this regard, but it has generated serious unintended consequences, and local government spending has yet to be constrained.
Florida’s appealing climate and natural beauty long have been among its key competitive advantages. These advantages should not be threatened by well-intended, but unfair, taxes.Stephen O. Morrell, Ph.D., is a Florida TaxWatch senior research fellow and professor of economics and finance at Barry University’s Andreas School of Business in Miami Shores.
SOURCE: Palm Beach Post