Local Property Tax Caps Have Big Consequences

Throughout the country this year, candidates for state office are seizing on local property taxes as a campaign issue. Some local officials argue that that should be the localities’ business.
September 20, 2010
 

Nestled in a 224-page gubernatorial campaign agenda from New York’s Andrew Cuomo this spring was a call for a cap on local property taxes. The proposal didn’t take long to attract attention. The state teachers’ union, often friendly with the Democratic attorney general, withheld its endorsement. Cuomo had proposed to cap all local tax increases at 2 percent per year in an attempt to ease the burden on taxpayers and force governments to slash spending. Even though traditional Democratic constituencies don’t like it, the idea has appealed to New Yorkers increasingly frustrated with their tax burden, according to polls.

Candidates of both parties have had the same idea. Property tax caps, freezes or cuts have appeared in campaign agendas in at least a half-dozen states. The issue appears as a ballot initiative in Indiana, Colorado, Missouri and Louisiana. It’s not unusual for office-seekers to tout lower taxes, and statewide limitations on local taxes have been a continuing part of American politics since 1978, when California voters passed Proposition 13. But this year, denunciations of property taxes have grown sharper, as voters, stung by the recession, struggle to pay their bills.

This trend has alarmed local governments and school districts, which rely primarily on property tax revenue to pay for services, especially now that state aid and other forms of income are down sharply. Unlike other tax cuts, property taxes are unusual in that the state government has the authority to make the cuts but doesn’t suffer their direct effects. Bearing the brunt instead are local services, parks, fire and police departments and schools.

“You really do see calls for property tax reform in particular during down economic times,” says Joseph Marbach, provost of LaSalle University and an expert in New Jersey politics. “We had a rash of them in the 1970s when California spearheaded everything and then Massachusetts followed and a wave struck the country. It was quiet for a while and now we’re seeing it.”

Prop. 13’s legacy

In 1980, two years after California’s Proposition 13 dramatically reduced property tax bills, Massachusetts voters opted to limit their annual property tax increases to 2.5 percent. In 1992, Colorado voters approved the Taxpayers’ Bill of Rights, which capped governments’ revenue increases at the rate of inflation plus population growth. Subsequent legislation and initiatives have weakened TABOR but a measure on the Colorado ballot this year would reinstate the caps and make them stricter. Today, roughly 40 states have some sort of property tax restriction on the books. But few of them set the tax limits low enough to inhibit local governments’ ability to raise revenue.

Besides Cuomo, Illinois Governor Pat Quinn, a Democrat running for reelection, also wants property taxes to go down in exchange for an increase in the state income tax. School officials in Illinois are leery about becoming more dependent on a state government that already is months behind in paying its bills. In New Jersey, Chris Christie was elected governor last year in part thanks to his promise to cut property taxes. As governor, he was able to persuade the Democratic Legislature to pass a measure capping annual increases in local tax bills at 2 percent. Republican candidates Rick Scott of Florida, Terry Branstad of Iowa and Paul LePage of Maine all have advocated property tax caps or cuts. LePage goes so far as calling for the tax to be phased out completely.

Property taxes are one of the most reliable sources of local government revenue, since property values generally remain relatively stable, unlike income and sales taxes, which vary widely depending on the state of the economy. Local governments, as a result, use property taxes to fund services when state budgets are cut and other tax sources are drying up. Census data show that property tax collections were the only major form of state and local tax revenue to increase in every quarter throughout the recession.

“Local governments often feel a squeeze because everything rolls downhill,” says Doug Roscoe, a political science professor at the University of Massachusetts-Dartmouth. “The federal government is going to reduce its transfers of aid to states, and the states in turn slash their aid to localities, and localities have to turn to other sources of revenue, which is the property tax.”

In Massachusetts, local governments that want to raise more money from property taxes than allowed under the 1980 cap have to ask voters for approval. The number of override requests jumps dramatically during economic downturns, Roscoe says.

This recession differs from past ones in that property values have dropped much more sharply, forcing local governments to raise property tax rates to make up the difference, angering voters, and handing candidates an issue to campaign on. The debate over property taxes also reveals just how constrained local governments are. When it comes to raising money, they are entirely dependent on the will of the legislature and statewide officials.

“In most states, you have relatively limited local autonomy in terms of just about everything to do with government,” Roscoe says. “There’s really no federalism within the states. You often have state policies that affect local levels of taxation.”

Reduced resources

In Indiana, representatives of local government have warned that voting for this year’s property tax cap amendment would result in fewer services, but public opinion in support of the ballot measure is so strong they have not mounted an intensive campaign to defeat it. Governor Mitch Daniels, who is pondering running for the GOP presidential nomination in 2012, is one of the proposal’s strongest backers. He says local governments will still be able to increase their property tax receipts under the proposed amendment as long as they get voter approval first.

“When local spending units want to raise more money, they have to get the people’s permission to do it. It’s no longer the case that they can raise it at their own discretion and that’s the way it should be,” he said at a rally on Wednesday.

Indiana's Legislature already has capped residential and commercial property taxes, but this November’s ballot initiative would put those caps in the state constitution. To pay for them, the Legislature increased the state sales tax and took over school funding, police and firefighter pension payments and other expenses that were once the responsibility of local governments. School districts already have complained that their resources have been cut.

“There’s really very little way for us to make up the shortfalls,” says Matt Greller, executive director of the Indiana Association of Cities and Towns, adding that local officials rely on property taxes for between 55 and 70 percent of their spending. In Muncie, Indiana, tax caps were part of the reason why the city had to cut its budget by roughly $6 million over three years and lay off dozens of employees. The city council has also turned to fees to try to make up some of the money lost. Residents now pay a few dollars more on their water bills to finance the upkeep of fire hydrants, a $650,000 expense that used to come out of the city’s general fund. The hydrant fee has not generated much opposition, according to council member Sam Marshall.

By David Harrison, Stateline Staff Writer

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