The Week in Public Finance: Amid Rising Home Prices, 2 States Take Property Tax Proposals to Voters

Ballot measures in California and Louisiana seek to protect homeowners from huge property tax spikes.
by | September 28, 2018
For Sale sign outside of a home.
(Shutterstock)

SPEED READ:

  • Voters in California and Louisiana face ballot measures that would reduce their property taxes at a time when the median U.S. home price has risen by 40 percent in five years
  • California's Proposition 5 would help seniors, the disabled or people who are homeless as the result of a natural disaster.
  • Louisiana's Amendment 6 would phase in homeowners’ new property taxes over four years.
 

Home prices have risen, but when voters in two states head to the polls in November, they could at least reduce their property taxes.

The median home price has risen by 40 percent nationwide in the past five years and is still rapidly rising. The increase is blamed largely on a housing shortage. The problem has been especially acute in California, which -- along with Louisiana -- is considering property tax reductions this fall. 

California's Proposition 5 would allow home buyers who are seniors, disabled or homeless as the result of a natural disaster to pay taxes on only a portion of their new home's market value.

The proposal is controversial because it expands the state’s existing constitutional limit on property taxes. That limit, which was established by Prop. 13, has been in place for 40 years and only allows homes to be taxed at their market value when they were last sold. It means that those who live in their homes for a long time ultimately pay artificially low taxes.

While the measure is likely to be popular with homeowners, it could be devastating for local governments. According to research from the independent California Legislative Analyst’s Office, it could mean the loss of $150 million in total revenue for schools and local governments across the state in the first year alone. That figure is likely to increase over time to reach between $1 billion and a few billion dollars per year.

“It’s terrible tax policy,” says Quarles & Brady’s state and local tax law expert, David Brunori. “But it’s good politics because people 55 and over vote -- and it will likely win because of that.”

The California Association of Realtors, which is backing the measure, argues that long-term homeowners who eventually sell their homes pay a “moving penalty” because they have to adjust to a far higher tax bill -- even if their new home is worth less than their old one. That, says spokeswoman Lotus Lou, discourages people from selling their homes. If passed, she says, the proposal could free up inventory for younger buyers and help ease the state’s housing crunch.

Unlike California, Louisiana’s proposal is largely controversy-free.

The state has seen a tight housing market, particularly in the New Orleans area. There, Amendment 6 seeks to ease the shock of rapidly increasing home values by phasing in homeowners’ new property taxes over four years. It would offer relief to homeowners who haven’t made any significant improvements to their property but whose houses have been reassessed at a value at least 50 percent higher.

The measure is meant to counteract a plan by the Louisiana Tax Commission to tax short-term rental properties in New Orleans by an average of 50 percent more. The city is seeing an exodus of residents amid a shortage of affordable housing -- a problem many blame on housing being eaten up by Airbnb and short-term rental companies.

Phasing in property tax increases is already a fairly common practice and typically outlined in either law or regulation, says Wake Forest University’s John Dinan. “What’s different here, is that [the policy] will be to the level of the state constitution,” says Dinan, a state constitutional expert. Enshrining the policy in the state constitution makes changing it incredibly difficult in the future. But, he adds, that’s in keeping with Louisiana’s political culture where tacking on “constitutional amendments ranks right up there with football and gumbo.”

Polling is not yet available for either measure.

For a summary of November's most important ballot measures, click here.

 

In other public finance news:

The Nation’s Old Age Crisis

The nation’s median age is creeping up and that’s becoming a burden on state economic output, a new report says. And according to S&P Global Ratings, different parts of the country are more resilient than others when it comes to balancing the needs of aging baby boomers.

The challenges are greatest in the Northeast, which is home to of five of the six oldest states in the country and where the median resident age is above 40 years old. For Maine and Connecticut, the prospects are particularly bleak with weak -- and in the case of Connecticut -- contracting population growth not offsetting the aging population.

In contrast, the South coastal states from Maryland to Texas boast strong demographic growth as well as economic growth. Directly inland, however, states aren’t faring as well. For example, West Virginia had the worst population decline in the country, falling by 2 percent over the past seven years. That decline contributed to a nearly 9 percent drop in the state’s working age population.

New York’s Severely Distressed Municipalities Have Doubled

New York state’s Fiscal Stress Monitoring System has designated 12 municipalities across the state as suffering from significant fiscal stress, more than double the rate of last year. Nassau County was home to the most distressed localities (three) as well as being itself designated as severely distressed.

On a positive note, State Comptroller Thomas DiNapoli, who created the monitoring system in 2013, said the overall list of municipalities with some kind of distress designation has declined. The system evaluates local governments on nine financial indicators as well as demographic trends, and creates a fiscal stress score.

“Fewer local governments are considered fiscally stressed, but those with persistent financial problems are struggling to stay out of the red and fix their problems,” said DiNapoli in a statement. “While the results may be encouraging in some areas, there are municipalities that should focus on near-term financial risks and implement more prudent long-term planning.”

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*CORRECTION: A previous version of this mischaracterized Lotus Lou as a man and misidentified Prop. 5 as Prop. 2.