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Oregon's Complicated Property Tax Rates Favor Higher-Valued Houses

Property tax rules tying housing values to decades-old property assessments in Oregon are creating a skewed system that’s bleeding into sale prices in Portland, a new study has found.

Home Sales
This Sept. 13, 2011, photo shows a house for sale (and for rent) in Portland, Ore. Many residents of more established neighborhoods have trouble selling their property due to artificially lower property taxes on many houses in the city.
Property tax rules tying housing values to decades-old assessments in Portland, Ore. are creating a skewed system that’s bleeding into property sale prices, a new study has found.

The study, conducted by the Northwest Economic Research Center for the Oregon League of Cities, looked at the unintended consequences of uneven property tax discounts resulting from two voter-approved measures in the 1990s.

Researchers found that certain neighborhoods in Portland with low taxes enjoyed higher housing sale prices. Meanwhile, other neighborhoods had higher taxes and lower sale prices. The results “clearly” show that property owners “with arbitrarily low property taxes receive a boost in property values,” NERC Director Tom Potiowsky said in a news release. “Oregon’s property tax system creates a hidden subsidy for these property owners and shifts the burden of local services on to others.”

The two culprits identified by the report are statewide measures passed in the 1990s as a response to multiple property tax rate increases during the 1980s.

Measure 5, passed in 1990, placed limits on how much could be levied based on the real market value of houses in Oregon. But the 1990s were marked by skyrocketing housing values and homeowners felt Measure 5 did nothing because their tax bills were still getting bigger each year. In 1997, voters passed Measure 50, which tied the tax rate to the assessed value of a house. The kicker was that the “assessed value” must be no more than 90 percent of a property’s 1995-96 value. The tax rate could also increase by no more than 3 percent each year.

The move had the effect of locking Oregon's property tax rates to a certain point in time. Generally speaking, properties are assessed every few years by a city and tax bills rise and fall accordingly. If there is a cap on the amount a tax can rise in a year, it is at least pegged to a somewhat recent assessment.

Fast forward nearly 20 years later, and housing values have not increased at equal rates across Portland, especially during the aftermath of the Great Recession and real estate market collapse. (The NERC study looked only at Portland, though the tax policies apply to the whole state.) Neighborhoods that have gentrified or otherwise seen fast-rising property values enjoy artificially low tax rates because their assessed value is based on the mid-1990s value. Meanwhile, neighborhoods that have stable property values have higher tax rates.

Oregon is notorious for its oddly designed property tax limit but it’s certainly wasn’t alone in the fervor to curb tax increases as housing values rise. In the 1980s and 1990s, many efforts across the country sought to create caps on property taxes, beginning with Proposition 13 in California in 1978. Prop 13 limited property tax rates in California to one percent of the assessed value and insured that the rate could not increase by more than two percent per year.

In California, however, the tax rate can change when a property changes hands and a new assessed value is assigned. The basic theory in California was to avoid any unpleasant surprises, said Joan Youngman, senior fellow at the Lincoln Institute of Land Policy in Massachusetts.

“So, there are great disparities if houses are bought decades apart but the theory was that, at some point, the house's value will be reset to market value,” she said. “The incredible thing in Oregon is, there’s no reset when you sell. So these disparities just continue forever.”

In Portland, property taxes are based on the lower of two values: either the assessed value or the real market value. But in practice, implementing the rates can be much more complicated and can even result in uneven rates on the same block. The confusion prompted the Deschutes County assessor to create a video with the “Property Tax Fairy” explaining how the tricky system works.

Taking the average house in Portland of 1,600 square feet, the NERC study found that a place where the assessed value was only 45 percent of the actual market value could generate as much as $31,000 more on the sale price. For the same sized house that had an assessed value closer to market value (75 percent), the sale price could be discounted by as much as $15,000.

The movement started by Prop 13 has quieted down as most areas set on capping or limiting property tax rates have done so. But Youngman said they are always an easy target for anti-tax sentiment because (unlike income tax or sales tax), it’s one of the few actual bills for government services that citizens get.

“Property taxes will never have a quiet life,” she said. “When people are in an anti-tax mood people at state level are very happy to deflect that to the local level and show how anti-tax they are by supporting property tax initiatives.”

Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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