Thursday, May 4, 2006

Our Dirty Little Secret

The 5.5% tax cap myth - our dirty little secret

False Advertising
Any advertising which is misleading in any material respect is considered to be false advertising.

In 1986, RI Gen. Law § 44-5-2 was passed apparently to limit local tax increases to 5.5%. This law clearly qualifies under the definition of false advertising. Let me explain how.

We assume that the 5.5% limit means that taxes won't go up more than 5.5%. But that 5.5% limit is very misleading.

You see, the 5.5% limit can be applied to either the tax levy, in which case there would indeed be a true limit of 5.5%, but it also can be applied to the tax rate, at the discretion of the town, and this is where deception comes in.

First, a short refresher in fractions, ugh! Sorry, but it will I'll try to make it painless, I promise.

First, remember that if the top number of a fraction increases the same as the bottom number, the value remains the same. For example, multiplying both top and bottom numbers by 2 gives the same fraction: 1/2 = 2/4 = 50/100 etc.

The decimal equivalent of any fraction is determined by dividing the top number by the bottom number and in this example is 50%.

A tax rate is a basically a fraction; the top number is the tax levy and the bottom number is the value of the taxable property. Converting this fraction to a decimal is done the same as any fraction; divide the top number by the bottom number.

We express tax rates as dollars per thousand instead of percentages so the conversion is modified slightly but the bottom line is that a tax rate of $25 per thousand is the exactly same as 2.5%. Both will produce the same tax bill on a $100,000 property, $2,500.

With me so far?

Now for the shenanigans. Just remember that a tax rate is a number derived from a fraction - Levy ÷ Value.

Let's say a revaluation increases a town's total value by 25%. (The bottom number in the fraction).

If the levy (the top number) also increases by 25%, the tax rate will remain unchanged! In any fraction, if both the top and bottom number increase by the same proportion, the result remains unchanged - remember our fractions lesson?

If this town chose to apply the 5.5% limit to the tax rate it would satisfy the law, since the increase in the tax rate, zero increase in our example, would clearly be below 5.5%. And yet taxpayers would be paying 25% more in total property taxes!.

Clearly the law is at least a deception if not an outright scam. It's a shameful loophole and should be plugged immediately.

An ambiguity or unintended omission in a law, rule, regulation, or contract which allows a party to circumvent the intent of the text and avoid its obligations under certain circumstances.

The legislature owes it to us to fix this now.


Eileen said...

Great explanation! My husband & I were just talking about Laffey's tax DECREASE. I mentioned to my husband that I thought that the basic tax rate could be manipulated due to re-evaluations & so a decrease could still become an increase (or at least flatten). But I wasn't sure exactly how it worked. Thanks for the explanation!!!

Harvey said...

Glad it helped. I hope it helps others as well.

bernhard weiss said...

There are skeletons in the closet and I do not know if these points have been taken into consideration by the general assembly, when they wrote the law.
In a year of re-valuation the tax rate ,over previous year is 5.5% for the entire town/municipality. It is NOT that the tax of an individual homeowner can not go up more that 5.5%.
Those who have experienced an increase in re-val of more than average experience a tax increase of more than average.
Those who are at average or below experience a status quo or a decrease in taxes.
These do not account for what a homeowner pais for his house, if his income has increased at all, if they are on fixed incomes or not. They just imply and assume that income has gone up and you can afford the house with increased taxes.
Please also note that BONDS and the interest on them are items outside the tax limitation.

Bernhard May 11, 2006