Thursday, March 8, 2007

So you think a limit on the tax levy is enough? You're wrong my friend.


The property tax cap legislation recently passed by the General Assembly effectively addresses an important loophole in the previous 5.5% tax cap. ("New property tax cap raises concerns over budgets across RI", Providence Journal, front page, March 6, 2007)

Prior to this legislation, a community could apply the 5.5% cap to either the amount of the tax levy or the tax rate itself.

For example, imagine that a town's total valuation rose by 30%, a very modest increase in today's climate of rising property values. Since the formula for calculating a tax rate is the levy divided by the total valuation, a town could apply the 5.5% limit to the rate, raise the tax levy by up to 30% (same as the value), the tax rate wouldn't increase at all so they would be under the 5.5% limit!

This is no longer possible under the new legislation which closes this huge loophole and even reduces the cap in stages over the next six years to 4%. NOTE: There is no limit to the amount your tax bill can go up!

There are important considerations however, which remain unaddressed. The first is the same one that characterizes both California's and Massachusetts' property tax solutions; the tax limit is arbitrary and fixed, while inflation and the economy, two main drivers of budgets, are not. In times of low inflation, the 4% limit could actually be too generous and by the same token, when inflation is greater than 4%, as it was in the recent past, it will be unrealistic to require such a limit on town spending increases.

The second, (in my view the more important) problem is that this solution fails to consider the most critical factor in an individual's property tax bill, the property value. Traditional revaluation produces increases in tax bills for about two thirds of property owners but it produces decreases for one third. This means that regardless of any changes in the budget, most of the increase in the tax bills of most property owners is used to offset the tax decreases of the other third. Two thirds pay more than their fair share of the tax burden under current revaluation practice and one third of owners don't pay enough.

With a revaluation every three years many owners are simply unable to keep up with their tax increases and are forced to sell their homes, not because the tax levy is increasing too much, but because new buyers are paying ever higher prices for their property requiring them to be overtaxed.

There is a real and fundamental difference between a person who is able and willing to pay $500,000 for a home and the associated tax, and another person living in a similar home who has been revalued into a $500,000 home. The right tax system must be able to address both individuals fairly. Currently it does not. We tax existing owners as if they too chose to buy their home at the new valuation. It is basically unfair to existing property owners.

There is an alternative way to revalue, (see http://righttax.org)which allows for the proper tax rate to be applied to new owners willing to pay those higher prices and at the same time, is fair to all existing owners who will pay their fair share of the tax levy in direct response to the needs of their town, the tax levy.

Only when new owners and existing owners alike pay their fair share of the tax burden have we fulīŦlled the request of our own constitution and the basis of our nation, fair taxes for all.