The property tax shuffle: some states have made major changes in their property taxes while others have zeroed in on special cuts for poor and elderly homeowners.

Property taxes are issues No. 1, 2 and 3 for the residents of this state, says New Jersey Assemblyman John McKeon.

That sentiment has echoed across the country the past two years as rising assessments and higher tax bills have caught up with rapidly accelerating home prices.

Home values, up 55 percent over the past five years, boosted personal wealth for home-owners, many of whom took advantage of the growth in equity. Sales of vacation homes and investment properties pumped up real estate values in coastal and resort areas. At the same time, homeowners on fixed incomes or with stagnant paychecks faced new financial pressures as property taxes soared. In popular parts of the country, working-class people can no longer afford houses in their hometowns and cities. The imbalance between housing economics and pocketbook economics has taxpayers demanding relief.

At least 21 states are working on property tax cuts this year and many others enacted property tax relief in 2006, using a variety of tools. This year in New Jersey, where homeowners facing the highest property taxes in the country were discussing a constitutional convention, legislators turned to homestead credits and tax limits.

The New Jersey Legislature last year created four joint legislative committees to review ideas for property tax reform including alternatives for funding schools and the possibilities of consolidating local governments. Next they secured voter approval to increase the sales tax by a half cent in exchange for property tax relief. The four committees reported recommendations in November 2006, and legislators entered 2007 still in special session to work on delivering property tax reform. The final package signed into law in April reduces property taxes by 20 percent for homeowners with incomes up to $100,000 and phases down to 10 percent for homeowners with incomes up to $250,000. The plan trims the average homeowner's property tax bill by $1,000. It also requires doubling the renters' rebate for 800,000 tenants.

The package restricts annual property tax increases to 4 percent for school districts and local governments, down from a recent average of nearly 7 percent, and requires voter approval to exceed the limit.

The proposed state budget calls for increased state aid so local governments can continue to reduce their reliance on property taxes. And a commission has been created to study how to consolidate New Jersey's myriad local governments, which include 567 municipalities, a third with fewer than 5,000 residents.

Assembly Speaker Joseph J. Roberts Jr. says the package "provides historic levels of property tax savings, cutting property taxes for the overwhelming majority of New Jerseyans."

GOING WITH THE SWAP

Other states recently swapped one tax for another. Texas lawmakers cut property taxes as part of a school finance reform package. The revenues were partially replaced with a combination of a $1 per-pack cigarette tax increase and a business margins tax, which broadens the business taxpayer base. Both Idaho and South Carolina have eliminated school maintenance and operations taxes by increasing the general state sales tax by 1 percent.

South Carolina's reforms include a sales tax increase tied to the elimination of school taxes plus a cap on property taxes. It limits assessment increases to 15 percent over the next five years, averaging 3 percent a year, but only for owner-occupied homes, not secondary or investment property. Since vacation-home buyers drove up property values, voters were all too happy to approve a November referendum calling for the cap.

SHIFTING BURDENS

Those who do not share equally in property tax relief are quick to point out that it shifts property tax burdens onto them. Yet as recent state actions demonstrate, the trend right now is to focus more relief for the residential taxpayer over the commercial taxpayer, and the primary homeowner over the investment owner.

Florida began this trend in 1992 when voters passed the Save Our Homes ballot amendment that placed a 3 percent assessment cap on residents' primary homes. It worked for a while. But as population growth and housing demands sent home prices soaring, its flaws flared up. The cap doesn't transfer, so people are reluctant to move because they'll be bumped into the current market value of their new residence. The cap does protect those who remain in their homes, but newcomers, out-of-state owners of vacation houses and especially businesses have been hit with higher and higher taxes. (A similar situation exists in California where a 2 percent cap benefits those who stay put.)

"Runaway property taxes threaten the standard of living of millions of homeowners and renters and the bottom lines of businesses big and small," said House Speaker Marco Rubio as lawmakers rolled up their sleeves to tackle reform. But the regular two-month session, which ended May 4, wasn't long enough to sort through differences in competing House and Senate plans. Lawmakers were forced into a special session scheduled for June 12 to 22.

"The issue is too important to our state and to our taxpayers for us to give them a product they would not be proud of," said Senate President Ken Pruitt in announcing the special session. "We have laid a great foundation."

Rubio said some broad agreements had been reached and the sides were "very close" on a compromise measure that would provide significant relief to homeowners, renters and commercial property owners.

The biggest difference between the chambers is how deeply to cut property taxes. The House plan rolls back taxes to 2001 rates and replaces the portion of property taxes used to fund schools with a 1 percent increase in the sales tax. Counties could chose to eliminate the rest of the taxes on homesteaded property, exchanging it with another sales tax increase of 1.5 percent. The plan would save homeowners as much as 19 percent. The House deal would also save owners of second homes and commercial property owners.

Senators are opting for relief to a broader range of property owners, that phases in over several years and does not raise the sales tax. Their plan rolls back tax rates, slows growth in future taxes, doubles the homestead exemption for first-time buyers and makes the Save our Homes tax cap portable. It offers $11 billion in relief while the House version offers $25 million or more, setting the stage for negotiations on what kind and how much property tax relief might be achievable.

Both chambers are considering rollbacks as well as providing businesses relief for the personal property taxes they pay on equipment and furnishings. Whatever the final agreement is in the Sunshine State, it will be crafted into a proposed constitutional amendment for voters in 2008.

READING THE TEA LEAVES

How much states decide to reduce reliance on the property tax is also critical to local governments, which depend heavily on this stable revenue source to deliver local services. Since property taxes support chiefly schools and local governments (72 percent of their revenues on average), cities, counties and school boards are concerned about new limits or rollbacks of property taxes without the revenue being replaced.

For now, targeted relief, tax rebates and tax swapping will likely remain the preferred solutions for reducing dependence on the property tax as a revenue source.

And change could be ahead. Although house values nationally declined only slightly in March, resales suffered their biggest monthly decline since the late 1980s. Foreclosures are up. Prices are dropping.

But it will take some time for the slowdown to show up in property tax assessments. So until a different solution for paying for government services presents itself, the ubiquitous property tax bill, unpopular as it is, will continue to show up in homeowners' mailboxes.

RELATED ARTICLE: The tax we love to hate.

Americans detest the property tax and they aren't alone. Swedes rate their real estate tax as the most unpopular in that nation. England's version of the property tax--the council tax--is the most scorned there.

So why is the property tax so maligned by the taxpaying public? The Tax Foundation, a research organization in Washington, D.C., points to three principal reasons. First, taxpayers cannot control the property tax bite because it is based on neighborhood property values and assessment levels. They are frustrated with their inability to rein in their tax tab by changing their behavior or buying habits. Second, property taxes are not based on a homeowner's ability to pay, but on the property's value. This is particularly burdensome for elderly homeowners whose home values have risen but whose incomes have not. Finally, the tax is highly visible. Unlike the sales tax, which is paid in small increments with each purchase, the property tax is billed all at once. For the roughly one-third of Americans who own their homes outright, the annual lump-sum bill can be staggering. Even homeowners who pay their property taxes through their monthly mortgage payments receive an annual property tax bill that shows the amount due, revealing just how much their property tax burden really is.

"One of the great ironies of tax policies is that people hate the tax that's easiest to see, not necessarily the one that costs them most," says the Tax Foundation's Andrew Chamberlain. He points out that state and local governments actually collect more in sales taxes than in property taxes.

But that fact hasn't swayed irritable taxpayers in their demand for property tax relief or weary state and local officials in looking for ways to provide it. "No one likes the property tax," says David Brunori, a professor at George Washington University who specializes in property tax issues. "And no matter how much a person pays, he thinks he pays too much."

--Corina Eckl, NCSL 

RELATED ARTICLE: Housing slump stings state coffers.

Property taxes are tied to assessment rates and house values, so rapidly escalating prices in recent years have intensified appeals for property tax relief. But by all accounts the housing boom is over. The supporting evidence is considerable.

* According to the U.S. Department of Housing and Urban Development, single family housing starts have fallen dramatically since early 2006. After reaching just over 1.8 million starts in January 2006, they dropped to about 1.2 million in February 2007.

* CNN reported in February that new house sales saw their steepest plunge in 13 years. The decline affected every region of the country, from an 8.1 percent dip in the Midwest to a 37.4 percent drop in the West.

* The growing glut of new houses triggered a drop in prices. In February, the median price of a new home fell to $239,800, a 2.1 percent dip from a year earlier. Builders are offering potential buyers attractive incentives like upgrades to granite countertops and finished basements to lure them in.

* The National Association of Realtors reported that existing home sales plummeted in March, falling 8.4 percent compared to February figures. This was the largest one-month decline in nearly two decades.

* As reported in The New York Times, the states that benefited most from the housing boom are expected to get hit the hardest in the current slide. From late 2005 to late 2006, the number of existing home sales fell by 21 percent in California, 27 percent in Arizona, 31 percent in Florida and 36 percent in Nevada.

* Serious mortgage delinquency rates--loans that are more than 90 days delinquent or in foreclosure--are rising. Although much of the national media focus is on subprime mortgages offered to borrowers who could not qualify for conventional loans, Douglas Duncan of the Mortgage Bankers Association notes that local economic factors are more important than loan type in evaluating mortgage delinquency rates. As a side note, residential mortgage payments are estimated to jump $10 billion as subprime teaser rates adjust from their low starting points.

Although the housing market is only one sector of the economy, its strength--or lack thereof--has far-reaching consequences. John Peterson of the Congressional Budget Office reports that because home values have fallen, there is a lack of home equity to tap for consumption and remodeling, which further weakens the economy. "But our economy today is more flexible and better able to absorb shocks than in the past," he says.

In addition to national economic impacts, state coffers are affected, too. Sales tax collections are adversely affected as consumers reduce their purchases of building materials, furniture and big household items like stoves, refrigerators, and washers and dryers.

Other state tax categories also are being hit. Slowing home sales and lower prices are curtailing collections from real estate transfer taxes; in several states collections are well below original estimates. In Connecticut, for instance, real estate conveyance taxes were nearly $26 million below expectations at the end of February.

Will the slumping housing market and the resulting impact on state revenue collections stem the demand for property tax relief? Probably not. It will take a while for property tax assessments to reflect the slowdown. And even when they do, other factors propelling property tax relief concerns--like how best to provide equitable and adequate school funding--will remain.

--Corina Eckl, NCSL

TAX RELIEF TOOLBOX 

States generally choose among three approaches when crafting property tax relief.

* Targeted Relief: Tax cuts for certain populations based on age, disability or income levels. Most states have homestead exemption programs for seniors and disabled taxpayers, which remove part of a house's value from tax calculations. Many states also offer income-based circuit-breaker programs that provide a safety valve against an overload of property tax burdens, and often include rental households, who pay taxes indirectly through their rent. A less well-known solution allows eligible taxpayers to defer or put off paying property taxes until they move, sell or die, helping them to remain in their homes. Some states have offered rebates on property taxes when state funds were available.

* Tax Limits: Caps on the amount of revenues that can be levied by a local government. Some states freeze taxes at certain levels, impose levy limits, tax rate limits or limit assessments, often called "appraisal caps" for either all property, or just certain classifications (residential, commercial, farm, etc.).

* Property Tax Swaps: An intergovernmental trade that increases state taxes such as the sales or cigarette tax to provide aid to local governments. Some states do this by providing certain taxing authority to local governments that are then required to reduce property taxes.

Bert Waisanen is NCSL's property tax expert.

PER CAPITA PROPERTY TAX BILLS
2004

Rank                            Per Capita

  1     New Jersey              $2,098.9
  2     Connecticut             $1,943.9
  3     New Hampshire           $1,939.7
  4     District of Columbia    $1,855.6
  5     New York                $1,677.0
  6     Rhode Island            $1,628.8
  7     Maine                   $1,596.5
  8     Massachusetts           $1,531.8
  9     Vermont                 $1,530.5
 10     Illinois                $1,407.2
 11     Wyoming                 $1,351.7
 12     Wisconsin               $1,349.7
 13     Alaska                  $1,305.6
 14     Texas                   $1,253.8
 15     Kansas                  $1,187.5
 16     Michigan                $1,185.5
 17     Nebraska                $1,148.2
 18     Maryland                $1,082.3
 19     Iowa                    $1,079.9
 20     Florida                 $1,064.2
 21     Montana                 $1,034.3
 22     Virginia                $1,031.3
 23     Washington              $1,028.9
 24     Colorado                $1,026.1
 25     Pennsylvania            $1,010.0
 26     Ohio                      $981.0
 27     Indiana                   $975.4
 28     Minnesota                 $965.3
 29     Oregon                    $963.3
 30     California                $962.5
 31     Nevada                    $920.4
 32     North Dakota              $919.2
 33     South Dakota              $914.6
 34     South Carolina            $882.4
 35     Georgia                   $879.7
 36     Arizona                   $848.1
 37     Idaho                     $777.4
 38     Missouri                  $747.3
 39     North Carolina            $713.5
 40     Utah                      $689.4
 41     Mississippi               $641.1
 42     Tennessee                 $608.4
 43     Hawaii                    $571.2
 44     Delaware                  $546.0
 45     West Virginia             $540.0
 46     Kentucky                  $515.8
 47     Louisiana                 $502.2
 48     Oklahoma                  $464.7
 49     New Mexico                $441.4
 50     Arkansas                  $400.3
 51     Alabama                   $367.3

        National Average        $1,085.8