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Ways to skin the property tax cat.

Michigan's dramatic property tax reduction in 1994 sparked predictions that other states -- particularly those with high property taxes -- would follow suit with major reforms of their own. After all, Michigan lawmakers proved that you could roll back property taxes, raise state sales and cigarette taxes to replace the revenue, and still survive at the polls.

Proposals emerged a half dozen states, including the high property tax states of Vermont and Wisconsin, to repeal the property tax as a school funding source. Some of these proposals were on the fast track. Yet when the dust settled, no states adopted a Michigan-style "overnight" property tax fix.

This is not to say, however, that states failed in their efforts to relieve the property tax burden. Quite the opposite -- a dozen or so states have provided substantial relief to property taxpayers in the last two years. It's just that their incremental tax relief strategies failed to generate the media attention showered upon Michigan in the wake of its tax shift.


Iowa is a perfect example of how, in the end, small steps can produce big results. In the 1994 session, the Legislature bought some time by adopting a property tax freeze on county governments. This temporary measure was followed in 1995 by a phased repeal of property taxes on manufacturing machinery and equipment. New business manufacturing machinery and equipment were fully exempt, while property taxes on existing machinery were to be phased out ovef eight years. State funds are slated to replace the lost revenue, at a cost of $200 million annually when the exemptions are fully phased in. Also in 1995, the state assumed half of county mental health program costs. Transferring these costs to the states will reduce county property taxes by $78 million in FY 1997 and $95 million in FY 1998. Finally, in the 1996 session, the Iowa Legislature provided an $85 million property tax cut for homeowners by increasing school aid and boosting state funding for the homestead credit program.

Wisconsin is another state that has significantly reduced the property tax burden by taking small steps. in 1994, growing taxpayer frustration with rising property taxes led the Legislature to adopt a freeze on local school property taxes. Strong state revenue growth allowed the state to pump additional money into the school aid formula, preventing hardship for most schools. The Legislature came back in the 1995 session, continued the tax freeze and pledged to increase the state share of school spending from 45 percent to 66 percent by the end of fiscal Year 1997.

So far, Wisconsin is on track toward keeping its promise. State spending for K-12 education was increased by 12 percent in 1995, 10 percent in 1996 and by a whopping 32 percent more in 1997. Overall K-12 spending has increased from $2.2 billion in 1994 to $3.5 billion in 1997. Property taxes on the median valued home were reduced by 11.5 percent, or $245, according to a recent analysis by the Legislative Fiscal Bureau. This was accomplished by putting all new revenue growth into school aid, tapping budget surpluses and making cuts in other areas of state spending. Wisconsin's phased approach, combined with a healthy economy, allowed the state to provide property tax relief without increasing taxes, a key goal of legislative leaders.

Indiana also provided substantial property tax relief as a result of measures passed in the 1995 and 1996 legislative sessions. In 1995, the General Assembly approved a measure to phase out the steep automobile property tax beginning in january 1996. As originally passed, the bill would have cut the auto property tax by 50 percent when fully implemented in the year 2001. In the 1996 session, with revenues exceeding expectations, the legislature accelerated the auto property tax cut and doubled the state-funded property tax homestead exemption. Taxpayers will pay $650 million less property taxes over the next four years.

The Illinois General Assembly has also adopted an incremental approach. Back in 1991, taxpayers in suburban Chicago counties - the so called "collar counties" -- were complaining loudly about escalating property values and the resulting in-creases in property tax. However, this was the height of the recession, and the state had no money to provide tax relief. Instead, the General Assembly imposed "tax caps" on the collar counties that prevented local govemment revenues from increasing by more than 5 percent. The caps were extended to Cook County (Chicago) in 1995 and to the rest of the state in 1996.


Other examples of incremental property tax relief abound. Kansas adopted a phased reduction in automobile property taxes in 1995. Utah expanded its homestead exemption program in both the 1995 and 1996 sessions, providing more than $100 million in property tax relief. Idaho provided a $40 million, 6 percent property tax cut by assuming more school costs. Maine and Ohio increased eligibility for their property tax rebate programs. The Arizona Legislature passed property tax relief legislation appropriating $199 million for FY 1997. Of this amount, approximately $151 million replaces reductions in the state general fund, primarily due to elimination of a 47-cent state property tax rate. The balance, $48 million, will provide property tax relief at the local level.

Connecticut is phasing out the property tax on automobiles. Ohio expanded its homestead credit program. New Jersey provided indirect property tax relief: It allowed homeowners and renters to deduct property taxes paid (or their equivalent amount in rent) on the state income tax. Kentucky and Georgia both repealed property taxes on intangible assets -- holdings like stocks and bonds -- although Supreme Court decisions forced these repeals.

In the 1996 session, the Georgia General Assembly referred to the voters a proposed constitutional amendment that would allow local voters to decide whether to adopt a local option sales tax for education. The tax would replace a portion of the property taxes that currently fund schools. Many localities will have both the constitutional amendment and the proposed local sales tax on the ballot in November. If both measures pass, this would mark a major shift in how schools are financed in Georgia.

South Carolina probably came closest to a Michigan-style reform in 1995, when the General Assembly exempted the first $100,000 in value of a primary residence from any school property taxes. In its first year, the homestead exemption's $195 million cost was funded primarily with surpluses and other "one time" funds. However, the legislature found money in FY 1997 to fully fund the program's $213 million cost from ongoing revenues, without new taxes.

Contrast these successes with those of states that tried to adopt dramatic property tax reform bills. Vermont failed for the third consecutive year to adopt a sweeping property tax reduction. Measures adopted by the House would have substituted a local school income and a statewide property tax for school property taxes on primary residences. This plan ultimately failed in the 1995 and 1996 sessions, along with more modest Senate proposals to institute a new homestead exemption for a portion of school taxes.

In Colorado, the House passed a proposed constitutional amendment that would have repealed school property taxes and directed the legislature to find replacement revenues. The measure died in the Senate in 1996. And in Idaho, a bill to repeal all school operating property taxes cleared both houses of the Legislature, but was vetoed by the governor in 1994.

What lessons can be drawn from recent state property tax experiences? First, judging from the high priority given to it in the last few years, property tax relief is still good politics. Taxpayers dislike the tax and want their burden reduced. Second, as with many issues before legislative bodies, sweeping reforms often fail where incremental change can succeed. Third, states that are flush with cash have a much easier time cutting the property tax burden than states that must raise taxes or cut spending to replace property tax revenue,

The success of state efforts to relieve the property tax burden should probably be tempered with a note of caution. It remains to be seen whether these property tax relief efforts can be sustained during the next economic downturn. Property taxes have historically been the most stable of major state and local taxes, while sales and income tax collections are susceptible to economic cycles. States' best intentions in reducing property taxes sometimes unravel -- along with state revenue collections -- during recessions.
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Title Annotation:property tax reforms
Author:Mackey, Scott
Publication:State Legislatures
Date:Sep 1, 1996
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