The Florida Legislator recently passed a ballot initiative that could turn our current property tax into one of the most biased, unfair tax schemes in the United States.
Under out current “Save out Homes” (SOH) plan, the assessed values of homesteaded properties can only go up by 3% per year. The plan had a noble purpose; it was design to prevent homeowners from getting priced out of their homes due to tax increases.
While the plan did have good intentions, there were many flaws in the plan. First, SOH only protected the assessed values of homestead homes, which is only portion of the tax equation. It never restricted the other half of the equation, millage rates. This means that the taxing authorities still have the ability to raise taxes far in excess of the 3% annual cap simply by raising millage rates. This hasn’t been a significant issue since SOH passed in 1992, mainly because home values have generally increased in Florida. However, as home values start to drop at a rate in excess of 3% per year, taxing authorities will have to find ways to overcome budget shortfalls. They can solve this by simply increasing millage rates, effectively eliminating the tax increase protection of SOH.
Another significant flaw in SOH is the fixed 3% rate, which has no protection from inflation. Again, this hasn’t been an issue since its passage in 1992 because overall inflation has generally hovered around that 3%. However, if we ever return to the double-digit inflation that we experience in the 1970s, the fixed-3% rate will become significant. In the face of rapidly rising prices due to high inflation, taxing authorities will be forced to increase millage rates. It is beyond me why SOH was ever passed with the 3% cap rather than a cap that adjusted with changed in the Consumer Price Index (CPI).
Still, the most significant flaw in SOH is its inherent unfairness. For the first nine years of its life, SOH worked well because home prices generally did not increase much more than 3%. However, between 2001 and 2005, most areas in Florida experienced dramatic increases in home values, often more than 200%. As a result, homeowners that purchased homes before 2001 are often pay very little in taxes when compared to homeowners who purchased in recent years.
Up until this time, I had little concern about SOH because I knew the deflation of the bubble would ultimately take care of some of the inequities. To show how the inequities would be solved through housing deflation consider two homeowners: one that bought his home in 2000 for $100,000 and one that bought an identical home in 2005 for $300,000. Assuming a 2% millage rate, in 2005 the homeowners would pay:
Homeowner 1:
2005 SOH assessed value (capped by 3% increase) = $115,927 - $25,000 homestead exemption = $90,927 taxable base x 2% millage rate = 2005 property tax of $1,819
Homeowner 2:
2005 assessed value = $300,000 - $25,000 homestead exemption = $275,000 taxable base x 2% millage rate = 2005 property tax of $5,500
Obviously this is clearly unfair because Homeowner 1 is paying only 33% of the tax paid by Homeowner 2. They pay vastly different amounts even though they are living in the same home and may be consuming identical levels of public services (fire, police, schools, roads, etc.).
However, I think things will eventually things will even out. Assume by 2009, the two homes are now worth $150,000. Also assume that the taxing authorities increase the millage rates to 2.5% to make up for the properties’ devaluations:
Homeowner 1:
2009 SOH assessed value (capped by 3% increase) = $130,477 - $50,000 homestead exemption = $105,477 taxable base x 2.5% millage rate = 2009 property tax of $2,637
Homeowner 2:
2009 assessed value = $150,000 - $25,000 homestead exemption = $125,000 taxable base x 2.5% millage rate = 2005 property tax of $3,125
Following the devaluation, the taxes paid by the two homeowners are much more equitable. Now, Homeowner 1 is paying 84% of the tax paid by Homeowner 2. Over time, the two taxpayers would probably end up paying similar amounts in tax.
However, if this new ballot initiative passes, much of the equality created by housing devaluation is eliminated. The new initiative consists of two main changes: an increase of the homestead exemption to $50,000 and the “portability” of SOH.
The increase in the homestead exemption will have little impact on equality other than increasing taxes on non-homesteaded properties. However, the portability provision may be one of the most unfair tax proposals I have ever seen.
Under the portability proposal, homeowners can “take” up to $500,000 in SOH differential (the difference between the actual assessed value versus the SOH value) when they move from one homestead to another. This means homeowners that purchased prior to 2000 and live in high-valued homes can pay significantly reduced property taxes.
To illustrate what will happen if this passes, lets add a third homeowner to our 2009 comparison. In this case, the third homeowner sells a home in 2009 that has a $110,000 in SOH differential. He then immediately downsizes and purchases a home that is identical to Homeowner 1 and Homeowner 2. Here’s what this third homeowner will pay on newly purchase home under the portability proposal:
Homeowner 3:
2009 assessed value = $150,000 - $110,000 portable SOH differential - $50,000 homestead exception = $0.00 taxable value (you can’t go negative) x 2.5% millage rate = 2009 property tax of $0.00
So, under the new proposal, in this scenario, you will have three neighbors all living side-by-side in identical homes. All three consume identical amount of public services. Homeowner 1 pays $2,137 in annual property tax (after accounting for the increase homestead exemption). Homeowner 2 pays $2,500. Homeowner 3 pays nothing.
Do you think this is fair?
Keep in mind that this not only has a disproportionate benefit for those who bought prior to 2000, it also has a disproportionate benefit for the extremely wealthy because they’re much more likely to have substantial SOH differentials than the middle class and working poor. In effect, this increases the already regressive nature of Florida’s property tax system.
If this doesn’t convince you, consider this: If this the voters pass this initiative, there will be some homeowners living in homes that are worth nearly $520,000 that will pay NOTHING in property taxes (at least in the short term) because they used the benefits of portability.
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18 comments:
View from an outsider, SOH's will never approve anything without portability. Is it shortsighted and selfish? absolutely. Will it enhance the real estate crash in FL? absolutely. Will it stop retirees from moving to FL? absolutely. Will it prohibit new business from moving to FL? absolutely. Will it be a boom for the Carolinas and Tenn and georgia? absolutely. Will it lower the standard of living for all Floridians? absolutely. Do selfish, shortsighted floridians deserve all of the above? absolutely!!
I am a renter and if portability passes I will no longer consider buying property here even if the values drop. To me portability is unspeakably unfair, but I fully expect the typical selfish floridian to vote for it. I had one person tell me that portability was fair because folks who already own property and have paid taxes have earned portability.
If portability passes, the millage rates will go up, and the Tax assessors office will reduce the assessed value of the sold house so that less property value is transfered. Further, someone suggested that as property values go down, so will insurance rates. I'll be that insurance will go down, but not as much as the reduced value of the houses would suggest. These insurance companies are now used to X in profits and they are going to get it buy increasing rates when the property values go down. Anyone who thinks this might be a problem need only look at the insurance companies success rate on rate increases with the Florida insurance regulators.
One more reason to wait till 2009 to buy!
Gotta LOVE this State Gov!
It will be interesting to see how this shakes out. First it must pass through the courts, which isn't easy.
Then, we'll get bombarded by opposing special interests. The Realtors® and the mortgage brokers love this because it creates more transactions. The teachers, police, and firefighter unions hate it because it will restrict tax revenues.
After all is said and done, I hightly doubt they'll get 60% of the voters to approve it. Renters, government employees, snow birds, and anyone interested in fairness will vote against it.
In the mean time, every Realtor® is South Florida will start their new mantra, "Buy now, before the market takes off when tax reform is passed."
Too bad, it would have the opposite effect -- a market flooded with people trying to sell their homes while they still have significant SOH differentials.
I don't think the new SOH portability plan works the way that you calculated in your examples. First, I believe that the portability only applies to roughly half the tax bill, because the school board tax (which is a huge portion of the bill) is exempt.
Plus, there is an ad-valorem and non-ad valorem part to the tax bill. The non-ad valorem part of the bill is not affected by assessed value at all. So, nobody would ever be paying zero taxes.
I haven't seen the exact details of the new proposal, so I can't say for sure. I'll post again if I find more info.
That said, I am totally against portability. In fact, it is likely unconstitutional. There have been many law experts that have suggested that even if this plan passes, it could easily be struck down in the courts.
I do think, however, that this plan would cause property values to fall much farther than the "Super-exemption" plan would have. The "Super-exemption" had some significant tax savings in it. In the lower-end of the market, it would have cut many tax bills by 2/3.
This new plan, however, does little for the recent buyer or potential new buyers.
Here is an article about the potential legal challenges to this bill:
Tax plan is open to legal fight
pb,
The way I understand it is the protable SOH differential applies to the whole assessment. Therefore, it will be applied to both school and non-school assessment.
On the other hand the additional $25,000 homestead exemption will NOT be applied to the whole assessment. That will only be apply to the non-school assessment. Once newspayers said that this rule effectively makes the $50k homestead exemption worth about $40k as an exemption.
As for non-ad valorem taxes, you're correct. Niether SOH or the homestead exemption apply. However, the non-ad valorem taxes are usually de minimis in many municipalities.
In most Broward municipalities, the non-ad valorem tax is typically less than 3% of the total property tax bill.
Consider the yesterday's F@cked Buyer. Their tax bill this year is $4159.44, of which, only $94.00 is non-ad valorem.
In this case, if they had more than $230,070 of portable SOH differential, they'd pay $94.00 a year in taxes.
Regardless, you're right on the non-ad valorem issue, everyone will pay some taxes even its just a drop in the bucket.
Pb,
Just to make sure that I wasn't full of crap, I checked a few newspapers and have seen the issue of po. I've seen some that say it applies while other say it does not.
However, I put my basis on the stuff I have read on the Florida House of Representatives website. Check out the following documents (beware they're PDFs). Both indicate that the protable SOH differential applies to both school and non-school assessments:
County by County Cost
Methodology
You're right about the school tax exemption only applying to the additional $25k of homestead.
I did find out that currently, you could have a taxable value of 0. Century Village in West Palm Beach would be an example (where the condos there sell for almost nothing). This unit has a $233 tax bill:
Century Village Condo
I don't know if they would change that for the $50k exemption or not (set some sort of minimum).
As far as taking the accrued SOH down (moving from a more expensive to a less expensive home), here is how it's supposed to work:
Source: Q&A: How would the new tax proposal work?
"A. You get a percentage of your tax savings. For example: An owner of $500,000 home wants to purchase a $300,000 home. Under SOH, the owner's current house is assessed at $250,000. When the portability formula is applied, the new home is valued at $150,000 for tax purposes.
Here's the math:
Market value of new home divided by market value of old home, and the result multiplied by assessed value on the old home to equal assessed value of the new home.
Using this example: $300,000/$500,000 x $250,000 = $150,000"
:|
Big fat NO vote on this one
I'll be devil's advocate. A lot of people who bought before 2002 are doing fine, but would not do fine if their tax bill doubled. As a father of two, I can understand where they're coming from. If I wanted to buy a similar house in a different school district or closer to work, it's unfair that my tax bill doubles just because a bunch of flippers drove prices up. It's wrong that I'm locked in my house due to tax bill concerns. It's not always greed and selfishness, it's often concern over the prospect of money that used to be for things like college savings, clothes, books, and even some luxuries instead going toward tax bills, through no fault of my own.
The way I interpret the new exemption is this: The new $25k exemption does not kick in until assessed value is greater than $50k. It will negate taxable value between $50 -$75k. This means that any property valued at > $50k will always have at least $25k of taxable value, excluding other exemptions. Therefore it is not possible to ever get to a taxable value of $0. If market value is below $25k the standard homestead exemption is cut considerably.
how will this affect the a renter who wants to buy in the near future?
To el a, I understand that your tax bill would double if you move. But, what makes you so special that your taxes should be lower than the neighbors? This is taxes, assessments we're talking about. Property taxes pay for schools and services. Something all homesteaders USE, but expect the new guy to pay for. Thank God, I didn't move there.
anon, actually you're right. I kind of got off track, my larger point was that I don't fault someone with a family for voting for this bill. People should put the financial welfare of their family ahead of the financial welfare of their neighbors. I do.
If I wanted to buy a similar house in a different school district or closer to work, it's unfair that my tax bill doubles
Not any more unfair than childless me having to pay school taxes to educate your two brats.
anon, you must know my kids
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