Get Real on Property Tax Reform (part one)

By Kris Nelson and Tom Gihring of Portland, Oregon. Kris and Tom are members of Common Ground USA, a national organization dedicated to promoting prosperity by reducing taxes on labor and capital and using the value of land and other natural/public resources to pay for essential governmental services.

The flaws in Oregon’s property tax structure have begun to receive widespread attention. It’s no wonder: property owners are increasingly concerned about growing inequities. The statewide tax rate limitations and use of taxable assessments emanating from Measures 5 and 50 have resulted in economic distortions and disparities in tax bills among property owners. Local entities, despite voter approvals, cannot adequately fund essential services thanks to M5’s local tax caps, causing “compression.”

Our previous study of the cumulative effects of Measure 50 limits on assessed values in Salem revealed a troubling pattern: tax burdens are shifted off of rapidly-appreciating properties (usually occupied by higher income households), resulting in a tax shift onto properties with slower-growing or decreasing assessed values. Statewide the effect has been to shift tax burden onto residential properties. The most objectionable feature of property taxes for most homeowners is a disconnect between their tax bill and their ability to pay the tax, or the actual appreciation in property values they experience.

Oregon’s property tax structure is also a good example of perverse incentives. Because buildings are taxed at the same rate as land, owners have no incentive to invest in property improvements: Doing so will result in higher taxes. Conversely, holding onto underutilized lots or letting buildings deteriorate results in low taxes.

What are the best solutions to this broken tax structure?

The Oregonian’s proposal to reset assessed values upon sale to an overall average price recognizes the problem, but it prolongs the fabrication of false assessments under M-50 and fails to address ongoing discrepancies in neighborhood market values. “Reset on sale” to real market value (RMV) could take up to 30 years to complete the process of turning-over the housing stock. Then, if the assessment growth limit isn’t permanently replaced through a constitutional amendment, the same inequities ‘reset’ and continue to build.

We are encouraged by the League of Oregon Cities’ pursuit of a constitutional fix to exempt a local option levy from the rate limits, but we believe the property tax system’s brokenness is so severe it warrants a permanent solution. According to organizations like the Institute on Taxation and Economic Policy, assessment caps are among the least fair and least effective tax strategies available. Furthermore, the reset rule puts residential properties at a tax disadvantage, since homes typically change hands more frequently than do businesses and makes homeowners less likely to sell their homes for fear of buyers incurring huge property tax increases. A permanent, one-time reset to RMV could be accompanied by tax relief measures such as a phase-in period and a means-tested tax deferral. Replacing the rate growth limits with a revenue limit, as Washington does, would enable fair use of RMV with a check on tax increases. To address temporary funding measures, local entities could also have caps on revenue growth.

Tomorrow, we’ll discuss a highly regarded alternative tax system that would protect property owners from unfair treatment, return to real market values, support local desires to fund schools and vital services, and end economic distortions through built-in tax incentives that lead to local job creation and expanded tax bases.

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