The Curious Case of the Missing $5.4 Billion
This is likely to be my last post on BlueOregon for a while – I’m starting a new job tomorrow that will keep me pretty darned busy. But before taking a hiatus, I wanted to draw people’s attention to what I think is an important and sometimes overlooked fact: Oregon school districts and local governments in 2011 will have $2.7 billion a year - $5.4 billion a biennium – less in tax revenue than they would have had, collectively, under the tax structure we had in 1990. Since the State and local governments – especially school districts and counties – are so financially intertwined, that fact also has a huge impact on the State government.
In 1990, school districts and other local governments collected the equivalent of 5% of total state personal income in property tax revenues. In other words, if you added up all the property taxes collected, and looked at the total amount of personal income everyone in the state made, the first figure used to be about 5% of the second. The property tax measures Measure 5, in 1990, and Measures 47 / 50, in 1996-97, have driven that down to about 3%. Total personal income in Oregon is about $135 billion a year; so a 2% drop is about $2.7 billion a year. I guess you could factor out the annual revenue from measures 66 and 67, about $365 million; if they had not been passed, but neither had Measures 5 and 47/50, there’d be a bit over $2.3 billion a year – or $4.6 billion a biennium - in additional tax revenue. Other than 66/67, there have not been other significant changes to the tax structure.
Much of the pre-Measure 5 property tax money went to schools. So it’s no surprise that since 1990, K-12 school funding, as a percentage of personal income, has declined, according to figures given me by economist John Tapogna, from 4.7% of personal income to 3.8% - or about $1.2 billion a year. To give an example of what that means, Portland receives about 8% of total state K-12 spending; so Portland schools are down by over $90 million a year from the way things were. Actually, it’s doubtless more than that, because Portland used to be an unusually rich school district, and the city now exports a great deal of revenue to other school districts in the name of equalization. (OK – again, I guess we should adjust for 66/67, which I think postdated the figures I got from John; I guess Portland gets about 8% of 40% of $365 million, or $11.7 million, so maybe PPS is ‘only’ down $80-plus million a year, when you don’t factor in the effects of equalization.)
At the local government level, according to the Multnomah County Tax Supervising and Conservation Commission, a rough estimate is that if we still had the pre-Measure 5 property tax rates on real market value, there would be $450 million, within the city limits, for city and county services like mental health and police and community corrections and housing and parks and libraries and so on. Just eliminating Measure 47/50, and taxing up to the Measure 5 limits, would raise $150 for local government services within the city limits.
I should make it clear, at some point, that in making the statewide comparisons, I am not talking about restoring the entire pre-1990 property tax system, under which –given the overall increase in property values since 1990, which despite the past couple of years still, I am confident, has outstripped increases in personal income – total property taxes as a percentage of personal income would doubtless now be far above 5%. I am in effect assuming a system that would have resulted in maintaining total property taxes (both commercial and residential) at a fixed rate of personal income.
It’s important to remember, I think, that we never, as a state, spelled out to voters what exactly we were going to do as a consequence of the dramatic reduction in property tax revenues. We never said “we hereby announce that we are going to expect less out of our public schools”; instead, we continued to say that we were going to provide a quality education for every child. We never said “we are going to shrink our university system”; instead, we just raised tuition and relied more on out-of-state students. We never said “from here on out the streets will be a lot more dangerous”; instead, we passed mandatory minimum sentencing laws. We never said “we are going to stop trying to take care of frail seniors and people with disabilities”: instead, we periodically adjusted the ‘disability level’ at which people were entitled to aid.
In the 1990’s, the economic boom to some extent masked the effects of 5 and 47/50, as booming state income tax revenues allowed the state to replace some of the lost schools revenue. But even in the 1990’s, schools – especially the previously rich schools, like Portland’s – felt the pinch. Since the end of the ‘90’s boom, we have gone from huge cuts to mild recovery to huge cuts again. But it seems to me that there has not been a general recognition that there is now, post-1990, a ‘new normal,’ an age in which we just don’t invest as much in public services as we used to.
I’m not offering up any policy suggestions here. All I would suggest is that our state and local candidates, and journalists, occasionally make mention of this big fat fact – whatever conclusions they might draw from it. I think that a lot of people out there have a vague sense that twenty years ago they were getting more in terms of public services, and now they’re getting less (and/or paying more in non-tax fees, like tuition), and they’re not clear on why. I think political leaders – regardless of whether they support rolling back 5 or 47/50 or any other major tax initiative – could help clear up the confusion if they occasionally said, Listen, we used to collect, in taxes, a significantly larger share of our state’s resources for public services than we do now, so there’s an argument that you shouldn’t really expect public services to be equivalent to what they were in 1990.
By Steve Novick
May 25, 2010
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May 25, '10
The part you are missing in this post is the business vs. personal share split. The reason a lot of individuals feel like they are paying more and not getting the services is because they are paying more and getting less. It is business that is paying less.
May 25, '10
Well, businesses obviously pay a much larger share of property taxes than they do of income taxes, so yes there has been a shift in the overall percentage mix from businesses to individuals, but property taxes on homes are lower than they were, too, as a % of personal income.
May 25, '10
". . . but property taxes on homes are lower than they were, too, as a % of personal income."
I don't believe this is true. Property taxes have moved inexorably upwards over the last 15 years, while real income has stalled, if not actually declined, for the average Oregonian. [Consider the cost of health care. In 1995 a family of four might have paid a monthly premium of $190; today, that same family is lucky if they pay less than $1,000 per month -- and that family's "deductables" have increased considerably.]
The real story is how the Portland tax burden has shifted from a shared burden between businesses and individual earners to one based primarily on property taxes and other taxes on individuals. When businesses don't pay their fair share, there is insufficient revenue to support the local schools. The resultant shortfall is made up by State tax dollars. 25 years ago, most of the money to run PPS came from local tax revenue; now most comes from the State.
May 26, '10
"Property taxes have moved inexorably upwards over the last 15 years"
Um, I think that's just flatly wrong.
Under 1990's Measure 5, property taxes are capped at $15 per $1000 of value - or $1500 per $100,000 of value.
With the tax rate capped, the only way that your actual taxes would go up is if your assessed property value would go up.
Then, 1997's Measure 50 capped the growth in assessed values at 3% a year. So even in the midst of the real estate price boom in the last decade, property taxes didn't boom along with property values.
So, my question is: do you have some evidence to document your assertion that property taxes have gone up over the last 15 years?
May 26, '10
Yeah, I have proof that my property tax has gone up. Since 2002 when we bought our house the property tax statement and the check I write has increased 137% in those seven years of writing them. I'm talking real money, not some theoretical percentage parsed out.
Meanwhile my income is half what it was back then. That is real money, too.
The 3% limit exempts special levys so the 3% is not really what happens. I would love it if my bill only increased 3%.
Property is not an income generating investment. The owner receives no benefit from increased values until they sell. In the late 1980's there were fixed-income poor-people and elderly facing property taxes nearly doubling from one year to the next. That is why measure 5 passed. Plus it is fundamentally unfair to tax income that doesn't exist, i.e. a rise in property values.
Also on my property tax statement I show over half the property tax collected going to schools. They get over half the general fund, too.
So with half of all tax money generated in Oregon going to schools they can't cope?
Since I had to learn to live on half the money I did some years ago, I can't work up much sympathy for state government whose budget increased 9% this biennium, but call that a "cut".
When the unions quit being willing to throw the schoolkids under the bus just to protect their benefits and guaranteed pay raises that those of us that work in the real world would never have access to, then I'll believe they are short of money.
May 26, '10
How much did the value of your home go up during that period of time? Both market value and tax assessed value?
May 26, '10
Not the point. See my previous post, paragraph 4. That increase in value doesn't exist in the real world until I sell it. Just like my IRA going up and down in value means nothing unless I cash it in. I receive no benefit until I sell.
May 26, '10
Kari wrote: "So, my question is: do you have some evidence to document your assertion that property taxes have gone up over the last 15 years?"
Yes, I do.
I picked five Portland properties sort of at random, homes that would sell in today's market in the range of $400,000 to $475,000. One each from N, NE, SE, SW, and NW. Tax assessment information going back 13 years to 1997 is available to all at portlandmaps.com.
Here's what these homeowners experienced:
7427 N Fowler 1997 taxes: $2544 2009 taxes: $4002 64% increase
2305 NE 47th 1997 taxes: $2801 2009 taxes: $4405 64% increase
4215 SE Yamhill 1997 taxes: $2523 2009 taxes: $3968 64% increase
1716 NW 29th 1997 taxes: $2183 2009 taxes: $4400 more than 100% increase
2952 SW Champlain 1997 taxes: $2993 2009 taxes: $5013 60% increase
Kari, the fact that home values have increased markedly during the same time period does not soften the blow to the homeowner's pocketbook -- the homeowner still has to pay the always-increasing property tax year after year. While it is true the value of the home has increased too, that's not much use to the homeowner until it comes time to sell the home or use it as collateral on new a loan.
What is a fair property tax? At what point does it become too burdensome? Certainly you would not argue that taxes should be doubled on a home that increased in value 100% during the last ten years. That would price most Portland residents out of the housing market.
One thing I know we can agree on: Portland's property tax system is wacky. it needs a complete overhaul. It is not uncommon to see two houses side by side, built by the same builder 50 years ago, one with a $2200 tax bill, the other with a $4500 tax bill. Go and try to explain that to a newcomer to Portland!
May 26, '10
If the value of the property goes up, the property tax bill will go up too. That's kind of a no brainer.
Do keep in mind that money decreases in value over time, too. From your first example, $2544 in 1997 dollars is $3385 in 2009 dollars.
So, we're actually only talking about an 18% real-dollar increase over 12 years -- or about 1.5% per year.
I'm willing to bet the value of the home went up by more than that.
Are you arguing that property taxes should be fixed based on when you bought the property? You're going to get even MORE side-by-side differences if you do that.
Are are you arguing that property taxes should be adjusted for income? That would be mighty interesting.
Certainly, I do think that we can agree that the whole damn system is out of whack. It doesn't make intuitive sense, it treats different people differently, and it doesn't account for changing economic circumstances.
So, what's your alternative?
May 26, '10
“Are you arguing that property taxes should be fixed based on when you bought the property? You're going to get even MORE side-by-side differences if you do that.”
Actually property taxes are firmly tied to the value of the property in 1995. Many people assume that assessed values under M 50 reset on sale, as in California, but the only reference to transfer of property in Measure 47 was repealed by Measure 50. Oregon’s limitation is much more restrictive. All the properties in existence in 1995-96 are indexed forever to their value at that time. Even where there is a new assessment due to improvements, M 50 requires that the new assessment be limited to the ratio of average assessed value (subject to the 3% limit) to average real market value located in the same area and in the same property class. And only the change is subject to even that reassessment.
This system seems to violate the "equal privileges and immunities" clause of the Oregon Constitution, taxing people at vastly different rates in relation to the value of their property, because it’s tied to the market value as of 1995. If your area’s boom was prior to 1995, you are paying a higher rate as compared to current real market value than somebody who owns property in an area that saw big growth after that, and those disparities are far from trivial.
There are basically three ways to tax: Income, wealth, and transactions. Property taxes have become a lousy way to tax. We sort of tax income in this state, with what is essentially a flat tax. We don't tax transactions much at all. And when we tax wealth, we tax homes more than anything else, largely based on wealth that belongs to banks.
May 31, '10
Well said, Sue.
May 26, '10
Kari, not to be offensive, but how out of touch can you be?
As Sue notes below, in our system, taxes do not go up when there is a home sale. Under Measures 47 and 50, the basis for taxing a property was pegged to the assessed value of that property in the 1995-96 tax year. The measures allowed modest annual increases in assessments but exempted increases tied to local bond measures, etc.
As you can see from my five examples, property taxes increase "inexorably," hurting those on fixed incomes and others whose income can't keep up with the unyielding increases.
What do I suggest as an alternative? Overhaul the tax system. Both taxpayers and the local governing entities need a more stable and balanced system. In the ideal world, we would have a better balance between taxes derived from home owners and those derived from busines enterprises.
A system like ours, where property taxes always go up, no matter what, ends up forcing homeowners out of the city -- and when they sell, a much more affluent kind of owner is likely. It changes the complexion of the City in more ways than one.
Our economy seems much less balanced today than it once was, with the loss of manufacturing jobs and the growth of the service industy. The manufacturing sector provided a solid foundation for stable revenue and tended to be local in nature (i.e., not tied to a national franchise). Today, that's gone. Moreover, it strikes me that a basic social covenant that used to exist is gone too: big business doesn't seem to give a damn about anything except shareholder value. They will go out of their way to avoid paying their fair share of taxes. Enron is the most onerous example, but there are countless others. Where is the commitment to community? Don't these corporate robots realize that through their taxes, they can maintain a thriving school system, which creates the foundation for their company's future prosperity?
Of course, it doesn't help when you watch the numbskulls at city hall squander precious resources on senseless pet projects and vengeful personal politics.
By the way, you mentioned earlier that you thought the millage rate was $15 per thousand of assessed value. The actual rate differs by neighborhood, but in Portland, if my memory serves me, it is around $23 per thousand. Five miles west, in Beaverton, the millage rate is about $17 per thousand. In Dunthorpe, it's less than $15!!
Jul 11, '10
Novick usually has his facts right, I'd trust him
May 25, '10
Steve, this is a great post. Rather than jump immediately into the debate over whether taxes are too low today or were too high twenty years ago, who's paying too much and who's paying too little, etc., you've asked us to start by looking at the objective fact that the percentage of our income going to state and local taxes in Oregon today is substantially less than it was 20 years ago.
It would be helpful if we, first, came to terms with that fact, then explored what has changed and why, as well as what the real impact of that change has been on government services.
That's a pretty strong challenge you've laid down before taking your leave. :)
May 26, '10
For once we agree.
May 25, '10
Good post Steve. OCPP noted recently Oregon Taxes and Spending Have Remained in Line With Oregonians’ Pocketbooks for Three Decades.
May 26, '10
Excellent post. An excellent addition would be a comprehensive list of all the ways that the tax limitation measures produced major disinvestments while masking the cause. This comment would be way too long if I tried to do it here.
One of the first things the Legislature did to address its obligations under Measure 5 was to remove most of its prior support for schools from the equation, so that schools took an initial hit that was much more than one would calculate from the Constitutional formula.
One of the big things Measure 5 did was change property taxes to a rate basis from a levy basis. There were caps before, but they were caps on increases to the budget. When local governments asked voters for a levy or, in some cases for a tax base, it was based on raising a particular amount, so when property value increased the rate could actually go down. Most importantly, those school districts with tax bases had predictable budgets. Now, school districts are often required to adopt their budgets before they have a firm bottom line from the State, and in fact there is no such thing as a firm bottom line.
During the years following Measure 5, residential property values soared in some places (and commercial property values mostly did not) and the rate base meant that taxes were tied to the vagaries of the real estate market. This set up the conditions for Measures 47/50.
The real start to all of this was the loss of the Homeowners and Renters Relief Program (I think that's the right title) in the budget crisis tied to the early 80s recession. That made it a lot easier to claim that people were being taxed out of their homes in the campaign for M5.
The other problem at the time was that many school districts were in perpetual budget crisis because their communities balked at the tax rates their schools needed to raise healthy budgets on a base of limited property value. At the time of Measure 5, Willamette Week argued that it should pass because the school funding system was so broken that we should break it further to force a total restructuring. Initially there were major winners when equalization was implemented, and winner districts held sway in the Legislature.
I haven't looked at this in detail in over a decade, but I'm sure you understate the impact to PPS substantially. The high point in inflation adjusted, per student spending in Portland was about 1986, actually declining slightly before Measure 5. The details of the equalization process tend to cost Portland in a variety of ways.
Part of the Measure 5 campaign's gambit was to claim that it would "hold schools harmless." At the same time, it was specifically designed to radically change how we support and govern our public schools. Anybody think it would have passed if it said: " Gives the Legislature power to set local school budgets and equalize school spending"?
May 26, '10
With a 3% annual increase, $100 becomes $155.80 in 15 years.
May 26, '10
Correct, except that is after 15 years. So that is actually year 16.
May 26, '10
Minus inflation, which pretty much makes a 3% annual increase a wash.
May 26, '10
I talk facts, you parse.
I didn't expect to change your mind, but I was hoping for more than pablum.
May 26, '10
It should be noted that a school district's budget includes a much higher proportion of expenses that have seen high growth in costs than the CPI includes, such as health insurance.
May 27, '10
Steve, A great post. It was obvious in 1993 when 100 teachers were laid off in Eugene 4J Schools because there was not enough money to pay them, that Measure 5 was a disaster for our kids. It has only gotten worse. What was and often is less obvious is that the effect on state budgets of trying to bail out the public schools (unsuccessfully) is that all state responsibilities also lose out. In addition, nearly all counties are or soon will be functionally bankrupt and cities have trouble filling pot holes all because of that little 2% that no longer goes to pay the public bills.
When it is not so late, I will post a suggestion or two on what to do differently to pay for basic school, city, county and special district bills. The property tax can be reformed to produce the revenue we need, fairly tax properties of similar value similarly, redress the balance between income property and your homestead, and account for income declines that tend to happen generationally after homeowners retire or become disabled. Remember, the whole point of taxation is to assess the cost of public services we all need in ways the people generally find to be fair.
It must be repeated over and over that, contrary to the rant on the right, taxes in Oregon have been steadily declining, in real terms, for at least two decades. The decline of schools and other basic services simply reflect that reality.
May 27, '10
Gang - I think part of the problem with part of this discussion might be Kari and Mike starting with "15 years." Measure 5 was passed 20 years ago. And as noted in some posts there is wild inequality because of Measure 47/50 tying people to 1995 values - there are some people today who own $250,000 houses are being taxed as if they were worth $80,000, which is not an option anyone had in 1990. Those people - assuming they have been property owners all along - are certainly paying less in property taxes as a percentage of their personal income than they would have been paying in 1990. FYI, total personal income in Oregon in 1990 was $51 billion; in 1997 it was $82 billion; last year it was $136 billion. Part of that is increased population, which is up by, I think, around 36% or so since 1990, but part of it is that some people's income really went up, Wait - let me check - per capita personal income (unadjusted for inflation) in Oregon has gone from $17,895 to $35,667 since 1990. In 1996 it was $23,751. So that's a bit more than a 50% increase since '96. Less than the increase Mike sees in property taxes on certain properties since 1997, but not a spectacular amount less - and again, starting in 1997 instead of 1990 matters, a lot. So I still feel pretty confident that if you looked at 1990 and 2010 property taxes and personal income, even if you excluded business property taxes from the calculation, you'd see that the percentage has gone down. And I KNOW that if you include business property taxes in the calculation, its gone down by a hefty 2% of total personal income. Of course, that's based on averages, certainly not everyone's income has gone up that much. My point is not that no one person has seen a property tax increase of greater size than the increase in their personal income at any point in the past twenty years, but that overall, total property taxes as a percentage of collective personal income are lower than they were in 1990.
May 27, '10
What a spectacularly excellent post, Steve. You know, we've been trying to raise this issue for some time now. It is worth noting the strange coincidence that the gap between what the Quality Education Model says is needed to have 90% of students reach state standards and what we are actually providing for schools is pretty darn close to this 5/50 revenue gap.
I would also add that this problem gets worse every year. Just as looking at 1990 shows a far more striking situation than using 1997 as the base year, each year we move down this 5/50 trajectory (with the exception of dramatic recessionary years) the gap widens.
Thanks for raising the profile yet again.