PNJ Investigates "Case of the Missing Tax Break"

In the past year, lawmakers (and voters) have ratified a couple of measures designed to reduce property taxes, by forcing local government tax rates downward and expanding homestead exemptions. So one would expect homeowner taxes to "drop like a rock" (to coin a phrase) in the wake of these changes, right?

Well, no. As the Pensacola News-Journal's Michael Stewart points out, for many homeowners part of the tax savings from the previously enacted tax cuts is getting eaten up by an arcane "recapture rule." In a nutshell, the recapture rule says that if a home's market value falls, its assessed value will still rise by up to 3 percent.

If this rule sounds screwy, it's not-- or, at least no screwier than the "Save our Homes" tax break that is entirely responsible for it.

Here's the problem: since 1995, Florida has had in place a cap on the amount by which a home's assessed value can grow each year. It's 3% or inflation, whichever is less. This cap is known popularly (and with a touch of drama) as "Save Our Homes."

Of course, when market values are growing and the assessed value is not allowed to grow along with it, the result is a gap between what a home is really worth and what the tax system says it's worth. This gap is an inequity-- it takes the tax system further away from being fair and measuring things properly. The recapture rule is designed to undo this inequity. Simple as that.

An example: suppose you bought your house in 1995 for $100,000. Between 1995 and 2006, your home value doubles to $200,000. A properly functioning tax system would take account of the fact that your home is worth a lot more. But Florida's tax system only allows your home's value to grow at 3 percent a year. At this rate, the assessed value of your home in 2006 would only have risen to $138,000.

So in this example, your home is worth $200,000 and the tax system is treating it as if it were worth $138,000-- the tax system is basically pretending one-third of the value of your home doesn't exist. And all you've done to "deserve" this tax break is to not sell your house. Doesn't matter if you're rich or poor. Doesn't matter who you are, just that you didn't sell your house.

If you treat this $62,000 as basically an unearned, incorrect tax giveaway, then a mechanism that reduces the size of that giveaway seems like a good idea.

And that's what the recapture does.

Palm Beach County Appraiser Gary Nikolits knows this perfectly well, which is why it's a laughably political move when he writes a letter to the governor expressing shock that this sort of thing could happen. As Stewart reports:

“Can you imagine the outcry when they open their (tax notices) in August to find that while their market value may have decreased, their taxable value increased?” Nikolits stated in the letter.

Nikolits (and other appraisers around the state) have plenty of reason to be politically nervous about the impact of the recapture rule, but that doesn't make this rule wrong.

Put another way, anyone who thinks the recapture rule is "unfair" has got it exactly backwards. The true "unfairness" is in the Save Our Homes break, which creates a huge gap between market value and assessed value. The recapture rule is a perfectly acceptable way of mitigating that unfairness.

Crist: Use Reserves to Reduce Deficit

Facing a $1.4 billion projected hole in this year's budget, Florida Governor Charlie Crist has a simple message: stay calm. As the Palm Beach Post's Dara Kam reports, Crist is rejecting the notion of calling a special legislative session to deal with the deficit:

“No interest in that. The reason the legislature gave the executive branch the authority that they did was to be able to avoid that. And I think it was very smart...”

His reason? the projected deficit is, at this point, just a projection:

“It’s not a fact. I have to deal with facts. So I don’t want to go ahead and lurch ahead and use the totality of the reserve based on an estimate only because we get a new estimate in November,” Crist said.

This is, of course, true. Projecting economic growth and tax collections is a tricky business, and the only thing one can be sure of about the total amount of tax revenue Florida will have in the bank when the fiscal year ends next June is that it will not be exactly what folks are currently forecasting.

But there are several reasons why Crist should maybe be worrying a little bit more about this than he seems to be:
1) $1.4 billion is a big number. It's a lot bigger than, say, zero. And it's hard to imagine the economic turnaround that's going to make this number go away between now and next June. So to say that there's uncertainty about this estimate is missing the point: whether it ends up being $1.3 billion or $1.5 billion, the state is still in a world of fiscal trouble.
2) Property taxes are still very much a concern in the wake of Amendment 5's apparent demise. Cutting property taxes costs money-- and money is precisely what Florida's government is $1.4 billion short of right now.
3) Crist thinks what will get them out of their fiscal jam is the ability to draw from the state's reserves. But that's not a bottomless source of revenue either-- every time you draw down the reserves, that leaves less for dealing with the next crisis.

There is, in fact, a very good argument for requiring the projected deficit to be dealt with through the regular legislative process (which, of course, includes Crist) rather than by Crist alone. Whatever its size, there will almost certainly be a big budget deficit at the end of this year absent further action by the legislature. And the legislature has a variety of very different policy levers it can pull to fix the budget hole. It could cut spending, raise existing taxes, or even create new taxes (like, say, an income tax) that most other states already have.

These are big choices. None is obviously better than the others, and dealing with these big choices in a smart way is absolutely what lawmakers are paid for.

The governor should have input, of course, and he does. But he shouldn't be the only one tasked with solving the state's shortfall.

Haridopolos: Still Beating the Drum for Sensible Tax Reform

Being a state senator is rarely a glamorous job. And telling an audience of 42 people at a community college why they should reject a proposed property tax cut is about the last kind of fun most of us can imagine. But, as the Tallahassee Democrat chronicles, that's exactly what state Senator Mike Haridopolos is still doing, even in the wake of Amendment 5 (the property tax-cut proposal in question) getting kicked off the November ballot. 

The message, in a nutshell: if it sounds too good to be true, it probably is. If Amendment 5 had made it to the ballot, voters would have been able to evaluate a clearly defined tax cut and an amorphous, poorly defined sales tax increase. (The ballot language says that the sales tax hike could take the form of either a rate increase or expanding the tax base to include more services, or both.) The tax cut was concrete, the tax hike was hypothetical and could actually be avoided entirely if the revenue loss is made up through spending cuts. That's the genius of Amendment 5: there's always the possibility, in the ballot language anyway, that there really would be a free lunch: property tax cuts for nothing. 

Haridopolos, commendably, wants to remind voters that if they take the property tax cut now, the other shoe will almost certainly drop: he argues that for many voters, the net result of Amendment 5 could be a tax hike. And while he hit the campaign trail on this issue long before last week's news of a growing projected budget deficit, his stance looks much more prescient in the face of a $1.5 billion budget hole.

The adjective "brave" shouldn't have to be used to describe a simple policy discussion. So to describe the Senator's stance as brave says more about the head-in-the-sand attitude exhibited by most lawmakers (and, sadly, many voters) than it does about the Senator himself. But Senator Haridopolos is to be commended for asking the hard questions that so many others seem unwilling to confront.

Florida's "Nuclear Option"

Advocates of shrinking Florida's government in a bathtub took two body blows last week. First, a state judge sat down (for several hours) with the text of Amendment 5, the property tax amendment voters were set to evaluate this November, and decided that it was too misleading and confusing to live. Second, on Friday the state's bean-counters gave their most recent (and most dismal) economic forecast-- including an estimated $1.5 billion budget shortfall for the fiscal year now underway.

From a fiscal sanity perspective, this is only half-bad news: while a huge new budget hole means nothing but pain for everyone involved, Amendment 5 was a half-baked approach to property tax reform that would probably never have been fully funded, so good riddance to it.

The glass-half-full way of looking at all this is to note that, with the new deficits coming hard on the heels of some gawd-awful budget cuts earlier this year, Florida policymakers will now be forced to put all their options on the table, including some tax hikes that no one has dared speak of so far. And that's the stance taken by Mike Thomas in his Orlando Sentinel column today:

It is time for the nuclear option: a state income tax.

Thomas hits the nail right on the head, in a cursory way, in explaining why this is a sensible thing for policymakers to discuss:

Florida taxes cannot be fixed in their present configuration. They are levied against too narrow a slice of the economy ... The only way to create a stable and fair tax system is a state income tax backed by responsible spending. That diversifies the tax base. It takes the strain off property taxes and lower-income residents. It creates options for dealing with the next big hurricane and resulting insurance crisis.

This isn't rocket science. While most other states are using the so-called "three-legged-stool" approach (property, sales, and income taxes) to raise needed revenue responsibly, Florida is one of the diminishing number of states that is still engaged in a quixotic effort to be "different" from other states by not levying an income tax at all. But as any Floridian who's encountered a cash register or a property tax bill knows, the inevitable outcome of such a policy is that the tax load gets shifted onto homeowners, renters, and consumers. And the property tax and sales tax rates end up much higher than they otherwise would be as a result.

As I've said, this isn't rocket science. A broader tax base means a lower tax rate. And a narrower tax base forces tax rates on the remaining base higher. Similarly, every time the state decides it's not going to tax something-- whether it's personal income or intangible property or sales of consumer services-- the tax rates on everything else have to creep up a little bit higher to make up for the loss.

Is it now, at long last, time for a reasoned debate on the merits and demerits of a "tax swap" that reduces property taxes for fixed-income families while creating a personal income tax? Let's hope so...

Special Session? Not So Fast

Less than two days after a state court rejected the language of Amendment 5, the November property tax swap proposal, for being too misleading, some anti-taxers are already calling for a special legislative session to push through property tax cuts anyway. But the editorial board at the Ocala Star-Banner says: not so fast.

Yet another special session on property taxes or the budget, or some combination of the two, would only mean more slashing and burning: Cut taxes or spending (or both); eliminate programs or personnel; shovel the burden onto cities and counties.
Thus, neither the Crist administration nor lawmakers would come to Tallahassee with a new, specific and imaginative plan to address the whole picture: the need to raise additional revenues and broaden sources from which they come; to balance out inequities in the property tax system, both among homeowners and between residential and business taxes; to fix pending budget shortfalls, such as the anticipated $6 billion to $8 billion chasm in education spending, if Amendment 5, and its proposed "swap" of property taxes for new sales taxes, gets back on the ballot and is approved by voters; and to think beyond the next fiscal year.

This is all undeniably true. But what's the alternative? One can hope, beyond hope, that after the election, lawmakers will decide to abandon ideology and start talking frankly about how to achieve a more sustainable tax system. But right now, it sure seems like everyone involved is afraid to talk about true tax reform-- and it's hard to see how waiting three or six months is going to change that.